S-1 1 d63278ds1.htm FORM S-1 FORM S-1
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Index to Financial Statements

As filed with the Securities and Exchange Commission on August 28, 2015

File No.                    

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

NOBILIS HEALTH CORP.

(Exact name of registrant as specified in its charter)

 

 

 

British Columbia, Canada   8062   98-1188172

(State or other jurisdiction of

incorporation)

 

(Primary Standard Industrial

Classification Code)

 

(IRS Employer

Identification No.)

11700 Katy Freeway

Suite 300

Houston, Texas 77079

(713) 355-8614

(Address, including zip code, and telephone number, including area code of registrant’s principal executive offices)

 

 

Northstar Healthcare Acquisitions, L.L.C.

11700 Katy Freeway

Suite 300

Houston, Texas 77079

(713) 355-8614

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies of communications to:

Richard Raymer

Dorsey & Whitney LLP

Brookfield Place

161 Bay Street, Suite 4310

Toronto, Ontario Canada M5J 2S1

 

 

Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.  x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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:  ¨ a large accelerated filer, ¨ an accelerated file, ¨ a non-accelerated filer, or x a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act)

 

 

Calculation of Registration Fee

 

 

 

Title of Each Class of

Securities to be Registered

 

Amount

to be

Registered (1)

 

Proposed

Maximum

Offering Price

Per Share (2)

 

Proposed

Maximum

aggregate

offering price (2)

  Amount of
Registration Fee

Common Shares, no par value, to be offered for resale by the Selling Securityholders issued in connection with the Offering (as defined herein).

  7,847,668   $4.21   $33,038,682.28   $3,839

Common Shares, no par value, to be offered for resale by the Selling Securityholders and issuable upon the exercise of Warrants (as defined herein) issued in connection with the Offering.

  3,923,834   $4.21   $16,519,341.14   $1,920

Common Shares, no par value, to be offered for resale by the Selling Securityholders and issuable upon the exercise of Compensation Options (as defined herein) issued in connection with the Offering.

  392,383   $4.21   $1,651,932.43   $192

Warrants to be offered for resale by the Selling Warrantholders issued in connection with the Offering.

  3,923,834   —  (3)   —  (3)   —  (3)

Common Shares, no par value, to be offered for resale by the Selling Securityholders issued in connection with the Athas Acquisition (as defined herein).

  10,497,303   $4.21   44,193,645.63   $5,135

Total

 

22,661,188

    —   $95,403,601.48   $11,086

 

 

(1) Pursuant to Rule 416 under the Securities Act of 1933, as amended (the “Securities Act”), the common shares being registered hereunder also include an indeterminate number of additional common shares as may become issuable as a result of stock splits, stock dividends, stock distributions and similar transactions.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act using the average of the high and low prices of the common shares on the NYSE MKT on August 24, 2015, a date within five (5) trading days prior to the date of the filing of this registration statement.
(3) Pursuant to Rule 457(g) of the Securities Act, no registration fee is required as the common shares issuable upon exercise of the warrants are registered under the Registration Statement.

 

 

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

 

 

 


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The information in this prospectus is not complete and may be changed. Our Selling Securityholders may not sell these securities until the registration statement filed with the U.S. Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED August 28, 2015

PRELIMINARY PROSPECTUS

 

LOGO

NOBILIS HEALTH CORP.

22,661,188 Common Shares

3,923,834 Warrants to Purchase Common Shares

 

 

This prospectus relates to the registration and resale, from time to time, by certain selling securityholders (each a “Selling Securityholder” and collectively, the “Selling Securityholders”), of up to an aggregate 22,661,188 common shares and up to an aggregate of 3,923,834 Warrants consisting of:

 

  (1) 7,847,668 common shares issued to the Selling Securityholders in connection with the Offering (as defined herein);

 

  (2) Up to 3,923,834 common shares (the “Warrant Shares”) issuable upon the exercise of outstanding warrants (the “Warrants”) issued to the Selling Securityholders in connection with the Offering;

 

  (3) Up to 392,383 common shares issuable upon the exercise of outstanding Compensation Options issued to certain Selling Securityholders for services rendered to us in connection with the Offering;

 

  (4) 10,497,303 common shares issued to the Selling Securityholders in connection with the Athas Acquisition; and

 

  (5) 3,923,834 Warrants to purchase common shares (we refer to these warrantholders as the Selling Warrantholders).

We will not receive any of the proceeds from the resale of these common shares or Warrants by the Selling Securityholders. However, upon exercise we will receive the cash exercise price of the Warrants. If the Compensation Options are cashlessly exercised we will not receive any cash from these exercises.

The Selling Securityholders may sell or otherwise dispose of the common shares, the Warrants, the Warrant Shares or the common shares issuable upon exercise of Compensation Options covered by this prospectus or interests therein on any stock exchange, market or trading facility on which the common shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices. Additional information about the Selling Securityholders, and the times and manner in which they may offer and sell common shares under this prospectus, is provided in the sections entitled “Selling Securityholders” and “Plan of Distribution” of this prospectus.

Our common shares are presently quoted on the NYSE MKT under the symbol “HLTH” and on the Toronto Stock Exchange (the “TSX”) under the symbol “NHC”. Our Warrants are not currently quoted on the NYSE MKT or the TSX but we intend on applying to list the Warrants on the TSX in conjunction with the effectiveness of this prospectus. On August 24, 2015, the closing bid price was $4.45 per common share.

We issued an aggregate 7,847,668 of the common shares and 3,923,834 Warrants covered by this prospectus in the Offering and 10,497,303 common shares in connection with the Athas Acquisition. We may issue up to an additional 4,316,217 common shares in conjunction with the exercise of the outstanding Warrants or Compensation Options issued as part of the Offering. Additional information about the Offering is provided in the section entitled “Description of Private Placement” of this prospectus and additional information about the Athas Acquisition is provided in the section entitled “Description of Athas Acquisition” of this prospectus.

 

 

You should consider carefully the risks that we have described in the section entitled “Risk Factors” beginning on Page 10 of this prospectus before deciding whether to invest in our Warrants or common shares.

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is                     , 2015


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Index to Financial Statements

TABLE OF CONTENTS

 

     Page  

ABOUT THE PROSPECTUS

     1   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     1   

CURRENCY AND EXCHANGE RATES

     3   

PROSPECTUS SUMMARY

     4   

NOBILIS HEALTH CORP.

     4   

THE OFFERING

     5   

DESCRIPTION OF PRIVATE PLACEMENT

     7   

DESCRIPTION OF ATHAS ACQUISITION

     9   

RISK FACTORS

     10   

MARKET, INDUSTRY AND OTHER DATA

     29   

USE OF PROCEEDS

     30   

MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     31   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     34   

DESCRIPTION OF BUSINESS NOBILIS HEALTH CORP.

     54   

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     63   

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     63   

EXECUTIVE COMPENSATION

     68   

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.

     75   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     76   

DESCRIPTION OF CAPITAL STOCK

     78   

SELLING SECURITYHOLDERS

     80   

PLAN OF DISTRIBUTION

     88   

CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS FOR U.S. RESIDENTS

     90   

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

     92   

LEGAL MATTERS

     100   

EXPERTS

     100   

ADDITIONAL INFORMATION

     100   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

You may only rely on the information contained in this prospectus or that we have referred you to. We have not authorized anyone to provide you with different information. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the common shares offered by this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any common shares in any circumstances in which such offer or solicitation is unlawful. Neither the delivery of this prospectus nor any sale made in connection with this prospectus shall, under any circumstances, create any implication that there has been no change in our affairs since the date of this prospectus or that this prospectus is correct as of any time after its date.


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ABOUT THE PROSPECTUS

Unless otherwise stated to the contrary, this prospectus, references to the “Company,” “Nobilis,” “we,” “us,” and “our” and similar terms refer to Nobilis Health Corp. References to our “common shares” refer to the common shares, no par value, of Nobilis Health Corp.

A list of our healthcare facilities (the “Nobilis Facilities”) and the abbreviations by which we refer to them in this prospectus appear below:

 

Healthcare Facility

  

Abbreviation

Northstar Healthcare Surgery Center - Houston

   NHSC-H

Kirby Surgical Center

   Kirby

Microsurgery Institute of Dallas

   MSID

Northstar Healthcare Surgery Center - Scottsdale

   NHSC-S

First Nobilis Hospital

   FNH

First Nobilis Surgical Center

   FNSC

Victory Medical Center Houston

   VMC

Plano Surgical Hospital

   PSH

You should read this prospectus together with additional information described under the headings “Where You Can Find More Information.” If there is any inconsistency between the information in this prospectus and the documents incorporated by reference herein, you should rely on the information in this prospectus.

You should rely only on the information contained in or incorporated by reference in this prospectus. We have not authorized any other person to provide information different from that contained in this prospectus and the documents incorporated by reference herein. If anyone provides you with different or inconsistent information, you should not rely on it. You should assume that the information appearing in this prospectus is accurate as of the dates on the cover page, regardless of time of delivery of the prospectus or any sale of securities. Our business, financial condition, results of operation and prospects may have changed since those dates.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Information set forth in this prospectus and the information it incorporates by reference may contain various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All information relative to future markets for our products and trends in and anticipated levels of revenue, gross margins and expenses, as well as other statements containing words such as “believe,” “project,” “may,” “will,” “anticipate,” “target,” “plan,” “estimate,” “expect” and “intend” and other similar expressions constitute forward-looking statements. These forward-looking statements are subject to business, economic and other risks and uncertainties, both known and unknown, and actual results may differ materially from those contained in the forward-looking statements. These forward-looking statements are based on current plans and expectations and are subject to a number of risks, uncertainties and other factors which could significantly affect current plans and expectations and our future financial condition and results. These factors, which could cause actual results, performance and achievements to differ materially from those anticipated, include, but are not limited to:

 

    the risk that we may face challenges managing our new Marketing Segment (as defined herein) and may not realize anticipated benefits;

 

    our ability to successfully maintain effective internal controls over financial reporting;

 

    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;

 

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

 

    adverse developments affecting the medical practices of our physician limited partners;

 

    our ability to maintain favorable relations with our physician limited partners;

 

    our ability to grow revenues by increasing case and procedure volume while maintaining profitability at our healthcare facilities;

 

    failure to timely or accurately bill for services;

 

    our ability to compete for physician partners, patients and strategic relationships;

 

    the risk of changes in patient volume and patient mix;

 

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

 

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

 

    the risk that we are not able to list the Warrants on the TSX and that there is no active trading market for the Warrants; and

 

    the risk of potential decreases in our reimbursement rates.

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

We have not undertaken any obligation to publicly update or revise any forward-looking statements. All of our forward-looking statements speak only as of the date of the document in which they are made or, if a date is specified, as of such date. Subject to an mandatory requirements of applicable law, we disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any changes in events, conditions, circumstances or information on which the forward-looking statement is based. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing factors and the risk factors set forth elsewhere in this prospectus under the heading “Risk Factors” beginning on page 10 of this prospectus and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the U.S. Securities and Exchange Commission on April 2, 2015 (the “2014 Annual Report”).

Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date such forward-looking statements are made. You should read carefully this prospectus and any related free writing prospectuses that we have authorized for use in connection with this offering, together with the information incorporated herein or therein by reference as described under the heading “Where You Can Find More Information,” completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify all of our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

 

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CURRENCY AND EXCHANGE RATES

Unless otherwise stated, all dollar amounts and the symbol “$” refers to United States dollars and “C$” or “Cdn$” refers to Canada dollars. The Canadian dollar exchange rates for United States dollars for each of the years in the five-year period ended December 31, 2014 as reported by the Bank of Canada, were as follows:

 

Year Ended December 31 (Cdn. $ per U.S. $1.00)

              
    

    Last    

  

    Low    

  

    High    

  

 Average 

2014

   1.1601    1.0589    1.1672    1.1045

2013

   1.0636    0.9845    1.0704    1.0299

2012

   0.9949    0.9642    1.0443    0.9996

2011

   1.0170    0.9407    1.0658    0.9891

2010

   0.9946    0.9931    1.0848    1.0299

On August 14, 2015, the rate of exchange of the Canadian dollar, based on the daily noon rate in Canada as published by the Bank of Canada, was U.S. $1.00 = Canadian $1.3078.

The average is based on the noon exchange rate as reported by the Bank of Canada.

 

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PROSPECTUS SUMMARY

This summary is not complete and does not contain all of the information you should consider before investing in the securities offered by this prospectus. You should read this summary together with the entire prospectus, including our financial statements, the notes to those financial statements, and the other documents identified under the headings “Where You Can Find More Information” in this prospectus before making an investment decision. See the Risk Factors section of this prospectus on page 10 for a discussion of the risks involved in investing in our securities.

NOBILIS HEALTH CORP.

Our Company

Nobilis Health Corp. was incorporated on March 16, 2007 under the name “Northstar Healthcare Inc.” pursuant to the provisions of the British Columbia Business Corporations Act (“BCBCA”). On December 5, 2014, Northstar Healthcare Inc. changed its name to Nobilis Health Corp. Our registered office is located at Suite 400, 570 Granville Street, Vancouver, British Columbia V6C 3P1 and our corporate office is located at 11700 Katy Freeway, Suite 300, Houston, Texas 77079. Our stock has been traded on the Toronto Stock Exchange under the symbol “NHC” since May 2007 and on the NYSE MKT under the symbol “HLTH” since April 2015.

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, referred to as the “JOBS Act”.

Our core business is the ownership, operation and management of outpatient surgery centers and surgical hospitals (the “Medical Services Segment”). We are also a provider of marketing services to our own affiliated entities as well as to third parties through our subsidiaries Athas Health, LLC (“Athas”) and Nobilis Health Marketing, LLC, which is a separate reportable business segment (the “Marketing Segment”).

Corporate Information

Our principal executive offices are located at 11700 Katy Freeway, Suite 300, Houston, Texas 77079, and our telephone number is (713) 355-8614. Our internet address is http://www.nobilishealth.com. The information on our website is not incorporated by reference into this prospectus, and you should not consider it part of this prospectus.

 



 

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THE OFFERING

 

Common shares offered by Selling Securityholders

Up to 22,661,188 common shares consisting of:

 

  (1) 7,847,668 common shares issued to the Selling Securityholders in connection with the Offering;

 

  (2) Up to 3,923,834 common shares issuable upon the exercise of the Warrants issued to the Selling Securityholders in connection with the Offering;

 

  (3) Up to 392,383 common shares issuable upon the exercise of Compensation Options issued to certain Selling Securityholders as compensation for services rendered to us in connection with the Offering; and

 

  (4) 10,497,303 common shares issued to the Selling Securityholders in connection with the Athas Acquisition.

 

Warrants Offered by the Selling Warrantholders

3,923,834 Warrants to purchase common shares.

 

Common shares and Warrants offered by us

None.

 

Common shares outstanding after this offering (assuming full exercise of the Warrants and the Compensation Options (as defined below))

75,301,5201

 

Use of Proceeds

We will not receive any of the proceeds from the resale or other disposition of the common shares or Warrants covered by this prospectus by the Selling Securityholders. However, we will receive the cash exercise price upon the exercise of the common share purchase warrants, other than the Compensation Options, the underlying shares of which are offered by this prospectus.

 

NYSE MKT and TSX Symbol

Our common shares are listed on the NYSE MKT under the symbol “HLTH” and on the Toronto Stock Exchange under the symbol “NHC”. We intend on applying to have the warrants listed on the TSX in conjunction with the effectiveness of this prospectus.

 

Risk Factors

Investing in our common shares and warrants may involve a high degree of risk. See the “Risk Factors” section of this prospectus on page 10 for a discussion of factors you should consider carefully before deciding to invest in our securities.

Terms of the Warrants

 

Warrants Offered

3,923,834 Warrants

 

1  The number of common shares outstanding after this offering is based on 70,985,303 common shares outstanding on August 24, 2015.

 



 

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Exercise

Each of the Warrants is exercisable to purchase one common share of the Company at a purchase price of C$11.50.

 

Expiration Date

5:00 p.m. (Toronto time) on May 13, 2017.

 

Acceleration and Cancellation

The expiry date of the Warrants may be accelerated by the Company at any time following February 13, 2016 and prior to the May 13, 2017. if the volume-weighted average trading price of the Company’s common shares on the principal market on which such shares trade is equal to or greater than C$13.50 for any 20 consecutive trading days, at which time the Company may accelerate the expiry date by issuing a press release announcing the reduced warrant term whereupon the Warrants will expire on the 20th calendar day after the date of such press release. Under the terms of the Underwriting Agreement, in the event that the Company fails to file a Registration Statement on or before August 31, 2015, the expiry of the Warrants may not be accelerated until August 13, 2016.

 

Antidilution

The exercise price per common share and the number of common shares issuable upon exercise of the Warrants is subject to adjustment upon the occurrence of certain events including, but not limited to, the following:

 

    the issuance to all, or substantially all, of the Company’s shareholders of a stock dividend;

 

    the subdivision or reduction of the Company’s common shares into a greater or smaller number of common shares, as applicable;

 

    the reorganization of the Company or the consolidation or merger or amalgamation of the Company with or into another body corporate; and

 

    a reclassification or other similar change to the Company’s outstanding common shares.

 



 

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DESCRIPTION OF PRIVATE PLACEMENT

During April 2015, our management and board of directors (the “Board”) entered into discussions with respect to potential equity financing opportunities to address the Company’s working capital needs. As a result of these discussions, on April 20, 2015, we entered into an engagement agreement with Mackie Research Capital Corporation (“Mackie”), as amended by the engagement agreement between us and Mackie dated as of April 21, 2015, whereby Mackie agreed to purchase for resale, on a bought-deal private placement basis, the Units as described below.

Offering

On May 13, 2015 (the “Closing Date”), we closed a combined treasury and secondary bought deal private placement, including the partial exercise of the underwriters’ option (the “Offering”), raising overall gross proceeds of C$70.6 million, with aggregate gross proceeds to the Company of C$36.3 million (the “Company Proceeds”).

Pursuant to the Offering, 7,847,668 units (each, a “Unit”), which includes 527,668 Units issued pursuant to the partial exercise of the underwriters’ option, were issued at a price of C$9.00 per Unit through a syndicate of underwriters (the “Underwriters”) co-led by Mackie as sole bookrunner and PI Financial Corp. (“PI Financial”) pursuant to the terms of an underwriting agreement dated as of the Closing Date (the “Underwriting Agreement”).

Each Unit is comprised of one treasury unit (a “Treasury Unit”) and one-half of one common share (each whole common share, an “Additional Share”) from Donald L. Kramer, Healthcare Ventures, Ltd. (a company controlled by Dr. Kramer) or from Harry Fleming (collectively, the “Selling Shareholders” and the Additional Shares from the Selling Shareholders, the “Secondary Shares”) or from treasury (the “Additional Treasury Shares”). Each Treasury Unit is comprised of one-half of one common share of the Company (each whole common share, a “Treasury Unit Share”) and one-half of one common share purchase warrant (each whole common share purchase warrant, a “Warrant”). Dr. Kramer is the former Chairman and current control person of the Company and Mr. Fleming is the former President and a current director of the Company.

Based on the 50/50 split of the per Unit proceeds agreed to between the Company and the Selling Shareholders and provided for in the Underwriting Agreement (the “Proceeds Split”), the Company received gross proceeds of C$36,267,012 from the sale of 7,847,668 Treasury Units, which comprised 3,923,834 Treasury Unit Shares and 3,923,834 Warrants, and 105,834 Additional Treasury Shares, and the Selling Shareholders received gross proceeds of C$34,362,000 from the sale of 3,818,000 Secondary Shares. Pursuant to the Proceeds Split, except for in limited circumstances, the C$9.00 per Unit was divided equally between the Company and Selling Shareholders with the Company contributing one-half of one Treasury Unit Share and one-half of one Warrant for proceeds of C$4.50 per Unit and the Selling Shareholders contributing only one-half of one Secondary Share for an equal amount of proceeds of C$4.50 per Unit. The Selling Shareholder component of the Offering and the Proceeds Split was deemed to be appropriate and therefore approved by the Company’s audit committee of the board of directors, taking into consideration a number of factors including, but not limited to, the potential benefits to the Company provided by (i) a sale of the Secondary Shares in a private placement versus in the open market, the former being a more controlled method for the sale; (ii) dilution of the ownership of the Selling Shareholders, without concurrent dilution to existing shareholders; and (iii) the possibility of a significant future warrant exercise and the associated additional funding for the Company.

Each Warrant issued in the Offering is exercisable for one common share of the Company (a “Warrant Share”) at any time until 5:00 p.m. (Toronto time) on May 13, 2017 at an exercise price of C$11.50. The expiry date of the Warrants may be accelerated by the Company at any time following the nine-month anniversary of the Closing Date, and prior to the expiry date of the Warrants if the volume-weighted average trading price of the Company’s

 



 

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common shares on the principal market on which such shares trade is equal to or greater than C$13.50 for any 20 consecutive trading days, at which time the Company may accelerate the expiry date by issuing a press release announcing the reduced warrant term whereupon the Warrants will expire on the 20th calendar day after the date of such press release. Under the terms of the Underwriting Agreement, if we fail to file a registration statement (“Registration Statement”) with the U.S. Securities and Exchange Commission (the “SEC”) on or before August 31, 2015, the expiry of the Warrants may not be accelerated until the 15 month anniversary following the Closing Date.

Warrant Indenture

The Warrants are governed under the terms of a warrant indenture dated May 13, 2015 (the “Warrant Indenture”) between the Company and CST Trust Company as warrant agent, and have been approved for listing on the Toronto Stock Exchange. The Warrant Indenture provides for adjustment in the number of common shares issuable upon the exercise of the Warrants and/or the exercise price per common share upon the occurrence of certain events. The Warrant Indenture also provides for adjustment in the class and/or number of common shares issuable upon the exercise of the Warrants and/or exercise price per common share in the event of other certain events, including re-classification, consolidation, amalgamation, arrangements, merger, or a sale of all or substantially all of the Company’s assets or property.

The Company Proceeds will be used for general working capital and potential acquisitions.

Compensation Options

In connection with the Offering, the Underwriters received a total cash commission of C$3,020,783 of which C$1,904,018 (equal to 5.25% of the gross proceeds of the Offering multiplied by the number of Treasury Unit Shares and Additional Treasury Shares, divided by the total number of Treasury Unit Shares and Additional Shares in the Offering) was paid by the Company and $1,116,765 (equal to 3.25% of the gross proceeds of the Offering multiplied by the number of Secondary Shares divided by the total number of Treasury Unit Shares and Additional Shares) was paid by the Selling Shareholders. In addition, the Underwriters were also granted an aggregate of 392,383 compensation options (the “Compensation Options”), being equal to 5% of the number of Treasury Units sold in the Offering. The Compensation Options are exercisable at any time until 5:00 pm (Toronto time) on May 13, 2017.

Registration Rights

Pursuant to our contractual obligations under the Offering, we are required to file a Registration Statement under the Securities Act by August 31, 2015. Pursuant to the contractual obligations under the Offering, the Registration Statement covers: (i) the Warrants; (ii) common shares issued in connection with the Offering; (iii) common shares issuable upon the exercise of the Warrants; and (iv) common shares issuable upon the exercise of the Compensation Options issued to Mackie and PI as compensation in connection with the Offering.

 



 

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DESCRIPTION OF ATHAS ACQUISITION

On December 1, 2014 the Company acquired (the “Athas Acquisition”) all of the individual member interests of Athas Health, LLC (“Athas”). As consideration for the Athas Acquisition, as adjusted by the entry into a confidential agreement effective June 30, 2015 (the “Confidential Agreement”), the Company (i) issued 10,497,303 common shares (the “Athas Shares”) to the selling membership interest holders of Athas (the “Athas Sellers”), (ii) paid $3 million in cash upon closing of the Athas Acquisition, and (iii) issued a promissory note to the Athas Sellers for $12 million. Athas Sellers, pursuant to a registration rights agreement executed as part of the Athas Acquisition, may require that the Company register all or a part of their common shares, subject to certain conditions set forth in the registration rights agreement.

Pursuant to the Confidential Agreement, the Athas Shares are subject to certain restrictions on transfer until July 1, 2016: The Athas Sellers holding more than 150,000 Athas Shares are not permitted to sell or otherwise dispose of the Athas Shares except (i) through private brokered or “block” sales in the United States or (ii) through controlled sales by and through PI Financial Corp. or Mackie Research Capital Corporation, where such sales are conducted after giving prior written notice to the Company in a manner designed to protect the trading price of the Company’s common shares. Athas Sellers holding 150,000 Athas Shares or fewer may sell common shares in an amount that shall not exceed, in the aggregate over any 30 consecutive trading days, that number of shares equaling one-third of such Athas Seller’s aggregate holdings of Athas Shares as of the date of the Confidential Agreement and in an amount that shall not exceed, on any given trading day, 5,000 shares.

 



 

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RISK FACTORS

An investment in us involves a high degree of risk. You should consider carefully the following information about these risks before deciding to purchase any of our securities. If any of the events or developments described below actually occurs, our business, results of operations and financial condition would likely suffer. In these circumstances, you may lose all or part of your investment. In addition, it is also possible that other risks and uncertainties that affect our business may arise or become material in the future.

Risks Related to Our Business

Our business is not highly diversified.

As of December 31, 2013, our only business was the ownership and operation of the three Nobilis ASCs located in Texas. Therefore, we were entirely dependent on the success of these facilities for all of our revenues. Additionally, during 2014, we started operations at NHSC-S in Arizona and FNH and FNSC in Houston, Texas. During 2015, we initiated operations at VMC in Houston, Texas and initiated our neuromonitoring and first assist ancillary service lines. These developments have provided some degree of diversification to our business. However, investors will not have the benefit of further diversification of operations or risk until such time, if ever, that we acquire or develop additional facilities, manage additional facilities, or undertake other related business opportunities. As a result of our geographic concentration in Texas and Arizona, we are particularly susceptible to downturns in the local and regional economies, regional inclement weather, changes in local or state regulation, or to reductions in Texas’ or Arizona’s Medicaid and/or Medicare payments to healthcare providers.

As of December 2014, we are also a provider of marketing services to our own affiliated entities as well as to third parties through our subsidiaries Athas and Nobilis Health Marketing, LLC, which together comprise the Marketing Segment, a separate reportable business segment, which may add some degree of diversification to our business. Two of our facilities represent approximately 76.63% of our contracted marketing revenue, and five of our facilities represent approximately 78.82% of our contracted marketing accounts receivable for the six months ended and as of June 30, 2015. As a result, our Marketing Segment is subject to a certain degree of revenue concentration. Because of this concentration among these facilities, if an event were to adversely affect one of these facilities, it may have a material impact on our business.

In addition, approximately 64.3% of the cases performed at the Nobilis ASCs in 2014 were concentrated among four major private insurance companies and workers’ compensation payors. At December 31, 2014, more than 54.2% of the cases performed at the Nobilis ASCs were on an “out of network” basis, without any reimbursement rate protection or consistent in-network patient enrollments typically seen from an in-network agreement. Accordingly, we are susceptible to changes in reimbursement policies and procedures by third-party insurers and patients’ preference of utilizing their out of network benefits. In an effort to stabilize its payor mix, Kirby Partnership (as defined herein) that operates our Kirby facility signed a multi-year in-network contract with one of the major private insurance companies commencing the first quarter of 2009 and another in-network contract with one of the major private insurance companies commencing the second quarter of 2012. These agreements have reduced the percentage of procedures performed at the Nobilis ASCs on an “out-of network” basis.

We face significant competition from other healthcare providers.

We compete with other facilities and hospitals for patients, physicians, nurses and technical staff. Some of our competitors have long-standing and well-established relationships with physicians and third-party payors in the community. Some of our competitors are also significantly larger than us, may have access to greater marketing, financial and other resources and may be better known in the general community. The competition among facilities and hospitals for physicians and patients has intensified in recent years. Some hospitals have imposed

 

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restrictions on the credentials of their medical staff (called conflict of interest credentialing) where these physicians hold an ownership in a competing facility. The Nobilis Facilities face competition from other facilities and from hospitals that perform similar outpatient services, both inside and outside of the Nobilis Facilities’ primary service areas. Further, some traditional hospitals have recently begun forming joint ventures with physicians whereby the hospital manages and the hospital and physicians jointly own the facility. Patients may travel to other facilities for a variety of reasons. These reasons include physician referrals or the need for services the Nobilis Facilities do not offer. Patients and their physicians who seek services from these other facilities may subsequently shift their preferences to those facilities and away from the Nobilis Facilities.

