UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2013

Or

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

Commission File Number 001-35639

USMD Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware	27-2866866
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
6333 North State Highway 161, Suite 200 Irving, Texas	75038
(Address of principal executive offices)	(zip code)

(214) 493-4000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

The registrant had 10,105,491 shares of common stock outstanding as of November 1, 2013.

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION

		Page
Item 1.	Financial Statements (Unaudited)		3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 4.	Controls and Procedures		27
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings		29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		29
Item 6.	Exhibits		30
Signatures			31

2

USMD HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	September 30, 2013			December 31, 2012
	(unaudited)
ASSETS(1)
Current assets:
Cash and cash equivalents	$	12,128		$	6,878
Restricted cash		5,000			5,000
Accounts receivable, net of allowance for doubtful accounts of $1,970 at September 30, 2013 and $1,127 at December 31, 2012, respectively		23,698			20,615
Inventories		1,402			782
Deferred tax assets		937			729
Prepaid expenses and other current assets		3,510			2,584
Total current assets		46,675			36,588
Property and equipment, net		24,070			26,203
Investments in nonconsolidated affiliates		61,127			35,892
Goodwill		118,176			118,261
Intangible assets, net		27,476			28,786
Other assets		375			386
Total assets	$	277,899		$	246,116
LIABILITIES(2) AND EQUITY
Current liabilities:
Accounts payable	$	1,880		$	3,318
Accrued payroll		15,478			9,813
Other accrued liabilities		9,182			5,867
Other current liabilities		951			1,115
Revolving credit facility		3,000			—
Current portion of long-term debt		4,903			4,639
Current portion of related party long-term debt		635			594
Current portion of capital lease obligations		276			287
Total current liabilities		36,305			25,633
Other long-term liabilities		1,260			1,300
Deferred compensation payable		4,737			4,898
Long-term debt, less current portion		34,564			16,754
Related party long-term debt, less current portion		3,252			3,734
Capital lease obligations, less current portion		351			561
Deferred tax liabilities		24,103			23,789
Total liabilities		104,572			76,669
Commitments and contingencies
Equity:
USMD Holdings, Inc. stockholders’ equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized; none issued		—			—
Common stock, $0.01 par value, 49,000,000 shares authorized; 10,090,908 and 10,033,500 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively		101			100
Additional paid-in capital		157,191			153,444
Retained earnings		12,549			12,671
Accumulated other comprehensive loss		(3	)		(16	)
Total USMD Holdings, Inc. stockholders’ equity		169,838			166,199
Noncontrolling interests in subsidiaries		3,489			3,248
Total equity		173,327			169,447
Total liabilities and equity	$	277,899		$	246,116

See accompanying notes to condensed consolidated financial statements.

3

USMD HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS - (continued)

(In thousands, except share data)

	September 30, 2013		December 31, 2012
	(unaudited)
(1) Assets of consolidated variable interest entity (“VIE”) included in total assets above (after elimination of intercompany transactions and balances):
Cash and cash equivalents	$	1,867	$	—
Accounts receivable		119		—
Total assets	$	1,986	$	—
(2) Liabilities of consolidated VIE included in total liabilities above (after elimination of intercompany transactions and balances):
Accounts payable	$	42	$	—
Other accrued liabilities		1,819		—
Total liabilities	$	1,861	$	—

See accompanying notes to condensed consolidated financial statements.

4

USMD HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Revenue:
Patient service revenue	$	49,633		$	14,235		$	141,752		$	14,235
Provision for doubtful accounts related to patient service revenue		(1,581	)		(268	)		(2,329	)		(268	)
Net patient service revenue		48,052			13,967			139,423			13,967
Management services revenue		6,067			5,757			19,140			17,464
Lithotripsy revenue		5,492			5,869			16,157			16,869
Net operating revenue		59,611			25,593			174,720			48,300
Operating expenses:
Salaries, wages and employee benefits		38,557			14,922			115,033			25,643
Medical supplies and services expense		8,459			1,785			19,933			1,981
Rent expense		3,770			1,268			10,945			1,514
Provision for doubtful accounts		99			16			112			88
Other operating expenses		6,674			4,677			19,985			8,540
Depreciation and amortization		1,900			797			5,782			1,334
Total operating expenses		59,459			23,465			171,790			39,100
Income from operations		152			2,128			2,930			9,200
Other income (expense):
Interest expense, net		(464	)		(241	)		(1,121	)		(651	)
Equity in income of nonconsolidated affiliates, net		2,321			784			5,988			1,541
Other gain (loss), net		—			59			(58	)		186
Total other income, net		1,857			602			4,809			1,076
Income before provision (benefit) for income taxes		2,009			2,730			7,739			10,276
Provision (benefit) for income taxes		(110	)		(93	)		414			512
Net income		2,119			2,823			7,325			9,764
Less: net income attributable to noncontrolling interests		(2,555	)		(3,183	)		(7,447	)		(9,171	)
Net income (loss) attributable to USMD Holdings, Inc.	$	(436	)	$	(360	)	$	(122	)	$	593
Earnings (loss) per share attributable to USMD Holdings, Inc.:
Basic	$	(0.04	)	$	(0.06	)	$	(0.01	)	$	0.14
Diluted	$	(0.04	)	$	(0.06	)	$	(0.01	)	$	0.14
Weighted average common shares outstanding:
Basic		10,088			5,748			10,071			4,307
Diluted		10,088			5,748			10,071			4,317

See accompanying notes to condensed consolidated financial statements.

5

USMD HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Net income	$	2,119		$	2,823		$	7,325		$	9,764
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of tax		1			(1	)		13			3
Total other comprehensive income (loss)		1			(1	)		13			3
Comprehensive income		2,120			2,822			7,338			9,767
Less: comprehensive income attributable to noncontrolling interests		(2,555	)		(3,183	)		(7,447	)		(9,171	)
Comprehensive income (loss) attributable to USMD Holdings, Inc. common stockholders	$	(435	)	$	(361	)	$	(109	)	$	596

See accompanying notes to condensed consolidated financial statements.

6

USMD HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

	USMD Holdings, Inc. Common Stockholders’ Equity																Noncontrolling Interests in Subsidiaries			Total Equity
	Common Stock				Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total USMD Holdings, Inc.
	Shares Outstanding		Par Value
Balance at December 31, 2012		10,034	$	100	$	153,444		$	(16	)	$	12,671		$	166,199		$	3,248		$	169,447
Net income (loss)		—		—		—			—			(122	)		(122	)		7,447			7,325
Other comprehensive income		—		—		—			13			—			13			—			13
Share-based payment expense		—		—		457			—			—			457			—			457
Common stock issued for share-based payment award exercised		6		—		100			—			—			100			—			100
Common stock issued for acquisition of business		4		—		109			—			—			109			—			109
Common stock issued for payment of accrued liabilities		47		1		657			—			—			658			—			658
Beneficial conversion debt discount on Convertible Subordinated Notes		—		—		3,729			—			—			3,729			—			3,729
Tax effect of beneficial conversion discount on Convertible Subordinated Notes		—		—		(1,305	)		—			—			(1,305	)		—			(1,305	)
Capital contributions from noncontrolling shareholders		—		—		—			—			—			—			562			562
Distributions to noncontrolling shareholders		—		—		—			—			—			—			(7,768	)		(7,768	)
Balance at September 30, 2013		10,091	$	101	$	157,191		$	(3	)	$	12,549		$	169,838		$	3,489		$	173,327

See accompanying notes to condensed consolidated financial statements.

7

USMD HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2013			2012
Cash flows from operating activities:
Net income	$	7,325		$	9,764
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for doubtful accounts		2,441			356
Depreciation and amortization of property and equipment		4,438			1,119
Amortization of intangible assets and debt issuance costs		1,489			215
Accretion of debt discount		56			—
Loss on sale or disposal of assets, net		62			—
Equity in income of nonconsolidated affiliates, net		(5,988	)		(1,541	)
Distributions from nonconsolidated affiliates		5,308			501
Share-based payment expense		457			645
Recovery of investments in nonconsolidated affiliates		—			(135	)
Deferred income tax provision (benefit)		(943	)		13
Change in operating assets and liabilities, net of effects of business combinations and initial consolidation of investee:
Accounts receivable		(5,524	)		(633	)
Inventories		(609	)		(208	)
Prepaid expenses and other assets		(926	)		(476	)
Current liabilities		8,141			(2,442	)
Other noncurrent liabilities		154			(4,169	)
Net cash provided by operating activities		15,881			3,009
Cash flows from investing activities:
Cash acquired in business combination		—			6,967
Capital expenditures		(2,357	)		(887	)
Investments in nonconsolidated affiliates		(200	)		—
Proceeds from sale of life insurance policies		—			3,184
Proceeds from sale of property and equipment		64			—
Increase in cash due to initial consolidation of investee		—			52
Net cash provided by (used in) investing activities		(2,493	)		9,316
Cash flows from financing activities:
Borrowings on revolving credit facility		3,000			—
Proceeds from issuance of long-term debt		—			21,124
Payments on long-term debt and capital lease obligations		(3,457	)		(19,749	)
Principal payments on related party long-term debt		(441	)		(2,790	)
Restricted cash		—			(5,000	)
Issuance of USMD common stock		—			980
Payment of debt issuance costs		(134	)		—
Proceeds from exercise of stock options		100			—
Capital contributions from noncontrolling interests		562			363
Distributions to noncontrolling interests		(7,768	)		(9,374	)
Net cash used in financing activities		(8,138	)		(14,446	)
Net increase (decrease) in cash and cash equivalents		5,250			(2,121	)
Cash and cash equivalents at beginning of year		6,878			10,822
Cash and cash equivalents at end of period	$	12,128		$	8,701
Supplemental noncash investing and financing information:
Other liabilities financed	$	461		$	1,335
Equipment acquired included in other liabilities	$	—		$	461
Equipment acquired through debt financing	$	180		$	—
Investment in nonconsolidated affiliate financed with debt	$	24,342		$	—
Supplemental cash flow information:
Cash paid for—
Interest, net of related parties	$	702		$	175
Interest to related parties	$	279		$	397
Income tax	$	1,448		$	421
Cash received for—
Income tax refund	$	810		$	—

See accompanying notes to condensed consolidated financial statements.

8

USMD HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2013

(Unaudited)

Note 1 – Description of Business and Basis of Presentation

Description of Business:

USMD Holdings, Inc. (“Holdings” or the “Company”) is a Delaware corporation formed on May 7, 2010 to facilitate the business combination of USMD Inc., a Texas corporation (“USMD”), Urology Associates of North Texas, L.L.P., a Texas limited liability partnership (“UANT”), and UANT Ventures, L.L.P., a Texas limited liability partnership (“Ventures”) (such transaction, the “Contribution”). Holdings described this transaction in its Registration Statement on Form S-4 (as amended, the “Registration Statement”) filed with the Securities and Exchange Commission (the “SEC”). Prior to the consummation of the Contribution, on December 1, 2011, Ventures and Holdings entered into a merger agreement with The Medical Clinic of North Texas, P.A., a Texas professional association (“MCNT”), and on December 15, 2011, Ventures and Holdings entered into a merger agreement with Impel Management Services, L.L.C., a Texas limited liability company (“Impel”), pursuant to which the businesses of MCNT and Impel were merged into subsidiaries of Ventures immediately prior to the Contribution and these businesses were contributed by Ventures to Holdings as part of the Contribution. Effective August 31, 2012, Holdings and the other parties consummated the Contribution (see Note 2).

The Company is an innovative early-stage physician-led integrated health system. Through its subsidiaries and affiliates, the Company provides health care services to patients in physician clinics, hospitals and other health care facilities, and also provides management and operational services to hospitals, physician practices and other healthcare service providers. An integrated health system is considered early-stage when it has not yet established all the components necessary to be considered a fully integrated health system.