Some of these competing facilities offer a broader array of outpatient surgery services than those available at the Nobilis Facilities. In addition, some of the Nobilis Facilities’ direct competitors are owned by non-profit or governmental entities, which may be supported by endowments and charitable contributions or by public or governmental support. These hospitals can make capital expenditures without paying sales tax, may hold the property without paying property taxes and may pay for the equipment out of earnings not burdened by income taxes. This competitive advantage may affect the Nobilis Facilities’ ability to compete effectively with these non-profit or governmental entities. There are several large, publicly traded companies, divisions or subsidiaries of large publicly held companies, and several private companies that develop and acquire multi-specialty facilities, and these companies compete with us in the acquisition of additional facilities. Further, many physician groups develop facilities without a corporate partner, using consultants who typically perform these services for a fee and who may take a small equity interest in the ongoing operations of a facility. We can give no assurances that we can compete effectively in these areas. If we are unable to compete effectively to recruit new physicians, attract patients, enter into arrangements with managed care payors or acquire new facilities, our ability to implement our growth strategies successfully could be impaired. This may have an adverse effect on our business, results of operations and financial condition.

The industry trend toward value-based purchasing may negatively impact our revenues.

We believe that value-based purchasing initiatives of both governmental and private payers tying financial incentives to quality and efficiency of care will increasingly affect the results of operations of our hospitals and other health care facilities and may negatively impact our revenues if we are unable to meet expected quality standards. The Patient Protection and Affordable Care Act (“PPACA”) contains a number of provisions intended to promote value-based purchasing in federal health care programs. Medicare now requires providers to report certain quality measures in order to receive full reimbursement increases for inpatient and outpatient procedures that were previously awarded automatically. In addition, hospitals that meet or exceed certain quality performance standards will receive increased reimbursement payments, and hospitals that have “excess readmissions” for specified conditions will receive reduced reimbursement.

There is a trend among private payors toward value-based purchasing of health care services, as well. Many large commercial payors require hospitals to report quality data, and several of these payors will not reimburse hospitals for certain preventable adverse events. We expect value-based purchasing programs, including programs that condition reimbursement on patient outcome measures, to become more common, to involve a higher percentage of reimbursement amounts and to spread to reimbursement for ASCs and other ancillary services. We are unable at this time to predict how this trend will affect our results of operations, but it could negatively impact our revenues if we are unable to meet quality standards established by both governmental and private payors.

We are subject to fluctuations in revenues and payor mix.

We depend on payments from third-party payors, including private insurers, managed care organizations and government healthcare programs. We are dependent on private and, to a lesser extent, governmental third-party sources of payment for the procedures performed in our facilities. Our competitive position has been, and will continue to be, affected by reimbursement and co-payment initiatives undertaken by third-party payors, including insurance companies, and, to a lesser extent, employers, and Medicare and Medicaid.

 

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As an increasing percentage of patients become subject to healthcare coverage arrangements with managed care payors, our success may depend in part on our ability to negotiate favorable contracts on behalf of our facilities with managed care organizations, employer groups and other private third-party payors. There can be no assurances that we will be able to enter into these arrangements on satisfactory terms in the future. Also, to the extent that our facilities have managed care contracts currently in place, there can be no assurance that such contracts will be renewed or the rates of reimbursement held at current levels.

Managed care plans often set their reimbursement rates based on Medicare and Medicaid rates and consequently, although only a small portion of our revenues are from Medicare and Medicaid, the rates established by these payors may influence our revenues from private payors.

As with most government reimbursement programs, the Medicare and Medicaid programs are subject to statutory and regulatory changes, possible retroactive and prospective rate adjustments, administrative rulings, freezes and funding reductions, all of which may adversely affect our revenues and results of operations. The Centers for Medicare and Medicare Services (“CMS”) introduced substantial changes to reimbursement and coverage in early 2007. While the ASC final rule expanded the types of procedures eligible for payment in the ASC setting and excluded from eligibility only those procedures that pose a significant safety risk to patients or are expected to require active medical monitoring at midnight when furnished in an ASC, rule also provided a 4-year transition to the fully implemented revised ASC payment rates. Beginning with the November 2007 OPPS/ASC final rule with comment period (CMS-1392-FC), the annual update OPPS/ASC final rule with comment period provides the ASC payment rates and lists the surgical procedures and services that qualify for separate payment under the revised ASC payment system. As a result, reimbursement levels decreased but coverage expanded. These rates remain subject to change, thus our operating margins may continue to be under pressure as a result of changes in payor mix and growth in operating expenses in excess of increases in payments by third-party payors. In addition, as a result of competitive pressures, our ability to maintain operating margins through price increases to privately insured patients is limited. This could have a material adverse effect on our business, operating results and financial condition.

Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered and is recognized upon performance of the patient service. In determining net patient service revenue, management periodically reviews and evaluates historical payment data, payor mix and current economic conditions and adjusts, as required, the estimated collections as a percentage of gross billings in subsequent periods based on final settlements and collections.

Management continues to monitor historical collections and market conditions to manage and report the effects of a change in estimates. While we believe that the current reporting and trending software provides us with an accurate estimate of net patient service revenues, any future methods of improving these estimates could have a material adverse effect on our operating results and financial condition.

Out-of-network reimbursement and contract negotiations.

One of the complexities of our business is navigating the increasingly hostile environment for entities that are not participants in the health insurance companies’ (“Third Party Payors”) provider networks (also referred to as an out-of-network provider or facility). Third Party Payors negotiate discounted fees with providers and facilities in return for access to the patient populations which those Third Party Payors cover. The providers and facilities that contractually agree to these rates become part of the Third Party Payor’s “network”. The Nobilis Facilities are currently out-of-network as to most Third Party Payors.

There are several risks associated with not participating in Third Party Payor networks. First, not all Third Party Payors offer coverage to their patients for services rendered by non-participants in that Third Party Payor’s network. Further, it is typically the case that a patients with so-called “out-of-network benefits” will be obliged to pay a higher co-pays, a higher deductibles, and a larger percentage of co-insurance payments. In addition,

 

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because the out-of-network coverage often mandates payment at a “usual and customary rate”, the determination of the amounts payable by the Third Party Payor can fluctuate. Healthcare providers and facilities that choose not to participate in a Third Party Payor’s often face longer times for their claims to be processed and paid. Further, many Third Party Payors aggressively audit claims from out-of-network providers and facilities and continuously change their benefit policies in various ways that restrict the ability of beneficiaries to access out-of-network benefits, and to restrict out-of-network providers from treating their beneficiaries.

Consequently, it may become necessary for the Nobilis Facilities to change their out-of-network strategy and join Third Party Payor networks. This may require us to negotiate and maintain numerous contracts with various Third Party Payors. In either case, our performance is greatly dependent upon decisions that Third Party Payors make regarding their out-of-network benefits and alternatively, our ability to negotiate profitable contracts with Third Party Payors. If it becomes necessary for the Nobilis Facilities to become in-network facilities, there is no guarantee that we will be able to successfully negotiate these contracts. Further, we may experience difficulty in establishing and maintaining relationships with health maintenance organizations, preferred provider organizations, and other Third Party Payors. Out-of-network reimbursement rates are typically higher than in-network reimbursement rates, so our revenue would likely decline if we move to an in-network provider strategy and fail to increase our volume of business sufficiently to offset reduced in-network reimbursement rates. These factors could adversely affect our revenues and our business.

We depend on our physicians and other key personnel.

Our success depends, in part, on our ability to attract and retain quality physicians. There can be no assurance that we can continue to attract high quality physicians, facility staff and technical staff to our facilities. In addition, notwithstanding contractual commitments given by certain of our physicians to maintain certain specified volume levels at our facilities, there can be no assurances that our current physicians will continue to practice at our facilities at their current levels, if at all. An inability to attract and retain physicians may adversely affect our business, results of operations and financial condition.

The Physician Limited Partners in the Kirby Partnership have agreed not to compete with Nobilis pursuant to the terms of the Kirby Partnership Interest Purchase Agreements and the partnership agreements. These covenants, however, only restrict ownership in a competing ASC, and do not prevent a Physician Limited Partner from performing procedures (and receiving remuneration for the performance of such procedures in the form of professional fees) at competing ASCs.

Our success also depends on the efforts and abilities of our management, as well as our ability to attract additional qualified personnel to manage operations and future growth. Although we have entered into employment agreements with certain of our key employees, we cannot be certain that any of these employees will not voluntarily terminate their employment. We have employment contracts Chris Lloyd (CEO), Harry Fleming (Executive Director) and Matthew Maruca (General Counsel). Also, at this time, we do not maintain any key employee life insurance policies on any management personnel or Physician Limited Partners, but may do so in the future. The loss of a member of management, other key employee, Physician Limited Partner or other physician using our facilities could have an adverse effect on our business, operating results and financial condition.

We do not have control of the day-to-day medical affairs and certain other affairs of the Nobilis Facilities.

Although we indirectly manage the day to-day-business affairs of each Nobilis Facility under a management agreement, we only have the right to attend and observe at meetings of each Nobilis Facility’s Medical Board. As such, we do not have the ability to direct day-to-day medical affairs of the Nobilis Facilities, but rather only its business and commercial affairs, all as set forth in the respective governance documents of each Nobilis Facility. In addition, certain actions at the Nobilis Facilities are subject to a veto by a written vote of a majority in interest

 

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of the Physician Limited Partners, including the approval of the annual budget and annual plan (subject to the right of the Nobilis party to continue to operate the Nobilis Facilities in a manner that preserves its business and goodwill, business relationships and physical plant).

The non-solicitation, non-competition, transfer and other covenants of the Physician Limited Partners and others may not be enforceable.

Under the Kirby Partnership Agreement (subject to certain limited exceptions) during the time that a Physician Limited Partner is a Partner and for two years thereafter, the Physician Limited Partner may not directly or indirectly own, control, finance or participate in the profits or revenues of any business that engages in competition with such Nobilis Facility anywhere within a 20-mile radius of such Nobilis Facility; provided, however, that a Physician Limited Partner shall not be prevented from performing surgery at another facility or otherwise practicing medicine in a private practice that may utilize such competing facility. In addition, six of the nine current Physician Limited Partners at Kirby are bound by a similar non-competition provision contained in a Unit Transfer Agreement executed in 2012. The Physician Limited Partners bound by this provision may not directly or indirectly own, control, finance or participate in the profits or revenues of any business that engages in competition with such Nobilis Facility anywhere within a 20- mile radius of such Nobilis Facility for a period of three years from March 30, 2012. The Unit Transfer Agreement contains certain “burn off” provisions which state that the non-competition period will be reduced by a year in the event that Kirby fails to meet certain gross revenue goals.

In addition, our subsidiary, Athas, is a party, either directly or indirectly, to several contracts containing non-competition provisions purporting to bind physicians to whom Athas provides marketing services.

Because non-competition provisions are enforced not as a matter of contractual law but as a matter of equity, a court asked to enforce a non-competition provision with a Physician Limited Partner or other physicians will have broad discretion over enforcement, non-enforcement or the fashioning of relief different from that contractually agreed to by the parties. While no single physician’s non-competition provision is material to our business, a court decision to not enforce a physician’s non-competition covenant could set a precedent with respect to physicians bound by the same or similar provisions, such that, in the aggregate, there results a detrimental impact on our revenues.

If we fail to effectively and timely transition to the ICD-10 coding system, our operations could be adversely affected.

Health plans and providers, including our surgery centers and professionals, are required to transition to the new ICD-10 coding system, which greatly expands the number and detail of billing codes used for third-party claims. Use of the ICD-10 system is required beginning October 1, 2015. Transition to the new ICD-10 system requires significant investment in coding technology and software as well as the training of staff involved in the coding and billing process. In addition to these upfront costs of transition to ICD-10, it is possible that we could experience disruption or delays in payment due to technical or coding errors or other implementation issues involving our systems or the systems and implementation efforts of health plans and their business partners. Further, the extent to which the transition to the more detailed ICD-10 coding system could result in decreased reimbursement, because the use of ICD-10 codes results in conditions being reclassified to payment groupings with lower levels of reimbursement than assigned under the previous system, is unknown at this time.

We may not be able to effectively manage information security risks.

If we are unable to effectively manage information security risks, or the security measures protecting our information technology systems are breached, we could suffer a loss of confidential data, which may subject us to liability, or a disruption of our operations. We rely on our information systems to securely transmit, store, and manage confidential data. A failure in or breach of our operational or information security systems as a result of cyber-attacks or information security breaches could disrupt our business, result in the disclosure or misuse of

 

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confidential or proprietary information, damage our reputation, increase our costs or lead to liability under privacy and security laws (including the Health Insurance Portability and Accountability Act), litigation, governmental inquiries, fines and financial losses. As a result, cyber security and the continued development and enhancement of the controls and processes designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for us, and we must continue to focus on any security risks in connection with the transition and integration of information systems as we pursue our growth and acquisition strategy. Although we believe that we have appropriate information security procedures and other safeguards in place, there can be no assurance that we will not be subject to a cyber-attack. We continue to prioritize the security of our information technology systems and the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from cyber-attack, damage or unauthorized access. As cyber threats continue to evolve due to the proliferation of new technologies and the increased activities by perpetrators of such attacks, we may be required to expend additional resources to continue to enhance our information security measures or to investigate and remediate any information security vulnerabilities or breaches.

There are many federal, state and local laws that regulate our business.

The Nobilis Facilities are subject to numerous federal, state and local laws, rules and regulations. Regulations that may have the most significant effect on our business are:

Licensure and Accreditation

Healthcare facilities, such as the Nobilis Facilities, are subject to professional and private licensing, certification and accreditation requirements. These include, but are not limited to, requirements imposed by Medicare, Medicaid, state licensing authorities, voluntary accrediting organizations and third-party private payors. Receipt and renewal of such licenses, certifications and accreditations are often based on inspections, surveys, audits, investigations or other reviews, some of which may require affirmative compliance actions by the Nobilis Facilities that could be burdensome and expensive. We believe that the Nobilis Facilities are currently in material compliance with all applicable licensing, certification and accreditation requirements.

However, the applicable standards may change in the future. There can be no assurance that each of the Nobilis Facilities will be able to maintain all necessary licenses or certifications in good standing or that they will not be required to incur substantial costs in doing so. The failure to maintain all necessary licenses, certifications and accreditations in good standing, or the expenditure of substantial funds to maintain them, could have an adverse effect on our business, results of operations and financial condition.

In addition, in order to perform medical and surgical procedures in Texas, physicians must be licensed by the Texas Medical Board. Professional nurses and technical staff must also be licensed under state law. There can be no assurance that any particular physician, nurse or technical staff member who has medical staff privileges at the Nobilis Facilities will not have his or her license suspended or revoked by the Texas Medical Board or be sanctioned by the Department of Health and Human Services (“DHHS”) or Office of Inspector General (“OIG”), for violations of federal Medicare laws. If a license is suspended or revoked, or if such physician, nurse or technical staff member is sanctioned by the OIG and excluded from the Medicare program, such physician, nurse or technical staff member may not be able to perform surgical procedures at the Nobilis Facilities, which may have an adverse effect on our operations and business.

Anti-Kickback Statute

The United States Medicare/Medicaid Fraud and Abuse Anti-kickback Statute (the “Anti-Kickback Statute”) prohibits “knowingly or willfully” paying money or providing remuneration of any sort in exchange for federally-funded referrals. Because the Physician Limited Partners are in a position to generate referrals to the Nobilis Facilities, distributions of profits to these Limited Partners could come under scrutiny under the Anti-

 

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Kickback Statute. While the DHHS has issued regulations containing “safe harbors” to the Anti-Kickback Statute, including those specifically applicable to ASCs, our operations and arrangements do not comply with all of the requirements. As we do not have the benefit of the safe harbors, we are not immune from government review or prosecution. However, we believe that the business operations of the Nobilis Facilities are structured to substantially comply with applicable anti-kickback laws. To the extent safe harbor protection is not available, the agreements governing the structure and operations of the Nobilis Facilities include provisions to mitigate against alleged kickbacks or other inducements.

The State of Texas and the State of Arizona each maintain its own version of the Anti-Kickback Statute (the “Non-solicitation Laws”). In Texas the relevant law is called the Texas Patient Solicitation Act (“TPSA”). The TPSA prohibits payment of remuneration for referrals and violations can result in state criminal and civil penalties. Because the TPSA is based on the federal Anti-Kickback Statute, the risks described above also arise under this state law except that the TPSA arguably is not limited to claims for treatment of federal program beneficiaries. In Arizona, A.R.S §13-3713 makes it unlawful for a person to knowingly offer, deliver, receive, or accept any rebate, refund, commission, preference or other consideration in exchange for a patient, client or customer referral to any individual, pharmacy, laboratory, clinic or health care institution providing medical or health-related services or items under A.R.S. § 11-291 et seq., providing for indigent care, or A.R.S. § 36-2901 et seq., or providing for the Arizona Health Care Cost Containment System, other than specifically provided under those sections. A violator of the relevant Arizona laws is guilty of: a class 3 felony for payment of $1,000 or more; a class 4 felony for payment of more than $100 but less than $1,000; or a class 6 felony for payment of $100 or less.

The Non-solicitation Laws parallel in many respects the federal Anti-Kickback Statute, but they apply more broadly because they are not limited only to providers participating in federal and state health care programs. The Texas statute specifically provides that it permits any payment, business arrangement, or payment practice that is permitted under the federal Anti-Kickback Statute and regulations promulgated under that law, although failure to fall within a safe harbor does not mean that the arrangement necessarily violates Texas law. Arizona takes the same approach.

Some of the various arrangements that our company enters into with providers may not fit into a safe harbor to the federal Anti-Kickback Statute and thus may not be exempt from scrutiny under the Non-solicitation Laws. Although an arrangement that fits a federal safe harbor may also be exempted from the prohibitions of the Non-solicitation Laws, the burden is on the medical provider to prove that the questioned arrangement fits one of the federal safe harbors. Additionally, even if that burden is met, the provider must still comply with the law’s requirements to disclose to the patient the financial relationship involved.

A failure by our company to comply with the Anti-Kickback Statute, TPSA or Arizona laws could have an adverse effect on our business, results of operations and financial condition.

False Claims Legislation

Under the United States Criminal False Claims Act, individuals or entities that knowingly file false or fraudulent claims that are payable by the Medicare or Medicaid programs are subject to both criminal and civil liability. While the Nobilis Facilities have a compliance program and policies to create a corporate culture of compliance with these laws, failure to comply could result in monetary penalties (up to three times the amount of damages), fines and/or imprisonment, which could have an adverse effect on our business, results of operations and financial condition.

HIPAA

The Nobilis Facilities are subject to the Health Insurance Portability and Accountability Act (“HIPAA”), which mandates industry standards for the exchange of protected health information, including electronic health

 

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information. While we believe that we have implemented privacy and security systems to bring us into material compliance with HIPAA, we cannot ensure that the business associates to whom we provide information will comply with HIPAA standards. In addition, because Congress continues to amend HIPAA to keep pace with evolving recordkeeping technologies, we cannot guarantee compliance with future amendments. If we, for whatever reasons, fail to comply with the standards, or any state statute that governs an individual’s right to privacy that are not pre-empted by HIPAA, we could be subject to criminal penalties and civil sanctions, which could have an adverse effect on our business, financial condition and results of operations.

Patient Protection and Affordable Care Act

The Nobilis Facilities may be affected by the PPACA, which began taking effect on June 21, 2010. The impact on Nobilis Facilities remains uncertain. By mandating that residents obtain minimum levels of health insurance coverage, the PPACA has expanded the overall number of insured patients. However, it remains to be seen whether the cost born by employers of providing insurance coverage will result in a shift away from the types of policies that have historically provided the coverage that we have relied upon in the past. Further, as discussed above, the impact that value-based purchasing initiatives could have on our revenues remains unclear. We continue to review the potential impact of the PPACA’s provisions on its business as the out-of-network reimbursement under the policies issued by the state exchange might be substantially lower than those by the employer-sponsored polices.

Antitrust

Federal and state antitrust laws restrict the ability of competitors, including physicians and other providers, to act in concert in restraint of trade, to fix prices for services, to allocate territories, to tie the purchase of one product to the purchase of another product, or to attempt to monopolize a market for services.

Notwithstanding the Nobilis entities’ efforts to fully comply with all antitrust laws, a significant amount of ambiguity exists with respect to the application of these laws to healthcare activities. Thus, no assurance can be provided that an enforcement action or judicial proceeding will not be brought against the Nobilis Facilities or that the facilities will not be liable for substantial penalties, fines and legal expenses.

Environmental Laws and regulations

Typical health care provider operations include, but are not limited to, in various combinations, the handling, use, treatment, storage, transportation, disposal and/or discharge of hazardous, infectious, toxic, radioactive and flammable materials, wastes, pollutants or contaminants. As such, health care provider operations are particularly susceptible to the practical, financial, and legal risks associated with the obligations imposed by applicable environment laws and regulations. Such risks may (i) result in damage to individuals, property, or the environment; (ii) interrupt operations and/or increase their cost; (iii) result in legal liability, damages, injunctions, or fines; (iv) result in investigations, administrative proceedings, civil litigation, criminal prosecution, penalties, or other governmental agency actions; and (v) may not be covered by insurance. There can be no assurance that we will not encounter such risks in the future, and such risks may result in material adverse consequences to our operations or financial results.

Other regulations

In addition to the regulatory initiatives described above, healthcare facilities, including the Nobilis Facilities, are subject to a wide variety of federal, state, and local environmental and occupational health and safety laws and regulations that may affect their operations, facilities, and properties. Violations of these laws could subject us to civil penalties and fines for not investigating and remedying any contamination by hazardous substances, as well as other liability from third parties.

 

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Although we believe the Nobilis Facilities are currently in material compliance with all applicable environmental laws and regulations, and expect such compliance will continue in the future, there can be no assurance that the Nobilis Facilities will not violate the requirements of one or more of these laws or that we will not have to expend significant amounts to remediate or ensure compliance.

We may be subject to changes in current law or the enactment of future legislation.

In recent years, a variety of legislative and regulatory initiatives have occurred on both the federal and state levels concerning physician ownership of healthcare entities to which physicians refer patients, third-party payment programs and other regulatory matters concerning ASCs. We anticipate that federal and state legislatures will continue to review and assess alternative healthcare delivery and payment systems. Potential approaches that have been considered include mandated basic health care benefits, controls on health care spending through limitations on the growth of private health insurance premiums and Medicare and Medicaid spending, the creation of large insurance purchasing groups, pay for performance systems, and other fundamental changes to the health care delivery system. Private sector providers and payors have embraced certain elements of reform, resulting in increased consolidation of health care providers and payors as those providers and payors seek to form alliances in order to provide cost effective, quality care. Legislative debate is expected to continue in the future, and we cannot predict what impact the adoption of any federal or state health care reform measures or future private sector reform may have on its business.

It is not possible to predict what federal or state initiatives, if any, may be adopted in the future or how such changes might affect us. If a federal or state agency asserts a different position or enacts new legislation regarding ASCs, we may experience a significant reduction in our revenues, be excluded from participation in third-party payor programs, or be subject to future civil and criminal penalties.

Technologies, tools, software, and applications could block our advertisements, impair our ability to deliver interest-based advertising, or shift the location in which our advertising appears, which could harm our operating results.

Technologies, tools, software, and applications (including new and enhanced Web browsers) have been developed and are likely to continue to be developed that can block display, search, and interest-based advertising and content, delete or block the cookies used to deliver such advertising, or shift the location in which advertising appears on pages so that our advertisements do not show up in the most favorable locations or are obscured. Most of our marketing expenditures are fees paid to internet search companies for the display of our graphical advertisements or clicks on search advertisements on Web pages. As a result, the adoption of such technologies, tools, software, and applications could reduce the frequency with which, or prominence of, our advertisements in search results. Further, we may not be able to continue to procure and/or to afford primary placement in interest-based advertising locations and this, in turn, could reduce our ability to attract prospective patients to our services or to attract or retain customers to whom we provide marketing and advertising services.

We rely on third parties to provide the technologies necessary to deliver content, advertising, and services to our prospective patients, and any change in the service terms, costs, availability, or acceptance of these formats and technologies could adversely affect our business.

We rely on third parties to provide the technologies that we use to deliver our content and our advertising to prospective patients through the use of search engine optimization services. There can be no assurance that these providers will continue to provide us with search engine optimization services on reasonable terms, or at all. Providers may change the fees they charge for these services or otherwise change their business model in a manner that slows the widespread use of their platforms and search engines. In order for our services to be successful, we must procure a prominent place in the search results from major search providers. These providers in turn rely on a large base of users of their technologies necessary to deliver our content and our advertising to prospective patients. We have limited or no control over the availability or acceptance of those providers’

 

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technologies, and any change in the terms, costs, availability of search engine optimization services or in end-user utilization of the service providers with whom we have chosen to work could adversely affect our business.

Any failure to scale and adapt our existing technology architecture to manage expansion of user-facing services and to respond to rapid technological change could adversely affect our business.

Our proprietary software for managing patient flow through our system relies on software, networking and telecommunications technologies. Technological changes could require substantial expenditures to modify or adapt our infrastructure. The technology architectures and platforms utilized for our services are highly complex and may not provide satisfactory security features or support in the future, as usage increases and products and services expand, change, and become more complex. In the future, we may make additional changes to our existing, or move to completely new, architectures, platforms and systems, or our prospective patients may increasingly access our sites through devices that compel us to invest in new architectures, platforms and systems. Such changes may be technologically challenging to develop and implement, may take time to test and deploy, may cause us to incur substantial costs or data loss, and may cause changes, delays or interruptions in service. These changes, delays, or interruptions in our systems may disrupt our business. Also, to the extent that demands for our services increase, we may need to expand our infrastructure, including the capacity of our hardware servers and the sophistication of our software in order to sustain our ability to manage patient-flow through. This expansion is likely to be expensive and complex and require additional technical expertise. Further, it is costly to retrieve, store, and integrate data that enables us to track our patients through our processes. Any difficulties experienced in adapting our architectures, platforms and infrastructure to accommodate increased patient flow, to store user data, and track patient status preferences, together with the associated costs and potential loss of traffic, could harm our operating results, cash flows from operations, and financial condition.

If our security measures are breached, we may face significant legal and financial exposure. Further, a breach could result in the perception that our technology is insecure or insufficient to protect sensitive patient data, and patients, physicians and healthcare facilities may curtail or stop partnering with us or cease using services, and we may incur significant legal and financial exposure.

Our products and services involve the storage and transmission of patient and potential patient personal and medical information, including “Protected Health Information” that is subject to the security and privacy proprietary information in our facilities and on our equipment, networks and corporate systems. Security breaches expose us to a risk of loss of this information, litigation, remediation costs, increased costs for security measures, loss of revenue, damage to our reputation, and potential liability. Our user data and corporate systems and security measures have been and may in the future be breached due to the actions of outside parties (including cyber-attacks), employee error, malfeasance, a combination of these, or otherwise, allowing an unauthorized party to obtain access to our data or our users’ or customers’ data. Additionally, outside parties may attempt to fraudulently induce employees, users, or customers to disclose sensitive information in order to gain access to our data or our users’ or customers’ data.

Any breach or unauthorized access could result in significant legal and financial exposure, increased remediation and other costs, damage to our reputation and a loss of confidence in the security of our products, services and networks that could potentially have an adverse effect on our business. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently or may be designed to remain dormant until a predetermined event and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose users and customers.

In addition, various federal, state and foreign legislative or regulatory bodies may enact new or additional laws and regulations concerning privacy, data-retention and data-protection issues, including laws or regulations mandating disclosure to domestic or international law enforcement bodies, which could adversely impact our

 

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business, our brand or our reputation with users. The interpretation and application of privacy, data protection and data retention laws and regulations are often uncertain and in flux in the U.S. and internationally. These laws may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices, complicating long-range business planning decisions. If privacy, data protection or data retention laws are interpreted and applied in a manner that is inconsistent with our current policies and practices we may be fined or ordered to change our business practices in a manner that adversely impacts our operating results. Complying with these varying international requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.

Our business depends on strong brands related to our procedures, and failing to maintain or enhance our brands in a cost-effective manner could harm our operating results.

Maintaining and enhancing our brands is an important aspect of our efforts to attract potential patients. We believe that the importance of brand recognition will increase due to the relatively low barriers to entry in certain portions of the market. Maintaining and enhancing our brands will depend largely the ability of third parties to perform those surgical services in a safe and effective manner. Given the nature of surgical services and the fact that we do not directly control the physicians performing our procedures, there will always be a significant risk that surgeries may not be successful. Our subsidiary Athas Health, LLC, has in the past been negatively impacted by negative reputation of a former physician-partner, and our brands are susceptible to being negatively impacted in the future by the conduct of third parties, including physicians and healthcare facilities.

Misappropriation or infringement of our intellectual property and proprietary rights, enforcement actions to protect our intellectual property and claims from third parties relating to intellectual property could materially and adversely affect our financial performance.

Litigation regarding intellectual property rights is common in the internet and technology industries. We expect that internet technologies and software products and services may be increasingly subject to third party infringement claims as the number of competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Our ability to compete depends upon our proprietary systems and technology. While we rely on trademark, trade secret, patent and copyright law, confidentiality agreements and technical measures to protect our proprietary rights, we believe that the technical and creative skills of our personnel, continued development of our proprietary systems and technology, brand name recognition and reliable website maintenance are more essential in establishing and maintaining a leadership position and strengthening our brands. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our services or to obtain and use information that we regard as proprietary. Policing unauthorized use of our proprietary rights is difficult and may be expensive. We have no assurance that the steps taken by us will prevent misappropriation of technology or that the agreements entered into for that purpose will be enforceable. Effective trademark, service mark, patent, copyright and trade secret protection may not be available when our products and services are made available online. In addition, if litigation becomes necessary to enforce or protect our intellectual property rights or to defend against claims of infringement or invalidity, this litigation, even if successful, could result in substantial costs and diversion of resources and management attention. We also have no assurances that our products and services do not infringe on the intellectual property rights of third parties. Claims of infringement, even if unsuccessful, could result in substantial costs and diversion of resources and management attention. If we are not successful, we may be subject to preliminary and permanent injunctive relief and monetary damages which may be trebled in the case willful infringements.

Government regulation and consumer advocates may limit the scope and content of our services, which could affect our ability to meet our clients’ needs, which could have a material adverse effect on our business, results of operations and financial position.

Government regulations may directly or indirectly affect or attempt to affect the scope, content and manner of presentation of health services, advertising and marketing. Such regulation may seek, among other things, to

 

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limit the ability of health service providers to advertising expenditures by certain industries or for certain products and services. In addition, there has been a tendency on the part of businesses to resort to the judicial system to challenge advertising practices, which could cause our clients affected by such actions to reduce their spending on our services. Any limitation or judicial action that effects our ability to meet our clients’ needs or reduces client spending on our services could have a material adverse effect on our business, results of operations and financial position.

We are subject to state and federal laws and regulations regarding truth in advertising.

Most states regulate advertising related to healthcare. Most of these laws and regulations address the obligations of a licensed professional to accurately describe his or her credentials, the efficacy of treatments offered by the professional and the risks to a potential patient of such treatments. In some states it is unclear what rules apply to advertisers of healthcare services who are not licensed professionals. If we determine that regulatory requirements in a given state prevent one or more of our marketing services programs, we may be required to cease contracting with physicians and healthcare facilities in that state and to cease marketing to citizens of that state. However, if advertising requirements on the whole become overly burdensome, we may elect to terminate operations or particular marketing services programs entirely or avoid introducing particular marketing services programs. In some states we have modified the compensation structure of our marketing programs to reduce uncertainty regarding our compliance with state laws.

The Federal Trade Commission enforces Section 5 of the Federal Trade Commission Act (the “FTC Act”), which prohibits deceptive or unfair practices in or affecting commerce, and Section 12 of the FTC Act, which prohibits the dissemination of any false advertisement to induce the purchase of any food, drug, device, or service. An ad is deceptive under Section 5 of the FTC Act if it has a statement – or omits information – that: 1) is likely to mislead consumers acting reasonably under the circumstances; and 2) is “material” – that is, important to a consumer’s decision to buy or use the product. An ad or business practice is unfair if: 1) it causes or is likely to cause substantial consumer injury that a consumer could not reasonably avoid; and 2) the injury is not outweighed by any benefit the practice provides to consumers or competition. These consumer protection laws apply equally to marketers across all mediums, whether delivered on a desktop computer, a mobile device, or more traditional media such as television, radio, or print. If a disclosure is needed to prevent an online ad claim from being deceptive or unfair, it must be clear and conspicuous. Under the FTC guidance, this means advertisers should ensure that the disclosure is clear and conspicuous on all devices and platforms that consumers may use to view the ad. FTC guidance also explains that if an advertisement without a disclosure would be deceptive or unfair, or would otherwise violate a rule, and the disclosure cannot be made clearly and conspicuously on a device or platform, then that device or platform should not be used. It may be difficult or impossible for the Company know precisely how clearly a disclosure appears on a particular platform which may cause our disclosures to be inadequate. This may subject the significant penalties, including statutory damages; further our efforts to comply with these regulations may negatively affect conversion rates of leads, and thus, our revenue or profitability.

Under the FTC Act, ads, promotional brochures, informational tapes, seminars and other forms of marketing of surgical services to consumers should not have express or implied claims that are false or unsubstantiated, or that omit material information. In particular, claims that convey an inaccurate impression about the safety, efficacy, success or other benefits of any form of surgery would raise concerns about deception. Claims about success rates, long-term stability, or predictability of outcome must be substantiated by competent and reliable scientific evidence. The standard of review of these disclosures is viewed from the perspective of the “reasonable person”. However, this standard can be difficult to apply when promoting new and innovative surgical procedures and techniques such as the ones we promote. A failure on our part to fully describe risk factors or to make assertions that are alleged to be lacking in scientific support could subject us to litigation or regulatory enforcement actions, which could result in financial losses and fines and which could harm our reputation.

 

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We are subject to various federal and state laws, rules, regulations and orders regarding telemarketing and privacy, including restrictions on the use of unsolicited emails and restrictions on marketing activities conducted through the use of telephonic communications (including text messaging to mobile telephones).

Our financial performance could be adversely affected by newly-adopted or amended laws, rules, regulations and orders relating to telemarketing and increased enforcement of such laws, rules, regulations or orders by governmental agencies or by private litigants. One example of recent regulatory changes that may affect our business, operating results and financial condition are the regulations under the Telephone Consumer Protection Act (“TCPA”). Regulations adopted by the Federal Communications Commission under the TCPA that became effective October 16, 2013 require the prior express written consent of the called party before a caller can initiate telemarketing calls (i) to wireless numbers (including text messaging) using an automatic telephone dialing system or an artificial or prerecorded voice; or (ii) to residential lines using an artificial or prerecorded voice. Failure to comply with the TCPA can result in significant penalties, including statutory damages. Our efforts to comply with these regulations may negatively affect conversion rates of leads, and thus, our revenue or profitability.

We are subject to general business risks in the healthcare industry.

We are subject to general business risks inherent in the healthcare industry, including changing physician and patient preferences, adverse changes in reimbursement by third-party payors, the inability to collect a profitable level of fees, increases in labor costs and other operating costs, possible future changes in labor relations, competition from or the oversupply of other similar surgical facilities, changes in neighborhood or location conditions and general economic conditions, health related risks (including liability for the provision of health care services), disease outbreaks and control risks, the imposition of increased taxes or new taxes, capital expenditure requirements, changes in interest rates, and changes in the availability and cost of long-term financing. Moreover, there is no assurance that the performance achieved to date at the facilities that we own and operate and expected in the future will continue or be achieved. Any one of, or a combination of, these factors may adversely affect our business, results of operations and financial condition.

We may be unable to implement our organic growth strategy.

Future growth will place increased demands on our management, operational and financial information systems and other resources. Further expansion of our operations will require substantial financial resources and management resources and attention. To accommodate our anticipated future growth, and to compete effectively, we will need to continue to implement and improve our management, operational, financial and information systems and to expand, train, manage and motivate our workforce. Our personnel, systems, procedures or controls may not be adequate to support our operations in the future. Further, focusing our financial resources and management attention on the expansion of our operations may negatively impact our financial results. Any failure to implement and improve our management, operational, financial and information systems, or to expand, train, manage or motivate our workforce, could reduce or prevent our growth. We can give you no assurances that our personnel, systems, procedures or controls will be adequate to support our operations in the future or that our financial resources and management attention on the expansion of our operations will not adversely affect our business, result of operations and financial condition. In addition, direct-to-consumer marketing may not be a suitable means to attract case volume as patients may not directly seek our services, but instead may choose to consult with a non-Nobilis-affiliated physician. We can offer no guarantees that the financial resources expended on direct-to-consumer marketing campaigns will result in the expansion of our business.

We may be unable to implement our acquisition strategy.

Our efforts to execute our acquisition strategy may be affected by our ability to identify suitable candidates and negotiate and close acquisition transactions. We may encounter numerous business risks in acquiring additional facilities, and may have difficulty operating and integrating these facilities. Further, the companies or assets we

 

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acquire in the future may not ultimately produce returns that justify our investment. If we are not able to execute our acquisition strategy, our ability to increase revenues and earnings through external growth will be impaired.

In addition, we will need capital to acquire other centers, integrate, operate and expand the Nobilis Facilities. We may finance future acquisition and development projects through debt or equity financings and may use our common shares for all or a portion of the consideration to be paid in future acquisitions. To the extent that we undertake these financings or use our common shares as consideration, our shareholders may experience future ownership dilution. Our senior secured credit facility with General Electric Capital Corporation (“Credit Facility”) subjects us to covenants that affect the conduct of business. In the event that our common shares do not maintain a sufficient valuation, or potential acquisition candidates are unwilling to accept our common shares as all or part of the consideration, we may be required to use more of our cash resources, if available, or to rely solely on additional financing arrangements to pursue our acquisition and development strategy. However, we may not have sufficient capital resources or be able to obtain financing on terms acceptable to us for our acquisition and development strategy, which would limit our growth. Without sufficient capital resources to implement this strategy, our future growth could be limited and operations impaired. There can be no assurance that additional financing will be available to fund this growth strategy or that, if available, the financing will be on terms that are acceptable to us.

Restrictive covenants in our Credit Facility may restrict our ability to pursue our business strategies.

The operating and financial restrictions and covenants in our Credit Facility may adversely affect our ability to finance future operations or capital needs or to engage in other business activities. Such agreements limit our ability, among other things, to:

 

    incur additional indebtedness or issue certain preferred equity;

 

    pay dividends on, repurchase or make distributions in respect of our common stock, prepay, redeem, or repurchase certain debt or make other restricted payments;

 

    make certain investments;

 

    create certain liens;

 

    enter into agreements restricting our subsidiaries’ ability to pay dividends, loan money, or transfer assets to us;

 

    consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and

 

    enter into certain transactions with our affiliates.

A breach of any of these covenants could result in a default under our Credit Facility and permit the lenders to cease making loans to us. Upon the occurrence of an event of default under the Credit Facility, the creditors thereunder could elect to declare all amounts outstanding to be immediately due and payable and, in the case of our revolving credit facility, which is a part of the Credit Facility, terminate all commitments to extend further credit.

If our operating performance declines, we may be required to obtain waivers from the lenders under the Credit Facility to avoid defaults thereunder. If we are not able to obtain such waivers, our creditors could exercise their rights upon default.

Furthermore, if we were unable to repay the amounts due and payable under our secured obligations, the creditors thereunder could proceed against the collateral granted to them to secure our obligations thereunder. We have pledged a significant portion of our assets, including our ownership interests in certain of our directly owned subsidiaries, as collateral under our Credit Facility. If the creditors under our Credit Facility accelerate the repayment of our debt obligations, we cannot assure you that we will have sufficient assets to repay our Credit

 

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Facility, or will have the ability to borrow sufficient funds to refinance such indebtedness. Even if we were able to obtain new financing, it may not be on commercially reasonable terms, or terms that are acceptable to us.

We may incur unexpected, material liabilities as a result of acquiring ASCs or other healthcare facilities.

Although we intend to conduct due diligence on any future acquisition, we may inadvertently invest in ASCs or other healthcare facilities that have material liabilities arising from, for example, the failure to comply with government regulations or other past activities. Although the Nobilis Facilities have the benefit of professional and general liability insurance, we do not currently maintain and are unlikely to acquire insurance specifically covering every unknown or contingent liability that may have occurred prior to our investment in the Nobilis Facilities, particularly those involving prior civil or criminal misconduct (for which there is no insurance). Incurring such liabilities as a result of future acquisitions could have an adverse effect on our business, operations and financial condition.

We may be subject to professional liability claims.

As a healthcare provider, we are subject to professional liability claims both directly and vicariously through the malpractice of members of our medical staff. As a healthcare facility, each Nobilis Facility has direct responsibility and legal liability for the standard of care provided in its facility by its staff. The Nobilis Facilities have legal responsibility for the physical environment and appropriate operation of equipment used during surgical procedures. In addition, each Nobilis Facility has vicarious liability for the negligence of its credentialed medical staff under circumstances where it either knew or should have known of a problem leading to a patient injury. The physicians credentialed by the Nobilis Facilities are involved in the delivery of healthcare services to the public and are exposed to the risk of professional liability claims. Although the Nobilis Facilities neither control the practice of medicine by physicians nor have responsibility for compliance with certain regulatory and other requirements directly applicable to physicians and their services, as a result of the relationship between each Nobilis Facility and the physicians providing services to patients in the Nobilis Facilities, we or our subsidiaries may become subject to medical malpractice claims under various legal theories. Claims of this nature, if successful, could result in damage awards to the claimants in excess of the limits of available insurance coverage. Insurance against losses related to claims of this type can be expensive and varies widely from state to state. The Nobilis Facilities maintain and require the physicians on the medical staff of the Nobilis Facilities to maintain liability insurance in amounts and coverages believed to be adequate, presently $1 million per claim to an aggregate of $3 million per year.

In 2003, Texas passed legislation that reformed its laws related to professional liability claims by setting caps on non-economic damages in the amount of $250,000 per claimant to a per claim aggregate of $750,000 for physicians and other providers, including ASCs. Punitive damages are excluded from this cap. This tort reform legislation has resulted in a reduction in the cost of malpractice insurance because of the reduction in malpractice claims. However, there can be no assurances that this trend will continue into the future.

Most malpractice liability insurance policies do not extend coverage for punitive damages. While extremely rare in the medical area, punitive damages are those damages assessed by a jury with the intent to “punish” a tortfeasor rather than pay for a material loss resulting from the alleged injury. We cannot assure you that we will not incur liability for punitive damage awards even where adequate insurance limits are maintained. We also believe that there has been, and will continue to be, an increase in governmental investigations of physician-owned facilities, particularly in the area of Medicare/Medicaid false claims, as well as an increase in enforcement actions resulting from these investigations. Investigation activity by private third-party payors has also increased with, in some cases, intervention by the states’ attorneys general. Also possible are potential non-covered claims, or “qui tam” or “whistleblower” suits.

Although exposure to qui tam lawsuits is minimal since Medicare and Medicaid comprise less than 5.0% of our revenue and an even smaller percentage of our profit, many plaintiffs’ lawyers have refocused their practices on

 

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“whistleblower” lawsuits given the reduction in awards from medical malpractice claims. These whistleblower lawsuits are based on alleged violations of government law related to billing practice and kickbacks. Under federal Medicare law, these whistleblowers are entitled to receive a percentage of recoveries made if the federal government takes on the case. However, a whistleblower may pursue direct action against the healthcare entity under the applicable statutes and seek recoveries without federal government intervention. Many malpractice carriers will not insure for violations of the law although they may cover the cost of defense. Any adverse determination in a legal proceeding or governmental investigation, whether currently asserted or arising in the future, could have a material adverse effect on our financial condition.

The Nobilis Facilities may, in the ordinary course of their business, be subject to litigation claims. In particular, the Nobilis Facilities can be subject to claims, among others, relating to actions of medical personnel performing services at the Nobilis Facilities. Historically, the Nobilis Facilities have been able to obtain what we believe is adequate insurance to cover these risks. However, the cost of this insurance may increase and there can be no assurance that we will be able to obtain adequate insurance against medical liability claims in the future on economically reasonable terms, or at all. In addition, claims of this nature, if successful, could result in damage awards to the claimants in excess of the limits of any applicable insurance coverage. If the insurance that we have in place from time to time is not sufficient to cover claims that are made, the resulting shortfall could have a material adverse effect on our business and operations.

The Nobilis Facilities’ insurance coverages might not cover all claims against them or be available at a reasonable cost, if at all. If the Nobilis Facilities are unable to maintain insurance coverage, if judgments are obtained in excess of the coverage the Nobilis Facilities maintain, or if the Nobilis Facilities are required to pay uninsured punitive damages or pay fines under “qui tam” lawsuits, the Nobilis Facilities would be exposed to substantial additional liabilities. We cannot assure that each Nobilis Facility will be able to maintain insurance coverage at a reasonable premium, or at all, that coverage will be adequate to satisfy adverse determinations against the Nobilis Facilities, or that the number of claims will not increase.

We are impacted by general economic conditions.

Our business is subject to general economic risks incident to the U.S. healthcare market and the U.S. and Canadian capital markets. The majority of our patients obtain health insurance through their employers, thus factors impacting the employment rate can increase or decrease our potential patient population. Further, because many health insurance plans require patients to pay co-insurance and/or a deductible, the ability of a patient to pay these portions impacts the patient’s decision to undergo the elective surgical procedures we provide in many of our facilities. The continuing recovery from the global recessionary economic conditions that existed in 2012 had a positive financial impact on our business in 2013, 2014 and into 2015.

Because we have relied on, and will continue to rely on, outside investors and lenders for capital used for our operational capital, capital expenditures and strategic acquisitions, the general market conditions in the U.S. and Canada, such as interest rates, availability of credit, inflation rates, economic uncertainty, changes in laws and regulations, and national and international political circumstances impact our business.

Malpractice insurance premiums or claims may adversely affect our business.

Should the Nobilis Facilities experience adverse risk management claims or should the market for medical malpractice dictate a large increase in rates, our business and financial results could be adversely affected.

We rely on technology.

The medical technology used in our facilities is ever changing and represents a significant cost of doing business. There can be no assurance that the equipment purchased or leased by our facilities will not be enhanced or

 

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rendered obsolete by advances in medical technology, or that our facilities will be able to finance or lease additional equipment necessary to remain competitive should its medical staff physicians request such modern equipment or its existing equipment become obsolete. This could have an adverse effect on our business, operations and financial condition.

We are subject to rising costs.

The costs of providing our services have been rising and are expected to continue to rise at a rate higher than that anticipated for consumer goods as a whole. Our business, operating results or financial condition could be adversely affected if we are unable to implement annual private pay increases due to market conditions, otherwise increase our revenues or, to a lesser extent, if reimbursement rates from Medicaid and Medicare sources are not adjusted to cover increases in labor and other costs.

We depend on referrals.

Our success, in large part, is dependent upon referrals to our physicians from other physicians, systems, health plans and others in the communities in which we operate, and upon our medical staff’s ability to maintain good relations with these referral sources. Physicians who use our facilities and those who refer patients are not our employees and, in many cases, most physicians have admitting privileges at other hospitals and (subject to any non-competition arrangements that may have been entered into in connection with the Partnership Agreements) may refer patients to other providers. If we are unable to successfully cultivate and maintain strong relationships with our physicians and their referral sources, the number of procedures performed at our facilities may decrease and cause revenues to decline. This could adversely affect our business, results of operations and financial condition.

We may face a shortage of nurses.

The United States is currently experiencing a shortage of nursing staff. The failure of the Nobilis Facilities to hire and retain qualified nurses could have a material adverse effect on our business operations and financial condition.

We are subject to general litigation risks.

Litigation could potentially be brought against us by various individuals or entities including, but not limited to federal, state, or local governments, potential competitors, investors and current and former employees. Any such lawsuits could have an adverse effect on our operations and financial results.

We are subject to Canadian tax laws.

Our company’s income and our related entities must be computed in accordance with Canadian and foreign tax laws, as applicable, and we are subject to Canadian tax laws, all of which may be changed in a manner that could adversely affect the amount of distributions to shareholders. There can be no assurance that Canadian federal income tax laws, the judicial interpretation thereof or the administrative and assessing practices and policies of the Canada Revenue Agency and the Department of Finance (Canada) will not be changed in a manner that adversely affects shareholders. In particular, any such change could increase the amount of tax payable by us, reducing the amount available to pay dividends to the holders of our common shares.

We are subject to U.S. tax laws.

There can be no assurance that United States federal income tax laws and Internal Revenue Service and Department of the Treasury administrative and legislative policies respecting the United States federal income tax consequences described herein will not be changed in a manner that adversely affects the holders of our common shares.

 

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Future issuances of our common shares could result in dilution.

Our articles authorize the issuance of an unlimited number of common shares, on terms that the Board of Directors, without approval of any shareholders, establishes. We may issue additional common shares in the future in connection with a future financing or acquisition. The issuance of additional shares may dilute the investment of a shareholder. We also have outstanding warrants to purchase a significant number of common shares as well as a stock option pool available to employees, which if exercised, would cause dilution to our stockholders.

We qualify as an “emerging growth company” under the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:

 

    have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;

 

    comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);

 

    submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay” and “say-on-frequency”; and

 

    disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive’s compensation to median employee compensation.

We will remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our ordinary shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.

Until such time, however, we cannot predict if investors will find our common shares less attractive because we may rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our stock price may be more volatile.

Since we have elected under Section 107 of the JOBS Act to use the extended transition period with respect to complying with new or revised accounting standards, our financial statements may not be comparable to companies that comply with public company effective dates making it more difficult for an investor to compare our results with other public companies.

Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 102(b)(2)(B) of the JOBS Act for complying with new or revised accounting standards. In other words, as an emerging growth company we can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

If securities analysts do not publish research or reports about our business or if they downgrade us or our sector, the price of our common shares could decline.

The trading market for our common shares will depend in part on research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. Furthermore, if one or more of the

 

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analysts who cover us downgrades us or the industry in which we operate or the stock of any of our competitors, the price of our common shares will probably decline. If one or more of these analysts ceases coverage altogether, we could lose visibility, which could also lead to a decline in the price of the common shares.

The market price and trading volume of our common shares may be volatile, which may adversely affect its market price.

The market price of our common shares on the exchanges on which our common shares are traded could be subject to significant fluctuations due to factors such as:

 

    actual or anticipated fluctuations in our financial condition or results of operations;

 

    limited trading activity;

 

    the success or failure of our operating strategies and our perceived prospects; realization of any of the risks described in this section; failure to be covered by securities analysts or failure to meet the expectations of securities analysts;

 

    a decline in the stock prices of peer companies; and

 

    a discount in the trading multiple of our common shares relative to that of the common shares of certain of our peer companies due to perceived risks associated with our smaller size.

As a result, our common shares may trade at prices significantly below the price you paid to acquire them. Furthermore, declines in the price of our common shares may adversely affect our ability to conduct future offerings or to recruit and retain key employees.

We have no current plan to pay dividends on our common shares and investors may lose the entire amount of their investment.

We have no current plans to pay dividends on our common shares. Therefore, investors will not receive any funds absent a sale of their shares. We cannot assure investors of a positive return on their investment.

Holders of our warrants will have no rights as shareholders until such holders exercise their warrants and acquire our common shares.

Until holders of Warrants acquire common shares stock upon exercise of the warrants, holders of warrants will have no rights with respect to the common shares underlying such warrants. Upon exercise of the warrants, the holders thereof will be entitled to exercise the rights of common shareholders only as to matters for which the record date occurs after the exercise date.

There is no public trading for our warrants, and there is no guarantee that an active trading market will be created.

There is currently no public trading market for our Warrants. The Company intends on applying to list the Warrants on the TSX but there is no guarantee that the application will be accepted, and even if it is accepted there is no guarantee that an active public trading market will be created. The number of persons interested in purchasing our Warrants at or near bid prices at any given time may be relatively small or occasionally non-existent. As a consequence, there may be periods of several days or more when trading activity in our Warrants is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on the Warrant price. We cannot give you any assurance that a broader or more active public trading market for our Warrants will develop or be sustained, or that trading levels will be sustained. An active market for our Warrants may never develop. As a result, investors must bear the economic risk of holding their Warrants for an indefinite period of time.

 

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MARKET, INDUSTRY AND OTHER DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, on assumptions that we have made that are based on those data and other similar sources and on our knowledge of the markets for our services. These data involve a number of assumptions and limitations. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in section entitled “Risk Factors” of this prospectus and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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USE OF PROCEEDS

We are registering these common shares and Warrants pursuant to the registration rights granted to the Selling Securityholders in the Offering and in the Athas Acquisition. We will not receive any proceeds from the sale or other disposition by the Selling Securityholders of the common shares or Warrants covered by this prospectus. However, we will receive the cash exercise price of the Warrants and will use the proceeds for normal operations.

 

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MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

Our outstanding common shares, no par value, are listed on the Toronto Stock Exchange under the symbol “NHC” and on the NYSE MKT under the symbol “HLTH”. Our common shares traded on the OTC Pink in the United States until April 17, 2015 when it commenced trading on the NYSE MKT. The following table outlines the share price trading range and volume of shares traded by quarter as follows:

 

     Toronto Stock Exchange      NYSE MKT/OTC Pink  
     Share Price Trading Range      Share Price Trading Range  
         High              Low              High              Low      
     (C$ per share)             ($ per share)         

2015

           

1st Quarter

     6.72         3.14         5.24         2.70   

2nd Quarter

     11.00         6.38         9.34         5.14   

2014

           

1st Quarter

     1.28         0.98         1.16         0.90   

2nd Quarter

     1.22         0.97         1.11         0.92   

3rd Quarter

     1.58         1.11         1.45         0.96   

4th Quarter

     3.60         1.11         3.05         1.07   

2013

           

1st Quarter

     0.52         0.13         0.48         0.11   

2nd Quarter

     0.47         0.28         0.46         0.27   

3rd Quarter

     0.87         0.39         0.85         0.38   

4th Quarter

     1.64         0.71         1.45         0.73   

As of August 14, 2015, there were approximately 214 holders of record of our common shares, including brokers and other nominees.

Dividend Policy

We have not declared or paid any cash dividends on our common shares for over five years and we do not anticipate paying any dividends in the foreseeable future. We expect to retain any future earnings to finance our operations and expansion. The payment of cash dividends in the future will depend upon our future revenues, earnings and capital requirements and other factors the Board considers relevant.

Equity Compensation Plan Information

Restricted Share Unit Plan

During 2008, the board of directors approved the adoption of a Restricted Share Unit Plan for employees. Restricted Share Units (“RSUs”) may be granted to our employees at the sole discretion of the board of directors.

Subject to the board of directors’ ability to accelerate the vesting of the RSUs if it determines circumstances so warrant, each RSU will generally vest in full on the third anniversary of the date of grant; provided that if there is a change of control of our company prior to the vesting date of the RSUs and a participant is terminated (or resigns for good reason) within six months following such change of control, a pro rata portion of their unvested RSUs will vest up to the date of the change of control.

Upon vesting of his or her RSUs, a participant will be entitled to receive on the vesting date, at the discretion of the board of directors either: (a) a lump sum cash payment equal to the number of RSUs multiplied by an average closing price of the common shares on the Toronto Stock Exchange on the redemption date, net of any applicable

 

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deductions and withholdings; or (b) that number of common shares equal to the number of RSUs credited to the participant’s RSU account, such common shares to be issued from our treasury. The participant is to receive the benefit on, or as soon as practicable after, the vesting date, but in no event later than 90 days after the vesting date. Unlike stock options, RSUs do not require the payment of any monetary consideration to us.

Whenever cash dividends are paid on our company’s common shares, dividend equivalents in the form of additional RSUs will be credited to each Participant and will become part of his or her award under the RSU Plan. The RSUs representing dividend equivalents will vest and be paid at the same time and in the same manner as the RSUs to which the dividend equivalents pertain.

In the event of a participant’s termination of employment, voluntary or by cause, with us prior to any vesting date, the participant’s rights to any unvested RSUs will be immediately and irrevocably forfeited.

If the participant’s employment with us terminates on account of death or disability or is terminated by us without cause prior to any vesting date, the participant will become vested in a prorated portion of his or her unvested RSUs, based on the number of months that have elapsed in the then current vesting period as of the date of termination.

Deferred Share Unit (“DSU”) Plan

In May 2012, the board of directors terminated the DSU Plan. In conjunction with its termination, all outstanding DSUs previously issued to the directors were cancelled, and our company granted each director a number of RSUs equal to the number of DSUs which had been previously granted. The RSUs vested immediately. A total of 536,219 DSUs were cancelled in this manner. As the cancelled DSUs and newly granted RSUs all vested at the time of grant, no change to compensation expense occurred.