A wholly owned subsidiary of the Company is the sole member of a Texas certified non-profit healthcare organization that owns and operates a multi-specialty physician group practice (“USMD Physician Services”) in the Dallas-Fort Worth, Texas metropolitan area. Through wholly owned subsidiaries, the Company provides management and operational services to two short stay hospitals in the Dallas-Fort Worth, Texas metropolitan area and provides management and/or operational services to seven cancer treatment centers in five states and 21 lithotripsy service providers primarily located in the South Central United States. Of these managed entities, the Company has ownership interests in the two hospitals, two cancer treatment centers and 20 lithotripsy service providers. The Company also wholly owns and operates two clinical laboratories and one anatomical pathology laboratory in the Dallas-Fort Worth, Texas metropolitan area. In addition, the Company wholly owns and operates one cancer treatment center and one lithotripsy service provider in the Dallas-Fort Worth, Texas metropolitan area.

Basis of Presentation:

The unaudited condensed consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) for interim financial statements and pursuant to the rules and regulations of the SEC for interim reporting. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. These condensed consolidated financial statements reflect all adjustments that, in the opinion of the Company’s management, are necessary for fair presentation of the condensed consolidated financial statements. The December 31, 2012 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The operating results for the interim periods are not necessarily indicative of results for the full fiscal year. These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC.

The condensed consolidated financial statements include the accounts of the Company, entities controlled by the Company through its direct or indirect ownership of a majority interest and any other entities in which the Company has a controlling financial interest.

The Company consolidates variable interest entities (“VIEs”) where the Company is the primary beneficiary. The primary beneficiary of a VIE is the party that has both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.

The Company consolidates entities in which it or its wholly owned subsidiaries is the general partner or managing member and the limited partners or managing members, respectively, do not have sufficient rights to overcome the presumption of the Company’s control.

The Company uses the equity method to account for investments in entities it or its wholly owned subsidiaries does not control, but over which it or its wholly owned subsidiaries has the ability to exercise significant influence. The Company does not consolidate equity method investments, but rather measures them at their initial costs and subsequently adjusts their carrying values through income for the Company’s respective share of earnings or losses during the period.

The Company eliminates all significant intercompany accounts and transactions in consolidation.

The Company’s statements of operations and comprehensive income for the three months ended September 30, 2012 include two months of results of operations and comprehensive income of USMD and one month of results of operations and comprehensive income of the consolidated post-Contribution Company. The Company’s statements of operations, comprehensive income and cash flows for the nine months ended September 30, 2012 include eight months of results of operations, comprehensive income and cash flows of USMD and one month of results of operations, comprehensive income and cash flows of the consolidated post-Contribution Company. The Company’s statements of operations and comprehensive income for the three and nine months ended September 30, 2013 include the results of operations and comprehensive income of the consolidated post-Contribution Company. The Company’s cash flows for the nine months ended September 30, 2013 include the cash flows of the consolidated post-Contribution Company.

Segment Reporting

GAAP defines operating segments as components of an enterprise about which discrete financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company’s CODM is its Chief Executive Officer. The CODM assesses performance and allocates resources at the integrated healthcare system level. Accordingly, the Company has one operating segment for segment reporting purposes.

9

USMD HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements - (continued)

September 30, 2013

(Unaudited)

Out of Period Adjustment:

In calculating the Company’s December 31, 2012 provision for income taxes, certain deferred rent activity that should have been attributed to the opening balance sheet of one of the companies acquired in the Contribution was incorrectly recorded as current period activity. This error resulted in an understatement of the provision for income taxes and an overstatement of goodwill at December 31, 2012 in the amount of $196,000. During the first quarter of 2013, the Company corrected this error by recording additional income tax provision of $196,000 and decreasing goodwill by the same amount. The impact of this out of period adjustment was not material to the consolidated results, financial position or cash flows for the year ended December 31, 2012, nor is it expected to be material to the consolidated results, financial position or cash flows for the year ending December 31, 2013.

Note 2 – Business Combination

The Contribution

On August 31, 2012, Holdings, USMD, UANT, Ventures, MCNT and Impel consummated the Contribution. The Contribution was accounted for as a reverse acquisition by USMD into Holdings, previously a business combination related shell company. Under reverse acquisition accounting, the financial statements are issued in the name of the legal parent (Holdings), but represent a continuation of the accounting acquirer’s (USMD) financial statements, with an adjustment to retroactively restate USMD’s legal capital to reflect the legal capital of Holdings. The assets and liabilities of USMD continue to be recorded at their pre-combination carrying values. The assets and liabilities of Holdings are recorded at fair value at the acquisition date, which, for Holdings, equaled their carrying values. The assets acquired and liabilities assumed from Ventures, UANT, MCNT and Impel (the “acquired businesses”) are recorded at their respective fair values at the acquisition date.

In connection with the Contribution, Holdings issued as consideration to the former owners of Ventures, UANT, MCNT and Impel, approximately 6.4 million shares of its common stock with an estimated fair value of $158.1 million and options to purchase 68,982 shares of its common stock with an estimated fair value of $0.5 million. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed of Ventures, UANT, MCNT and Impel at the acquisition date (in thousands):

	August 31, 2012 (As initially reported)			Measurement Period Adjustments			August 31, 2012 (As adjusted)
Current assets	$	25,069		$	36		$	25,105
Property and equipment		24,020			(171	)		23,849
Investments in affiliates		36,198			—			36,198
Other assets		7,240			—			7,240
Identifiable intangible assets		32,479			(3,377	)		29,102
Goodwill		83,346			3,057			86,403
Liabilities assumed, other than long-term debt		(30,925	)		455			(30,470	)
Long-term debt		(18,832	)		—			(18,832	)
Net assets acquired and liabilities assumed	$	158,595		$	—		$	158,595

As discussed in Note 1, in connection with the Contribution, during the nine month period ended September 30, 2013, the Company reduced goodwill and liabilities assumed by $196,000. In addition, in June 2013, in connection with the valuation of fixed assets acquired, the Company reduced property and equipment acquired and increased goodwill by $171,000. As of August 31, 2013, the Company’s measurement period adjustments are complete.

Pro Forma Disclosures

The results of operations and cash flows of the acquired businesses are included in Holdings’ consolidated financial statements beginning September 1, 2012. For the three and nine month periods ended September 30, 2013, the acquired businesses contributed net operating revenues of $45.7 million and $136.8 million respectively. For the three and nine months ended September 30, 2012, the acquired businesses contributed net operating revenues of $21.8 million. It is impracticable for the Company to determine the amount of earnings of the acquired businesses included in the Company’s consolidated statements of operations for the three and nine months ended September 30, 2013 or September 30, 2012 due to the significant transfers of personnel, fixed assets and departments into and between newly created or historical departments and business units that have occurred subsequent to the Contribution. The following table presents unaudited pro forma results as if the entities had been combined on January 1, 2012. The pro forma financial information includes adjustments to give effect to activity that is directly attributable to the Contribution, factually supportable and expected to have a continuing impact on the combined results of operations. The pro forma financial information also includes adjustments to give effect to direct, incremental costs of the Contribution as nonrecurring charges directly related to the Contribution. The pro forma combined financial information has been prepared for illustrative purposes only and is not necessarily indicative of the results of operations in future periods or the results of operations that would have been realized had Holdings, USMD, Ventures, UANT, MCNT and Impel been a combined company during the specified periods (in thousands, except per share data).

10

USMD HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements - (continued)

September 30, 2013

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(unaudited, pro forma)
Net operating revenue	$	59,611		$	55,296		$	174,720		$	166,479
Net income	$	2,192		$	2,205		$	7,432		$	10,849
Net income (loss) attributable to USMD Holdings, Inc.	$	(363	)	$	(492	)	$	(15	)	$	3,219
Earnings (loss) per share attributable to USMD Holdings, Inc.
Basic	$	(0.03	)	$	(0.05	)	$	(0.00	)	$	0.32
Diluted	$	(0.03	)	$	(0.05	)	$	(0.00	)	$	0.32

For the three and nine months ended September 30, 2012, pro forma adjustments include a reduction to other operating expenses of $0.5 million and $1.8 million, respectively, for nonrecurring transaction costs directly attributable to the Contribution, primarily legal, accounting and other professional fees.

Acquisition of Physician Practice

In July 2013, the Company acquired a physician practice in exchange for 3,654 shares of the Company’s common stock with a fair value of $109,000.

Note 3 – Variable Interest Entity

In April 2013, the Company became an equal co-member of a Texas non-profit corporation (“WNI-DFW”) that has been approved by the Texas Medical Board as a certified non-profit healthcare organization. WNI-DFW contracts with health insurance companies to manage patient care by providing or arranging for the provision of all the necessary healthcare services for a health plan’s given patient population in the North Texas service area for a fixed fee per patient under what is typically known as a “risk contract.” Risk contracting, or full risk capitation, refers to a model in which an entity receives from the third party payer a fixed payment per patient per month for a defined patient population, and the entity is then responsible for arranging and/or providing all of the healthcare services required by that patient population. The entity accomplishes this by managing patient care and by contracting with downstream healthcare providers to provide needed healthcare services for the patient population. In such a model, the contracting entity is then responsible for incurring or paying for the cost of healthcare services required by that patient population. The entity generates a net surplus if the cost of all healthcare services provided to the patient population is less than the payments received from the third party payer, and it generates a net deficit if the cost of such services is higher than the payments received. In early May 2013, the Company and its equal co-member both made a $100,000 capital contribution to WNI-DFW. On June 1, 2013, WNI-DFW commenced operations.

The Company evaluated whether it has a variable interest in WNI-DFW, whether WNI-DFW is a VIE and whether the Company has a controlling financial interest in WNI-DFW. The Company concluded that it has variable interests in WNI-DFW on the basis of its capital contribution to WNI-DFW and because WNI-DFW has entered into a Primary Care Physician Agreement (“PCP Agreement”) with USMD Physician Services, an affiliate of the Company. WNI-DFW’s equity at risk, as defined by GAAP, is considered to be insufficient to finance its activities without additional support, and, therefore, WNI-DFW is considered a VIE.

In order to determine whether the Company has a controlling financial interest in the VIE and, thus, is the VIE’s primary beneficiary, the Company considered whether it has i) the power to direct the activities of WNI-DFW that most significantly impact its economic performance and ii) the obligation to absorb losses of WNI-DFW that could potentially be significant to it or the right to receive benefits from WNI-DFW that could potentially be significant to it.

The Company concluded that the members, the board of directors and the executive management team of WNI-DFW are structured in a way that neither member nor its designee has the individual power to direct the activities of WNI-DFW that most significantly impact its economic performance. Management considered whether the various service and support agreements between WNI-DFW and its members (or their affiliates) provide either variable interest party with this power and concluded that the PCP Agreement between USMD Physician Services and WNI-DFW does provide the power to direct such activities to USMD Physician Services. Under the PCP Agreement, USMD Physician Services is responsible for providing many services related to the growth of the patient population WNI-DFW will manage, the management of that population’s healthcare needs, and the provision of required healthcare services to those patients. The Company has concluded that the success or failure of USMD Physician Services in conducting these activities will most significantly impact the economic performance of WNI-DFW. In addition, the Company’s variable interests in WNI-DFW obligate the Company to absorb deficits and provide it the right to receive benefits that could potentially be significant to WNI-DFW. As a result of this analysis, the Company concluded that it is the primary beneficiary of WNI-DFW and therefore consolidates the balance sheets, results of operations and cash flows of WNI-DFW.

The following table summarizes the carrying amount of the assets and liabilities of WNI-DFW included in the Company’s condensed consolidated balance sheet at September 30, 2013 (after elimination of intercompany transactions and balances) (in thousands):

11

USMD HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements - (continued)

September 30, 2013

(Unaudited)

	September 30, 2013
Current assets:
Cash and cash equivalents	$	1,867
Accounts receivable		119
Total current assets	$	1,986
Current liabilities:
Accounts payable	$	42
Other accrued liabilities		1,819
Total current liabilities	$	1,861

The assets of WNI-DFW can only be used to settle obligations of WNI-DFW. The creditors of WNI-DFW have no recourse to the general credit of the Company. The Company is contractually obligated to make additional contributions of capital to WNI-DFW under certain circumstances, particularly in the event of deficits incurred by WNI-DFW.

The results of operations and cash flows of WNI-DFW are included in the Company’s consolidated financial statements beginning June 1, 2013. For the three and nine months ended September 30, 2013, WNI-DFW contributed net operating revenues of $3.1 million and $4.0 million, respectively, and income before provision for income taxes of $265,000 and $340,000 (after elimination of intercompany transactions), respectively.

Estimated Medical Expense

In connection with the operations of WNI-DFW, the Company makes estimates related to incurred but not reported medical claims (“IBNR”) of WNI-DFW. Since the patient population that WNI-DFW is contracted to provide health services to does not have a historical medical claims history from which claims-based actuarial judgments can be made, the Company must estimate the IBNR using other methods. Management relies on the Risk Adjustment Factor (“RAF”) score of the patient population to estimate the total medical supplies and services expense of providing healthcare services to that population. Because the per member per month capitated revenue the Company records is based on the patient population RAF score, the Company currently records an IBNR amount that results in total medical costs equal to 100% of the capitated revenue recorded. The earliest the Company anticipates having preliminary medical claims-based actuarial data points is as of December 31, 2013.

If actual results are not consistent with the Company’s estimate, the Company may be exposed to variances in medical supplies and services expense that may be material. A medical claims experience that is not consistent with the RAF score assigned to the patient population may affect the medical supplies and services expense.

Note 4 – Investments in Nonconsolidated Affiliates

The net carrying values and ownership percentages of nonconsolidated affiliates accounted for under the equity method are as follows (dollars in thousands):

	September 30, 2013					December 31, 2012
	Carrying Value		Ownership Percentage			Carrying Value		Ownership Percentage
USMD Hospital at Arlington, L.P.	$	50,108		46.40	%	$	24,997		28.44	%
USMD Hospital at Fort Worth, L.P.		10,686		30.88	%		10,779		30.88	%
Other		333		4%-34	%		116		4%-34	%
	$	61,127				$	35,892

On September 13, 2013, the Company issued convertible subordinated notes payable (see Note 8) to certain limited partners of USMD Hospital at Arlington, L.P. (“USMD Arlington”) to acquire additional ownership interests in USMD Arlington. As a result of this transaction, the Company’s investment in USMD Arlington increased by $24.3 million and its ownership percentage in USMD Arlington increased to 46.4%.

In February 2013, the Company invested $200,000 in a new cancer treatment center in Anchorage, Alaska. The Company has an existing agreement to provide management services to this center. Because the Company has the ability to exercise significant influence over the management and operations of the center, the Company accounts for the investment under the equity method of accounting.

At September 30, 2013, USMD Arlington and USMD Hospital at Forth Worth, L.P. (“USMD Fort Worth”) were significant equity investees, as that term is defined by SEC Regulation S-X Rule 8-03(b)(3). Summarized financial information for USMD Arlington and USMD Forth Worth is as follows (in thousands):

12

USMD HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements - (continued)

September 30, 2013

(Unaudited)

	Nine Months Ended September 30,
	2013		2012
USMD Arlington:
Revenue	$	67,044	$	62,935
Income from operations	$	15,769	$	12,649
Income from continuing operations	$	15,013	$	10,813
Net income	$	15,013	$	10,813
USMD Fort Worth:
Revenue	$	26,988	$	25,874
Income from operations	$	5,577	$	4,183
Income from continuing operations	$	4,946	$	3,911
Net income	$	4,946	$	3,911

Note 5 – Patient Service Revenue and the Allowance for Doubtful Accounts

Patient Service Revenue

On June 1, 2013, in connection with the commencement of operations at WNI-DFW, the Company began earning capitated patient service revenue. The Company’s patient service revenue is summarized by payer in the following table (in thousands). The Company had no patient service revenue prior to September 1, 2012.

	Three Months Ended September 30, 2013						Nine Months Ended September 30, 2013						Three and Nine Months Ended September 30, 2012
	Amount			Ratio of Net Patient Service Revenue			Amount			Ratio of Net Patient Service Revenue			Amount			Ratio of Net Patient Service Revenue
Medicare	$	13,743			28.6	%	$	40,392			29.0	%	$	4,235			30.3	%
Medicaid		309			0.6	%		1,079			0.8	%		92			0.7	%
Managed care and commercial payers		30,775			64.0	%		91,472			65.6	%		9,565			68.5	%
Capitated revenue		3,759			7.8	%		5,622			4.0	%		—			—	%
Self-pay		1,047			2.2	%		3,187			2.3	%		343			2.5	%
Patient service revenue before provision for doubtful accounts		49,633			103.3	%		141,752			101.7	%		14,235			101.9	%
Patient service revenue provision for doubtful accounts		(1,581	)		(3.3	)%		(2,329	)		(1.7	)%		(268	)		(1.9	)%
Net patient service revenue	$	48,052			100.0	%	$	139,423			100.0	%	$	13,967			100.0	%

Allowance for Doubtful Accounts

The allowance for doubtful accounts is based on management’s assessment of the collectibility of patient accounts. The Company regularly reviews this allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances and current economic conditions that may affect a patient’s or customer’s ability to pay. Uncollectible accounts are written off once collection efforts are exhausted. A summary of the Company’s accounts receivable allowance for doubtful accounts activity is as follows (in thousands):

Balance at December 31, 2012		Provision for Doubtful Accounts Related to Patient Service Revenue		Provision for Doubtful Accounts		Write-offs, net of Recoveries			Balance at September 30, 2013
	$1,127		2,329		112		(1,598	)	$	1,970

The allowance for doubtful accounts as a percent of accounts receivable, net of contractual allowances, was 8.7% and 6.4% as of September 30, 2013 and December 31, 2012, respectively. The increase in this ratio is primarily the result of a growth in the aging of the patient portion of commercial accounts and the growth in the aging of both the insurance and patient portion of Medicare and Medicaid account balances over 120 days.

Self pay is defined as the total of all unfunded patient balances plus the patient portion of insured accounts. As a result of the increased aging of accounts receivable, account write-offs have grown, particularly in the third quarter. Write-offs related to self-pay account balances increased 45% from the second quarter 2013 and 58% from the fourth quarter 2012, primarily from the patient responsible portion. The patient responsible portion of accounts receivable has a longer collections cycle, and continues to increase as the cost of care shifts from the employer to the employee. Management has taken steps to mitigate the longer collections cycle by instituting more stringent point of service collections protocols.

13

USMD HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements - (continued)

September 30, 2013

(Unaudited)

Aging of post-Contribution account balances is primarily the result of the elongated Medicaid provider enrollment process. The Medicaid enrollment process could not begin until the Medicare enrollment process was complete. While most of the Medicaid balance outstanding is deemed collectible for physicians employed by USMD Physician Services and its subsidiaries and the pace of collections of the older Medicaid accounts receivable has accelerated in the third quarter, management cannot predict with certainty that a portion of the oldest government accounts receivable will ultimately be collected and, consequently has reserved against its collection. Of the total Medicaid accounts receivable as of September 30, 2013, approximately $0.7 million is anticipated with a higher degree of certainty to be collectible and over 40% of that total was collected as of early November 2013.

Changes in general economic conditions, payer mix, or trends in federal governmental and private employer healthcare coverage could affect the estimate of the allowance for doubtful accounts, collection of accounts receivable, financial position, results of operations, and cash flows of the Company.

Note 6 – Goodwill

The following table sets forth the goodwill activity for each of the Company’s reporting units during the nine months ended September 30, 2013 (in thousands):

	Physician and Ancillary Services			Cancer Treatment Services		Lithotripsy Services			Total
Balance at December 31, 2012
Goodwill	$	60,614		$	54,219	$	6,837		$	121,670
Accumulated impairment		—			—		(3,409	)		(3,409	)
		60,614			54,219		3,428			118,261
Adjustments related to business combination		(196	)		111		—			(85	)
Balance at September 30, 2013
Goodwill		60,418			54,330		6,837			121,585
Accumulated impairment		—			—		(3,409	)		(3,409	)
	$	60,418		$	54,330	$	3,428		$	118,176

In June 2013, the Company reduced fixed assets acquired in the Contribution by $171,000. This resulted in an increase to goodwill of $111,000, net of tax.

Note 7 – Other Accrued Liabilities

Other accrued liabilities consist of the following (in thousands):

	September 30, 2013		December 31, 2012
Accrued expenses	$	3,446	$	3,108
Accrued bonus		1,017		1,469
Accrued payables		3,466		822
Income taxes payable		1,253		468
	$	9,182	$	5,867

14

USMD HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements - (continued)

September 30, 2013

(Unaudited)

Note 8 – Long-Term Debt and Capital Lease Obligations

Long-term debt and capital lease obligations consist of the following (in thousands):

	September 30, 2013			December 31, 2012
Holdings:
Credit agreement:
Term debt	$	16,750		$	19,938
Revolving credit facility		3,000			—
Convertible subordinated notes, net of unamortized discount of $3,673		20,669			—
Subordinated notes payable		3,887			4,328
Other note payable		138			185
		44,444			24,451
Consolidated lithotripsy entities:
Notes payable		1,909			1,270
Capital lease obligations		628			848
		2,537			2,118
Total long-term debt and capital lease obligations		46,981			26,569
Less: current portion		(8,814	)		(5,520	)
Long-term debt and capital lease obligations, less current portion	$	38,167		$	21,049

Convertible Subordinated Notes

On September 13, 2013, the Company issued convertible subordinated notes in the aggregate principal amount of $24.3 million (the “Convertible Subordinated Notes”) to certain limited partners of USMD Arlington to acquire their limited partnership interests in USMD Arlington. The Convertible Subordinated Notes bear interest at a fixed rate of 5.00% per annum and mature on March 1, 2019. Interest payments are due and payable on the last day of each month beginning on September 30, 2013 and the principal is due upon maturity. The Company may prepay the Convertible Subordinated Notes, in whole or in part, at any time after September 1, 2014 without penalty.

Each noteholder will have the right at any time after September 1, 2014 to convert all or any part of the unpaid principal balance of their respective Convertible Subordinated Note into shares of common stock of Holdings at the rate of one share of common stock for each $23.37 of principal. At the date of issuance of the Convertible Subordinated Notes, the commitment date, the conversion price was less than the fair value of shares of Holdings’ common stock. The Company recognized the intrinsic value of the conversion option’s in-the-money portion as a $3.7 million beneficial conversion discount to the debt with an offsetting entry to additional paid-in capital. Recognition of the beneficial conversion discount results in a temporary book-tax basis difference in the debt instrument. Accordingly, the Company recorded a $1.3 million deferred tax liability with an offsetting entry to additional paid-in capital. The beneficial conversion discount will be accreted to the Convertible Subordinated Notes using the effective interest method over 66 months until they mature on March 1, 2019. The conversion rate will be appropriately adjusted for stock splits, mergers or other fundamental corporate transactions.

The aggregate Convertible Subordinated Notes are convertible into 1,041,581 common shares of Holdings at a conversion price of $23.37 per share. If the Convertible Subordinated Notes were converted into shares of the Company’s common stock at the September 30, 2013 closing price, the value of the shares issued would exceed the Convertible Subordinated Notes principal amount by $2.3 million. The Convertible Subordinated Notes have an effective interest rate of 8.50%. For the three and nine months ended September 30, 2013, the Company recognized interest expense related to the Convertible Subordinated Notes of $157,000, comprised of $101,000 related to the contractual interest rate and $56,000 related to discount accretion.