Stock Option Plan

In April 2012, the board of directors approved the adoption of the Stock Option Plan (“Stock Option Plan”) for insiders, employees, and service providers. In May 2012, our company’s shareholders approved the Stock Option Plan, and in July 2012, the Toronto Stock Exchange approved the Stock Option Plan. The Stock Option Plan was amended in April 2013. Options reserved under the plan consist of the right of a participant (a “Participant”) to purchase one common share per option (“Option”) and may be granted at the sole discretion of the board of directors. The exercise price of an Option is determined by the board of directors at the time of grant and shall not be less than the current market price. The term of each Option is determined by the board of directors and shall not exceed 10 years.

If an Option holder shall cease to be a Participant for cause, no Option held by such Option holder shall be exercisable following the date on which such Option holder ceases to be a Participant. If an Option holder ceases to be a Participant for any reason other than for cause, any Option held by such Option holder at such time shall remain exercisable in full at any time, and in part from time to time, for a period of 90 days after the date on which the Option holder ceases to be a Participant.

If the Participant’s employment with us terminates on account of death, any Option held by such Participant at the date of death shall be exercisable in whole or in part only by the person or persons to whom the rights of the Participant’s Options transfer by will or laws of descent.

The maximum number of RSUs and Options that may be issued under the combined plans is equal to 20.0% of our issued and outstanding common shares. The maximum number of RSUs and Options in the aggregate that may be issued to Insiders is equal to 10.0% of our issued and outstanding common shares, pursuant to certain rules of the TSX.

 

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Convertible Securities

As of August 14, 2015, we had 4,256,666 incentive stock options under the Stock Option Plan outstanding at exercise prices ranging from C$0.95 - C$7.94. Each incentive stock option entitles the holder to purchase, subject to adjustment, one common share at the exercise price established at the time of grant of the options.

As of August 14, 2015, we had 4,650,000 RSUs outstanding.

As of August 14, 2015, we had (i) 35,291 transferable Agent’s Warrants outstanding to purchase common shares at an exercise price of C$0.95, (ii) 121,485 transferable Agent’s Warrants outstanding to purchase common shares at an exercise price of C$1.37 and (iii) 392,383 transferable Agent’s Warrants outstanding to purchase common shares at an exercise price of C$11.50. Each Agent’s Warrant entitles the holder to purchase, subject to adjustment, one common share of our Company for a period of two years ending December 15, 2015,

September 26, 2016 and May 13, 2017, respectively. The Agent’s Warrants were issued in connection with the Company’s private placements in December 2013, September 2014 and May 2015, respectively.

As of August 14, 2015, we had 3,923,824 Warrants outstanding to purchase common shares at an exercise price of C$11.50. Each Warrant is exercisable for one common share at any time until 5:00 pm (Toronto time) on May 13, 2017. The expiry date of the Warrants may be accelerated by us at any time following February 13, 2016, and prior to the expiry date of the Warrants if the volume-weighted average trading price of our common shares on the principal market on which such shares trade is equal to or greater than C$13.50 for any 20 consecutive trading days, at which time we may accelerate the expiry date by issuing a press release announcing the reduced warrant term whereupon the Warrants will expire on the 20th calendar day after the date of such press release.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors” and elsewhere in this Registration Statement. We assume no obligation to update forward-looking statements or the risk factors. You should read the following discussion in conjunction with our financial statements and related notes.

General

Our core business is the ownership, operation and management of outpatient surgery centers and surgical hospitals (the “Medical Services Segment”). We are also a provider of marketing services to our own affiliated entities as well as to third parties through our subsidiary Athas, which is a separate reportable business segment (the “Marketing Segment”).

Unless otherwise indicated, all financial and statistical information included in this section relates to our continuing operations, with dollar amounts expressed in thousands (except per share, per case and per procedure). Continuing operations information includes the results of 7 of our 8 healthcare facilities (the “Nobilis Facilities”) operated throughout the three and six months ended June 30, 2015 and 2014. The Nobilis Facilities are located in Texas and Arizona and consist of two hospitals in Houston, Texas and five ambulatory surgery centers, referred to as the “Nobilis ASCs” of which three are located in Houston, Texas, one in Dallas, Texas and one in Scottsdale, Arizona. Continuing operation information does not include the results of our recent acquisition of a Dallas-area hospital, which took place after June 30, 2015.

Recent Developments

Acquisition of Peak Surgeon Innovations, LLC. In June 2015, the Company acquired Peak Surgeon Innovations, LLC (“Peak”), a provider of intraoperative neuromonitoring (“IOM”) services for hospitals, surgery centers and other healthcare facilities. The Company acquired a 100% ownership interest in Peak for cash consideration of approximately $0.9 million and stock consideration of approximately $0.7 million provided to Bryan Hasse (the “Seller”). In addition to such cash and stock consideration, the Seller is eligible to receive a potential earnout payment (in cash or stock at the option of Seller) upon achievement by the IOM service line of certain EBITDA performance metrics.

Acquisition of Victory Plano Hospital, LP. On Jul 30, 2015, Marsh Lane Surgical Hospital, LLC (“Marsh Lane”), a Texas limited liability company and wholly owned subsidiary of the Company, closed the purchase of certain assets (the “Acquisition”) pursuant to an asset purchase agreement (the “Purchase Agreement”) by and among Marsh Lane, the Company, Victory Parent Company, LLC, a Texas limited liability company (“VPC”), and Victory Medical Center Plano, LP, a Texas limited partnership (“Victory Plano”). The Acquisition was closed following the conclusion of bankruptcy proceedings in the U.S. Bankruptcy Court for the Northern District of Texas, Fort Worth Division (the “Bankruptcy Court”) initiated by Victory Plano. On June 12, 2015, Victory Plano filed for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code in the Bankruptcy Court. Following the Bankruptcy Court’s entry into the Sale Motion and Bidding Procedures Order, on July 29, 2015, the Bankruptcy Court entered into a Sale Order approving the terms and conditions of the Purchase Agreement and certain other financial arrangements.

As consideration for the purchase of Victory Plano’s assets, Marsh Lane paid approximately $1.3 million in cash to be used by Victory Plano and VPC to cure and pay certain defaults under contracts assumed by Marsh Lane. The Purchaser also assumed Victory Plano’s indebtedness to Legacy Texas Bank in the amount of approximately $4.5 million. Marsh Lane also assumed Victory Plano’s capital equipment leases and its real estate lease.

 

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Surgical Assist. In June 2015, the Company established Nobilis Surgical Assist, LLC to launch its surgical assist ancillary service line. A third party will handle staffing of cases performed at the Nobilis Facilities, as well as certain administrative matters associated with this service line’s operation. Together with the acquisition of Peak, the Company anticipates increased facility efficiency and revenue per case with the addition of these ancillary services.

Overview of 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 facility 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 or by physician entities using the Nobilis Facilities under a use agreement and billed by the Nobilis Facilities on the physician entities’ behalf;

 

    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.

Six Months ended June 30, 2015 compared to Six Months ended June 30, 2014

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

 

     Net Patient Service Revenue
($)(in thousands)
     Number of Cases (1)      Net Patient Service Revenue
($) per Case (2)
 

Nobilis Facility

   2015      2014      2015      2014      2015      2014  

NHSC-H

   $ 10,477       $ 8,040         1,007         491       $ 10,405         16,375   

KIRBY

     6,009         5,020         1,930         1,769         3,113         2,838   

MSID

     16,891         13,839         1,633         870         10,343         15,906   

NHSC-S

     8,151         31         549         5         14,847         —     

FNH

     30,573         —           1,121         —           27,273         —     

FNSC

     2,717         —           888         —           3,060         —     

VMC

     2,379         —           380         —           6,261         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     77,198         26,930         7,508         3,135         10,282         8,590   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Year over Year Growth

     187         139         20   

 

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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Year ended December 31, 2014 Compared to Year Ended December 31, 2013

The following table sets out the net patient service revenues, the number of procedures performed and the net patient service revenue per procedure at the Nobilis Facilities for last two fiscal years ended December 31, 2014 and 2013:

 

     Net Patient Service Revenue
($)(in thousands)
     Number of Cases (1)      Net Patient Service Revenue
($) per Case (2)
 

Nobilis Facility

         2014                  2013              2014          2013              2014                  2013        

NHSC-H

   $ 22,052       $ 6,676         1,402         825       $ 15,725       $ 8,092   

KIRBY

     12,933         11,503         3,760         3,491         3,440         3,295   

MSID

     31,320         12,635         1,831         1,170         17,105         10,799   

NHSC-S

     1,773         —           214         —           8,287         —     

FNH

     10,763         —           659         —           16,333         —     

FNSC

     1,444         —           450         —           3,209         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     80,285         30,814         8,316         5,486         9,654         5,617   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Year over Year Growth

     161         52      —           72      —     

 

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.

Three months ended June 30, 2015 compared to Three months ended June 30, 2014

The Nobilis Facilities focus on a limited number of high-volume, non-emergency procedures, most of which are billed on an “out of network” basis. Billing on an “out of network” basis means that we bill to entities not participating in the health insurance companies’ (“Third Party Payors”) provider networks, which negotiate discounted fees with providers and facilities in return for access to the patient populations covered by those Third Party Payors. The case mix at each Nobilis Facility is a function of the clinical specialties of the physicians on the medical staff and the equipment and infrastructure at each facility. The Nobilis Facilities intend to continue to refine their case mix as opportunities arise. The following table sets forth the combined number of cases and procedures by medical specialty performed for three months ended June 30, 2015 and 2014:

MEDICAL SERVICES SEGMENT

CASE AND PROCEDURE MIX OF THE NOBILIS FACILITIES

FOR THE THREE MONTHS ENDED JUNE 30, 2015 AND 2014

 

Specialty

  2015 Cases     2015 %
Cases
    2015
Procedures
    2015 %
Procedures
    2014 Cases     2014 %
Cases
    2014
Procedures
    2014 %
Procedures
 

Pain Management

    1,237        27.8     4,368        37.9     779        47.3     3,046        53.5

Musculoskeletal Interventions

    175        3.9     537        4.7     —          0.0     —          0.0

Interventional Headache Procedure

    38        0.9     135        1.2     —          0.0     —          0.0

Orthopedics

    275        6.2     626        5.4     215        13.1     697        12.2

Spine

    300        6.8     456        4.0     10        0.6     28        0.5

Podiatry

    145        3.3     453        3.9     77        4.7     474        8.3

Gastro-intestinal

    95        2.1     186        1.6     20        1.2     27        0.5

General Surgery

    181        4.1     403        3.5     62        3.8     144        2.5

Plastic & Reconstructive

    421        9.5     961        8.3     —          0.0     —          0.0

Bariatrics

    1,006        22.6     2,439        21.2     353        21.4     816        14.3

Gynecology

    241        5.4     258        2.2     1        0.1     1        0.0

Urology

    6        0.1     6        0.1     —          0.0     —          0.0

Ear, Nose, Throat (E.N.T.)

    157        3.5     518        4.5     129        7.8     457        8.0

Neuromonotoring

    165        3.7     165        1.4     —          0.0     —          0.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL

    4,442        100.0     11,511        100.0     1,646        100.0     5,690        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

MARKETING SEGMENT

CASE AND PROCEDURE MIX OF THE NOBILIS FACILITIES

FOR THE THREE MONTHS ENDED JUNE 30, 2015 AND 2014

 

Specialty

  2015 Cases     2015 %
Cases
    2015
Procedures
    2015 %
Procedures
    2014 Cases     2014 %
Cases
    2014
Procedures
    2014 %
Procedures
 

Pain Management

    150        44.4     150        44.4     —          0.0     —          0.0

Musculoskeletal Interventions

    104        30.8     104        30.8     —          0.0     —          0.0

Interventional Headache Procedure

    84        24.9     84        24.9     —          0.0     —          0.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL

    338        100.0     338        100.0     —          0.0     —          0.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CONSOLIDATED SEGMENTS

CASE AND PROCEDURE MIX OF THE NOBILIS FACILITIES

FOR THE THREE MONTHS ENDED JUNE 30, 2015 AND 2014

 

Specialty

  2015 Cases     2015 %
Cases
    2015
Procedures
    2015 %
Procedures
    2014 Cases     2014 %
Cases
    2014
Procedures
    2014 %
Procedures
 

Pain Management

    1,387        29.0     4,518        38.1     779        47.3     3,046        53.5

Musculoskeletal Interventions

    279        5.8     641        5.4     —          0.0     —          0.0

Interventional Headache Procedure

    122        2.6     219        1.8     —          0.0     —          0.0

Orthopedics

    275        5.8     626        5.3     215        13.1     697        12.2

Spine

    300        6.3     456        3.8     10        0.6     28        0.5

Podiatry

    145        3.0     453        3.8     77        4.7     474        8.3

Gastro-intestinal

    95        2.0     186        1.6     20        1.2     27        0.5

General Surgery

    181        3.8     403        3.4     62        3.8     144        2.5

Plastic & Reconstructive

    421        8.8     961        8.1     —          0.0     —          0.0

Bariatrics

    1,006        21.0     2,439        20.6     353        21.4     816        14.3

Gynecology

    241        5.0     258        2.2     1        0.1     1        0.0

Urology

    6        0.1     6        0.1     —          0.0     —          0.0

Ear, Nose, Throat (E.N.T.)

    157        3.3     518        4.4     129        7.8     457        8.0

Neuromonotoring

    165        3.5     165        1.4     —          0.0     —          0.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL

    4,780        100.0     11,849        100.0     1,646        100.0     5,690        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Note:

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

Our total cases performed for the three months ended June 30, 2015, were 4,780, representing a total increase of 3,134 cases, or 190.4%, from the 1,646 cases in the same period in 2014. Cases at our existing facilities, or “same center facilities,” were 2,804, representing 1,158 of the total increase. The consolidated marketing programs are attributable to 833 of the increase, with 338 cases reported under the Marketing Segment, and the remaining under the Medical Services Segment. Cases generated by new facilities during the reporting period are attributable to 1,638 of the increase. Case volume primarily increased under the specialties of pain management, musculoskeletal interventions, spine and bariatric surgeries.

 

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Our procedure volume for the three months ended June 30, 2015, increased by 108.2% to 11,849 from 5,690 during the prior corresponding period. Since case reimbursement is based on case type, an increase or decrease in the number of procedures per case has no effect on our reimbursement and net patient service revenue per case.

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

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

The following tables set out the payor mix at our Medical Services Segment, our Marketing Segment and on a consolidated basis for the three months ended June 30, 2015 and 2014. This information is not intended to provide a comprehensive comparison of financial results, as reimbursement by insurance carrier varies based on deductibles, plan coverage and cases performed.

MEDICAL SERVICES SEGMENT

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

 

Payors

   2015 Patient and Net
Professional Fee Revenue

by Payor Mix
    2014 Patient and Net
Professional Fee Revenue
by Payor Mix
 

Private insurance and other private pay

     95.0     97.3

Workers compensation

     4.6     1.7

Medicare

     0.4     1.0
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

 

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MARKETING & FACTORING SEGMENT

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

 

Payors

   2015 Patient and Net
Professional Fee Revenue
by Payor Mix
    2014 Patient and Net
Professional Fee Revenue
by Payor Mix
 

Private insurance and other private pay

     100.0     0.0

Workers compensation

     0.0     0.0

Medicare

     0.0     0.0
  

 

 

   

 

 

 

Total

     100.0     0.0
  

 

 

   

 

 

 

CONSOLIDATED SEGMENTS

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

 

Payors

   2015 Patient and Net
Professional Fee Revenue
by Payor Mix
    2014 Patient and Net
Professional Fee Revenue
by Payor Mix
 

Private insurance and other private pay

     95.5     97.3

Workers compensation

     4.1     1.7

Medicare

     0.4     1.0
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

 

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

AND FOR THE THREE MONTHS ENDED JUNE 30, 2014

 

       Three months ended June 30,    
     2015     2014  

Revenues:

     100     100

Cost of revenues

     1.9     0.0
  

 

 

   

 

 

 

Gross Profit

     98.1     100
  

 

 

   

 

 

 

Operating expenses:

    

Salaries and benefits

     18.5     13.3

Drugs and supplies

     16.2     15.9

General and administrative

     42.1     39.7

Amortization

     2.0     2.0
  

 

 

   

 

 

 

Total operating expenses

     78.8     70.9

Corporate costs:

    

Salaries and benefits

     2.0     3.1

General and administrative

     12.4     4.6

Legal expenses

     1.5     2.3

Amortization

     0.1     0.2
  

 

 

   

 

 

 

Total corporate costs

     16.0     10.2

Income from operations

     3.3     18.9

Other expense (income):

    

Interest expense

     0.6     0.4

Other expense (income), net

     -2.6     -0.6
  

 

 

   

 

 

 

Total other expense (income)

     -2.0     -0.1

Net income before income taxes and noncontrolling interests

     5.3     19.0
  

 

 

   

 

 

 

Income tax

     0.9     1.0

Net income

     4.4     18.0
  

 

 

   

 

 

 

Net income attributable to noncontrolling interests

     7.7     16.6

Net income attributable to Nobilis Health Corp.

     -3.3     1.4
  

 

 

   

 

 

 

Consolidated Revenues

Our total revenues for the three months ended June 30, 2015, totaled $48.9 million, an increase of $33.8 million or 223.8%, compared to $15.1 million from the prior corresponding period. The Marketing Segment accounted for $5.0 million of the increase. The Medical Services Segment increased by $28.8 million, or 190.7%, compared to $15.1 million from the prior corresponding period. Same center facilities growth represented $6.5 million of the three month period increase, while the remaining $22.3 million increase is attributable to newly acquired facilities.

Operating Salaries

Operating salaries and benefits for the three months ended June 30, 2015, totaled $9.0 million, an increase of $7.0 million, or 350.0%, from $2.0 million the prior corresponding period. The Marketing Segment accounted for $2.2 million of the increase while the Medical Services Segment increased by $4.8 million, or 240.0%. Staffing costs at newly acquired facilities accounted for $4.1 million of the Medical Services Segment’s increase. The remaining $0.7 million increase is attributable to additional staffing at same center facilities driven by increased

 

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case volumes. Operating salaries and benefits as a percent of revenues were 18.5% compared to 13.3% in the prior corresponding period. The increase was a result of the higher staffing needs at newly acquired hospitals.

Medical supplies

Drugs and medical supplies expense for the three months ended June 30, 2015, totaled $7.9 million, an increase of $5.5 million or 229.2% from the prior corresponding period. Medical supplies costs at newly acquired facilities accounted for $4.6 million of the increase with the remaining $0.9 million attributable to same center growth. Drugs and medical supplies as a percent of revenues increased to 16.2% from 15.9% from the prior corresponding period due to lower operating margins at a newly acquired hospital.

Operating General and Administrative

Our operating general and administrative expense for three months ended June 30, 2015, totaled $20.6 million, an increase of $14.6 million, or 243.3%, from the prior corresponding period. The Marketing Segment contributed to $1.3 million of the increase. The remaining $13.3 million increase is due to an increase in marketing expenses, physician contracting, general infrastructure development, such as rent, telecommunication, travel, and consulting, and an increase in operations associated with the newly acquired medical services facilities. Newly acquired facilities contributed to $2.9 million of the increase. Marketing expenses allocated to the Medical Services Segment increased by $5.3 million to $6.1 million for the three months ended June 30, 2015, from $0.8 million for the corresponding period in 2014. The increase in marketing expenses is related to our strategic growth initiatives of growing our bariatric, spine, podiatry and gynecological brands. For the development of the marketing programs, the Company enters into independent contractor agreements with physicians to provide services to the Company including administrative, management and marketing services. This expense increased by $0.9 million to $1.7 million for the three months ended June 30, 2015 from $0.8 million for the corresponding period in 2014. Expenses related to general infrastructure development increased by $1.1 million to $1.7 million in 2015 from $0.6 million in 2014.

In addition, operating general and administrative expenses contained revenue cycle management expenses. From time to time, we transfer to third parties certain of our accounts receivable payments on a non-recourse basis in return for advancement on payment to achieve a faster cash collection. The advancement payment varies by specialty and on average represents between 20% and 50% of the amounts transferred. We do not have any other relationship with third parties of this nature other than the vendor relationship described herein. For three months ended June 30, 2015 and 2014 we received advancement payments of $0.5 million and $0.1 million, respectively. During the same period, we transferred $2.1 million and $2.2 million, respectively, of receivables, net of advancement payment, representing a decrease in revenue cycle management expenses of $0.1 million.

Depreciation

Depreciation for the three months ended June 30, 2015, totaled $1.0 million, an increase of $0.7 million or 233.3% from the prior corresponding period. This increase is primarily due to an increase in property and equipment from newly acquired facilities.

Corporate General and Administrative

In total, corporate costs for the three months ended June 30, 2015, totaled $7.8 million, representing an increase of $6.3 million or 420.0% from the prior corresponding period. The increase was primarily attributable to additional corporate staff and legal expenses related to mergers and acquisitions, and non-cash compensation. Corporate salaries and benefits increased by $0.5 million to $1.0 million for the three months ended June 30, 2015 from $0.5 million for the corresponding period in 2014. Legal expenses increased by $0.4 million to $0.7 million for the three months ended June 30, 2015 from $0.3 million for the corresponding period in 2014. Non-cash compensation increased by $6.1 million to $6.2 million for the three months ended June 30, 2015 from $0.1

 

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million for the corresponding period in 2014. The increase in non-cash compensation is attributable to an accelerated vesting of senior executive share-based compensation related to a change of positions. We present corporate costs as a separate section from the operating expenses of the revenue generating facilities to illustrate our operational efficiency.

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

Six months ended June 30, 2015 compared to Six months ended June 30, 2014

The Nobilis Facilities focus on a limited number of high-volume, non-emergency procedures, most of which are billed on an “out of network” basis. The case mix at each Nobilis Facility is a function of the clinical specialties of the physicians on the medical staff and the equipment and infrastructure at each facility. The Nobilis Facilities intend to continue to refine their case mix as opportunities arise. The following table sets forth the combined number of cases and procedures by medical specialty performed for six months ended June 30, 2015 and 2014:

MEDICAL SERVICES SEGMENT

CASE AND PROCEDURE MIX OF THE NOBILIS FACILITIES

FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014

 

Specialty

  2015 Cases     2015 % Cases     2015
Procedures
    2015 %
Procedures
    2014 Cases     2014 %
Cases
    2014
Procedures
    2014 %
Procedures
 

Pain Management

    2,286        29.8     8,083        39.7     1,400        44.5     5,610        54.4

Musculoskeletal Interventions

    358        4.7     1,224        6.0     —          0.0     —          0.0

Interventional Headache Procedure

    58        0.8     155        0.8     —          0.0     —          0.0

Orthopedics

    646        8.4     1,299        6.4     377        12.0     1,119        10.8

Spine

    322        4.2     591        2.9     17        0.5     50        0.5

Podiatry

    244        3.2     863        4.2     152        4.8     828        8.0

Gastro-intestinal

    182        2.4     341        1.7     38        1.2     50        0.5

General Surgery

    315        4.1     682        3.4     164        5.2     338        3.3

Plastic & Reconstructive

    785        10.2     1,893        9.3     —          0.0     —          0.0

Bariatrics

    1,676        21.8     3,750        18.4     707        22.5     1,384        13.4

Gynecology

    340        4.4     375        1.8     27        0.9     36        0.3

Urology

    7        0.1     7        0.0     —          0.0     —          0.0

Ear, Nose, Throat (E.N.T.)

    289        3.8     919        4.5     263        8.4     905        8.8

Neuromonitoring

    165        2.2     165        0.8     —          0.0     —          0.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL

    7,673        100.0     20,347        100.0     3,145        100.0     10,320        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

MARKETING SEGMENT

CASE AND PROCEDURE MIX OF THE NOBILIS FACILITIES

FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014

 

Specialty

  2015 Cases     2015 % Cases     2015
Procedures
    2015 %
Procedures
    2014 Cases     2014 %
Cases
    2014
Procedures
    2014 %
Procedures
 

Pain Management

    278        44.6     278        44.6     —          0.0     —          0.0

Musculoskeletal Interventions

    228        36.6     228        36.6     —          0.0     —          0.0

Interventional Headache Procedure

    117        18.8     117        18.8     —          0.0     —          0.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL

    623        100.0     623        100.0     —          0.0     —          0.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONSOLIDATED SEGMENTS

CASE AND PROCEDURE MIX OF THE NOBILIS FACILITIES

FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014

 

Specialty

  2015 Cases     2015 % Cases     2015
Procedures
    2015 %
Procedures
    2014 Cases     2014 %
Cases
    2014
Procedures
    2014 %
Procedures
 

Pain Management

    2,564        30.9     8,361        39.9     1,400        44.5     5,610        54.4

Musculoskeletal Interventions

    586        7.1     1,452        6.9     —          0.0     —          0.0

Interventional Headache Procedure

    175        2.1     272        1.3     —          0.0     —          0.0

Orthopedics

    646        7.8     1,299        6.2     377        12.0     1,119        10.8

Spine

    322        3.9     591        2.8     17        0.5     50        0.5

Podiatry

    244        2.9     863        4.1     152        4.8     828        8.0

Gastro-intestinal

    182        2.2     341        1.6     38        1.2     50        0.5

General Surgery

    315        3.8     682        3.3     164        5.2     338        3.3

Plastic & Reconstructive

    785        9.5     1,893        9.0     —          0.0     —          0.0

Bariatrics

    1,676        20.2     3,750        17.9     707        22.5     1,384        13.4

Gynecology

    340        4.1     375        1.8     27        0.9     36        0.3

Urology

    7        0.1     7        0.0     —          0.0     —          0.0

Ear, Nose, Throat (E.N.T.)

    289        3.5     919        4.4     263        8.4     905        8.8

Neuromonitoring

    165        2.0     165        0.8     —          0.0     —          0.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL

    8,296        100.0     20,970        100.0     3,145        100.0     10,320        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Note:

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

Our total cases performed for the six months ended June 30, 2015, were 8,296, representing a total increase of 5,151 cases, or 163.8%, from the 3,145 cases in the same period in 2014. Cases at same center facilities were 5,119, representing 1,984 of the total increase. The consolidated marketing programs are attributable to 1,541 of the increase, with 623 cases reported under the Marketing Segment, and the remaining under the Medical Services Segment. Cases generated by new facilities during the reporting period are attributable to 2,544 of the increase. Case volume primarily increased under the specialties of pain management, musculoskeletal interventions, spine and bariatric surgeries.

Our procedure volume for the six months ended June 30, 2015, increased by 103.2% to 20,970 from 3,145 during the prior corresponding period. Since case reimbursement is based on case type, an increase or decrease in the number of procedures per case has no effect on our reimbursement and net patient service revenue per case.

We receive payments for surgical procedures and related services from private health insurance plans, workers’ compensation, directly from patients and from government payer plans. A substantial portion of net patient service revenues generated by the Nobilis Facilities is based on payments received from private (non-government) insurance plans. We receive a relatively small amount of revenue from Medicare or Medicaid procedures. We also receive a relatively small portion of revenue directly from uninsured patients, who pay out of pocket for the services they receive. Insured patients are responsible for services not covered by their health insurance plans, and for deductibles, co-payments and co-insurance obligations under their plans. The amount of

 

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these deductibles, co-payments and coinsurance obligations has increased in recent years but does not represent a material component of the revenue generated by the Nobilis Facilities. The surgical center fees of the Nobilis Facilities are generated by our physician limited partners and the other physicians who use the Nobilis Facilities to provide services. The surgical center fees are billed and collected directly by the Nobilis Facilities.

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

The following tables set out the payer mix at our Medical Services Segment, our Marketing Segment and on a consolidated basis for the six months ended June 30, 2015 and 2014. This information is not intended to provide a comprehensive comparison of financial results, as reimbursement by insurance carrier varies based on deductibles, plan coverage and cases performed.