The indebtedness represented by the Convertible Subordinated Notes is expressly subordinate to all senior indebtedness of Holdings currently outstanding or incurred in the future, which includes without limitation its indebtedness to banks.

Notes Payable

During the third quarter of 2013, one of the Company’s consolidated lithotripsy partnerships acquired equipment totaling $0.4 million from another consolidated entity and executed a note payable with a third party to finance the full amount of the purchased equipment. The note bears a fixed interest rate of 4.2% and principal and interest payments are due monthly in 60 equal installments of $6,488 until maturity in July, 2018. The note is secured by the financed equipment. The associated asset disposal and acquisition transactions have been eliminated in consolidation from the Company’s results of operations and cash flows.

During the second quarter of 2013, one of the Company’s consolidated lithotripsy partnerships acquired equipment totaling $0.2 million and executed a note payable to finance the full amount of the purchased equipment. The note bears a fixed interest rate of 4.2% and principal and interest payments are due monthly in 36 equal installments of $5,336 until maturity in May, 2016. The note is secured by the financed equipment.

During the third quarter of 2012, one of the Company’s consolidated lithotripsy partnerships acquired equipment totaling $0.5 million; however financing agreements were not finalized at December 31, 2012. The entity executed a note payable in the first quarter of 2013 to finance the full amount of the purchased equipment. The note bears a fixed interest rate of 3.87% and principal and interest payments are due monthly in 48 equal installments of $10,390 until maturity in January, 2017. The note is secured by the financed equipment.

15

USMD HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements - (continued)

September 30, 2013

(Unaudited)

Revolving Credit Facility

On August 31, 2012, in connection with the Contribution, the Company entered into a credit agreement with a syndicate of banks (“Credit Agreement”). During April 2013, Holdings borrowed $3.0 million under the revolving credit facility (“Revolver”) available under the Company’s Credit Agreement. The loan is for working capital purposes and accrues interest at the 30 day London Interbank Offered Rate plus a margin of 3.00% (3.25% at September 30, 2013) with interest payments due monthly. The Revolver terminates on February 28, 2014 and the Company currently has $7.0 million available to borrow under this credit facility.

Note 9 – Fair Value Measurements

Fair Value of Financial Instruments

Financial instruments consist mainly of cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings and long-term debt. The carrying value of financial instruments with a short-term or variable-rate nature approximate fair value and are not presented in the table below. The carrying value and estimated fair value of the Company’s financial instruments that do not approximate fair value are set forth in the table below (in thousands):

	September 30, 2013				December 31, 2012
	Carrying Value		Fair Value		Carrying Value		Fair Value
Convertible Subordinated Notes	$	20,669	$	20,669	$	—	$	—
Subordinated related party notes payable	$	3,887	$	4,477	$	4,328	$	5,078
Consolidated lithotripsy entity notes payable	$	1,909	$	1,911	$	1,270	$	1,273
Other long-term liabilities	$	—	$	—	$	461	$	461
Other notes payable	$	138	$	142	$	185	$	194

The Company determines the fair value of its subordinated related party notes payable using discounted cash flows based primarily on borrowing rates currently available to it for similar debt or debt for which the Company could use the proceeds to retire existing debt (Level 3 fair value measurement). The Company’s consolidated lithotripsy entities enter into term notes for equipment; borrowing rates are based on individual entity creditworthiness. At September 30, 2013, the Company estimated current borrowing rates for the lithotripsy entity notes payable by adjusting the discount factor of the obligations at September 30, 2013 by the variance in borrowing rates between the inception dates and balance sheet date (Level 3 fair value measurement). Management noted no significant events that would otherwise affect the lithotripsy entity borrowers’ creditworthiness. At September 30, 2013 and December 31, 2012, the carrying value of Convertible Subordinated Notes and other long-term liabilities, respectively, approximated fair value due to recent inception. Quoted market prices are not available for the Company’s notes payable.

Note 10 – Share-Based Payment

Pursuant to its 2010 Equity Compensation Plan (the “Plan”), the Company may grant equity awards to employees, nonemployee directors and nonemployee service providers in the form of stock options, restricted stock and stock appreciation rights. The terms of the Plan provide for the reservation of up to 1,000,000 shares of common stock for issuance under the Plan, including a maximum of 900,000 shares issued pursuant to stock options and 100,000 shares issued pursuant to restricted stock and stock appreciation rights. Stock options may be granted with terms up to ten years. At September 30, 2013, the Company had 439,076 shares available for grant under the Plan.

The fair value of share-based payment awards on the date of grant is estimated using the Black-Scholes option pricing model, which requires the Company to make certain predictive assumptions. The risk-free interest rate is based on the implied yield of U.S. Treasury zero-coupon securities that correspond to the expected life of the award. As a recently formed public entity with a small public float and limited trading of its public common shares on the NASDAQ stock market, it was not practicable for the Company to estimate the volatility of its common shares; therefore, management estimated volatility based on the historical volatilities of a small group of companies considered as close to comparable to the Company as available and an industry index, all equally weighted, over the expected life of the option. Management concluded that this group is more characteristic of the Company’s business than a broad industry index. The expected life of awards granted represents the period of time that the awards are expected to be outstanding based on the “simplified” method, which is allowed for companies that cannot reasonably estimate the expected life of options based on its historical award exercise experience. The Company does not expect to pay dividends on its common stock. Due to the nature of the issuances, the company estimated zero option forfeitures. Share-based payment expense is recorded only for those awards that are expected to vest. Weighted-average assumptions used in the Black-Scholes option pricing model for stock options granted were as follows:

	Nine Months Ended September 30,
	2013			2012
Risk-free interest rate		1.78	%		0.41	%
Expected volatility of common stock		45.2	%		51.7	%
Expected life of options		6.2 years			4.1 years
Dividend yield		0.00	%		0.00	%

16

USMD HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements - (continued)

September 30, 2013

(Unaudited)

The Black-Scholes option pricing model was developed for estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because option valuation models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value of the options. The Company’s options do not have the characteristics of exchange traded options, and therefore, the option valuation models do not necessarily provide a reliable measure of the fair value of stock options. A summary of stock option activity for the nine months ended September 30, 2013 is as follows:

Options	Number of Shares			Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term  (in years)		Aggregate Intrinsic Value
Outstanding as of December 31, 2012		321,807		$	24.26		6.12	$	—
Granted		192,845			26.24
Exercised		(6,037	)		16.56			$	132,000
Forfeited		(1,445	)		21.03
Outstanding as of September 30, 2013		507,170		$	25.12		6.67	$	920,843
Vested and expected to vest at September 30, 2013		221,595		$	24.35		5.69	$	497,120
Exercisable at September 30, 2013		167,610		$	24.06		5.30	$	410,998

The weighted-average grant-date fair value of stock options granted during the nine months ended September 30, 2013 and 2012 was $11.44 and $10.12 per option, respectively. The fair value of stock options vested and share-based payment expense recognized for the nine months ended September 30, 2013 and 2012 was $457,000 and $288,000, respectively, and is included in salaries, wages and employee benefits.

At September 30, 2013, the Company had 285,575 nonvested stock option awards with a weighted-average grant-date fair value of $8.91. At September 30, 2013, the total unrecognized compensation costs related to nonvested share-based payment awards was $2,558,000, which is expected to be recognized over a remaining weighted-average period of 3.6 years.

Payments in Common Stock

Pursuant to the Plan, on March 11, 2013, the Company granted 47,011 shares of its common stock with a fair value of $647,000 to certain executives and members of senior management in payment of all or a portion of their bonuses accrued at December 31, 2012.

Effective September 30, 2013, one of the Company’s executives entered into a severance agreement with the Company. In connection with the severance agreement, the former executive was granted 14,583 shares of Holdings’ common stock with a fair value of $404,000, which is included in salaries, wages and employee benefits on the Company’s statement of operations.

The common shares described above have not been registered under the Securities Act of 1933, as amended (the “1933 Act”), and may not be transferred without an effective registration statement or pursuant to an appropriate exemption from the registration requirement of the 1933 Act.

Note 11 – Earnings (loss) per Share

Basic earnings (loss) per share is computed by dividing net income (loss) attributable to the Company’s stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is based on the weighted-average number of common shares outstanding plus the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Securities that are potentially dilutive to common shares include outstanding stock options and the Convertible Subordinated Notes. Potential common shares are excluded from the computation of diluted earnings per common share when the effect would be antidilutive.

Dilutive potential common shares related to stock options are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of stock options are used to purchase common shares at the average market price during the period. Proceeds from the exercise of stock options include the amount the employee must pay for exercising stock options, the amount of compensation cost for future services that the Company has not yet recognized and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible. The number of shares remaining represents the potentially dilutive effect of the securities. Stock options are only dilutive to the extent that the average market price of common stock during the period exceeds the exercise price of the options.

Dilutive common shares for the Convertible Subordinated Notes are calculated in accordance with the if-converted method. Under the if-converted method, if dilutive, net income attributable to the Company’s stockholders is adjusted to add back the amount of after-tax interest charges recognized in the period, including any deemed interest from a beneficial conversion feature, and the Convertible Subordinated Notes are assumed to have been converted with the resulting common shares added to weighted average shares outstanding. These securities are only dilutive to the extent that the after-tax interest charges per common share exceed basic earnings per share.

In accordance with reverse acquisition accounting, the Company’s 2012 weighted-average number of common shares outstanding and potentially dilutive common shares have been retroactively adjusted to reflect the legal capital of the Company after the Contribution. The following table presents a reconciliation of the numerators and denominators of basic and diluted earnings (loss) per share and the computation of basic and diluted earnings (loss) per share (in thousands, except per share data):

17

USMD HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements - (continued)

September 30, 2013

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Numerator :
Net earnings (loss) attributable to USMD Holdings, Inc. - basic	$	(436	)	$	(360	)	$	(122	)	$	593
Effect of potentially dilutive securities:
Interest on Convertible Subordinated Notes, net of tax		—			—			—			—
Net earnings (loss) attributable to USMD Holdings, Inc. - diluted		(436	)		(360	)		(122	)		593
Denominator :
Weighted-average common shares outstanding		10,088			5,748			10,071			4,307
Effect of potentially dilutive securities:
Stock options		—			—			—			10
Convertible Subordinated Notes		—			—			—			—
Weighted-average common shares outstanding assuming dilution		10,088			5,748			10,071			4,317
Earnings (loss) per share attributable to USMD Holdings, Inc.
Basic	$	(0.04	)	$	(0.06	)	$	(0.01	)	$	0.14
Diluted	$	(0.04	)	$	(0.06	)	$	(0.01	)	$	0.14

The following table presents the potential shares excluded from the diluted earnings (loss) per share calculation because the effect of including theses potential shares would be antidilutive (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Stock options		576		202		576		183
Convertible Subordinated Notes		1,042		—		1,042		—
		1,618		202		1,618		183

Note 12 – Commitments and Contingencies

Financial Guarantees

As of September 30, 2013, the Company had issued guarantees to third parties of the indebtedness and other obligations of certain of its nonconsolidated investees. Should the investees fail to pay the obligations due, the Company could be required to make payments totaling an aggregate of $21.2 million. The guarantees provide for recourse against the investee; however, if the Company were required to perform under the guarantees, recovery of any amount from investees would be unlikely. The remaining terms of these guarantees range from 16 to 78 months. The Company records a liability for performance under financial guarantees, when, upon review of available financial information of the nonconsolidated affiliate and in consideration of pertinent factors, management determines that it is probable it will have to perform under the guarantee and the liability is reasonably estimable. The Company has not recorded a liability for these guarantees, as it believes it is not probable that it will have to perform under these agreements.

Litigation

The Company is from time to time subject to litigation and related claims and arbitration matters arising in the ordinary course of business, including claims relating to contracts and financial obligations, partnership or joint venture entity disputes, and with respect to USMD Physician Services, claims arising from the provision of professional medical services to patients. In some cases, plaintiffs may seek damages, including punitive damages, that may not be covered by insurance. In other cases, claims may not be covered by insurance at all. The Company maintains professional and general liability insurance through commercial insurance carriers for claims and in amounts that the Company believes to be sufficient for its operations, although, potentially, some claims may exceed the scope and amount of coverage in effect. The Company expenses as incurred legal costs associated with litigation or other loss contingencies.

The Company accrues for a contingent loss when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Judgment is required in both the determination of the probability of a loss and the determination as to whether a loss is reasonably estimable. These determinations are updated at least quarterly and are adjusted to reflect the effects of negotiations, settlements, rulings, advice of legal counsel and technical experts and other information and events pertaining to a particular matter. To the extent there is a reasonable possibility that probable losses could exceed amounts already accrued, if any, and the additional loss or range of loss is estimable, management discloses the additional loss or range of loss. For matters where the Company has evaluated that a loss is not probable, but is reasonably possible, the Company will disclose an estimate of the possible loss or range of loss or make a statement that such an estimate cannot be made.

Certain subsidiaries of the Company are party to six medical negligence lawsuits and one wrongful termination lawsuit. In addition, a subsidiary of the Company has received notices of five potential claims. In one medical negligence lawsuit, management believes that any liability that may ultimately result from the resolution of this matter will not have a material adverse effect on the financial condition or results of operations of the Company. In the remaining five medical negligence lawsuits, the parties are in the early stages of discovery and the plaintiffs have not made specific demands for damages. As related to the five potential claims, no specific claims or demands have been made. Due to these circumstances, the Company is unable to estimate a reasonably possible range of loss related to these lawsuits and pending claims. The Company is insured against the claims described above and believes based on the facts known to date that any damage award related to such claims would be recoverable from its insurer.

The Company is subject to various additional claims and legal proceedings that have arisen in the ordinary course of its business activities. Management believes that any liability that may ultimately result from the resolution of these matters will not have a material adverse effect on the financial condition or results of operations of the Company.

18

USMD HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements - (continued)

September 30, 2013

(Unaudited)

Financial Advisory Commitment

Effective June 18, 2013, the Company amended its existing financial advisory services agreement (“FAS Agreement”) with an investment banking firm. The Company is obligated to compensate the firm in cash for certain financial transactions in amounts generally equal to the greater of a minimum $1.0 million to $2.0 million dependent upon the transaction type or a percentage of the potential transaction value, as further defined in the FAS Agreement. If the Company enters into a qualifying financial transaction during a one year period subsequent to termination of the FAS Agreement, the investment banking firm is entitled to compensation under the terms of the FAS Agreement. At September 30, 2013, the Company has not closed any transaction for which compensation is due to the investment banking firm.

Operating Lease Commitments

At September 30, 2013, future minimum rental commitments under non-cancelable operating leases are as follows (in thousands):

	Minimum Lease Commitments		Sublease Income			Net Lease Commitments
October through December 2013	$	2,864	$	(46	)	$	2,818
2014		10,889		(90	)		10,799
2015		10,199		(92	)		10,107
2016		8,193		(94	)		8,099
2017		7,016		(97	)		6,919
2018		6,156		(99	)		6,057
Thereafter		31,462		(698	)		30,764
Total	$	76,779	$	(1,216	)	$	75,563

Subsequent to September 30, 2013, the Company executed operating lease agreements with minimum lease commitments of $1.7 million due over 87 months.

Note 13 – Related Party Transactions

The Company provides management, clinical and support services to various nonconsolidated affiliates in which it has limited partnership or ownership interests. Management services revenue from these entities totaled $12.2 million and $12.3 million for the nine months ended September 30, 2013 and 2012, respectively, and $4.1 million and $4.0 million for the three months ended September 30, 2013 and 2012, respectively. The majority of this revenue is earned from USMD Arlington and USMD Fort Worth.

One consolidated lithotripsy entity provides lithotripsy services to USMD Arlington and USMD Fort Worth. The Company recognized lithotripsy revenues from USMD Arlington and USMD Fort Worth totaling $2.1 million for each of the nine months ended September 30, 2013 and 2012, and $0.6 million for each of the three months ended September 30, 2013 and 2012.

The Company leases space from USMD Arlington for certain of its physicians and its Arlington cancer treatment center. The Company recorded rent expense related to USMD Arlington totaling $1.3 million and $0.1 million for the nine months ended September 30, 2013 and 2012, respectively, and $0.4 million and $0.1 million for the three months ended September 30, 2013 and 2012, respectively.

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

This section should be read in conjunction with the accompanying condensed consolidated financial statements. As used in this Quarterly Report on Form 10-Q, the terms “Holdings,” the “Company,” “we,” “us” and “our” refer to USMD Holdings, Inc. and its consolidated subsidiaries (collectively, “Holdings”). The purpose of this section, Management’s Discussion and Analysis of Financial Condition and Results of Operations, is to provide a narrative explanation of our financial statements that enables investors to better understand our business, to enhance our overall financial disclosures, to provide the context within which our financial information may be analyzed and to provide information about the quality of, and potential variability of, our financial condition, results of operations and cash flows.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains, and from time to time management may make, statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts but instead represent management’s current expectations regarding future events, many of which, by their nature, are inherently uncertain and outside its control. The forward-looking statements contained in this Quarterly Report are based on information as of the date of this Quarterly Report on Form 10-Q. Many of these forward-looking statements relate to future industry trends, actions, future performance or results of current and anticipated initiatives and the outcome of contingencies and other uncertainties that may have a significant impact on our business, future operating results and liquidity. Whenever possible, we identify these statements by using words such as “anticipate,” “believe,” “estimate,” “continue,” “intend,” “expect,” “plan,” “forecast,” “project” and similar expressions, for future-tense or conditional constructions (“will,” “may,” “should,” “could,” etc.). We caution you that these statements are only predictions and are not guarantees of future performance. These forward-looking statements and our actual results, developments and business are subject to certain risks and uncertainties that could cause actual results and events to differ materially from those anticipated by these statements. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. We assume no obligation to update or revise any forward-looking statements, whether as a result of new information or future events, except as required by law. Many factors that could cause actual results to differ from those in the forward-looking statements including, among others, those discussed under “Risk Factors,” in our Registration Statement on Form S-4 and those described elsewhere in this Quarterly Report on Form 10-Q and from time to time in our future reports filed with the Securities and Exchange Commission (the “SEC”).

Executive Overview

Background

USMD Holdings, Inc., a Delaware corporation, was formed on May 7, 2010 to facilitate the business combination of USMD Inc., a Texas corporation (“USMD”), Urology Associates of North Texas, L.L.P., a Texas limited liability partnership (“UANT”), and UANT Ventures, L.L.P., a Texas limited liability partnership (“Ventures”). On August 19, 2010, Holdings, USMD, Ventures and UANT entered into a Contribution and Purchase Agreement (such agreement, the “Original Contribution Agreement”) pursuant to which the entities would combine into a single integrated health services company (such transaction, the “Contribution”). Immediately prior to the Contribution, a subsidiary of Ventures would merge into UANT, resulting in UANT’s becoming a wholly owned subsidiary of Ventures, and certain of the USMD shareholders would contribute all or a portion of their shares of USMD common stock to Ventures in exchange for partnership interests in Ventures. When the Contribution was consummated, Ventures would contribute its assets, which would include its equity interests in USMD and UANT, and the remaining USMD shareholders would contribute their USMD shares, to Holdings in exchange for shares of Holdings common stock. Holdings described the Contribution in its Registration Statement on Form S-4 filed with the SEC on December 23, 2010 and declared effective by the SEC on July 25, 2011. On August 23, 2011, the shareholders of USMD and the partners of Ventures voted on and approved the Original Contribution Agreement.

Prior to the consummation of the Contribution, on December 1, 2011, Ventures and Holdings entered into a merger agreement with The Medical Clinic of North Texas, P.A., a Texas professional association (“MCNT”), and on December 15, 2011, Ventures and Holdings entered into a merger agreement with Impel Management Services, L.L.C., a Texas limited liability company (“Impel”). These merger agreements provided that subsidiaries of Ventures would merge into each of MCNT and Impel, resulting in these businesses becoming wholly owned subsidiaries of Ventures prior to the closing of the Contribution. As a result of these merger agreements, on February 9, 2012, Holdings, USMD, UANT and Ventures executed an amendment to the Original Contribution Agreement (the “Amendment”) to reflect, among other changes, that Ventures would contribute to Holdings, in addition to its equity interests in USMD and UANT, its equity interests in MCNT and Impel as part of the Contribution. Holdings described these transactions in a post-effective amendment to its Registration Statement on Form S-4 filed with the SEC on February 10, 2012, which was declared effective on April 30, 2012. On May 21, 2012, Ventures, Holdings, MCNT and Impel executed corresponding amendments to the merger agreements. On May 29, 2012, the equity holders of USMD, Ventures, MCNT and Impel voted on and approved the Amendment. On August 31, 2012, Holdings and the other parties consummated the Contribution, inclusive of the mergers.

For accounting purposes, the Contribution qualifies as a business combination and was accounted for as a reverse acquisition by USMD into Holdings, previously a business combination related shell company. Under reverse acquisition accounting, the financial statements are issued in the name of the legal parent (Holdings), but represent a continuation of the accounting acquirer’s (USMD) financial statements, with an adjustment to retroactively restate USMD’s legal capital to reflect the legal capital of Holdings. The assets and liabilities of USMD continue at their pre-Contribution carrying values. The assets and liabilities of Holdings are recorded at fair value at the acquisition date, which, for Holdings, equaled their carrying values. The assets acquired and liabilities assumed from Ventures, UANT, MCNT and Impel (collectively, the “acquired businesses”) are recorded at their respective fair values at the acquisition date. Holdings’ results of operations for the three months ended September 30, 2012 include two months of results of operations of USMD and one month of results of operations of the consolidated post-Contribution Company. Holdings’ results of operations and cash flows for the nine months ended September 30, 2012 include eight months of results of operations and cash flows of USMD and one month of results of operations and cash flows of the consolidated post-Contribution Company.

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The Business of Holdings

The Contribution created an innovative early-stage physician-led integrated health system committed to maintaining the vital doctor-patient relationship that we believe results in higher quality and more affordable patient care. An integrated health system is considered early-stage when it has not yet established all the components necessary to be considered a fully integrated health system. Our focus and the focus of our healthcare providers is to deliver higher quality, more convenient, cost effective health care to our patients. We believe our model brings primary care and specialist physicians together and places them in their proper role as leaders of health care delivery, and that this important shift brings quality and patient satisfaction back to the forefront where it belongs by making our providers responsible for patient outcomes and the overall clinical experience.

We intend to expand our business in the North Texas service area by developing, acquiring or affiliating with complementary physician group practices and ancillary healthcare service providers. We also intend to expand our business in other strategic service areas by developing strategic alliances with large integrated practices. We believe that developing, acquiring or collaborating with targeted physician group practices and ancillary healthcare service providers will permit us to pursue more innovative compensation arrangements with health care consumers, such as risk contracting, and will place us in a position to achieve our goal of becoming a national fully integrated health services company.