MEDICAL SERVICES SEGMENT

PATIENT AND NET PROFESSIONAL FEE REVENUE BY PAYORS OF THE NOBILIS FACILITIES FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014

 

Payors

   2015 Patient and Net
Professional Fee Revenue

by Payor Mix
    2014 Patient and Net
Professional Fee Revenue
by Payor Mix
 

Private insurance and other private pay

     95.0     96.9

Workers compensation

     4.5     2.2

Medicare

     0.5     0.9
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

MARKETING & FACTORING SEGMENT

PATIENT AND NET PROFESSIONAL FEE REVENUE BY PAYORS OF THE NOBILIS FACILITIES FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014

 

Payors

   2015 Patient and Net
Professional Fee Revenue
by Payor Mix
    2014 Patient and Net
Professional Fee Revenue
by Payor Mix
 

Private insurance and other private pay

     100.0     0.0

Workers compensation

     0.0     0.0

Medicare

     0.0     0.0
  

 

 

   

 

 

 

Total

     100.0     0.0
  

 

 

   

 

 

 

 

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CONSOLIDATED SEGMENTS

PATIENT AND NET PROFESSIONAL FEE REVENUE BY PAYORS OF THE NOBILIS FACILITIES FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014

 

Payors

   2015 Patient and Net
Professional Fee Revenue
by Payor Mix
    2014 Patient and Net
Professional Fee Revenue
by Payor Mix
 

Private insurance and other private pay

     95.3     96.4

Workers compensation

     4.2     2.6

Medicare

     0.5     1.0
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

RESULTS OF OPERATIONS AS A PERCENTAGE OF PATIENT AND NET PROFESSIONAL FEES

FOR THE SIX MONTHS ENDED JUNE 30, 2015

AND FOR THE SIX MONTHS ENDED JUNE 30, 2014

 

       Six months ended June 30,    
     2015     2014  

Revenues:

     100     100

Cost of revenues

     1.1     0.0
  

 

 

   

 

 

 

Gross Profit

     98.9     100
  

 

 

   

 

 

 

Operating expenses:

    

Salaries and benefits

     19.4     14.4

Drugs and supplies

     15.0     14.6

General and administrative

     39.3     43.7

Amortization

     1.9     2.2
  

 

 

   

 

 

 

Total operating expenses

     75.6     74.9

Corporate costs:

    

Salaries and benefits

     2.3     3.8

General and administrative

     13.3     4.6

Legal expenses

     1.4     2.3

Amortization

     0.1     0.2
  

 

 

   

 

 

 

Total corporate costs

     17.1     10.8

Income from operations

     6.2     14.2

Other expense (income):

    

Interest expense

     0.9     0.4

Other expense (income), net

     -1.6     -0.2
  

 

 

   

 

 

 

Total other expense (income)

     -0.7     0.2

Net income before income taxes and noncontrolling interests

     6.9     14.1
  

 

 

   

 

 

 

Income tax

     0.7     0.9

Net income

     6.2     13.2
  

 

 

   

 

 

 

Net income attributable to noncontrolling interests

     9.6     14.2

Net income attributable to Nobilis Health Corp.

     -3.4     -1.0
  

 

 

   

 

 

 

Consolidated Revenues

Our total revenues for the six months ended June 30, 2015, totaled $86.0 million, an increase of $58.8 million or 216.2%, compared to $27.2 million from the prior corresponding period. The Marketing Segment accounted for $8.5 million of the increase, while the Medical Services Segment increased by $50.3 million, or 184.9%, compared to $27.2 million from the prior corresponding period. Same center facilities growth represented $11.3 million of the six month period increase, while the remaining $39.0 million is attributable to newly acquired facilities.

 

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Operating Salaries

Operating salaries and benefits for the six months ended June 30, 2015, totaled $16.7 million, an increase of $12.8 million or 328.2%, from $3.9 million the prior corresponding period. The Marketing Segment accounted for $4.4 million of the increase while the Medical Services Segment increased by $8.4 million, or 215.4%. Staffing costs at newly acquired facilities accounted for $7.6 million of the Medical Services Segment’s increase. The remaining $0.8 million increase is attributable to additional staffing at same center facilities driven by increased case volumes. Operating salaries and benefits as a percent of revenues were 19.4% compared to 14.4% in the prior corresponding period. The increase was a result of the higher staffing needs at newly acquired hospitals.

Medical supplies

Drugs and medical supplies expense for the six months ended June 30, 2015, totaled $12.9 million, an increase of $8.9 million or 222.5% from the prior corresponding period. Medical supplies costs at newly acquired facilities accounted for $7.3 million of the increase with the remaining $1.6 million attributable to same center growth. Drugs and medical supplies as a percent of revenues increased to 15.1% from 14.6% from the prior corresponding period due to lower operating margins at a newly acquired hospital.

Operating General and Administrative

Our operating general and administrative expense for six months ended June 30, 2015, totaled $33.8 million, an increase of $21.9 million, or 184.0%, from the prior corresponding period. The Marketing Segment contributed to $1.7 million of the increase. The remainder of the $20.2 million increase is due to an increase in marketing expenses, physician contracting, general infrastructure development, such as rent telecommunication, travel, and consulting, and an increase in operations associated with the newly acquired medical services facilities. Newly acquired facilities contributed to $7.1 million of the increase. Marketing expenses allocated to the Medical Services Segment increased by $9.8 million to $11.7 million for the six months ended June 30, 2015, from $1.9 million for the corresponding period in 2014. The increase in marketing expenses is related to our purchase of Athas in December 2014, and the associate creation of our Marketing business segment, and strategic growth initiatives of growing our bariatric, spine, podiatry and gynecological brands. For the development of the marketing programs, the Company enters into independent contractor agreements with physicians to provide services to the Company including administrative, management and marketing services. This expense increased by $1.4 million to $3.1 million for the six months ended June 30, 2015 from $1.7 million for the corresponding period in 2014. Expenses related to general infrastructure development increased by $1.7 million to $3.1 million in 2015 from $1.3 million in 2014.

In addition, our operating general and administrative expenses contained revenue cycle management expenses. From time to time, we transfer to third parties certain of our accounts receivable payments on a non-recourse basis in return for advancement on payment to achieve a faster cash collection. The advancement payment varies by specialty and on average represents between 20% and 50% of the amounts transferred. We do not have any other relationship with third parties of this nature other than the vendor relationship described herein. For six months ended June 30, 2015 and 2014 we received advancement payments of $1.1 million and $0.3 million, respectively. During each respective periods, we transferred $3.8 million and $3.8 million, respectively, of receivables, net of advancement payment.

Depreciation

Depreciation for the six months ended June 30, 2015, totaled $1.6 million, an increase of $1.0 million or 166.7% from the prior corresponding period. This increase is primarily due to an increase in property and equipment from newly acquired facilities.

 

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Corporate General and Administrative

In total, corporate costs for the six months ended June 30, 2015, totaled $14.7 million, representing an increase of $11.7 million or 390.0% from the prior corresponding period. The increase was primarily attributable to additional corporate staff and legal expenses related to mergers and acquisitions, and non-cash compensation. Corporate salaries and benefits increased by $1.0 million to $2.0 million for the six months ended June 30, 2015 from $1.0 million for the corresponding period in 2014. Legal expenses increased by $0.6 million to $1.2 million for the six months ended June 30, 2015 from $0.6 million for the corresponding period in 2014. Non-cash compensation increased by $8.9 million to $9.0 million for the six months ended June 30, 2015 from $0.2 million for the corresponding period in 2014. The increase in non-cash compensation is attributable to an accelerated vesting of senior executive share-based compensation related to a change of Company positions and additional stock based compensation granted to the company’s Chief Executive Officer. We present corporate costs as a separate section from the operating expenses of the revenue generating facilities to illustrate our operational efficiency.

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

Fiscal Year ended December 31, 2014 compared to Fiscal Year ended December 31, 2013

The Nobilis Facilities focus on a limited number of high-volume, non-emergency procedures, most of which are billed on an “out of network” basis. The case mix at each Nobilis Facility is a function of the clinical specialties of the physicians on the medical staff and the equipment and infrastructure at each facility. The Nobilis Facilities intend to continue to refine their case mix as opportunities arise. The following table sets forth the combined number of cased and procedures by medical specialty performed in 2014 and 2013 at the Nobilis Facilities:

MEDICAL SERVICES SEGMENT

CASE AND PROCEDURE MIX OF THE NOBILIS FACILITIES

FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

Specialty

  2014 Cases     2014 %
Cases
    2014
Procedures
    2014 %
Procedures
    2013 Cases     2013 %
Cases
    2013
Procedures
    2013 %
Procedures
 

Pain Management

    3,415        41.1     13,246        51.1     2,877        52.4     11,928        60.5

Musculoskeletal Interventions

    18        0.2     18        0.1     —          0.0     —          0.0

Interventional Headache Procedure

    —          0.0     —          0.0     —          0.0     —          0.0

Orthopedics

    985        11.8     2,808        10.8     724        13.2     2,417        12.3

Podiatry

    361        4.3     1,800        6.9     286        5.2     1,566        7.9

Gastro-intestinal

    213        2.6     295        1.1     269        4.9     400        2.0

General Surgery

    550        6.6     1,205        4.6     415        7.6     1,095        5.6

Plastic & Reconstructive

    421        5.1     752        2.9     —          0.0     —          0.0

Bariatrics

    1,591        19.1     3,632        14.0     372        6.8     594        3.0

Gynecology

    134        1.6     163        0.6     77        1.4     98        0.5

Ear, Nose, Throat (E.N.T.)

    628        7.6     2,019        7.9     466        8.5     1,620        8.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL

    8,316        100.0     25,938        100.0     5,486        100.0     19,718        100.0

Contracted marketing revenue is comprised of payments from hospitals, ASCs and other ancillary service providers, other than the Nobilis Facilities, through marketing services agreements. The services include licensing, marketing, patient intake, patient outcome assessments and educational services. Revenue is recognized on a gross basis upon the performance of the marketing service and when ultimate collection is measurable and reasonably assured. Facility revenue from the cases generated by Athas under its marketing program and performed at Nobilis facilities are included under the Medical Services Segment.

Factoring revenue is comprised of revenue generated from certain accounts receivables which are purchased from third parties through the regular course of business. Purchase price is determined either by a flat fee per

 

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case, as dictated per the agreement, or as a percentage of final collections. At the time of purchase, the Company assumes all financial risk and incurs all costs related to collections without any recourse to the third party seller. Revenue is recognized based upon the date of the original service associated with the receivable.

MARKETING & FACTORING SEGMENT

CASE AND PROCEDURE MIX OF THE NOBILIS FACILITIES

FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

Specialty

  2014 Cases     2014 %
Cases
    2014
Procedures
    2014 %
Procedures
    2013 Cases     2013 %
Cases
    2013
Procedures
    2013 %
Procedures
 

Pain Management

    178        42.0     178        42.0     —          0.0     —          0.0

Musculoskeletal Interventions

    206        48.6     206        48.6     —          0.0     —          0.0

Interventional Headache Procedure

    40        9.4     40        9.4     —          0.0     —          0.0

Orthopedics

    —          0.0     —          0.0     —          0.0     —          0.0

Podiatry

    —          0.0     —          0.0     —          0.0     —          0.0

Gastro-intestinal

    —          0.0     —          0.0     —          0.0     —          0.0

General Surgery

    —          0.0     —          0.0     —          0.0     —          0.0

Plastic & Reconstructive

    —          0.0     —          0.0     —          0.0     —          0.0

Bariatrics

    —          0.0     —          0.0     —          0.0     —          0.0

Gynecology

    —          0.0     —          0.0     —          0.0     —          0.0

Ear, Nose, Throat (E.N.T.)

    —          0.0     —          0.0     —          0.0     —          0.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL

    424        100.0     424        100.0     —          0.0     —          0.0

CONSOLIDATED SEGMENTS

CASE AND PROCEDURE MIX OF THE NOBILIS FACILITIES

FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

Specialty

  2014 Cases     2014 %
Cases
    2014
Procedures
    2014 %
Procedures
    2013 Cases     2013 %
Cases
    2013
Procedures
    2013 %
Procedures
 

Pain Management

    3,593        41.1     13,424        50.9     2,877        52.4     11,928        60.5

Musculoskeletal Interventions

    224        2.6     224        0.8     —          0.0     —          0.0

Interventional Headache Procedure

    40        0.5     40        0.2     —          0.0     —          0.0

Orthopedics

    985        11.3     2,808        10.7     724        13.2     2,417        12.3

Podiatry

    361        4.1     1,800        6.8     286        5.2     1,566        7.9

Gastro-intestinal

    213        2.4     295        1.1     269        4.9     400        2.0

General Surgery

    550        6.3     1,205        4.6     415        7.6     1,095        5.6

Plastic & Reconstructive

    421        4.8     752        2.9     —          0.0     —          0.0

Bariatrics

    1,591        18.2     3,632        13.8     372        6.8     594        3.0

GYN

    134        1.5     163        0.6     77        1.4     98        0.5

Ear, Nose, Throat (E.N.T.)

    628        7.2     2,019        7.6     466        8.5     1,620        8.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL

    8,740        100.0     26,362        100.0     5,486        100.0     19,718        100.0

Note:

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

Total cases for the twelve months ended December 31, 2014, were 8,740, representing an increase of 3,254 cases or 59.3% from the 5,486 cases in the prior corresponding period. The newly acquired Marketing Segment is attributable to 424 of the increase while the Medical Services Segment increased by 2,830 cases, or 51.6%, from 5,486 the prior corresponding period. Case volume primarily increased under bariatric and pain management surgeries.

 

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Procedure volume for the twelve months ended December 31, 2014, increased by 33.7% from 19,718 to 26,362. Since case reimbursement is based on case type, a decrease in the number of procedures per case has no effect on reimbursement and net patient service revenue per case.

The Nobilis Facilities 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. The Nobilis Facilities receive a relatively small amount of revenue from Medicare or Medicaid procedures. The Nobilis Facilities also receive a relatively small portion of their 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. 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 actually collected by the Company from third-party payors, including private insurers vary even 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.

MEDICAL SERVICES SEGMENT

PATIENT AND NET PROFESSIONAL FEE REVENUE BY PAYORS OF THE NOBILIS FACILITIES FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

Payors

   2014 Patient and Net
Professional Fee
Revenue by Payor Mix
    2013 Patient and Net
Professional Fee
Revenue by Payor Mix
 

Private insurance and other private pay

     97.0     92.4

Workers compensation

     2.3     4.5

Medicare

     0.7     3.1
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

MARKETING & FACTORING SEGMENT

PATIENT AND NET PROFESSIONAL FEE REVENUE BY PAYORS OF THE NOBILIS FACILITIES FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

Payors

   2014 Patient and Net
Professional Fee
Revenue by Payor Mix
    2013 Patient and Net
Professional Fee
Revenue by Payor Mix
 

Private insurance and other private pay

     100.0     0.0

Workers compensation

     0.0     0.0

Medicare

     0.0     0.0
  

 

 

   

 

 

 

Total

     100.0     0.0
  

 

 

   

 

 

 

 

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CONSOLIDATED SEGMENTS

PATIENT AND NET PROFESSIONAL FEE REVENUE BY PAYORS OF THE NOBILIS FACILITIES FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

Payors

   2014 Patient and Net
Professional Fee
Revenue by Payor Mix
    2013 Patient and Net
Professional Fee
Revenue by Payor Mix
 

Private insurance and other private pay

     97.1     92.4

Workers compensation

     2.2     4.5

Medicare

     0.7     3.1
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

Consolidated Revenues

Total revenues for the twelve months ended December 31, 2014, totaled $84.0 million, an increase of $52.9 million or 170.1%, compared to $31.1 million from the prior corresponding period. The newly acquired Marketing Segment is attributable to $3.4 million of the increase while the Medical Services Segment increased by $49.5 million, or 159.2% compared to $31.1 million from the prior corresponding period. The increase in total revenues was due to an increase in total case volume, the addition of the newly acquired facilities, and a favorable shift in case mix to higher per revenue per case specialties.

Operating Salaries

Operating salaries and benefits for the twelve months ended December 31, 2014, totaled $11.9 million, an increase of $6.6 million or 124.5% from the prior corresponding period. This increase is primarily due to increased case volumes and the opening of the NHSC-S, FNH and FNSC locations.

Medical supplies

Drugs and medical supplies expense for the twelve months ended December 31, 2014, totaled $11.1 million, an increase of $6.7 million or 152.3% from the prior corresponding period. This increase is primarily due to an increase in case volume at all Nobilis Facilities. Additionally, the shift in case mix to include a greater percentage of orthopedic and spine cases contributes to an overall higher spend on drugs and medical supplies per case.

Operating General and Administrative

Operating general and administrative expense for the twelve months ended December 31, 2014, totaled $31.8 million, an increase of $21.2 million or an increase of 200.0% from the prior corresponding period. The newly acquired Marketing Segment is attributable to $1.8 million of the increase. The remaining $19.4 million increase is due to an increase in operations associated with the newly acquired medical services facilities, an increase in marketing expense, physician contracting, general infrastructure development, such as rent, telecommunication, travel, consulting, etc., and revenue cycle management expenses.

The newly acquired medical services facilities accounted for $6.4 million of the increase in operating general and administrative expense. Marketing expense, excluding the newly acquired Marketing Segment, increased to $6.0 million for the twelve months ended December 31, 2014, from $2.3 million for the corresponding period in 2013. For the development of the marketing programs, the Company enters into independent contractor agreements with physicians to provide services to the Company including administrative, management and marketing services. This expense increased to $4.0 million for the twelve months ended December 31, 2014 to $1.0 million in 2013. Expenses related to general infrastructure development increased by $1.7 million to $3.0 million in 2014 from $1.3 million in 2013. As a percentage of total revenues, operating general and administrative expenses increase by 3.6% from 34.2% of total revenues in 2013 to 37.8% in 2014 due to the Company’s ongoing effort to develop new marketing programs.

 

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In addition, operating general and administrative expenses increased as a result of an increase in revenue cycle management expenses. Pursuant to the terms of this arrangement, the Company, from time to time, shall transfer to the third party certain of its accounts receivable payments on a non-recourse basis in return for advancement on payment for a faster cash collection. The advancement payment varies by specialties and on average is between 20 and 50% of the amounts transferred. The Company does not have any other relationship with this third party other than the vendor relationship described herein. For the twelve months ended December 31, 2014 and 2013 advancement payment of $1.3 million and $0.4 million was received by the Company. During the same period, $7.3 million and $2.5 million of receivables, net of advancement payment, were transferred resulting in an increase in revenue cycle management expenses of $4.8 million.

Depreciation

Depreciation for the twelve months ended December 31, 2014, totaled $1.5 million, an increase of $0.8 million or 114.3% from the prior corresponding period. This increase is primarily due to an increase in property and equipment from the Northstar Healthcare Surgery Center – Scottsdale, LLC location.

Corporate General and Administrative

In total, Corporate costs for the twelve months ended December 31, 2014, totaled $6.6 million, an increase of $1.2 million or 22.2% from the prior corresponding period. The increase was primarily attributable to additional corporate staff and legal expenses related to marketing and acquisitions. We present corporate costs as a separate section from the operating expenses of the revenue generating operational facilities to illustrate our operation efficiency.

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

Liquidity and Capital Resources

We are dependent upon cash generated from operating activities of the Nobilis Facilities, which are the major source of financing for our operations, growth initiatives, acquisitions and for meeting our contractual obligations. Our primary sources of liquidity are cash generated from operating activities of the Nobilis Facilities, available cash and cash equivalents, and available borrowings under our term loan with General Electric Capital Corporation (the “Term Loan”). We expect to be able to fund our operating activities for the remainder of 2015 with cash flows generated from our operations, available cash and cash equivalents, financing activities and access to the Term Loan.

Cash and cash equivalents at June 30, 2015 and December 31, 2014 were $31.7 million and $7.6 million, respectively. For the six months ended June, 2015, we experienced an increase in operating cash flows of approximately $5.4 million, primarily attributable to increased case volumes.

As of June 30, 2015, the Company had consolidated net working capital of $56.7 million compared to $23.8 million as of December 31, 2014. The increase is primarily due to increased cash related to a private placement (as described below), and increased accounts receivables related to increased case volumes. Total accounts receivable were $51.1 million with accounts payables and accrued liabilities totaling $29.0 million.

We have a $25 million debt financing facility with GE Capital, Healthcare Financial Services (“GE”). Pursuant to the Credit Agreement and ancillary agreements (collectively, the “Loan Agreement”), the term loan bears interest at a rate of 4% plus LIBOR per annum and amortizes over 20 years with required quarterly payments of principal and interest until the loan matures in March 2020. The revolving loan also bears interest at a rate of 4% plus LIBOR per annum and amounts borrowed under the revolver may be repaid and re-borrowed periodically with a maturity of March 2020. The credit facility is collateralized by the accounts receivable and physical

 

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equipment of all 100% owned subsidiaries as well as the Company’s ownership interest in all less-than-wholly owned subsidiaries. The new credit facility serves to refinance all previously held debt and lines of credit and provide $5.0 million in working capital.

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

Cash and cash equivalents at December 31, 2014 and December 31, 2013 were $7.6 million and $5.6 million, respectively. For the year ended December 31, 2014, we experienced an increase in operating cash flows, net of non-controlling interests, of approximately $0.5 million, primarily attributable to increased case volumes at same store operations and the newly acquired hospital and ASC.

As of December 31, 2014, the Company had consolidated net working capital of $23.8 million compared to $8.4 million in the corresponding period of 2013. The increase is primarily due to an increase in accounts receivable of $33.9 million and assets related to the acquisition of Athas. Net cash provided by operating activities for 2014 was $4.0 million compared to $3.5 million in 2013. The cash impact from the aforementioned operating results will largely be seen during the first quarter of 2015.

Off-Balance Sheet Arrangements

As of August 14, 2015, we did not have any off-balance sheet financings.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect our reported results of operations and the amount of reported assets and liabilities. Some accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. Actual results may differ from the estimates and assumptions used in the preparation of our consolidated financial statements. Described below are the most significant policies we apply in preparing our consolidated financial statements, some of which are subject to alternative treatments under accounting principles generally accepted in the United States.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued new guidance that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This standard is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. We are currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.

In June 2014, the FASB issued amended guidance on the accounting for certain share-based employee compensation awards. The amended guidance applies to share-based employee compensation awards that include

 

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a performance target that affects vesting when the performance target can be achieved after the requisite service period. These targets are to be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award and compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. We do not expect adoption will have a material impact on its consolidated financial statements.

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

Quantitative and Qualitative Disclosures about Market Risk

We are subject to market risk from exposure to changes in interest rates based on our financing, investing and cash management activities. We do not, however, hold or issue financial instruments or derivatives for trading or speculative purposes. At June 30, 2015, the following components of our Loan Agreement bear interest at variable rates at specified margins above either the agent bank’s alternate base rate or the LIBOR rate: (i) a $20 million, 5-year term loan; and (ii) a $5 million, 5-year revolving credit facility.

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

We currently believe we have adequate liquidity to fund operations during the near term through the generation of operating cash flows, cash on hand and access to our senior secured revolving credit facility. 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.

 

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DESCRIPTION OF BUSINESS NOBILIS HEALTH CORP.

General Overview

Nobilis Health Corp. was incorporated on March 16, 2007 under the name “Northstar Healthcare Inc.” pursuant to the provisions of BCBCA. On December 5, 2014, Northstar Healthcare Inc. changed its name to Nobilis Health Corp. Our registered office is located at Suite 400, 570 Granville Street, Vancouver, British Columbia V6C 3P1 and our corporate office is located at 4120 Southwest Freeway, Suite 150, Houston, Texas 77027. Our common shares are and have been publicly traded on the Toronto Stock Exchange under the symbol “NHC” since May 2007 and on the NYSE MKT under the symbol “HLTH” since April 2015.

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, referred to as the “JOBS Act”.

Inter-corporate Relationships

We own and manage eight healthcare facilities (the “Nobilis Facilities”) in Texas and Arizona; three hospitals (the “Nobilis Hospitals”) and five ambulatory surgery centers, referred to as the “Nobilis ASCs” of which three are located in Houston, Texas, one in Dallas, Texas and one in Scottsdale, Arizona.

The Nobilis ASCs consist of Northstar Healthcare Surgery Center- Houston Kirby Surgical Center, Microsurgery Institute of Dallas, Northstar Healthcare Surgery Center – Scottsdale and First Nobilis Surgery Center. The Nobilis Hospitals consist of First Nobilis Hospital, Victory Medical Center Houston and Plano Surgical Hospital.

Together as of August 14, 2015, the Nobilis Hospitals and the Nobilis ASCs have 22 surgical suites, 6 procedure or treatment rooms typically used by pain management specialists or for colonoscopies, 39 pre-operation beds, 36 post-operation or recovery beds, 27 overnight beds, and 476 physicians with medical staff privileges.

The Nobilis Facilities are each licensed in the state where they are located and provide surgical procedures in a limited number of clinical specialties, which enables them to develop routines, procedures and protocols to maximize operating efficiency and productivity while offering an enhanced healthcare experience for both physicians and patients. The Nobilis Facilities focus on certain clinical specialties, including orthopedic surgery, podiatric surgery, ENT, pain management, gastro- intestinal, gynecology, and general surgery. The Nobilis ASCs do not offer the full range of services typically found in traditional hospitals, allowing the Nobilis ASCs to operate with lower operating expenses. The Nobilis Hospitals do offer the services typically found in traditional hospitals and, as a result, have ability to take on more complex cases and cases that may require an overnight stay.

General Development of the Business

The following presents a summary of the general development of our business over the past five years. For a complete chart of the subsidiaries and entities referred to in this section, please refer to the diagram above which illustrates the various inter-corporate relationships in greater detail.

Pre-2010 Developments

At the time of completion of our company’s initial public offering in 2007, we acquired a 70% controlling partnership interest in The Palladium for Surgery – Houston, Ltd. (the “Palladium Partnership” or “PFSH”) and a 60% partnership interest in the Medical Ambulatory Surgical Suites, L.P. (the “Kirby Partnership”). PFSH and the Kirby Partnership operated two ASCs, located in Houston, Texas.

In February 2009, Dr. Donald Kramer, who was then Chief Executive Officer and also a director of our Company, tendered his resignation from both positions.

 

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2010 Developments

On September 30, 2010, we completed a private placement of common shares which resulted in a change of control. Pursuant to this private placement, we issued 14,583,417 of our common shares to Canada Healthcare Acquisitions, Inc. (“CHA”) for C$5 million and 4,195,029 of our common shares to Healthcare Ventures, Ltd. (“Ventures”) in exchange for all of its Class B Units in Northstar Healthcare Subco, LLC (“Northstar Subco”) and Northstar Healthcare Acquisitions, LLC (“NHA”), along with the forgiveness of the related liabilities. Both CHA and Ventures were at the time indirectly controlled by Donald Kramer, M.D. In conjunction with the closing of the private placement, our Company’s then board of directors resigned and was replaced with a new board of directors. The newly appointed board named Dr. Kramer as Chairman. On October 27, 2010, our Company’s board announced that Dr. Kramer and Ms. Donna Alexander rejoined our senior management team in their previous capacities as Chief Executive Officer and Chief Operating Officer, respectively. The appointments took effect immediately.

On November 1, 2010, we formed a joint venture with certain physician partners, known as The Houston Microsurgery Institute, LLC (“MSIH”). As of November 1, 2010, the PFSH Partnership ceased performing cases and entered into a lease agreement with MSIH pursuant to which MSIH utilized the PFSH Partnership’s facility and equipment in exchange for 25% interest in the equity of MSIH.

2011 Developments

In January 2011, our Company acquired Palladium for Surgery – Dallas (“PFSD”) for $2.2 million. In conjunction with the acquisition the Company formed Microsurgery Institute, LLC to operate the ASC controlled by PFSD. PFSD became a 25% owner of MSID and subleased the ASC facility to MSID. MSID was syndicated with physician investors who owned the remaining 75%.

In January 2011, we also purchased 18% of the 27.5% non-controlling interest in the PFSH Partnership from Dr. Donald Kramer for $0.3 million, thereby increasing our interest in the PFSH Partnership to 90.5%. In August, 2011, we purchased additional non-controlling interests from two limited partners and as a result of these transactions, our interest in MSIH increased to 22.9% from 18.1%. In February 2011, we formed Gulf Coast Toxicology, LLC (“GCT”) in partnership with Pioneer Laboratories, LLC. We have a 20% ownership interest in GCT, a Dallas-based drug screening laboratory. The laboratory screens and quantifies narcotics and other drugs in urine samples. GCT has partnered with a number of physicians in Houston who will supply the urine samples to be tested in the GCT’s laboratory. GCT commenced operations in early May 2011.

In November, 2011, two limited partners in the Kirby Partnership forfeited their ownership interests due to violations of the Kirby Partnership Agreement. The ownership percentages were distributed to the remaining partners, effectively increasing our interest in the Kirby Partnership to 65.5% from 60%.

2012 Developments

In January 2012, we issued 2,000,000 common shares to Dr. Kenneth Alo at a price of C$0.20 under a private placement agreement. Dr. Alo serves as a Medical Director of North American Spine (“NAS”), a subsidiary of Athas Health, LLC. The total purchase price approximated $0.4 million.

In February 2012, we acquired additional ownership interests from all of the physician limited partners at MSIH, effectively increasing our ownership interest to 90.6%.

In March 2012, we sold 18.4% of its ownership interest in the Kirby Partnership to existing physician limited partners, effectively decreasing our ownership interest to 47.1%.

In April 2012, we returned partner capital contributions to all physician limited partners of South Texas Procedure Suites, LLC (“STPS”). The transaction effectively increased our ownership interest in STPS to 100.0%. STPS ceased operations and we abandoned the procedure suites model.

 

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In August 2012, we purchased ownership interests from all of the physician limited partners at MSID, increasing our ownership interest to 100.0%. We then facilitated the closing of a private placement offering for equity at MSID to a physician group. The net result of these transactions is that we increased our equity ownership in MSID from 25.0% to 50.0%. In conjunction with this transaction, Northstar ASC Management, LLC (“NASC”) was created to provide management services to the re-syndicated partnership. The Company’s ownership interest in NASC is 50.0%.

In November 2012, we sold 6.9% of our ownership interest in the Kirby Partnership to one existing physician limited partner and one new physician limited partner, effectively decreasing our ownership interest to 40.1%.

In December 2012, we facilitated the closing of a private placement offering for equity at MSID to three new physician limited partners, effectively decreasing our ownership interest to 36.5%.

2013 Developments

In March 2013, we redeemed the remaining equity interests held by physician limited partners at MSIH, effectively increasing our ownership interests to 97.7%. In August 2013, we formed a limited liability company, Northstar Healthcare Surgery Center – Houston, LLC, which is owned 100% by Northstar Healthcare Acquisitions, LLC. In October 2013, MSIH ceased operating as an ASC and NHSC-H took over all existing operations of MSIH.

In July of 2013, we formed a limited liability company, NHC ASC – Dallas, LLC (“NHC ASC – Dallas”) which is owned 100% by NHA. In August 2013, we purchased ownership interests from all of the physician limited partners at MSID, increasing our ownership interest to 100%. In October 2013, we syndicated a partnership with certain physician partners for NHC ASC – Dallas. We assigned 100% of its equity interest in MSID to NHC ASC – Dallas, of which we own 35% as a result of syndication.

In November 2013, we sold 15.1% of our ownership interest in the Kirby Partnership to existing physician limited partners, effectively decreasing our ownership interest to 25%.

In December 2013, NHA formed a wholly owned limited liability company, Northstar Healthcare Surgery Center – Scottsdale, LLC, to operate as and ASC utilizing assets purchased from a former Brown Hand Center outpatient surgery center. These assets were acquired through a business combination in December of 2013. Operations commenced subsequent to December 31, 2013.

In December 2013, we completed a capital raise through the private placement of common shares and warrants (the “Units”). We issued 5,862,500 Units, at a price of C$0.80 per Unit. Each Unit consists of one common share in the capital of the Company and one-half of one common share purchase warrant exercisable for one additional share at a price of C$1.10. Through the private placement, we raised $4.1 million, net of offering costs of $0.3 million. We utilized some of the proceeds to acquire the Scottsdale Assets.

2014 Developments

In January 2014, we invested in two imaging centers and one urgent care clinic in Houston. The aggregate investment was comprised of $0.3 million in cash, net of acquired cash, and 431,711 shares of NHC stock representing a combined value of $0.9 million, net of acquired cash.

On October 2, 2014 our shareholders approved a special resolution changing the name of the Company to “Nobilis Health Corp.”, and in December, we amended our Articles of Incorporation.

On September 26, 2014, we closed a brokered private placement, with PI Financial Corp. as the Company’s Agent, of up to 6,153,846 Units at a price of C$1.30 per unit, for gross proceeds of $8,000,000, with the potential

 

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to raise a total of up to $10,000,000 (the “Private Placement”). . Each Unit consists of one common share in the capital of the Company and one-half of one common share purchase warrant exercisable for one additional share at a price of C$1.80 for 24 months from the closing date. The warrants are subject to an early acceleration provision in the event that, at any time following four months from the Closing date, the ten day volume weighted average price of the common shares equals or exceeds C$2.20. The proceeds of the Private Placement were used for general working capital purposes in connection with an agreement with First Surgical Partners Holdings, Inc. (“First Surgical”).

On September 29, 2014, we executed an agreement with First Surgical. Pursuant to the Agreement, the Company and First Surgical formed a new limited liability company, owned 51% by Nobilis and 49% by First Surgical, to jointly own and operate a hospital and surgical center. NHA manages the operations of the hospital and surgical center under a management agreement. We contributed $7.5 million to the new entity, which was raised by the Private Placement.

On December 1, 2014, we acquired all of the individual member interests of Athas for a total consideration of approximately $31.2 million to expand our marketing services. The “aggregate consideration” for the Athas ownership interests, as adjusted by the Confidential Agreement, consisted of $3 million in cash upon closing, the issuance of a promissory note by Company to the sellers for $12 million, and the issuance of 10,497,303 of our common shares. After the Athas transaction, Chris Lloyd, Athas’ CEO, was named our CEO.

2015 Developments

In February 2015, we formed a limited liability company, Southwest Freeway Surgery Center, LLC (“SFSC”), which is owned 100% by Northstar Subco. In July 2015, SFSC took over all existing operations of NHSC-H.

During the three month period ended March 31, 2015, we completed the deconsolidation of two imaging centers and one urgent care clinic in Houston. We resigned as the manager of these facilities resulting in loss of control and our rights to exercise significant influence. We retained investments in these facilities that are accounted for as cost method investments as of January 1, 2015. The revaluation of our remaining investments in these facilities resulted in no gain or loss due to the short term these investments were held. The deconsolidation resulted in the reversal of $0.7 million of goodwill.

On March 31, 2015, we closed a $25 million debt financing facility with GE. The facility will be used to support our growth efforts, provide a new revolving line as working capital and repay certain of the Company’s existing outstanding indebtedness, including the $12 million sellers’ note related to Nobilis’ acquisition of Athas Health in December 2014. 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. The new credit facility serves to refinance all previously held debt and lines of credit and provide $5.0 million for working capital. Closing costs associated with the credit facility were approximated at $0.6 million.

On April 18, 2015, Nobilis Health Holdings Corp. (“NHHC”) entered into a partnership interest purchase agreement (the “Agreement”) with VPC, a Texas limited liability company, and Victory Medical Center Houston GP, LLC, a Texas limited liability company, to purchase a 55% interest in Victory Medical Center Houston, L.P., a Texas limited partnership (the “Partnership”) that owns and operates Victory Healthcare Houston Hospital. On April 24, 2015, the Purchaser completed the acquisition of interest in the Partnership. The Purchaser paid $1.5 million in cash and assumed approximately $2.4 million in capital leases of VPC and certain intercompany loans

 

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of the Partnership. Additionally, thirty (30) days after completing the acquisition, the Purchaser will satisfy certain debts owed to creditors of the Partnership. The Agreement also contains customary representations, warranties, covenants and indemnities. We subsequently transferred the 55% interest in the Partnership to Northstar Healthcare General Partner, LLC, a Delaware limited liability company, and Northstar Healthcare Limited Partner, LLC, a Delaware limited liability company.

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

In June 2015, the Company established Nobilis Surgical Assist, LLC to launch its surgical assist ancillary service line. A third party will handle staffing of cases performed at the Nobilis Facilities, as well as certain administrative matters associated with this service line’s operation. Together with the acquisition of Peak, the Company anticipates increased facility efficiency and revenue per case with the addition of these ancillary services.

On July 30, 2015, the Company formed Marsh Lane, a Texas limited liability company and wholly owned subsidiary of the Company and closed the purchase of certain assets (the “Acquisition”) pursuant the Purchase Agreement by and among Marsh Lane, the Company, VPC, a Texas limited liability company, and Victory Plano, LP, a Texas limited partnership. The Acquisition was closed following the conclusion of bankruptcy proceedings in the Bankruptcy Court initiated by Victory Plano. On June 12, 2015, Victory Plano filed for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code in the Bankruptcy Court. Following the Bankruptcy Court’s entry into the Sale Motion and Bidding Procedures Order, on July 29, 2015, the Bankruptcy Court entered into a Sale Order approving the terms and conditions of the Purchase Agreement and certain other financial arrangements as described below.

As consideration for the purchase of Victory Plano’s assets, Marsh Lane paid approximately $1.3 million in cash to be used by Victory Plano and VPC to cure and pay certain defaults under contracts assumed by Marsh Lane. The Purchaser also assumed Victory Plano’s indebtedness to LegacyTexas Bank in the amount of approximately $4.5 million. Marsh Lane also assumed Victory Plano’s capital equipment leases and its real estate lease.

In connection with the Purchase Agreement, Marsh Lane (the “Borrower”) entered into a Loan Agreement (the “Loan Agreement”) dated as of July 30, 2015 with LegacyTexas Bank, successor to ViewPoint Bank, N.A. (“Legacy”). The principal amount of the term loan (the “Term Note”) pursuant to the Loan Agreement is $4.5 million, which bears interest on the outstanding principal amount thereof at an annual rate equal to the lesser of the Applicable Rate (4.00% per annum plus the applicable LIBOR Rate) and the maximum lawful rate permitted under Texas or federal law, whichever is higher. All outstanding principal on the Term Note under the Loan Agreement is due and payable on July 30, 2020.

In connection with the Purchase Agreement and the Loan Agreement, on July 30, 2015, the Company entered into a guaranty (the “Guaranty”) to guaranty the Borrower’s obligations under the Loan Agreement. Pursuant to the Guaranty, the Company irrevocably and unconditionally guaranteed the full and punctual payment and performance of all Loan Agreement obligations, in the manner and to the extent set forth in the Guaranty. The guaranty and payment of obligations under the Guaranty are expressly subordinated in the manner and extent set forth in the Subordination Agreement.

In connection with the Purchase Agreement and entry into the Legacy Loan Documents, Northstar Healthcare Acquisitions, L.L.C., a Delaware limited liability company and wholly owned subsidiary of the Company (“Northstar”), entered into the Second Amendment to Credit Agreement and Conditional Waiver, dated as of

 

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July 30, 2015, by and among the Northstar, GE, and the other Credit Parties named therein, (the “Credit Agreement Amendment”). The Credit Agreement Amendment, among other things, amended certain covenants, definitions and other terms contained in the Credit Agreement to accommodate the transactions contemplated by Purchase Agreement and the entry into the Legacy Loan Documents, and GE Capital granted the Company additional time to incorporate into the Credit Agreement several new subsidiaries formed during the Company’s recent acquisitions and new service lines.

Competition

Within the Texas market, we currently compete with traditional hospitals, specialty hospitals and other ASCs to attract both physicians and patients. Hospitals generally have an advantage over ASCs with respect to the negotiation of insurance contracts and competition for physicians’ inpatient and outpatient practices. Hospitals also offer a much broader and specialized range of medical services (enabling them to service a broader patient population) and generally have longer operating histories and greater financial resources, and are better known in the general community.

The competition among ASCs and hospitals for physicians and patients has intensified in recent years. As a result, some hospitals have been acquiring physician practices and employing the physicians to work for the hospital. These hospitals incentivize these physicians to utilize the hospitals’ facilities. Further, some traditional hospitals have recently formed joint ventures with physicians whereby the hospital manages, but the hospital and physicians jointly own, an ASC.

In addition, there are several large, publicly traded companies, divisions or subsidiaries of large publicly traded companies, and several private companies that develop and acquire ASCs and hospitals. These companies include United States Surgical Partners, Inc., AmSurg Corp., and Surgical Care Affiliates, Inc. These companies may compete with our company in the acquisition of additional ASCs and hospitals. Further, many physician groups develop ASCs without a corporate partner, using consultants who typically perform corporate services for a fee and who may take a small equity interest in the ongoing operations of such ASCs. See “Risk Factors – Risks Relating to Our Business – We Face Significant Competition From Other Healthcare Providers.”

Cycles

Net patient service revenues are slightly seasonal in nature. Generally, our revenues have been highest from October to December as physicians return from summer vacations and patients attempt to maximize the benefits afforded by third-party payors that renew health insurance deductibles at the beginning of each calendar year.

Facility Operations

 

    NHSC-H

SFSC operates NHSC-H, located at 4120 Southwest Freeway, Suite 200, in Houston, Texas, within minutes of the Texas Medical Center. Operations at this location began in December 2003 with specialties in pain management, ENT, podiatry, orthopedics, general surgery, gastrointestinal and chiropractic medicine. As of August 14, 2015, NHSC-H had three operating rooms and two procedure suites, and approximately 107 physicians had staff privileges at NHSC-H (47 of which performed surgeries in 2015). MSIH and PFSH each previously operated the ASC at this location. As of August 14, 2015, NHA directly held a 100% interest in NHSC-H.

 

    MSID

MSID is located at 5920 Forest Park Road, Suite 700, in Dallas, Texas. The facility was acquired on January 1, 2011 with specialties in pain management, ENT, podiatry, orthopedics and general surgery. The facility is wholly owned by NHC ASC – Dallas, LLC and Northstar Acquisitions owns 35% of

 

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NHC ASC – Dallas, LLC. As of August 14, 2015, MSID had three operating rooms and one procedure suite, and approximately 142 physicians had staff privileges at MSID (29 of which performed surgeries in 2015). As of August 14, 2015, Northstar Subco held an indirect 35.0% interest in MSID. PFSD and MSID each previously operated the ASC at this location.

 

    Kirby

The Kirby Partnership owns and operates Kirby, located at 9300 Kirby Drive, in Houston, Texas, less than four miles from the Texas Medical Center. Operations at this location began in June 2003 and, as of August 14, 2015, Kirby had four operating rooms and one procedure suite, and approximately 40 physicians had staff privileges (16 of which performed surgeries in 2015). As of August 14, 2015, Northstar Subco held an indirect 25.0% interest in Kirby while the remaining 75.0% is owned by Kirby’s Physician Limited Partners.

 

    NHSC-S

NHSC-S is located at 9377 E Bell Rd, Suite 201, Scottsdale, Arizona 85260. The facility was acquired in December, 2013. Operations at the facility began in early 2014. As of August 14, 2015, NHSC-S had four operating rooms and one procedure suite, and approximately 91 physicians had staff privileges at NHSC-S (16 of which performed surgeries in 2015). As of August 14, 2015, NHA directly held a 100% interest in NHSC-S.

FNSC

First Nobilis Surgical Center, LLC operates FNSC located at 411 North 1st Street, Bellaire, Texas 77401. The facility began as part of the joint venture with First Surgical, which was closed in September 2014. FNSC is a wholly owned subsidiary of First Nobilis, LLC, the joint venture entity owned 51% by Northstar Acquisitions and 49% by First Surgical. As of August 14, 2015, NHA held 51% of First Nobilis Surgical Center’s parent company First Nobilis, LLC. FNSC has four operating rooms. Approximately 150 physicians had staff privileges at FNSC (21 of which performed surgeries in 2015).

FNH

First Nobilis Hospital, LLC operates FNH, located at 4801 Bissonnet St, Bellaire, Texas 77401. The facility began as part of the joint venture with First Surgical, which was closed in September 2014. FNH is a wholly owned subsidiary of First Nobilis, LLC, the joint venture entity owned 51% by Northstar Acquisitions and 49% by First Surgical. As of January 1, 2015, NHA held 51% of First Nobilis Surgical Center’s parent company First Nobilis, LLC. FNH has four operating rooms and 19 beds. Approximately 300 physicians had staff privileges at FNH (63 of which performed surgeries in 2015).

 

    VMC

Victory Medical Center Houston, L.P. operates VMC, located at 2001 Hermann Drive, Houston, TX 77004. We began operating the facility upon the acquisition of a 55% interest, 0.25% of which is owned by Northstar Healthcare General Partner, LLC, a wholly owned subsidiary of our Company (“Northstar Healthcare GP”), and 54.25% of which is owned by Northstar Healthcare Limited Partner, LLC (“Northstar Healthcare LP”), a wholly owned subsidiary of the Company. As of August 14, 2015, 234 physicians had staff privileges at VMC (75 of which performed surgeries in 2015) and VMC had six operating rooms and 25 beds. As of August 14, 2015, we held 55% of Victory Houston through Northstar Healthcare GP and Northstar Healthcare LP.

 

    PSH

Marsh Lane Surgical Hospital, LLC (“Marsh Lane”) operates PSH, located at 2301 Marsh Lane, Plano, Texas 75093. Marsh Lane, a Texas limited liability company and wholly owned subsidiary of the Company, closed the purchase of certain assets (the “Acquisition”) pursuant to the Purchase

 

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Agreement by and among Marsh Lane, the Company, Victory Parent Company, LLC, a Texas limited liability company (“VPC”), and Victory Plano, LP, a Texas limited partnership. The Acquisition was closed following the conclusion of bankruptcy proceedings in the “Bankruptcy Court initiated by Victory Plano. PSH has six operating rooms and 25 beds.

Employees

As of August 14, 2015, we had approximately 631 employees, of which 439 are full time.

Intellectual Property

 

Mark

  

Type

   Owner    Status    App./Reg. #
NOBILIS HEALTH    Service Mark    Nobilis Health    Application Pending    App. No. 86375409
NORTHSTAR HEALTHCARE    Service Mark    Nobilis Health Corp.    Registered    App. No. 77892043
LOGO    Service Mark    Northstar Healthcare
Acquisitions, LLC
   Registered    Reg. No. 3444878
LOGO    Service Mark    Nobilis Health Corp.    Registered    Reg. No. 4,555,939
NUESTEP    Service Mark    Nobilis Health Corp.    Registered    Reg. No. 4,555,938
STEP AWAY FROM FOOT PAIN    Service Mark    Nobilis Health Corp.    Registered    Reg. No. 4,555,937
AccuraScope    Trade Mark    Athas Health, LLC    Registered    Reg. No. 4,041,538

Enforcement of Civil Liabilities

Our subsidiaries are organized under the laws of the states of Arizona, Delaware and Texas. Substantially all of our assets and all of the assets of our subsidiaries are located in the United States. Furthermore, all of our current officers and directors reside in the United States. As a result, investors should not find it difficult to effect service of process within the United States upon us or these persons or to enforce judgments obtained against us or these persons in U.S. courts, including judgments in actions predicated upon the civil liability provisions of the U.S. federal securities laws. It may, however, be difficult for an investor to bring an original action or an action to enforce a judgment obtained in a U.S. court in a Canadian or other foreign court predicated upon the civil liability provisions of the U.S. federal securities laws against us or these persons. Conversely, it may be difficult for an investor to bring an original action or an action to enforce a judgment obtained in a Canadian or other foreign court predicated upon the civil liability provisions of the U.S. federal securities laws against us or these persons. There is uncertainty as to whether Canadian courts would: (i) enforce judgments of United States courts obtained against our company or our directors and officers predicated upon the civil liability provisions of the United States federal securities laws, or (ii) entertain original actions brought in Canadian courts against our company or such persons predicated upon the federal securities laws of the United States, as such laws may conflict with Canadian laws. In Canada, such rights are within the legislative jurisdiction of the Provinces and Territories. The Province of British Columbia, where our company is domiciled, does not have laws for the reciprocal enforcement of judgments of United States courts.

Emerging Growth Company

We are an Emerging Growth Company as defined in the JOBS Act.

 

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We will continue to be deemed an emerging growth company until the earliest of:

 

(A) the last day of the fiscal year of the issuer during which it had total annual gross revenues of $1,000,000,000 (as such amount is indexed for inflation every 5 years by the Commission to reflect the change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, setting the threshold to the nearest 1,000,000) or more;

 

(B) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement under this title;

 

(C) the date on which such issuer has, during the previous 3-year period, issued more than $1,000,000,000 in non-convertible debt; or

 

(D) the date on which such issuer is deemed to be a ‘large accelerated filer’, as defined in section 240.12b-2 of title 17, Code of Federal Regulations, or any successor thereto.

As an emerging growth company we are exempt from Section 404(b) of Sarbanes Oxley. Section 404(b) requires that the registered accounting firm shall, in the same report, attest to and report on the assessment on the effectiveness of the internal control structure and procedures for financial reporting.

As an emerging growth company we are exempt from subsections (a) and (b) of Section 14A of the Securities Exchange Act of 1934 which require the shareholder approval of executive compensation and golden parachutes.

We have elected not to opt out of the extended transition period for complying with any new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

 

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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following table sets forth certain information with respect to our current directors, executive officers and key employees. The term for each director expires at our next annual meeting or until his or her successor is appointed. The ages of the directors, executive officer and key employees are shown as of August 14, 2015.

 

Name

  

Position

  

Age

Chris H. Lloyd    Chief Executive Officer    43(1)
Kenneth Klein    Chief Financial Officer    49(2)
Harry Fleming    Chairman of the Board and Executive Director    56(3)
Steve Ozonian    Director    60(4)
Richard Ganley    Director    55(5)
Jennifer Hauser    Director    47(6)
Matthew K. Maruca    General Counsel and Corporate Secretary    34(7)

 

(1) Effective December 1, 2014, Chris H. Lloyd was appointed as Chief Executive Officer of Nobilis.
(2) Effective July 9, 2015, Kenneth Klein was appointed as Chief Financial Officer of Nobilis.
(3) Effective September 2010, Harry Fleming was appointed as a member of the Board of Nobilis. Mr. Fleming was appointed as Chairman of the Board and Executive Director on April 30, 2015.
(4) Effective April 30, 2015, Steve Ozonian was appointed as a member of the Board of Nobilis.
(5) Effective June 2013, Richard Ganley was appointed as a member of the Board of Nobilis.
(6) Effective June 2013, Jennifer Hauser was appointed as a member of the Board of Nobilis.
(7) Effective October 2, 2014, Matthew Maruca was appointed as General Counsel and Corporate Secretary of Nobilis while with the law firm Baker Donelson. He joined the Company full time in February 2015.

Set forth below is biographical information with respect to each of the aforementioned individuals.

Chris H. Lloyd. Chris H. Lloyd serves our Chief Executive Officer. From 2009 until December 2014, Mr. Lloyd served as CEO of Athas Health, LLC and its predecessor, North American Laser Spine Institute, LLC. Mr. Lloyd began his career at Ernst & Young LLP in the Assurance and Advisory Business Services practice. After Ernst & Young, he went to work in Corporate Development for an international electric power development company. Mr. Lloyd next served as the Chief Financial Officer for TransAtlantic Petroleum, a publicly traded international oil and gas company. His resume also includes investment, ownership and management of a successful technology company as well as a real estate development venture. During his career he has been involved in funding, development, M&A and restructuring transactions totaling over $5 billion in value. Mr. Lloyd founded North American Spine in January of 2009 and led its transformation to Athas Health LLC, which we acquired on December 1, 2014. Mr. Lloyd received an M.B.A from the University of Texas at Austin in 2002 and a B.B.A. in accounting from the University of Oklahoma Price College of Business in 1994.

Kenneth Klein. Mr. Klein has served as our Chief Financial Officer since July 2015. Mr. Klein served as the Company’s Chief Accounting Officer since April 2015. Prior to joining Nobilis, Mr. Klein served for over five years as Senior Vice President, Chief Financial Officer and Treasurer of the Menninger Clinic, one of the nation’s leading inpatient psychiatric hospitals. Mr. Klein has over 26 years of experience in financial accounting & reporting, analysis, management, auditing, treasury and human resources, focusing primarily in the health care, construction and financial services industries. Mr. Klein began his career in 1988 with KPMG Peat

 

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Marwick in the audit practice. After KPMG, Mr. Klein has held various financial leadership positions with Texas Children’s Hospital, Memorial Hermann Healthcare System, Thermo Fisher Scientific, Castle Dental Centers, in addition to previously serving as the Company’s Chief Financial Officer from 2007 to 2010. Mr. Klein graduated with a B.S. in accounting from Sacred Heart University in Fairfield, Connecticut, where he was a member of Phi Beta Kappa and graduated with an MBA and Post Baccalaureate in Accounting from TWU in Houston Texas. A licensed CPA, Mr. Klein is also an adjunct professor of accounting for University of Houston – Downtown and for Lone Star College.

Harry Fleming. Mr. Fleming is a member of our Board since 2010 and also serves as Chairman of the Board and Executive Director since April 30, 2015. Mr. Fleming served as President of the Company from November 2014 to April 2015 and also as Chief Financial Officer of the Company from March 2013 to November 2014. Mr. Fleming was previously Chief Executive Officer and Director for Acro Energy. Mr. Fleming has over 25 years of legal experience in corporate finance and securities law and has focused much of his career on emerging growth companies, mergers and acquisition, strategic business planning and alliances, and investor relations. His background includes venture capital representation, business strategy consulting, public company representation, mergers and acquisitions with high tech firms in Houston and Boston. He also has extensive experience with consolidating companies in the waste management industry. Having spent more than 20 years working at law firms in Houston and Boston, Mr. Fleming maintains the highest rating (AV) of U.S. attorneys by Martindale-Hubbell. He also acted as general counsel and chief financial officer for several companies with an emphasis on start-up and growth strategies. Mr. Fleming is admitted to practice law in the State of Texas and the Commonwealth of Massachusetts. He also is admitted to practice before the U.S. Supreme Court. Mr. Fleming serves on the Mr. Fleming received his MBA from Boston College in 1999, his Doctorate of Jurisprudence from the University of Houston in 1983 and his BA from the University of St. Thomas in 1980.

Steve Ozonian. Steve Ozonian is an independent member of our Board since April 2015 and serves as chair of the audit and compliance committees of the Board. Mr. Ozonian has served at other public companies such as Prudential as Chairman and Chief Executive Officer of its residential and corporate services companies and also as the Chief Executive Officer of Realtor.com and Real Estate.com all having Sarbanes-Oxley Act of 2002 and government regulatory obligations. Mr. Ozonian also served as the national executive for residential at Bank of America and the Chief Executive Officer at Global Mobility Solutions. Mr. Ozonian brings significant experience as an operations executive and advisor towards the use of the Internet and technology to generate customers and improve the user experience through transparency and empowerment. Mr. Ozonian serves as the lead director of Lending Tree and is a board member at Realty Mogul,Williston Finanical Group and Realty Trac. Mr. Ozonian is considered an audit committee financial expert as defined by Item 407 of Regulation S-K.

Richard Ganley. Mr. Ganley is a member of our Board since June 2013. Mr. Ganley is the Chief Executive Officer and Positive Impact Executive for Van Go Activities and Beehive Logistics & Mobility Innovations. He has lived in Arizona since 1977 and has over 30 years of experience in the transportation, technology, healthcare, and service industries. Mr. Ganley is the founder and former Chief Executive Officer of Global Mobility Solutions, a worldwide leader in transportation and mobility solutions. He is also credited with pioneering many Internet tools and services in use today on the World Wide Web. He was the Co-Founder and Chief Executive Officer of Homefair.com, which was one of the first 700 “Dot Com” companies in the world. Mr. Ganley has extensive experience in the financial sector and has held a Series 7-General Securities Representative License, Series 6 – Investment Company Products/Variable Contracts Limited Representative License, Series 63 – Uniform Securities Agent License as well as his Life, Health, Property & Casualty Insurance License, and an Arizona Real Estate License.

Jennifer Hauser. Ms. Hauser is a member of our Board since June 2013. Ms. Hauser is a consumer health, wellness and lifestyle specialist and has worked with leading national brands, hospitals, and public health organizations for over 22 years. She actively represents leading health, food/nutrition and consumer product and technology companies including Merck Consumer Healthcare, Glaxo SmithKline, Pfizer, Johnson & Johnson, The Dannon Company, GNC, Microsoft, SpaFinder Wellness, and the American Heart Association. Ms. Hauser

 

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is also on the faculty at New York University in the School of Continuing and Professional Studies and a board member of the American Diabetes Association NY Chapter, and on the American Heart Association Consumer Health board committee.

Matthew K. Maruca. Mr. Maruca has served as our General Counsel and Corporate Secretary since October 2014.2 Prior to joining the Company, Mr. Maruca was an attorney at the law firm Baker Donelson focusing on general corporate and healthcare law matters from October 2014 to February 2015, during which time he also acted as outside General Counsel. Mr. Maruca joined Baker Donelson in October 2014 with other members of the healthcare group at the law firm Strasburger & Price LLC, where he had worked since January 2014. Mr. Maruca also served as Corporate Counsel of the Company from April 2011 to January 2014. Mr. Maruca holds a Doctorate of Jurisprudence from Tulane University Law School, where he graduated cum laude, and a B.A. from Boston College, where he was a member of Phi Beta Kappa and graduated summa cum laude.

Family Relationships

There are no family relationships between any of our directors or executive officers.

Legal Proceedings

From time to time, we may become involved in litigation relating to claims arising out of its operations in the normal course of business. We are not involved in any pending legal proceeding or litigation and, to the best of our knowledge, no governmental authority is contemplating any proceeding to which we area party or to which any of our properties is subject, which would reasonably be likely to have a material adverse effect on us.