In April 2013, the Company became an equal co-member of a Texas non-profit corporation (“WNI-DFW”) that has been approved by the Texas Medical Board as a certified non-profit healthcare organization. WNI-DFW contracts with health insurance companies to manage patient care in the North Texas service area under a “risk contract.” Risk contracting, or full risk capitation, refers to a model where we receive from the third party payer a defined amount per person per month in a population (a full dollar premium) in order to manage the healthcare of that population. In such a model, we are responsible for all cost of care of the population. The entity accomplishes this by managing patient care and by contracting with downstream health care providers to provide needed health care services for the patient population. This differs from the fee-for-service model where we are paid based on specific services performed.

For the periods presented, we had the following:

	Three Months Ended  September 30, 2013		Nine Months Ended September 30, 2013		Three and Nine Months Ended September 30, 2012
Patient encounters (i)		220,109		663,669		62,881
New patients (ii)		24,067		71,706		3,187
RVUs (iii)		368,662		1,102,694		109,275
Lab tests (iv)		206,378		614,638		64,213
Imaging procedures (iv)		21,806		56,562		2,434

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Cancer treatment center fractions treated (iv)		12,469		11,491		39,580		47,051
Lithotripsy cases (iv)		2,398		2,473		7,029		7,061

(i) A patient encounter is registered when a patient sees his or her physician.

(ii) New patients are registered for patients not previously seen by a service provider within our system.

(iii) Relative Value Units (“RVUs”) are equivalent to physician work RVUs as defined by the Medicare Physician Fee Schedule. RVUs reflect the relative level of time, skill, training and intensity required of a physician to provide a given service. We use RVUs as measures of physician productivity and utilization and RVUs are also a component of physician compensation.

(iv) Lab tests, imaging procedures, cancer treatment center fractions and lithotripsy cases are all production metrics based on Current Procedural Terminology codes.

We use various evidence-based quality metrics such as specific cancer screenings to measure how well our physicians manage their panel of patients. We believe our quality criteria have enabled us to reduce the total medical cost of care of our managed patients, including reductions in emergency room visits and hospital readmissions. We use these and other metrics to measure the performance of our business.

Results of Operations

Effects of Reverse Acquisition

As a result of the August 31, 2012 Contribution, which was accounted for as a reverse acquisition by USMD into Holdings, results of operations and cash flows have limited comparability to prior periods. Our results of operations for the three and nine months ended and cash flows for the nine months ended September 30, 2013 include the results of operations and cash flows of the consolidated post-Contribution Holdings. Our results of operations for the three months ended September 30, 2012 include two months of results of operations of USMD and one month of results of operations of the consolidated post-Contribution Company. Our results of operations and cash flows for the nine months ended September 30, 2012 include eight months of results of operations and cash flows of USMD and one month of results of operations and cash flows of the consolidated post-Contribution Company.

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Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

The following table summarizes our results of operations for the periods indicated and is used in the discussions that follow (dollars in thousands):

	Three Months Ended September 30,												Three Months Variance
	2013						2012						2013 vs. 2012
	Amount			Ratio			Amount			Ratio			Amount			Ratio
Revenues:
Net patient service revenue	$	48,052			80.6	%	$	13,967			54.6	%	$	34,085			244.0	%
Management services revenue		6,067			10.2	%		5,757			22.5	%		310			5.4	%
Lithotripsy revenue		5,492			9.2	%		5,869			22.9	%		(377	)		-6.4	%
Net operating revenue		59,611			100.0	%		25,593			100.0	%		34,018			132.9	%
Operating expenses:
Salaries, wages and employee benefits		38,557			64.7	%		14,922			58.3	%		23,635			158.4	%
Medical supplies and services expense		8,459			14.2	%		1,785			7.0	%		6,674			373.9	%
Rent expense		3,770			6.3	%		1,268			5.0	%		2,502			197.3	%
Provision for doubtful accounts		99			0.2	%		16			0.1	%		83			518.8	%
Other operating expenses		6,674			11.2	%		4,677			18.3	%		1,997			42.7	%
Depreciation and amortization		1,900			3.2	%		797			3.1	%		1,103			138.4	%
		59,459			99.7	%		23,465			91.7	%		35,994			153.4	%
Income from operations		152			0.3	%		2,128			8.3	%		(1,976	)		-92.9	%
Other income, net		1,857			3.1	%		602			2.4	%		1,255			208.5	%
Income before benefit for income taxes		2,009			3.4	%		2,730			10.7	%		(721	)		-26.4	%
Benefit for income taxes		(110	)		-0.2	%		(93	)		-0.4	%		(17	)		18.3	%
Net income		2,119			3.6	%		2,823			11.0	%		(704	)		-24.9	%
Less: net income attributable to noncontrolling interests		(2,555	)		-4.3	%		(3,183	)		-12.4	%		628			-19.7	%
Net loss attributable to USMD Holdings, Inc.	$	(436	)		-0.7	%	$	(360	)		-1.4	%	$	(76	)		21.1	%

Revenues

Net operating revenue increased $34.0 million to $59.6 million for the three months ended September 30, 2013 as compared to the same period in 2012, due primarily to increases in net patient service revenue related to businesses acquired in the Contribution.

Management services revenue includes revenue earned through the provision of management and staffing services to our managed entities and increased 5.4% to $6.1 million for the three months ended September 30, 2013. Hospital management services revenue increased $0.1 million as a result of improvements in adjusted net operating revenue at USMD Hospital at Arlington, L.P. (“USMD Arlington”) and USMD Hospital at Fort Worth L.P. (“USMD Fort Worth”). Cancer treatment center management services revenue decreased $0.3 million in 2013 as compared to 2012 primarily due to the termination of management agreements at four cancer treatment centers located in Florida. Consulting management services revenue is related to a business acquired in the Contribution and increased $0.3 million. The remaining $0.2 million increase is related to activities associated with businesses acquired in the Contribution.

Lithotripsy revenue consists of revenue of the consolidated lithotripsy entities, which decreased 6.4% to $5.5 million for the three months ended September 30, 2013 from $5.9 million for the same period in 2012. One of the consolidated lithotripsy entities ceased operations during the first quarter of 2013 resulting in a $0.2 million comparative decrease in revenue. A slight decrease in average contract price rate for the remaining consolidated lithotripsy entities resulted in a $0.2 million decline.

Operating Expenses

Salaries, wages and employee benefits increased $23.6 million to $38.6 million for the three months ended September 30, 2013 from $14.9 million in 2012. The increase is primarily related to businesses acquired in the Contribution. The salaries, wages and employee benefits of the acquired businesses used to generate net patient service revenue have a higher relative cost than our historical salaries, wages and employee benefits. This higher cost of revenue accounted for the majority of the increase in salaries, wages and employee benefits as a percentage of net operating revenue to 64.7% in 2013 from 58.3% in 2012.

Medical supplies and services expense increased $6.7 million to $8.5 million for the three months ended September 30, 2013 from $1.8 million in 2012 due primarily to the commencement of operations by WNI-DFW and the nature of businesses acquired in the Contribution. WNI-DFW began managing patient care in June 2013 and the related cost of healthcare services resulted in an increase of $2.8 million. The businesses acquired in the Contribution provide health care services to patients in physician clinics and other health care facilities and utilize significant medical supplies and services in the provision of those services resulting in an increase of $3.8 million.

Rent expense increased $2.5 million to $3.8 million for the three months ended September 30, 2013 from $1.3 million in 2012 due primarily to the businesses acquired in the Contribution. The acquired businesses provide their primary healthcare services in rented facilities.

Other operating expenses consist primarily of professional fees, purchased services, repairs & maintenance, travel expense and other expense. Other operating expenses increased 42.7% to $6.7 million for the three months ended September 30, 2013 from $4.7 million in 2012. The net increase is primarily related to expenses of businesses acquired in the Contribution.

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Depreciation and amortization expense increased $1.1 million to $1.9 million for the three months ended September 30, 2013 from $0.8 million in 2012. The increase is due primarily to increases in depreciation and amortization of $0.9 million and $0.2 million, respectively, related to property and equipment and intangible assets acquired and recorded at fair value in the Contribution.

Other Income, net

Other income, net increased $1.3 million to $1.9 million for the three months ended September 30, 2013 from $0.6 million in 2012 due primarily to a $1.5 million increase in equity in income of nonconsolidated affiliates. Increased ownership interests in USMD Arlington and USMD Fort Worth, as a result of the Contribution, accounted for a $1.1 million increase. Increased ownership interests in USMD Arlington through the acquisition of certain partnership interests accounted for a $0.2 million increase. An additional $0.1 million increase in equity in income of nonconsolidated affiliates is a result of increased profitability at USMD Arlington and USMD Fort Worth. Net interest expense increased $0.2 million as a result of the net increase in borrowings related to the Contribution, offset by an overall reduction in borrowing rates. A gain of $0.1 million in 2012 resulted in the remaining decrease.

Benefit for Income Taxes

Holdings’ effective tax rates were (5.5%) and (3.4%) for the three months ended September 30, 2013 and 2012, respectively. The decrease in the effective rate is primarily due to the decline of net income attributable to noncontrolling interests.

Net Income Attributable to Noncontrolling Interests

Noncontrolling interests eliminate the income or loss attributable to non-Holdings’ ownership interests in our consolidated entities. Net income attributable to noncontrolling interests decreased $0.6 million to $2.6 million for the three months ended September 30, 2013 from $3.2 million in 2012. Holdings’ increased ownership interest in three of the consolidated lithotripsy entities as a result of the Contribution accounted for $0.4 million of the decrease and the dissolution of another consolidated lithotripsy entity accounted for $0.1 million of the decrease.

Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

The following table summarizes our results of operations for the periods indicated and is used in the discussions that follow (dollars in thousands):

	Nine Months Ended September 30,												Nine Months Variance
	2013						2012						2013 vs. 2012
	Amount			Ratio			Amount			Ratio			Amount			Ratio
Revenues:
Net patient service revenue	$	139,423			79.8	%	$	13,967			28.9	%	$	125,456			898.2	%
Management services revenue		19,140			11.0	%		17,464			36.2	%		1,676			9.6	%
Lithotripsy revenue		16,157			9.2	%		16,869			34.9	%		(712	)		-4.2	%
Net operating revenue		174,720			100.0	%		48,300			100.0	%		126,420			261.7	%
Operating expenses:
Salaries, wages and employee benefits		115,033			65.8	%		25,643			53.1	%		89,390			348.6	%
Medical supplies and services expense		19,933			11.4	%		1,981			4.1	%		17,952			906.2	%
Rent expense		10,945			6.3	%		1,514			3.1	%		9,431			622.9	%
Provision for doubtful accounts		112			0.1	%		88			0.2	%		24			27.3	%
Other operating expenses		19,985			11.4	%		8,540			17.7	%		11,445			134.0	%
Depreciation and amortization		5,782			3.3	%		1,334			2.8	%		4,448			333.4	%
		171,790			98.3	%		39,100			81.0	%		132,690			339.4	%
Income from operations		2,930			1.7	%		9,200			19.0	%		(6,270	)		-68.2	%
Other income, net		4,809			2.8	%		1,076			2.2	%		3,733			346.9	%
Income before provision for income taxes		7,739			4.4	%		10,276			21.3	%		(2,537	)		-24.7	%
Provision for income taxes		414			0.2	%		512			1.1	%		(98	)		-19.1	%
Net income		7,325			4.2	%		9,764			20.2	%		(2,439	)		-25.0	%
Less: net income attributable to noncontrolling interests		(7,447	)		-4.3	%		(9,171	)		-19.0	%		1,724			-18.8	%
Net income (loss) attributable to USMD Holdings, Inc.	$	(122	)		-0.1	%	$	593			1.2	%	$	(715	)		-120.6	%

Revenues

Net operating revenue increased $126.4 million to $174.7 million for the nine months ended September 30, 2013 as compared to the same period in 2012, due primarily to increases in net patient service revenue related to businesses acquired in the Contribution.