Code of Ethics

We have adopted a code of business conduct and ethics that is applicable to all of our employees, officers and directors. The code is available on our web site, www.nobilishealth.com, under the “Investor Relations” tab. We intend to disclose future amendments to, or waivers from, certain provisions of our code of ethics, if any, on the above website within four business days following the date of such amendment or waiver.

Committees of the Board of Directors

Our Board of Directors has the authority to appoint committees to perform certain management and administration functions. Our Board of Directors currently has an Audit Committee, a Compensation Committee, a Nominating and Corporate Governance Committee and a Compliance Committee. The composition and responsibilities of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by the Board of Directors. The charters for each of these committees are available on our website at www.nobilishealth.com.

Audit Committee

Our Audit Committee consists of Steve Ozonian, Richard Ganley and Jennifer Hauser, each of whom satisfies the independence requirements under NYSE MKT listing standards and Rule 10A-3(b)(1) of the Exchange Act. The chairman of our Audit Committee is Mr. Ozonian. Each member of our Audit Committee can read and understand fundamental financial statements in accordance with Audit Committee requirements. In arriving at this determination, our Board of Directors has examined each Audit Committee member’s scope of experience.

 

2  Mr. Maruca acted as outside General Counsel and Corporate Secretary from October 2014 to February 2015. He was determined by the Board of Directors to be an Executive Officer within the meaning of Rule 3b-7 of the Exchange Act in June 2015.

 

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The purpose of the Audit Committee is to assist our Board of Directors with oversight of (i) the quality and integrity of our financial statements and its related internal controls over financial reporting, (ii) our compliance with legal and regulatory compliance, (iii) the independent registered public accounting firm’s qualifications and independence, and (iv) the performance of our independent registered public accounting firm. The Audit Committee’s primary function is to provide advice with respect to our financial matters and to assist our Board of Directors in fulfilling its oversight responsibilities regarding finance, accounting, and legal compliance.

Compensation Committee

Our Compensation Committee consists of Steve Ozonian, Richard Ganley and Jennifer Hauser, each of whom our Board of Directors has determined to be independent under NYSE MKT listing standards, a “non-employee director” as defined in Rule 16b-3 promulgated under the Exchange Act, and an “outside director” as that term is defined in Section 162(m) of the Internal Revenue Code. The chairperson of our Compensation Committee is Mr. Ganley.

The primary purpose of our Compensation Committee is to oversee the policies of our Company relating to compensation of our executives and make recommendations to our Board of Directors, as appropriate, with respect to such policies. The goal of such policies is to ensure that an appropriate relationship exists between executive pay and the creation of shareholder value, while at the same time motivating and retaining key employees.

Nominating and Corporate Governance Committee

Our Nominating and Corporate Governance Committee consists of Steve Ozonian, Richard Ganley and Jennifer Hauser, each of whom our Board of Directors has determined to be independent under NYSE MKT listing standards. The chairman of our Nominating and Corporate Governance Committee is Mr. Ganley.

The primary purposes of our Nominating and Corporate Governance Committee are to (i) identify, review and recommend qualified candidates for membership on our Board of Directors and the Board committees, (ii) develop and recommend to the Board of Directors the appropriate corporate governance principles and practices and (iii) oversee the evaluation of the Board of Directors through the annual review of the performance of the Board and its committees.

Compliance Committee

Our Compliance Committee consists of Steve Ozonian and Richard Ganley. The chairman of our Nominating and Corporate Governance Committee is Mr. Ozonian.

The primary purposes of our Compliance Committee are to (i) assist the Board in fulfilling its responsibilities relating to our regulatory compliance activities and (ii) monitor and evaluate our compliance with all federal, state and local regulatory requirements to which we are subject; provided, however, that the Compliance Committee is not responsible for obligations relating to compliance with tax and securities-related laws, rules or regulations, which remain the responsibility of the Audit Committee.

Strategic Acquisitions Committee

The Board’s Strategic Acquisitions Committee, consisting of Steve Ozonian and Richard Ganley, assists the Board in fulfilling its responsibilities relating to the development, articulation, and execution of the Company’s long-term strategic plan, and the review, evaluation, and approval of certain strategic transactions.

 

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Director Compensation

Our directors are compensated on an annual basis for their services on the board of directors as follows:

 

    each director receives an annual cash retainer of $135,000, paid in quarterly installments of $33,750, $15,000 of which is cash to the director and $18,750 of which is paid to such director’s broker to be used to purchase, when appropriate, our common shares;

 

    the chair of the Audit Committee will receive an additional annual retainer of $20,000;

 

    the chair of the Compensation Committee will receive and additional annual retainer of $10,000;

 

    the chair of the Nominating and Governance Committee will receive an additional annual retainer of $10,000;

 

    the chair of the Compliance Committee will receive an annual retainer of $10,000; and

 

    the chair of the Strategic Acquisitions Committee will receive an annual retainer of $10,000.

Each member of our board of directors will also be entitled to reimbursement of reasonable travel and other expenses incurred in connection with attending meetings of the board of directors and any committee on which the member serves.

 

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EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth all compensation paid, payable, awarded, granted, given or otherwise provided, directly or indirectly, for the fiscal years ended December 31, 2014, 2013, and 2012 to the Corporation’s current NEO’s and to any individual who at any time during the relevant fiscal year was a NEO:

 

                            Non-equity
Incentive Plan
Compensation
($)
             
Name and Principal Position   Fiscal
Year
    Salary
($)
   

Share-
based
Awards

(1) ($)

   

Option-
based
Awards

(2) ($)

   

Annual/
Short-
term
Incentive
Plan

($)

    Long-
term
Incentive
Plans
($)
    All Other
Compensation
($)
    Total
Compensation
($)
 

DONALD L. KRAMER,
Former Chief
Executive Officer

   
 
2014
2013
  
  
   
 
365,250
350,000
  
  
   
 
2,453,065
—  
  
  
 

 

—  

  

   
 
122,500
61,250
  
  
 

 

—  

  

   
 
7,992
10,338
  
(4) 
   
 
2,948,807
421,588
  
  

HARRY FLEMING,
Former Chief
Financial Officer,
Former President (5)

   
 
2014
2013
  
  
   
 
330,651
217,091
  
  
   
 
3,162,378
31,367
  
(8) 
 

 

134,193

(7) 

   
 
112,000
56,000
  
  
 

 

—  

  

   
 
13,361
52,849
  
(4)(6) 
   
 
3,618,390
491,500
  
  

KENNETH EFIRD,
Former Chief
Operating Officer

   
 
2014
2013
  
  
   
 
222,805
233,269
  
  
 

 

—  

  

 

 

134,193

(7) 

 

 

43,750

  

 

 

—  

  

   
 
11,011
8,048
  
(4) 
   
 
491,500
419,260
  
  

CHRIS LLOYD,
Chief Executive Officer

    2014        46,154          1,826,481              1,872,635   

ANDY CHEN,
Former Chief
Financial Officer

    2014        160,174          171,435 (8)      73,500          7,890        412,999   

Notes

(1) Consists of RSUs that, upon vesting, may be paid by Nobilis in cash or through the issuance of common shares from treasury. These figures reflect the grant date fair value.
(2) For details on the methodology used to calculate the fair value of the Company’s 2013 stock option awards, see Note 17 of the December 31, 2013 Consolidated Financial Statements. For details on the methodology used to calculate the fair value of the Company’s 2014 stock option awards, see Note 19 of the December 31, 2014 Consolidated Financial Statements.
(3) Mr. Kramer served as Chief Executive Officer until December 2014.
(4) Represents contributions made to the employees 401k Plan.
(5) Mr. Fleming joined Nobilis as its Chief Financial Officer in 2013. He assumed the role of President in October 2014 and resigned from such position in April 2015.
(6) Represents Mr. Fleming’s director fees and consulting fees.
(7) Mr. Efird joined Nobilis as its Chief Operating Officer in 2013 and resigned in 2014.
(8) Mr. Chen became Chief Financial Officer in August 2014 and resigned from such role in July 2015.

Employment Agreements as of December 31, 2014

As of December 31, 2014 our company had employment agreements with three executives: Christopher Lloyd, Harry Fleming and Andy Chen. In addition, our company has an Executive Transition Agreement with Donald Kramer, which governed certain compensation terms related to Dr. Kramer’s transition from Chief Executive Officer to Executive Director.

 

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Christopher Lloyd, Chief Executive Officer. Base compensation and Term. Mr. Lloyd’s employment agreement, effective as of November 26, 2014, as amended by the First Amendment to Employment Agreement effective as of the same date, has a term of 3 years and will automatically renew for additional 1 year terms unless the employment agreement is terminated by either party at least 30 days prior to the end of the initial 3-year term or any subsequent 1-year term. Mr. Lloyd’s salary is $600,000 in the first year of the initial term and increases to $625,000 and $650,000 in years 2 and 3, respectively.

Termination Provisions. Mr. Lloyd may terminate his employment agreement with “good reason” upon the occurrence of any of the following: i) a diminution in title or duties, ii) a failure by our company to substantially perform any material term in his employment agreement, iii) relocation of our company’s principal place of business more than 50 miles from its current location, iv) a reduction in salary or benefits other than as the result of adverse financial conditions of our company, or v) a change in control of our company.

The Company may terminate Mr. Lloyd’s employment agreement for “cause” upon the occurrence of any of the following: i) a failure to perform substantially all of his duties, ii) his dishonesty or gross negligence, iii) his conviction or nolo contendere plea to a felony, iv) any willful act or omission by him that is materially injurious to the financial condition or business reputation of our company, v) his failure to comply with a written directive of the Board or Chief Executive Officer, or vi) a breach of the non-competition or intellectual property confidentiality provisions contained in the employment agreement.

In the event that Mr. Lloyd terminates his employment agreement for “good reason” or our company terminates his employment agreement without “cause”, Mr. Lloyd is entitled to receive one year’s base salary as a separation benefit.

Incentive Compensation. In addition to his base salary, Mr. Lloyd may receive certain cash and equity incentive compensation. Mr. Lloyd participates in our company’s Short Term Incentive Program, which entitles him to receive as a bonus, up to 40% of his yearly base salary if our company achieves certain financial metrics established each year by our company’s Compensation, Nomination and Corporate Governance Committee. Mr. Lloyd is also entitled to receive up to 1,500,000 Options. 1,048,218 of such Options were granted on December 1, 2014 and vest as follows: 42,218 vested on January 1, 2015, 500,000 will vest on November 26, 2015 and 500,000 will vest on November 26, 2016. 451,782 of such Options were granted on January 1, 2015 and vested immediately (“Set 2 Options”). Additionally, Mr. Lloyd is entitled to receive, at the time of the exercise of the Set 2 Options, the number of RSUs (based on the 5-day VWAP from the date of exercise) sufficient to offset C$1.57 per option exercised.

Mr. Lloyd is entitled to participate in our 401k plan. Mr. Lloyd is not entitled to any other material compensation, including without limitation, equity, bonus, or retirement benefits.

Harry Fleming, Former President. Base compensation and Term. Mr. Fleming’s employment agreement, effective as of October 1, 2014 (the “Fleming Employment Agreement”), has a term of 3 years and will automatically renew for additional 1 year terms unless the employment agreement is terminated by either party at least 30 days prior to the end of the initial 3-year term or any subsequent 1-year term. Mr. Fleming’s salary is $425,000 in the first year of the initial term and increase to $450,000 and $475,000 in years 2 and 3, respectively.

Termination Provisions. Mr. Fleming may terminate the Fleming Employment Agreement with “good reason” upon the occurrence of any of the following: i) a diminution in title or duties, ii) a failure by our company to substantially perform any material term in his employment agreement, iii) relocation of our company’s principal place of business more than 50 miles from its current location, iv) a reduction in salary or benefits other than as the result of adverse financial conditions of our company, or v) a change in control of our company.

The Company may terminate the Fleming Employment Agreement for “cause” upon the occurrence of any of the following: i) a failure to perform substantially all of his duties, ii) his dishonesty or gross negligence, iii) his

 

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conviction or nolo contendere plea to a felony, iv) any willful act or omission by him that is materially injurious to the financial condition or business reputation of our company, v) his failure to comply with a written directive of the Board or Chief Executive Officer, or vi) a breach of the non-competition or intellectual property confidentiality provisions contained in the employment agreement.

In the event that Mr. Fleming terminates his employment agreement for “good reason” or our company terminates his employment agreement without “cause”, Mr. Fleming is entitled to receive any earned by unpaid base salary, accrued but unused vacation pay, and any incurred but unreimbursed business expenses.

Incentive Compensation. In addition to his base salary, Mr. Fleming may receive certain cash and equity incentive compensation. Mr. Fleming participates in our company’s Short Term Incentive Program, which entitles him to receive as a bonus, up to 40% of his yearly base salary if our company achieves certain financial metrics established each year by our company’s Compensation, Nomination and Corporate Governance Committee. Per the agreement, we awarded Mr. Fleming 1,000,000 RSUs that vest in 10 years regardless of Mr. Fleming’s employment status with our company (the “First Fleming Grant of RSUs”). These RSUs will immediately vest, however, upon the occurrence of any of the following: i) the termination of Mr. Fleming’s employment (for any reason), ii) a change in control of our company, or iii) at Mr. Fleming’s election if there is a formal offer from a third party to buy or to merge our company. In addition, the agreement (later amended as described below) contained an additional award of 1,000,000 RSUs (the “Second Fleming Grant of RSUs”) which would have been awarded in the event of a consummated change in control or in the event that our company terminated the Fleming Employment Agreement without cause (defined in the agreement) or Mr. Fleming terminated his employment with good reason (defined in the agreement). Due to the acquisition of Athas Health, LLC and the change in Mr. Fleming’s role with our company as the result of the anticipated scope of Mr. Lloyd’s duties, the Board approved amendments to Mr. Fleming’s employment agreement such that the Second Fleming Grant of RSUs was deleted in its entirety and the First Fleming Grant of RSUs was increased from 1,000,000 RSUs to 2,000,000 RSUs.

Mr. Fleming is entitled to participate in our 401k plan. Mr. Fleming is not entitled to any other material compensation, including without limitation, equity, bonus, or retirement benefits.

Effective April 30, 2015, Mr. Fleming resigned as our President.

Andy Chen, Former Chief Financial Officer. Mr. Chen’s employment agreement, effective as of November 26, 2014 (the “Chen Employment Agreement”), has a term of 3 years and will automatically renew for additional 1 year terms unless the agreement is terminated by either party at least 30 days prior to the end of the initial 3-year term or any subsequent 1-year term. Mr. Chen’s salary was $170,000 in 2014 and increased, per the Chen Employment Agreement, to $200,000 on January 1, 2015.

Termination Provisions. Mr. Chen may terminate the Chen Employment Agreement with good reason upon the occurrence of any of the following: i) a diminution in title or duties, ii) a failure by our company to substantially perform any material term in his employment agreement, iii) relocation of our company’s principal place of business more than 50 miles from its current location, iv) a reduction in salary or benefits other than as the result of adverse financial conditions of our company, or v) a change in control of our company.

The Company may terminate the Chen Employment Agreement for cause upon the occurrence of any of the following: i) a failure to perform substantially all of his duties, ii) his dishonesty or gross negligence, iii) his conviction or nolo contendere plea to a felony, iv) any willful act or omission by him that is materially injurious to the financial condition or business reputation of our company, v) his failure to comply with a written directive of the Board or Chief Executive Officer, or vi) a breach of the non-competition or intellectual property confidentiality provisions contained in the Chen Employment Agreement.

In the event that Mr. Chen terminates his employment agreement for “good reason” or our company terminates his employment agreement without “cause”, Mr. Chen is entitled to receive one year’s base salary as a separation benefit.

 

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Incentive Compensation. In addition to his base salary, Mr. Chen may receive certain cash and equity incentive compensation. Mr. Chen participates in our company’s Short Term Incentive Program, which entitles him to receive as a bonus, up to 40% of his yearly base salary if our company achieves certain financial metrics established each year by our company’s Compensation, Nomination and Corporate Governance Committee. Mr. Chen has received 200,000 Options. The Board has accelerated the vesting of the 200,000 Stock Options issued to Mr. Chen from vesting in one-third increments on May 9, 2015, May 9, 2016 and May 9, 2017, respectively, to all such Stock Options vested on February 3, 2015.

Mr. Chen is entitled to participate in our 401k plan. Mr. Chen is not entitled to any other material compensation, including without limitation, equity, bonus, or retirement benefits.

On July 9, 2015, Mr. Chen resigned as our Chief Financial Officer.

Donald Kramer, Former Chief Executive Officer, Former Executive Director. As the result of the Athas Health, LLC acquisition, Dr. Kramer resigned as our Chief Executive Officer and assumed the role of Executive Director. Dr. Kramer’s compensation as Executive Director remains at $450,000 per year, which was the salary he received as Chief Executive Officer. The Company and Dr. Kramer executed a Confidential Executive Transition Agreement, in which the parties agreement that Dr. Kramer would receive, in lieu of any incentive or separation compensation due under his employment agreement, 2,000,000 RSUs will vest the sooner of i) ten years or ii) the termination of his role as Executive Director.

Dr. Kramer is not entitled to any other material compensation, including without limitation, equity, bonus, or retirement benefits.

As of April 30, 2015, the Confidential Executive Transition Agreement was terminated following Dr. Kramer’s resignation from the Board.

Employment Agreements as of August 14, 2015

As of August 14, 2015, we had employment agreements with three executives: Harry Fleming, Christopher Lloyd and Matthew Maruca. The employment agreement with Mr. Lloyd is described above, while descriptions of employment agreements with Mr. Fleming and Mr. Maruca are included below.

Harry Fleming, Executive Director. Mr. Fleming’s executive employment agreement, effective as of April 30, 2015 (the “Fleming Executive Employment Agreement”), has a term of 3 years and will automatically renew for additional 1 year terms unless the agreement is terminated by either party at least 30 days prior to the end of the initial 3-year term or any subsequent 1-year term. Mr. Fleming is entitled to an annual base salary of $450,000 per year, to be increased to $475,000 in year two of the initial term and $500,000 in year three of the initial term.

Termination Provisions. Mr. Fleming may terminate the Fleming Executive Employment Agreement with good reason upon the occurrence of any of the following: i) a diminution in title or duties, ii) a failure by our company to substantially perform any material term in his employment agreement, iii) relocation of our company’s principal place of business more than 50 miles from its current location, iv) a reduction in salary or benefits other than as the result of adverse financial conditions of our company, or v) a change in control of our company.

The Company may terminate the Fleming Executive Employment Agreement for cause upon the occurrence of any of the following: i) a failure to perform substantially all of his duties, ii) his dishonesty or gross negligence, iii) his conviction or nolo contendere plea to a felony, iv) any willful act or omission by him that is materially injurious to the financial condition or business reputation of our company, v) his failure to comply with a written directive of the Board or Chief Executive Officer, or vi) a breach of the non-competition or intellectual property confidentiality provisions contained in the Fleming Executive Employment Agreement.

 

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Incentive Compensation. In addition to his base salary, Mr. Fleming may receive certain cash compensation and other incentive compensation. Mr. Fleming participates in our company’s Short Term Incentive Program, which entitles him to receive as a bonus, up to 40% of his yearly base salary if our company achieves certain financial metrics established each year by our company’s Compensation Committee. Mr. Chen has received 2,650,000 RSUs, which vested upon his resignation as President of the Company, and which can be taken down by Mr. Fleming on a demand basis at Mr. Fleming’s election. In order to adequately preserve the Company’s ability to fund the Company’s Stock Option Plan, Mr. Fleming is not eligible to participate in the Company’s Stock Option Plan. Instead, Mr. Fleming is entitled to receive an M&A Fee, equal to (a) 2% of the total consideration paid by the person or group acquiring the Company in a transaction constituting a Change of Control (as defined in the Fleming Executive Employment Agreement) or 2% of the total Issuer valuation at the time of closing of a merger transaction as described in the Change of Control provisions of the Fleming Executive Employment Agreement.

Mr. Fleming is entitled to participate in our 401k plan. Mr. Chen is not entitled to any other material compensation, including without limitation, equity, bonus, or retirement benefits.

Matthew Maruca, General Counsel. Mr. Maruca’s employment agreement with the Company, effective as of February 1, 2015 (the “Maruca Employment Agreement”), has a term of 3 years and will automatically renew for additional 1 year terms unless the agreement is terminated by either party at least 30 days prior to the end of the initial 3-year term or any subsequent 1-year term. Mr. Maruca is entitled to an annual base salary of $225,000 per year, to be increased to $240,000 in year two of the initial term and $250,000 in year three of the initial term.

Termination Provisions. Mr. Maruca may terminate the Maruca Employment Agreement with good reason upon the occurrence of any of the following: i) a diminution in title or duties, ii) a failure by our company to substantially perform any material term in his employment agreement, iii) relocation of our company’s principal place of business more than 50 miles from its current location, iv) a reduction in salary or benefits other than as the result of adverse financial conditions of our company, or v) a change in control of our company.

The Company may terminate the Maruca Employment Agreement for cause upon the occurrence of any of the following: i) a failure to perform substantially all of his duties, ii) his dishonesty, iii) his conviction or nolo contendere plea to a felony, iv) any gross negligence or willful act or omission by him that is materially injurious to the financial condition or business reputation of our company, v) his failure to comply with a written directive of the Board or Chief Executive Officer, or vi) a breach of the non-competition or intellectual property confidentiality provisions contained in the Maruca Employment Agreement.

In the event that Mr. Maruca terminates his employment agreement for “good reason” or our company terminates his employment agreement without “cause”, Mr. Maruca is entitled to receive one year’s base salary as a separation benefit.

Incentive Compensation. In addition to his base salary, Mr. Maruca may receive certain cash and equity incentive compensation. Mr. Maruca participates in our company’s Short Term Incentive Program, which entitles him to receive as a bonus, up to 40% of his yearly base salary if our company achieves certain financial metrics established each year by our company’s Compensation, Nomination and Corporate Governance Committee. Mr. Maruca has received 175,000 Options. 8,750 Options vested on March 31, 2015, 35,000 options vested on June 30, 2015, 52,500 will vest on September 30, 2015 and 78,750 will vest on December 31, 2015.

Mr. Maruca is entitled to participate in our 401k plan. Mr. Maruca is not entitled to any other material compensation, including without limitation, equity, bonus, or retirement benefits.

 

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Outstanding Equity Awards

The following table provides a summary of equity awards outstanding for each of the Named Executive Officers and Directors as of December 31, 2014:

Outstanding Share-Based Awards and Option-Based Awards

 

Name and Principal

Position

  Option-based Awards     Share-Based Awards  
    Number of Securities
Underlying
Unexercised Options
(#)
    Option
Exercise
Price
($CAD)
    Option
Expiry Date
    Value of
Unexercised
in-the-money
Options ($)
    Number of
Shares that
have not
Vested
    Market or
Payout Value of
Share-based
Awards that
have not Vested
($)
 

CHRIS LLOYD,

Chief Executive Officer

    1,048,218      $ 1.87        1 Dec.        1,472,809        N/A        N/A   

HARRY FLEMING,
Former President

    N/A        N/A        N/A        N/A        2,650,000        7,995,050   

ANDY CHEN,
Former Chief
Financial Officer

   

 

100,000

200,000

  

  

  $

$

.95

1.06

  

  

   
 
4 Dec 2023
9 May 2024
 
  
    640,466        N/A        N/A   

DONALD L. KRAMER,

Former Chief
Executive Officer

    N/A        N/A        N/A        N/A        2,000,000        6,034,000   

 

Notes:

(1) Assumes a December 31, 2014 value of Cdn$3.50 per Nobilis common share (being the closing price of the Common Shares on the TSX on December 31, 2014), which is then converted into U.S. dollars at a rate of Cdn$1.00 = US$0.8620 (being the average rate on December 31, 2014).

Incentive Plan Awards – Value Vested or Earned

 

Name and Principal

Position

  Fiscal Year     Option-based Awards –Value
Vested during the Year ($)
   

Share-based Awards –

Value Vested

during the

Year ($)

    Non-equity Incentive Plan
Compensation – Value
Earned during the Year
($)
 

CHRIS LLOYD,
Chief Executive Officer

    2014        N/A        N/A        0   

HARRY FLEMING,
Former President

    2014        N/A        N/A        112,000   

ANDY CHEN,
Former Chief
Financial Officer

    2014        N/A        N/A        73,500   

KENNETH EFIRD,
Former Chief
Operating Officer

    2014        N/A        N/A        0   

DONALD L. KRAMER, Former Chief
Executive Officer

    2014        N/A        N/A        122,500   

 

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Director Compensation

The following table shows the particulars of compensation paid to our current and former directors for the year ended December 31, 2014.

 

Name    Fee
Earned
($)
     Share-
based
awards
($) (1)
     Option-
based
awards
($)
     Non-equity
incentive plan
compensation
     Pension
Value
     All other
compensation
($)
     Total ($)  

Douglas Samuelson (2)

     36,000         81,971         —           —           —           106,000         223,971   

Thomas Foster

     22,000         —           —           —           —           42,000         64,000   

Richard Ganley

     48,000         —           —           —           —           10,000         58,000   

Jennifer Pfahler

     48,000         —           —           —           —           —           48,000   

James G. Springfield (2)

     24,000         —           —           —           —           5,000         29,000   

 

Notes:

(1) Consists of RSUs that, upon vesting, may be paid by Nobilis in cash or through the issuance of common shares from treasury. These figures reflect the grant date fair value.
(2) Mr. Samuelson and Mr. Springfield resigned as directors on July 14, 2014.

 

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Review, Approval or Ratification of Transactions with Related Persons

We rely on our Board to review related party transactions on an ongoing basis to prevent conflicts of interest. Our Board reviews a transaction in light of the affiliations of the director, officer or employee and the affiliations of such person’s immediate family. Transactions are presented to our Board for approval before they are entered into or, if this is not possible, for ratification after the transaction has occurred. If our Board finds that a conflict of interest exists, then it will determine the appropriate remedial action, if any. Our Board approves or ratifies a transaction if it determines that the transaction is consistent with the best interests of the Company.

Director Independence

Our Board of Directors has undertaken a review of its composition, the composition of its committees, and the independence of each director. Based upon information requested from and provided by each director concerning his or her background, employment and affiliations, including family relationships, our Board of Directors has determined that none of the members of our Board of Directors, except Mr. Fleming, has a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under the applicable rules and regulations of the Securities and Exchange Commission, or the SEC, and the listing requirements and rules of NYSE MKT. In making this determination, our Board of Directors considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances our Board of Directors deemed relevant in determining their independence.

Certain Transactions

Kolin Ozonian, Vice President of Mergers & Acquisitions for the Company, is the son of the Company’s Board member Steve Ozonian. Mr. Kolin Ozonian joined the Company in July 2015. As Vice President of Mergers & Acquisitions, Mr. Ozonian receives annual salary of $180,000, bonus of 40% under the Company’s STIP plan, and other benefits (including Company contributions to Mr. Ozonian’s 401(k) Plan account and health insurance premiums). Mr. Ozonian also received a grant of stock options to purchase 150,000 common shares. The compensation paid to Mr. Ozonian was approved in accordance with the Company’s standard compensation practices for similarly situated employees.

Nick Lloyd, Vice President of Operations, is the brother of the Company’s Chief Executive Officer Chris Lloyd. As Vice President of Operations, Mr. Lloyd receives annual salary of $210,000, is eligible to participate in the Company’s STIP plan, and receives other benefits (including Company contributions to Mr. Lloyd’s 401(k) Plan account and health insurance premiums).The compensation paid to Mr. Lloyd was approved in accordance with the Company’s standard compensation practices for similarly situated employees.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following tables set forth information as of August 14, 2015, regarding the ownership of our common shares by:

 

    each person who is known by us to own more than 5% of our common shares; and

 

    each named executive officer, each director and all of our directors and executive officers as a group.

The number of shares beneficially owned and the percentage of shares beneficially owned are based on 70,933,636 common shares outstanding as of August 14, 2015.

Beneficial ownership is determined in accordance with the rules and regulations of the SEC and generally includes voting or investment power with respect to securities. Under these rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power and includes any shares that an individual or entity has the right to acquire beneficial ownership of within 60 days through the exercise of any warrant, stock option, or other right. Shares subject to options that are exercisable within 60 days following August 14, 2015, are deemed to be outstanding and beneficially owned by the optionee for the purpose of computing share and percentage ownership of that optionee but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Except as indicated in the footnotes to this table, and as affected by applicable community property laws, all persons listed have sole voting and investment power for all shares shown as beneficially owned by them.