Management services revenue includes revenue earned through the provision of management and staffing services to our managed entities and increased 9.6% to $19.1 million for the nine months ended September 30, 2013. Hospital management services revenue increased $0.5 million as a result of inflation adjustments to the reimbursable management costs and improvements in adjusted net operating revenue at USMD Arlington and USMD Fort Worth. During the second quarter of 2013, the Company entered into a settlement agreement related to the early termination of management agreements at four cancer treatment centers located in Florida. Cancer treatment center management services revenue decreased $0.4 million in 2013 as compared to 2012 primarily due to a $1.3 million decline in revenues in the managed Florida locations offset by the $0.9 million settlement payment related to the managed Florida locations. Consulting management services revenue is related to businesses acquired in the Contribution and increased $0.9 million. The remaining $0.5 million increase is related to activities associated with businesses acquired in the Contribution.

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Lithotripsy revenue consists of revenue of the consolidated lithotripsy entities, which decreased 4.2% to $16.2 million for the nine months ended September 30, 2013 from $16.9 million for the same period in 2012. One of the consolidated lithotripsy entities ceased operations during the first quarter of 2013 resulting in a $0.5 million comparative decrease in revenue. A slight decrease in average contract price rate for the remaining consolidated lithotripsy entities resulted in a $0.2 million decline.

Operating Expenses

Salaries, wages and employee benefits increased $89.4 million to $115.0 million for the nine months ended September 30, 2013 from $25.6 million in 2012. The increase is primarily related to businesses acquired in the Contribution. The salaries, wages and employee benefits of the acquired businesses used to generate net patient service revenue have a higher relative cost than our historical salaries, wages and employee benefits. This higher cost of revenue accounted for the majority of the increase in salaries, wages and employee benefits as a percentage of net operating revenue to 65.8% in 2013 from 53.1% in 2012.

Medical supplies and services expense increased $18.0 million to $19.9 million for the nine months ended September 30, 2013 from $2.0 million in 2012 due primarily to the commencement of operations by WNI-DFW and the nature of businesses acquired in the Contribution. WNI-DFW began managing patient care in June 2013 and the related cost of healthcare services resulted in an increase of $3.7 million. The businesses acquired in the Contribution provide health care services to patients in physician clinics and other health care facilities and utilize significant medical supplies and services in the provision of those services resulting in an increase of $14.3 million.

Rent expense increased $9.4 million to $10.9 million for the nine months ended September 30, 2013 from $1.5 million in 2012 due primarily to the businesses acquired in the Contribution. The acquired businesses provide their primary healthcare services in rented facilities. An expansion of leased space at the corporate office during 2013 resulted in $0.3 million of the increase in rent expense.

Other operating expenses consist primarily of professional fees, purchased services, repairs & maintenance, travel expense and other expense. Other operating expenses increased $11.4 million to $20.0 million for the nine months ended September 30, 2013 from $8.5 million in 2012. The net increase is primarily related to expenses of businesses acquired in the Contribution.

Depreciation and amortization expense increased $4.4 million to $5.8 million for the nine months ended September 30, 2013 from $1.3 million in 2012. The increase is due to increases in depreciation and amortization of $3.3 million and $1.1 million, respectively, related primarily to property and equipment and intangible assets acquired and recorded at fair value in the Contribution.

Other Income, net

Other income, net increased $3.7 million to $4.8 million for the nine months ended September 30, 2013 from $1.1 million in 2012 due primarily to a $4.4 million increase in equity in income of nonconsolidated affiliates. Increased ownership interests in USMD Arlington and USMD Fort Worth, as a result of the Contribution, accounted for a $3.8 million increase. Increased ownership interests in USMD Arlington through the acquisition of certain partnership interest accounted for a $0.2 million increase. An additional $0.5 million increase in equity in income of nonconsolidated affiliates is a result of increased profitability at USMD Arlington and USMD Fort Worth. Net interest expense increased $0.5 million as a result of the net increase in borrowings related to the Contribution, offset by an overall reduction in borrowing rates. A $0.1 million loss on the disposal of an asset in 2013 compared to a gain of $0.2 million in 2012 resulted in the remaining $0.3 million decrease.

Provision for Income Taxes

Holdings’ effective tax rates were 5.3% and 5.0% for the nine months ended September 30, 2013 and 2012, respectively. The increase in the effective rate is primarily due to the out of period adjustment recording an additional income tax provision of $0.2 million during the first quarter of 2013, offset by the decline of net income attributable to noncontrolling interests.

Net Income Attributable to Noncontrolling Interests

Noncontrolling interests eliminate the income or loss attributable to non-Holdings’ ownership interests in our consolidated entities. Net income attributable to noncontrolling interests decreased $1.7 million to $7.4 million for the nine months ended September 30, 2013 from $9.2 million in 2012. Holdings’ increased ownership interest in three of the consolidated lithotripsy entities as a result of the Contribution accounted for $1.5 million of the decrease and the dissolution of another consolidated lithotripsy entity accounted for $0.2 million of the decrease.

Liquidity and Capital Resources

We primarily rely on cash flows from operations and distributions from USMD Arlington and USMD Fort Worth to fund our cash requirements. At September 30, 2013, we had unrestricted available cash of $8.5 million, which is net of $3.6 million in cash held by certain consolidated lithotripsy entities and by WNI-DFW that is unavailable for use in our operating activities. Additionally, on February 28, 2013, we renewed our revolving credit facility for one year to February 28, 2014. The revolving credit facility is available for working capital needs. Under the credit agreement entered into contemporaneously with the Contribution, we are required to maintain a $5.0 million restricted cash balance. We began making principal payments under the credit facility in December 2012. During April 2013, we borrowed $3.0 million under the revolving credit facility. As cash flow activity normalizes, we expect that our cash flows from operations will continue to increase during the fourth quarter of 2013; however, as we continue to incur integration and infrastructure improvement costs, we may be required to borrow additional funds under the revolving credit facility ($7.0 million available to borrow at September 30, 2013).

Our near term business plan contemplates expansion in the North Texas service area by hiring physicians, developing, partnering with or acquiring complementary physician group practices and ancillary healthcare service providers. We also plan to expand our count of primary care physicians and specialists in our areas of focus and areas that expand our integrated health system offerings. The implementation of some of these strategies will require additional capital, which we may seek through public or private financings or through other debt or equity transactions. In such an event, adequate funds may not be available when needed or may be available only on terms which could have a negative impact on our business and results of operations. In addition, if we raise additional funds by issuing equity or convertible securities, dilution to then existing stockholders may result.

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The following table summarizes our cash flows for the periods indicated and is used in the discussions that follow (in thousands):

	Nine Months Ended September 30,						Nine Months Variance
	2013			2012			2013 vs. 2012
Cash flows from operating activities:
Net income	$	7,325		$	9,764		$	(2,439	)
Net income to net cash reconciliation adjustments		7,320			1,173			6,147
Change in operating assets and liabilities		1,236			(7,928	)		9,164
Net cash provided by operating activities		15,881			3,009			12,872
Cash flows from investing activities:
Cash acquired in business combination		—			6,967			(6,967	)
Capital expenditures		(2,357	)		(887	)		(1,470	)
Investments in nonconsolidated affiliates		(200	)		—			(200	)
Proceeds from sale of life insurance policies		—			3,184			(3,184	)
Proceeds from sale of property and equipment		64			—			64
Increase in cash due to initial consolidation of investee		—			52			(52	)
Net cash provided by (used in) investing activities		(2,493	)		9,316			(11,809	)
Cash flows from financing activities:
Borrowings on revolving credit facility		3,000			—			3,000
Proceeds from issuance long-term debt		—			21,124			(21,124	)
Payments on long-term debt and capital lease obligations		(3,457	)		(19,749	)		16,292
Principal payments on related party long-term debt		(441	)		(2,790	)		2,349
Restricted cash		—			(5,000	)		5,000
Issuance of USMD common stock		—			980			(980	)
Payment of debt issuance costs		(134	)		—			(134	)
Proceeds from exercise of stock options		100			—			100
Distributions to noncontrolling interests, net of contributions		(7,206	)		(9,011	)		1,805
Net cash used in financing activities		(8,138	)		(14,446	)		6,308
Net increase (decrease) in cash and cash equivalents		5,250			(2,121	)		7,371
Cash and cash equivalents at beginning of year		6,878			10,822			(3,944	)
Cash and cash equivalents at end of period	$	12,128		$	8,701		$	3,427

Operating Activities

During 2013, we had an increase in accounts receivable, inventories and other assets of $7.1 million that was offset by net growth of $8.3 million in accounts payable and accrued liabilities.

The increase in accounts receivable is primarily due to a 28% increase in clinic patient services accounts receivable. The increase is attributable to merger related enrollment of the new company providers with our government and commercial payers and procedural issues in the clinics where medical services are provided to our patients.

We received formal acceptance of our new provider enrollment application as a provider for Texas Medicaid in May 2013 and received formal acceptance in June 2013 of our Medicare application for provider status of our pathology lab that relocated from Florida to Texas in March 2013. As a result, starting in mid-June, we began receiving Medicaid payments from the State of Texas for the various localities where our providers practice. After acceptance by Medicaid, the major Medicaid managed care payers began loading the new contracts for purposes of paying for services provided to their member beneficiaries under the Texas Medicaid program.

The accounts receivable backlog associated with these and other minor commercial payer issues related to services provided since the Contribution totaled $0.7 million as of September 30, 2013. As Texas Medicaid and the Medicaid managed care payers work through the backlog, load contracts and build out their various claims adjudication infrastructure, we anticipate that these payers will become current during the fourth quarter of 2013. Until the backlog is remediated, payment from these providers will continue to exceed normal collection cycles, contributing to the growth in accounts receivable.

Subsequent to the Contribution, we have also experienced a number of issues at the clinic level involving the executing of timely and accurate front end capture of charges, codes, demographics, consents, and insurance information necessary to timely file claims and follow-up on open accounts.

The impact on the collection cycle of the increasing Medicaid utilization subject to enrollment related delays, and the aforementioned procedural issues at the clinic level has resulted in an increase in days net revenue outstanding. Days outstanding increased from 28 at December 31, 2012 to 37 days at September 30, 2103. Due to a concentrated training effort and institution of uniform processes at the clinic level, and a declining backlog in merger-related enrollment accounts receivable, we believe the growth in the collections cycle will begin to decline.

Investing Activities

Net cash used in investing activities of $2.5 million for the nine months ended September 30, 2013 was primarily attributable to $2.4 million of cash used for capital expenditures and a $0.2 million investment in a new cancer treatment center. Cash paid for capital expenditures was primarily for technology infrastructure and leasehold improvements.

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We anticipate capital expenditures of approximately $2.5 million in 2013, primarily related to investments in our technology infrastructure, leasehold improvements and the replacement of lithotripters at our consolidated lithotripsy entities. The consolidated lithotripsy entities generally finance the acquisition of lithotripsy equipment.

Financing Activities

During April 2013, we borrowed $3.0 million under the revolving credit facility to maintain a minimum level of cash for management operations. Scheduled principal payments on long-term debt made for the nine months ended September 30, 2013 totaled $3.9 million versus $1.3 million for the same period in 2012. The increase is related to the long-term debt borrowed in connection with the Contribution (see Credit Agreement below).

Distributions to noncontrolling interests, net of contributions, decreased by $1.8 million for the nine months ended September 30, 2013 as compared to the same period in 2012. In connection with the Contribution, the Company acquired certain noncontrolling interests in entities it consolidates, resulting in the decrease, as those acquired interests are no longer entitled to distributions.

Credit Agreement

On August 31, 2012, in connection with the Contribution, we entered into a credit agreement with a syndicate of banks (“Credit Agreement”). The Credit Agreement provides for a Term Loan Credit Facility (“Term Loans”) in an aggregate principal amount of $21.0 million and a Revolving Credit Facility (“Revolver”) in an aggregate principal amount of $10.0 million. Proceeds from borrowings under the Term Loans were used to repay existing debt of the acquired businesses and to repay in whole or in part certain related party debt. Proceeds from borrowings under the Revolver are available solely to finance working capital.