 

Name and Address of Beneficial Owner (1)

  Shares of Common Stock
Beneficially Owned
    Percentage of Class
Beneficially Owned (2)
 

Greater than five percent holders:

   

Donald Kramer (3)

    17,870,282        24.5

PenderFund Capital Management (4)

    6,090,200        8.5

Directors and executive officers

   

Harry Fleming (5)

    2,678,755        3.6

Chris Lloyd (6)

    4,240,182        5.9

Matthew Maruca (7)

    96,250        *   

Steve Ozonian

    1,520        *   

Richard Ganley (8)

    163,550        *   

Jennifer Hauser

    6,609        *   

Kenneth Efird

    525,500        *   

Andy Chen (9)

    304,000        *   

Kenneth Klein

    —          —     

All current executive officers and directors as a group (7 persons)

      9.6

 

(1) Unless otherwise indicated, the address of all beneficial owners of our ordinary shares set forth above is 11700 Katy Freeway, Suite 300, Houston, Texas 77079.
(2) Based on 70,933,636 common shares outstanding as of August 14, 2015. Except as otherwise indicated, all shares are beneficially owned, and the sole investment and voting power is held, by the person named. This table is based on information supplied by our officers, directors and principal shareholders and reporting forms, if any, filed with the SEC on behalf of such persons.
(3) Includes 2,000,000 deferred but vested RSUs held by Dr. Kramer. 15,794,482 of the common shares are held by Healthcare Ventures Ltd. Dr. Kramer owns 100% of Healthcare Ventures Ltd. The address of Healthcare Ventures Ltd. is 3330 Chevy Chase, Houston, Texas 77019.
(4)

Based on information provided by Mr. Kelvin Wong at the time of the Offering. 1,297,400 of the common shares are held by Pender Select Ideas Fund (“PSIF”) and includes 3,700 common shares issuable upon exercise of Warrants held by PSIF. 1,381,850 of the common shares are held by Pender Small Cap Equity

 

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  Fund (“PSCEF”) and includes 31,850 common shares issuable upon exercise of Warrants held by PSCEF. 1,797,200 of the common shares are held by Pender Small Cap Opportunities Fund (“PSCOF”) and includes 170,300 common shares issuable upon exercise of Warrants held by PSCOF. 1,613,750 of the common shares are held by Pender Value Fund (“PVF”) and includes 109,150 common shares issuable upon exercise of Warrants held by PVF. Mr. Wong, as Chief Financial Officer of PenderFund Capital Management (“PFCM”), has voting and investment power over the common shares held by each of PSIF, PSCEF, PSCOF and PVF. The address of each of PFCM, PSIF, PSCEF, PSCOF and PVF is 1640-1066 W. Hastings Street, Vancouver, British Columbia V6E 3X1.
(5) Includes 2,6500,000 deferred but vested RSUs held by Mr. Fleming.
(6) Includes 1,096,436 vested Options granted to Mr. Lloyd pursuant to the Stock Option Plan.
(7) Includes 43,750 vested Options and 52,500 Options that will vest on September 30, 2015, granted to Mr. Maruca pursuant to the Stock Option Plan.
(8) Includes 50,000 vested Options and 60,000 Options that will vest on September 30, 2015, granted to Mr. Ganley pursuant to the Stock Option Plan.
(9) Includes 280,000 vested Options granted to Mr. Chen pursuant to the Stock Option Plan.

 

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DESCRIPTION OF CAPITAL STOCK

Common Shares

The following description of our common shares is a summary and is qualified in its entirety by the provisions of our Articles which have been filed as an exhibit to this prospectus.

Our authorized share capital consists of an unlimited number of common shares held of record by 214 holders. As of August 14, 2015, there were 70,933,636 issued and outstanding common shares. The power to allot and issue shares is conferred upon our Board of Directors. We may from time to time amend our Articles to add, change or remove any provision that is permitted by the BCBCA to be, or that is, set out in its Articles, including without limiting the generality of the foregoing, to: (i) create new classes of shares; (ii) change the designation of all or any of its shares; add, change or remove any rights, privileges, restrictions and conditions, including rights to accrued dividends, in respect of all or any of its shares, whether issued or unissued; and (iv) change the shares of any class or series, whether issued or unissued, into a different number of shares of the same class or series or into the same or a different number of shares of other classes or series. The holders of shares of a class are entitled to vote separately as a class upon a proposal to amend the Articles to, inter alia, add to, remove or change the rights, privileges, restrictions or conditions attached to the shares of such class. The foregoing amendments to the Articles must be authorized by a special resolution of shareholders holding at least 66 2/3% of the outstanding Common Shares.

Each common share carries one vote on all matters to be voted on at all meetings of shareholders. Generally, under the BCBCA, the holders of shares of a class are entitled to vote separately as a class, regardless of whether such class otherwise carries the right to vote, in a number of circumstances, including in respect of proposals to amend the Articles to add, change or remove the rights, privileges, restrictions or conditions attached to the shares of such class, or to increase the rights or privileges of any class of shares having rights or privileges equal or superior to the shareholders’ shares of such class. In addition, the holders of shares of a class are entitled to vote, regardless of whether such class otherwise carries the right to vote, in respect of an amalgamation agreement, continuance or squeeze-out transaction, or in the event of a sale, lease or exchange of all or substantially all of the company’s property out of the ordinary course of our business.

The holders of the common shares are entitled to receive dividends and we shall pay dividends thereon, if, as and when declared by the Board of Directors out of the moneys of the company properly applicable to the payment of dividends, in such amount and in such form as the Board of Directors may from time to time determine, and all dividends which the Board of Directors may declare on the common shares shall be declared and paid in equal amounts per share on all common shares at the time outstanding.

In the event of the dissolution, liquidation or winding-up of the company, whether voluntary or involuntary, or any other distribution of assets of the company among its shareholders for the purpose of winding up its affairs, subject to the prior rights of any shares ranking senior to the common shares with respect to priority in the distribution of assets upon dissolution, liquidation or winding-up, shareholders shall be entitled to receive the remaining property and assets of the company.

Warrants

As of August 14, 2015, we had 3,923,824 Warrants outstanding to purchase common shares at an exercise price of C$11.50. Each Warrant entitles the holder to purchase, subject to adjustment, one common share of our Company for a period of two years until May 13, 2017.

As of August 14, 2015, we had (i) 35,291 transferable Agent’s Warrants outstanding to purchase common shares at an exercise price of C$0.95, (ii) 121,485 transferable Agent’s Warrants outstanding to purchase common shares at an exercise price of C$1.37 and (iii) 392,383 transferable Agent’s Warrants outstanding to purchase

 

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common shares at an exercise price of C$11.50. Each Agent’s Warrant entitles the holder to purchase, subject to adjustment, one common share of our Company for a period of two years ending December 15, 2015, September 26, 2016 and May 13, 2017, respectively. The Agent’s Warrants were issued in connection with the Company’s private placements in December 2013, September 2014 and May 2015, respectively.

Stock Options and RSUs

As of August 14, 2015, we had 4,256,666 incentive stock options outstanding at exercise prices ranging from C$0.95 – C$7.94. Each incentive stock option entitles the holder to purchase, subject to adjustment, one common share of our Company at the exercise price established at the time of grant of the options.

As of August 14, 2015, we had 4,650,000 Restricted Share Units outstanding.

Terms of the Warrants as part of the Offering

The material terms and provisions of the Warrants are summarized below.

Each Warrant entitles the holder to purchase one common share for an exercise price equal to C$11.50 per common share. Subject to certain limitations as described below, the Warrants are immediately exercisable upon issuance and expire on May 13, 2017, the second anniversary of the initial issue date.

The expiry date of the Warrants may be accelerated by the Company at any time following February 13, 2016 and prior to the May 13, 2017. If the volume-weighted average trading price of the Company’s common shares on the principal market on which such shares trade is equal to or greater than C$13.50 for any 20 consecutive trading days, at which time the Company may accelerate the expiry date by issuing a press release announcing the reduced warrant term whereupon the Warrants will expire on the 20th calendar day after the date of such press release. Under the terms of the Underwriting Agreement, in the event that the Company fails to file a Registration Statement on or before August 31, 2015, the expiry of the Warrants may not be accelerated until August 13, 2016.

The exercise price per common share and the number of common shares issuable upon exercise of the Warrants is subject to adjustment upon the occurrence of certain events including, but not limited to, the following:

 

  the issuance to all, or substantially all, of the Company’s shareholders of a stock dividend;

 

  the subdivision or reduction of the Company’s common shares into a greater or smaller number of common shares, as applicable;

 

  the reorganization of the Company or the consolidation or merger or amalgamation of the Company with or into another body corporate; and

 

  a reclassification or other similar change to the Company’s outstanding common shares.

Upon the holder’s exercise of a Warrant, we will issue the common shares issuable upon exercise of the Warrant within five (5) business days following our receipt of notice of exercise and payment of the exercise price, subject to surrender of the Warrant. Prior to the exercise of any warrants to purchase common shares, holders of the Warrants, or any other warrant will not have any of the rights of holders of the common shares purchasable upon exercise, including the right to vote or to receive any payments of dividends on the common shares purchasable upon exercise.

Terms of the Compensation Options as part of the Offering

The Compensation Options entitle the holder to purchase common shares for an exercise price equal to $11.50 per common share. Subject to certain limitations as described below, the Compensation Options are immediately exercisable upon issuance and expire on May 13, 2017, the second anniversary of the initial issue date. The Compensation Options contain cashless exercise provisions.

 

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The exercise price and the number of common shares issuable upon the exercise of the Compensation Options, as applicable, is subject to appropriate adjustment in the event of recapitalization events, stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events affecting our common shares, and also upon any distributions of assets, including cash, stock or other property to our stockholders. The Compensation Options have cashless exercise features. After the close of business on the expiration date, unexercised Compensation Options will become void.

Upon the holder’s exercise of a Compensation Option we will issue the common shares issuable upon exercise of the Compensation Option within five (5) business days following our receipt of notice of exercise and payment of the exercise price, subject to surrender of the Compensation Option. Prior to the exercise of any Compensation Option, the holder will not have any of the rights of holders of the common shares, including the right to vote or to receive any payments of dividends on the common shares purchasable upon exercise.

SELLING SECURITYHOLDERS

This prospectus covers an aggregate of 22,661,188 common shares, comprised of (i) 7,847,668 common shares issued in the Offering (ii) up to 3,923,834 common shares issuable upon the exercise of the warrants issued in the Offering; (iii) up to 392,383 common shares issuable upon the exercise of the Compensation options issued to the Underwriters as compensation in connection with the Offering and (iv) 10,497,303 common shares issued as part of the Athas Acquisition. This prospectus also covers the resale of 3,923,834 Warrants issued in the Offering. These common shares and Warrants may be sold or otherwise disposed of by the Selling Securityholders and their transferees. The common shares and/or Warrants to be offered by the Selling Securityholders were issued in private placement transactions by us, each of which was exempt from the registration requirements of the Securities Act. The shares and warrants offered hereby are “restricted” securities under applicable federal and state securities laws and are being registered under the Securities Act, to give the Selling Securityholders the opportunity to publicly sell these shares and warrants. This prospectus is part of a registration statement on Form S-1 filed by us with the Securities and Exchange Commission under the Securities Act covering the resale of such shares and warrants from time to time by the Selling Securityholders. No estimate can be given as to the amount or percentage of the common shares or of the Warrants that will be held by the Selling Securityholders after any sales made pursuant to this prospectus because the Selling Securityholders are not required to sell any of the common shares or Warrants being registered under this prospectus. The table below assumes that the Selling Securityholders will sell all of the common shares and Warrants registered in this prospectus.

 

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Offering Selling Securityholders

The following table sets forth the name of each person who is offering for resale common shares and Warrants covered by this prospectus who received common shares or Warrants in the Offering, the beneficial ownership of each such selling securityholder, the number of common shares and Warrants that may be sold in this offering and the number of common shares and Warrants each will own after the offering, assuming they sell all of the shares and warrants offered. The term “Selling Securityholder” includes the securityholder listed below and its transferees. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. This information does not necessarily indicate beneficial ownership for any other purpose. In computing the number of common shares beneficially owned by a person and the percentage ownership of that person, common shares subject to warrants, options and other convertible securities held by that person that are currently convertible or exercisable, or convertible or exercisable within 60 days of the date of this prospectus are deemed outstanding. Such common shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. The percentage of beneficial ownership for the shares is based on 70,985,303 common shares outstanding on August 24, 2015. The percentage of beneficial ownership for the warrants is based on 3,923,834 warrants outstanding on August 24, 2015.

 

    Securities Beneficially Owned Prior to this
Offering
                 Securities Beneficially Owned After this
Offering
 

Name of Selling
Securityholder (1)

  Number
of Shares
    % of
Outstanding
Shares
    Number
of
Warrants
    % of
Outstanding
Warrants
    Number
of

Shares
Offered
(2)
     Number
of
Warrants
Offered
(2)
    Number
of
Shares
    % of
Outstanding
Shares
    Number
of
Warrants
    % of
Outstanding
Warrants
 

1033242 Ont Inc. (3)

    2,300        *        1,150        *        2,300         1,150        Nil        Nil        Nil        Nil   

1436454 Ontario Limited (4)

    13,000        *        6,500        *        13,000         6,500        Nil        Nil        Nil        Nil   

1483440 Ontario Inc. (5)

    6,000        *        3,000        *        6,000         3,000        Nil        Nil        Nil        Nil   

1589835 Ont Inc. (6)

    2,300        *        1,150        *        2,300         1,150        Nil        Nil        Nil        Nil   

9016-8154 Quebec Inc. (7)

    2,000        *        1,000        *        2,000         1,000        Nil        Nil        Nil        Nil   

9151-6187 Quebec Inc. (8)

    3,000        *        1,500        *        3,000         1,500        Nil        Nil        Nil        Nil   

AGF Canadian Growth Equity Class (9)

    351,500        *        175,750        4.48     351,500         175,750        Nil        Nil        Nil        Nil   

Amethyst Arbitrage Fund (10)

    34,000        *        17,000        *        34,000         17,000        Nil        Nil        Nil        Nil   

Amethyst Arbitrage Trading
Ltd. (11)

    16,000        *        8,000        *        16,000         8,000        Nil        Nil        Nil        Nil   

Arrow Diversified Fund (12)

    8,300        *        4,150        *        8,300         4,150        Nil        Nil        Nil        Nil   

Arrow Macro Fund (13)

    13,700        *        6,850        *        13,700         6,850        Nil        Nil        Nil        Nil   

Bar Haven Investments Ltd. (14)

    10,000        *        5,000        *        10,000         5,000        Nil        Nil        Nil        Nil   

Beaumont Select Corp Inc. (15)

    333,000        *        31,500        *        63,000         31,500        270,000        *        Nil        Nil   

Bloom Burton Healthcare
Fund (16)

    35,000        *        17,500        *        35,000         17,500        Nil        Nil        Nil        Nil   

Brookdale Global Opportunity Fund (17)

    5,800        *        2,900        *        5,800         2,900        Nil        Nil        Nil        Nil   

Brookdale International Partners, L.P. (18)

    14,200        *        7,100        *        14,200         7,100        Nil        Nil        Nil        Nil   

Butterfield Bank (Guernsey) Limited as Custodian of Glass Investments LP (19)

    29,500        *        6,500        *        13,000         6,500        16,500        *        Nil        Nil   

CCLIM on Behalf of Managed Accounts (20)

    801,300        1.1     300,000        *        600,000         300,000        201,300        *        Nil        Nil   

CPT Inc. (21)

    2,000        *        1,000        *        2,000         1,000        Nil        Nil        Nil        Nil   

Curtis Family Trust (22)

    26,500        *        5,000        *        10,000         5,000        16,500          Nil        Nil   

DKAM Capital Ideas Fund
LP (23)

    1,637,800        2.3     225,000        5.73     450,000         225,000        1,187,800        1.7     Nil        Nil   

Dolfine Bay (24)

    4,000        *        2,000        *        4,000         2,000        Nil        Nil        Nil        Nil   

DV Trading Inc. (25)

    17,000        *        8,500        *        17,000         8,500        Nil        Nil        Nil        Nil   

First Canadian Insurance (26)

    9,000        *        4,500        *        9,000         4,500        Nil        Nil        Nil        Nil   

Forge First Long Short LP (27)

    118,900        *        17,500        *        35,000         17,500        83,900          Nil        Nil   

Forge First Multi Strategy
LP (28)

    82,600        *        12,500        *        25,000         12,500        57,600          Nil        Nil   

Front Street Investment Management Inc. (29)

    678,700        *        135,000        3.44     270,000         135,000        408,700          Nil        Nil   

GWL Growth Equity (30)

    14,500        *        7,250        *        14,500         7,250        Nil        Nil        Nil        Nil   

IG AGF Canadian Diversified Growth Class (31)

    10,000        *        5,000        *        10,000         5,000        Nil        Nil        Nil        Nil   

IG AGF Canadian Diversified Growth Fund (32)

    89,000        *        44,500        *        89,000         44,500        Nil        Nil        Nil        Nil   

 

81


Table of Contents
Index to Financial Statements
    Securities Beneficially Owned Prior to this
Offering
                 Securities Beneficially Owned After this
Offering
 

Name of Selling
Securityholder (1)

  Number
of Shares
    % of
Outstanding
Shares
    Number
of
Warrants
    % of
Outstanding
Warrants
    Number
of

Shares
Offered
(2)
     Number
of
Warrants
Offered
(2)
    Number
of
Shares
    % of
Outstanding
Shares
    Number
of
Warrants
    % of
Outstanding
Warrants
 

Interward Capital Corp. (33)

    13,500        *        6,750        *        13,500         6,750        Nil        Nil        Nil        Nil   

Investors Group Corporate Class Inc. for Investors Global Health Care Class (34)

    160,000        *        80,000        2.04     160,000         80,000        Nil        Nil        Nil        Nil   

JFT Strategies Fund (35)

    388,900        *        149,550        3.81     299,100         149,550        89,800        *        Nil        Nil   

K.J. Harrison & Partners
Inc. (36)

    325,000        *        162,500        4.14     325,000         162,500        Nil        Nil        Nil        Nil   

London Life Growth Equity (37)

    85,000        *        42,500        1.08     85,000         42,500        Nil        Nil        Nil        Nil   

Maljec Holdings Inc. (38)

    3,000        *        1,500        *        3,000         1,500        Nil        Nil        Nil        Nil   

Maxam Diversified Strategies Fund (39)

    200,000        *        12,500        *        25,000         12,500        175,000        *        Nil        Nil   

Millennium Insurance Corporation (40)

    4,500        *        2,250        *        4,500         2,250        Nil        Nil        Nil        Nil   

MMCAP International Inc.
SPC (41)

    1,706,668        2.4     853,334        21.75     1,706,668         853,334        Nil        Nil        Nil        Nil   

Morgan Meighen & Associates Limited (42)

    650,000        *        225,000        5.73     450,000         225,000        200,000        *        Nil        Nil   

Newgen Trading Fund (43)

    18,500        *        9,250        *        18,500         9,250        Nil        Nil        Nil        Nil   

Newgen Trading Fund LP (44)

    47,800        *        23,900        *        47,800         23,900        Nil        Nil        Nil        Nil   

Newgen Trading Master
Fund (45)

    32,600        *        16,300        *        32,600         16,300        Nil        Nil        Nil        Nil   

Palos Income Fund L.P. (46)

    102,000        *        51,000        *        102,000         51,000        Nil        Nil        Nil        Nil   

Pender Select Ideas Fund (47)

    1,293,700        1.8     3,700        *        7,400         3,700        1,286,300        1.8     Nil        Nil   

Pender Small Cap Equity
Fund (48)

    1,350,000        1.9     31,850        *        63,700         31,850        1,286,300        1.8     Nil        Nil   

Pender Small Cap Opportunities Fund (49)

    1,626,900        2.3     170,300        4.34     340,600         170,300        1,286,300        1.8     Nil        Nil   

Pender Value Fund (50)

    1,504,600        2.1     109,150        2.78     218,300         109,150        1,286,300        1.8     Nil        Nil   

Polaris Event Trading Fund (51)

    6,100        *        3,050        *        6,100         3,050        Nil        Nil        Nil        Nil   

Retire First Ltd. on behalf of fully managed accounts (52)

    448,440        *        43,300        1.10     86,600         43,300        361,840        *        Nil        Nil   

Rockhaven Holdings Ltd. (53)

    10,000        *        5,000        *        10,000         5,000        Nil        Nil        Nil        Nil   

Royal Capital Management (54)

    10,000        *        5,000        *        10,000         5,000        Nil        Nil        Nil        Nil   

RPC Capital Ltd. (55)

    30,000        *        5,000        *        10,000         5,000        20,000        *        Nil        Nil   

Sevenoaks Opportunities Fund LP (56)

    155,000        *        27,500        *        55,000         27,500        100,000        *        Nil        Nil   

Somerset Group Inc. (57)

    285,000        *        7,500        *        15,000         7,500        270,000        *        Nil        Nil   

Sprott Asset Management
L.P. (58)

    2,663,500        3.8     462,500        11.79     925,000         462,500        1,738,500        2.4     Nil        Nil   

Stone Castle Investment Management (59)

    227,400        *        13,500        *        27,000         13,500        200,400        *        Nil        Nil   

The K2 Principal Fund L.P. (60)

    100,000        *        50,000        1.27     100,000         50,000        Nil        Nil        Nil        Nil   

Timelo Strategic Opportunities Fund (61)

    338,400        *        127,950        3.26     255,900         127,950        82,500        *        Nil        Nil   

Tom Sun Canada Ltd. (62)

    8,400        *        4,200        *        8,400         4,200        Nil        Nil        Nil        Nil   

Weber Investment
Corporation (63)

    5,700        *        2,850        *        5,700         2,850        Nil        Nil        Nil        Nil   

WG Hofatt Enterprises Ltd. (64)

    285,000        *        7,500        *        15,000         7,500        270,000        *        Nil        Nil   

Sydney & Alan Levitsky Consultants Inc. (65)

    1,400        *        700        *        1,400         700        Nil        Nil        Nil        Nil   

917406 Ontario Limited (66)

    5,000        *        2,500        *        5,000         2,500        Nil        Nil        Nil        Nil   

Celtic Ray Ltd. (67)

    5,000        *        2,500        *        5,000         2,500        Nil        Nil        Nil        Nil   

Alberto Galeone

    3,000        *        1,500        *        3,000         1,500        Nil        Nil        Nil        Nil   

Alexandre Besnard

    1,000        *        500        *        1,000         500        Nil        Nil        Nil        Nil   

Andrew Best

    30,000        *        15,000        *        30,000         15,000        Nil        Nil        Nil        Nil   

Andrew McDonald

    9,500        *        3,250        *        6,500         3,250        3,000        *        Nil        Nil   

Annie Shapiro

    1,200        *        600        *        1,200         600        Nil        Nil        Nil        Nil   

Asad Sheikh

    2,000        *        1,000        *        2,000         1,000        Nil        Nil        Nil        Nil   

Audrey Dobson

    4,400        *        2,200        *        4,400         2,200        Nil        Nil        Nil        Nil   

Beatriz Farbstein

    1,200        *        600        *        1,200         600        Nil        Nil        Nil        Nil   

Benoit Briere

    1,000        *        500        *        1,000         500        Nil        Nil        Nil        Nil   

Bruce Houck

    5,200        *        1,500        *        3,000         1,500        2,200        *        Nil        Nil   

C. Ralph Lipper

    1,200        *        600        *        1,200         600        Nil        Nil        Nil        Nil   

Daniel Heimlich

    31,200        *        10,100        *        20,200         10,100        11,000        *        Nil        Nil   

Daniel Moquin

    1,000        *        500        *        1,000         500        Nil        Nil        Nil        Nil   

 

82


Table of Contents
Index to Financial Statements
    Securities Beneficially Owned Prior to this
Offering
                 Securities Beneficially Owned After this
Offering
 

Name of Selling
Securityholder (1)

  Number
of Shares
    % of
Outstanding
Shares
    Number
of
Warrants
    % of
Outstanding
Warrants
    Number
of

Shares
Offered
(2)
     Number
of
Warrants
Offered
(2)
    Number
of
Shares
    % of
Outstanding
Shares
    Number
of
Warrants
    % of
Outstanding
Warrants
 

David Christilaw

    3,500        *        1,750        *        3,500         1,750        Nil        Nil        Nil        Nil   

David Jones

    3,000        *        1,500        *        3,000         1,500        Nil        Nil        Nil        Nil   

David Katz & Allan Land

    6,000        *        3,000        *        6,000         3,000        Nil        Nil        Nil        Nil   

David Katz & Tuula Katz

    13,000        *        6,500        *        13,000         6,500        Nil        Nil        Nil        Nil   

David Katz

    6,000        *        3,000        *        6,000         3,000        Nil        Nil        Nil        Nil   

Dr. Irvin L. Klinghofer

    6,000        *        3,000        *        6,000         3,000        Nil        Nil        Nil        Nil   

Edward I. Martin and/or Claireete Martin

    3,500        *        1,750        *        3,500         1,750        Nil        Nil        Nil        Nil   

Edwin Winston

    1,200        *        600        *        1,200         600        Nil        Nil        Nil        Nil   

Eleni Psicharis

    1,000        *        500        *        1,000         500        Nil        Nil        Nil        Nil   

Floyd R. Davis

    2,300        *        1,150        *        2,300         1,150        Nil        Nil        Nil        Nil   

Frederic Savaria

    1,000        *        500        *        1,000         500        Nil        Nil        Nil        Nil   

Garald Burlew

    2,000        *        1,000        *        2,000         1,000        Nil        Nil        Nil        Nil   

Geoffrey Adams

    2,000        *        1,000        *        2,000         1,000        Nil        Nil        Nil        Nil   

Gerald Schoel

    2,200        *        600        *        1,200         600        1,000        *        Nil        Nil   

Gregory Butler

    1,000        *        500        *        1,000         500        Nil        Nil        Nil        Nil   

Hershey Dwoskin

    1,200        *        600        *        1,200         600        Nil        Nil        Nil        Nil   

Howard Markowitz

    1,200        *        600        *        1,200         600        Nil        Nil        Nil        Nil   

Howard Messias

    2,000        *        1,000        *        2,000         1,000        Nil        Nil        Nil        Nil   

Hymie London

    1,200        *        600        *        1,200         600        Nil        Nil        Nil        Nil   

Patricia Bentley

    2,000        *        1,000        *        2,000         1,000        Nil        Nil        Nil        Nil   

Robert Dales

    13,000        *        6,500        *        13,000         6,500        Nil        Nil        Nil        Nil   

J. Stephen Lipper

    2,000        *        1,000        *        2,000         1,000        Nil        Nil        Nil        Nil   

Jack Shuber

    3,000        *        1,500        *        3,000         1,500        Nil        Nil        Nil        Nil   

Janet Dwoskin

    1,200        *        600        *        1,200         600        Nil        Nil        Nil        Nil   

Jim Stuckey

    3,000        *        1,500        *        3,000         1,500        Nil        Nil        Nil        Nil   

John Bradley

    10,000        *        5,000        *        10,000         5,000        Nil        Nil        Nil        Nil   

John Huisman

    6,000        *        1,500        *        3,000         1,500        3,000        *        Nil        Nil   

Josef Arfin

    7,000        *        3,500        *        7,000         3,500        Nil        Nil        Nil        Nil   

Lorne Schecter

    3,000        *        1,500        *        3,000         1,500        Nil        Nil        Nil        Nil   

Louise Audy-Emond

    1,500        *        750        *        1,500         750        Nil        Nil        Nil        Nil   

Marc Afilalo

    1,500        *        750        *        1,500         750        Nil        Nil        Nil        Nil   

Maria Moore

    3,000        *        1,500        *        3,000         1,500        Nil        Nil        Nil        Nil   

Marilyn Cohen

    1,200        *        600        *        1,200         600        Nil        Nil        Nil        Nil   

Mazhar Sheikh

    4,000        *        2,000        *        4,000         2,000        Nil        Nil        Nil        Nil   

Michael Cooper

    4,800        *        2,000        *        4,000         2,000        800        800        Nil        Nil   

Muthupalaniappan Kalairajah

    2,000        *        1,000        *        2,000         1,000        Nil        Nil        Nil        Nil   

Norman Cohen

    2,200        *        600        *        1,200         600        1,000        *        Nil        Nil   

Paul Complin

    2,200        *        1,100        *        2,200         1,100        Nil        Nil        Nil        Nil   

Pierre Arbour

    10,000        *        2,500        *        5,000         2,500        5,000        *        Nil        Nil   

Randall Lang and/or Patricia Lang

    4,000        *        2,000        *        4,000         2,000        Nil        Nil        Nil        Nil   

Robert Baumgart

    3,500        *        1,750        *        3,500         1,750        Nil        Nil        Nil        Nil   

Robert Mobbs