The Term Loans consist of the Tranche A Term Loan with an aggregate principal amount of $12.5 million, the Tranche B Term Loan with an aggregate principal amount of $3.5 million and the Tranche C Term Loan with an aggregate principal amount of $5.0 million. Interest on the Term Loans is due monthly. The Tranche A Term Loan accrues interest at the 30 day London Interbank Offered Rate (“LIBOR”) plus a margin of 3.00% (3.19% at September 30, 2013) and matures on August 31, 2017. Principal payments of $625,000 are due quarterly. The Tranche B Term Loan accrues interest at the 30 day LIBOR plus a margin of 3.50% (3.69% at September 30, 2013) and matures on August 31, 2014. Principal payments of $437,500 are due quarterly. The Tranche C Term Loan accrues interest at the 30 day LIBOR plus a margin of 1.25% (1.44% at September 30, 2013) and matures on August 31, 2017. The outstanding principal balance and any unpaid interest will be due upon the Tranche C Term Loan maturity date.

Amounts borrowed under the Revolver accrue interest at the 30 day London Interbank Offered Rate plus a margin of 3.00% (currently 3.19%) with interest payments due monthly.

We intend to fund the required principal and interest payments under the Term Loans with available cash balances and cash provided by operating activities.

The Credit Agreement requires the Company to maintain a fixed charge coverage ratio greater than or equal to 1.50:1.00 for any period of four consecutive fiscal quarters. The Company was in compliance of its debt covenant with a fixed charge coverage ratio of 1.55:1.00 as of September 30, 2013.

The terms of the Credit Agreement restrict our ability to enter into additional debt or other financings or retain proceeds from the sale of assets, requiring such proceeds to be applied to outstanding balances of the Term Loans and Revolver, with limited exceptions.

Convertible Subordinated Notes

On September 13, 2013, the Company issued convertible subordinated notes in the aggregate principal amount of $24.3 million (the “Convertible Subordinated Notes”) to certain limited partners of USMD Arlington to acquire their limited partnership interests in USMD Arlington.

The Convertible Subordinated Notes bear interest at a fixed rate of 5.00% per annum and mature on March 1, 2019. Interest payments are due and payable on the last day of each month beginning on September 30, 2013 and principal is due upon maturity. The Company may prepay the Convertible Subordinated Notes, in whole or in part, at any time after September 1, 2014.

Each noteholder will have the right at any time after September 1, 2014, to convert all or any part of the unpaid principal balance of their respective Convertible Subordinated Note into shares of common stock of Holdings at the rate of one share of common stock for each $23.37 of principal. At the date of issuance of the Convertible Subordinated Notes, the commitment date, the conversion option was in-the-money, as the conversion price was less than the fair value of shares of Holdings’ common stock. Holdings recognized the intrinsic value of the conversion option’s in-the-money portion as a $3.7 million beneficial conversion discount to the debt with an offsetting entry to additional paid-in capital. Recognition of the beneficial conversion discount results in a temporary book-tax basis difference in the debt instrument. Accordingly, the Company recorded a $1.3 million deferred tax liability with an offsetting entry to additional paid-in capital. The beneficial conversion discount will be accreted to the Convertible Subordinated Notes using the effective interest method over 66 months until they mature on March 1, 2019. The conversion rate will be appropriately adjusted for stock splits, mergers or other fundamental corporate transactions.

The $24.3 million aggregate value of the Convertible Subordinated Notes is convertible into 1,041,581 common shares at a conversion price of $23.37 per share. The Convertible Subordinated Notes have an effective interest rate of 8.50%.

The indebtedness represented by the Convertible Subordinated Notes is expressly subordinate to all senior indebtedness of Holdings currently outstanding or incurred in the future, which includes without limitation its indebtedness to banks.

We intend to fund the required interest payments under the Convertible Subordinated Notes with available cash balances and cash provided by operating activities.

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Off-Balance Sheet Arrangements

As of September 30, 2013, we had issued guarantees to third parties of the indebtedness and other obligations of certain of our nonconsolidated investees. Should the investees fail to pay the obligations due, we could be required to make payments totaling an aggregate of $21.2 million. The guarantees provide for recourse against the investee; however, if we are required to perform under one or more guarantees, recovery of any amount would be unlikely. The remaining terms of these guarantees range from 16 to 78 months. We record a liability for performance under financial guarantees, when, upon review of available financial information of the nonconsolidated affiliate, and in consideration of pertinent factors, management determines it is probable that we will have to perform under the guarantee and the liability is reasonably estimable. We have not recorded a liability for these guarantees, as we believe the likelihood that we will have to perform under these agreements is remote.

We do not have any arrangements that qualify as off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Critical Accounting Policies and Estimates

Our significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies, to the December 31, 2012 consolidated financial statements included in Part II, Item 8, Financial Statements and Supplementary Data in our Annual Report on Form 10-K filed with the SEC. Those significant accounting policies that we consider to be the most critical to aid in fully understanding and evaluating reported financial results, as they require management’s most difficult, subjective, or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain, are disclosed in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Critical Accounting Policies,” in our Annual Report on Form 10-K filed with the SEC.

In connection with the commencement of operations of WNI-DFW in June 2013, we began making significant estimates related to incurred but not reported medical claims (“IBNR”) of WNI-DFW. Since the patient population that WNI-DFW is contracted to provide health services to does not have a historical medical claims history from which we can make claims-based actuarial judgments, we must estimate the IBNR using other methods. We rely on the Risk Adjustment Factor (“RAF”) score of the patient population to estimate the total medical supplies and services expense of providing healthcare services to that population. Because the per member per month capitated revenue we record is based on the patient population RAF score, we currently record an IBNR amount that results in total medical costs equal to 100% of the capitated revenue recorded. The earliest we anticipate having preliminary medical claims-based actuarial data points is as of December 31, 2013.

If the actual cost of all healthcare services provided to the patient population exceeds the estimated medical costs, we would record additional medical expense to reflect those costs. If the actual cost of all healthcare services provided to the patient population is less than the estimated medical costs, we would reduce medical expenses recorded. For the four months ended September 30, 2013, if the actual cost of providing healthcare services to the WNI-DFW patient population increased or decreased by 10%, medical supplies and services expense would increase or decrease by $404,000.

Subsequent to the filing of our 2012 Annual Report on Form 10-K, there have been no other material changes to our critical accounting policies.

Recent Accounting Pronouncements

Subsequent to the filing of our 2012 Annual Report on Form 10-K, there have been no recently issued and/or adopted accounting policies that we believe would have a material impact on our consolidated financial position, results of operations or cash flows.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in our Exchange Act reports is i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and ii) accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. We conducted an evaluation, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

As described elsewhere in this Quarterly Report on Form 10-Q, on August 31, 2012 we completed a multi-entity business combination referred to as the Contribution. SEC guidance permits the exclusion of an assessment of the effectiveness of a registrant’s internal controls over financial reporting for an acquired business during the first year following such acquisition, if among other circumstances and factors, there is not adequate time between the acquisition date and the date of assessment in which to conduct that assessment. As such, management excluded the internal controls and processes of the businesses acquired in the Contribution in its assessment and conclusion on the effectiveness of internal control over financial reporting as of December 31, 2012.

On June 1, 2013, we began consolidating the balance sheets, results of operations and cash flows of WNI-DFW. See Note 3 of our Condensed Consolidated Financial Statements for information related to WNI-DFW.

We are in the process of integrating the operations of the acquired businesses, described above, including their internal controls and processes, into our operations. As a result of the Contribution, during 2013, the Company implemented new controls and procedures related to revenue recognition, specifically, net patient service revenue recognition inclusive of the patient service revenue provision for doubtful accounts.

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We are also in the process of extending to the acquired businesses and their processes our Section 404 compliance program under the Sarbanes-Oxley Act of 2002 and the applicable rules and regulations under such Act. The internal controls and processes of the businesses acquired in the Contribution will be included in our assessment and conclusion on the effectiveness of internal control over financial reporting as of December 31, 2013. Due to an inadequate period of time between acquisition and the assessment date, the internal controls and processes of WNI-DFW will not be included in our assessment and conclusion on the effectiveness of internal control over financial reporting as of December 31, 2013.

Except as noted above, there have been no significant changes in our internal controls over financial reporting (as defined by applicable SEC rules) during the period covered by this report that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

For information regarding material pending legal proceedings in which we are involved, see Note 12, Commitments and Contingencies in our September 30, 2013 Condensed Consolidated Financial Statements, included in Part I, Item 1, Financial Statements (Unaudited), of this Quarterly Report.

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

On September 13, 2013, Holdings issued convertible subordinated notes (“Convertible Subordinated Notes”) to certain limited partners of USMD Hospital at Arlington, L.P. (“USMD Arlington”) to acquire their limited partnership interests in USMD Arlington in exchange for the issuance by Holdings of its 5% convertible subordinated notes due 2019 in the aggregate principal amount of $24,341,764).

The Convertible Subordinated Notes will mature on March 1, 2019 and bear interest at a rate of 5.00% per annum. Payments will be due and payable monthly on the last day of each month commencing on September 30, 2013. Holdings may prepay the Convertible Subordinated Notes, in whole or in part, at any time after September 1, 2014. In order to prepay the Convertible Subordinated Notes, Holdings must deliver 60 days’ prior written notice of its intent to prepay the Convertible Subordinated Notes to the holders of the Convertible Subordinated Notes. Each note holder will have the right at any time after September 1, 2014, prior to the payment in full of the Convertible Subordinated Note, to convert all or any part of the unpaid principal balance of the Convertible Subordinated Note into shares of common stock of Holdings at the rate of one share of common stock for each $23.37 of principal. The conversion rate will be appropriately adjusted for stock splits, mergers or other fundamental corporate transactions.

Because the Convertible Subordinated Notes are convertible at any time after September 1, 2014 into shares of Holdings’ common stock, the issuance of the Convertible Subordinated Notes may be deemed to constitute a sale of equity securities of Holdings. The issuance and sale of the Convertible Subordinated Notes is exempt from registration under the Securities Act in reliance upon Rule 506 of Regulation D promulgated under the Securities Act as transactions by an issuer not involving any public offering. The recipients of the Convertible Subordinated Notes, each of whom is an accredited investor, represented their intentions to acquire the Convertible Subordinated Notes for investment only and not with a view to or for sale in connection with any distribution thereof. Each of the recipients of the Convertible Subordinated Notes was furnished adequate information regarding Holdings, its subsidiaries and the Convertible Subordinated Notes.

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Item 6. Exhibits

Exhibit No.	Description
4.1	Form of 5% convertible subordinated notes due 2019 (incorporated by reference to Exhibit 4.1 of the Registrants Current Report on Form 8-K filed on September 6, 2013)
10.1	Securities Exchange Agreement, by and among USMD Holdings, Inc. and certain Class P Limited Partners of USMD Hospital at Arlington, L.P. (incorporated by reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K filed on September 16, 2013)
31.1	Certification of John House, M.D., Chairman and Chief Executive Officer, pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Carolyn P. Jones, Chief Financial Officer, pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of John House, M.D., Chief Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Carolyn P. Jones, Chief Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Schema Document
101.CAL	XBRL Calculation Linkbase Document
101.DEF	XBRL Definition Linkbase Document
101.LAB	XBRL Label Linkbase Document
101.PRE	XBRL Presentation Linkbase Document

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SIGNATURES

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

USMD HOLDINGS, INC.

/s/ Carolyn P. Jones

Carolyn P. Jones, Chief Financial Officer

(On behalf of registrant and as Principal Financial Officer)

Date: November 14, 2013

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