Notes to Consolidated Financial Statements
NOTE 1 – COMPANY DESCRIPTION
Nobilis Health Corp. (“Nobilis” or the “Company”) was incorporated on March 16, 2007 under the name "Northstar Healthcare Inc." pursuant to the provisions of the British Columbia
Business Corporations Act
. On December 5, 2014, Northstar Healthcare Inc. changed its name to Nobilis Health Corp. The Company owns and manages health care facilities in the States of Texas and Arizona, consisting primarily of acute-care surgical hospitals, ambulatory surgery centers and clinics. The Company's service offerings within the health care industry include providing contracted marketing services and accounts receivable factoring.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The Company consolidates entities in which it has a controlling financial interest. We consolidate subsidiaries in which we hold, directly or indirectly, more than 50% of the voting rights and, in the case of variable interest entities, with respect to which the Company is determined to be the primary beneficiary.
The accompanying interim consolidated financial statements have not been audited by the Company’s independent registered public accounting firm, except that the Consolidated Balance Sheet at
December 31, 2016
, is derived from previously audited consolidated financial statements. In the opinion of management, all material adjustments, consisting of normal recurring adjustments, necessary for fair presentation have been included. These interim consolidated financial statements include all accounts of the Company. All intercompany transactions and accounts have been eliminated upon consolidation.
Certain reclassifications have been made to prior period amounts to conform to current period financial statement classifications. The reclassifications included in these comparative consolidated financial statements represents a change in presentation of cash flows related to capital leases. The reclassifications were deemed to be immaterial to the consolidated financial statements both individually and in the aggregate.
These consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. Therefore, these interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
(“2016 Annual Report”) filed with the SEC on March 14, 2017. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. There have been no material changes to the Company’s critical accounting policies or estimates from those disclosed in the 2016 Annual Report.
Recently Issued Accounting Pronouncements
In August 2016, the Financial Accounting Standards Board (FASB) issued Account Standard Update (ASU) No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”). ASU 2016-15 provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted, including adoption in any interim period. The Company does not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations – Clarifying the Definition of a Business
. This standard clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions, disposals of assets or businesses. The standard introduces a test to determine when assets acquired are not a business and clarifies that a business must include, at a minimum, an input and a substantive process that contributes to an output to be considered a business. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company does not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
In May 2017, the FASB issued ASU 2017-10,
Service Concession Arrangements: Determining the Customer of the Operation Services.
This standard clarifies the accounting and definition of the grantor in a service concession arrangement. Per ASU 2017-10, the grantor is the customer of the operation services in all cases for those arrangements. This new ASU is effective for the Company for reporting periods beginning after December 15, 2017. The Company is currently evaluating the new guidance to determine the method of adoption that it will use and the impact it will have on our consolidated financial statements.
Recently Adopted Accounting Stand
ards
In January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment.
This standard simplifies the accounting for goodwill impairment by eliminating step two from the goodwill impairment test. Instead of a two-step impairment model, if the carrying amount of a reporting unit exceeds its fair value as determined in step one of the impairment test, an impairment loss is measured at the amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. This ASU is effective for any interim or annual impairment tests for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company adopted this ASU in the second quarter of 2017.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic
718): Scope of Modification Accounting.
This standard clarifies the accounting and application of modifications to terms and conditions of share-based payment awards. This new ASU, based on meeting certain fair market value, classification and vesting conditions, includes guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. Early adoption is permitted, including adoption in any interim period. The Company adopted this ASU in the second quarter of 2017.
Revenue Recognition Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09
, Revenue from Contracts with Customers (Topic 606)
, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” The standard provides enhancements to the quality and consistency of how revenue is reported by companies, while also improving comparability in the financial statements of companies reporting using International Financial Reporting Standards or U.S. GAAP. The new standard also will require enhanced revenue disclosures, provide guidance for transactions that were not previously addressed comprehensively and improved guidance for multiple-element arrangements. This accounting standard becomes effective for the Company for reporting periods beginning after December 15, 2017, and interim reporting periods thereafter. Early adoption is permitted for annual reporting periods (including interim periods) beginning after December 15, 2016. This new standard permits the use of either the retrospective or cumulative effect transition method.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contract
s with Customers (Topic 606): Principal versus Agent Considerations
. The purpose of this standard is to clarify the implementation of guidance on principal versus agent considerations related to ASU 2014-09. The standard has the same effective date as ASU 2014-09 described above.
In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customer
(Topic 606) Identifying Performance Obligations and Licensing
, which provides clarity related to ASU 2014-09 regarding identifying performance obligations and licensing implementation. The standard has the same effective date as ASU 2014-09 described above.
In May 2016, the FASB issued ASU 2016-12:
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
, which provides narrow scope improvements and practical expedients related to ASU 2014-09. The purpose of this standard is to clarify certain narrow aspects of ASU 2014-09, such as assessing the collectability criterion, presentation of sales taxes, and other similar taxes collected from customers, non-cash consideration, contract modifications at transition, completed contracts at transition, and technical correction. The standard has the same effective date as ASU 2014-09 described above.
In December 2016, the FASB issued ASU 2016-20:
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
. The amendments in this standard affect narrow aspects of guidance issued in ASU 2014-09. The standard has the same effective date as ASU 2014-09 described above.
The Company plans to adopt these new revenue standard updates in the first quarter of 2018 and does not anticipate the adoption of these pronouncements to have a material impact with regard to its current contracts on its consolidated financial statements. The Company is still evaluating the possible effects of the new standard and the selected implementation transition method. The Company is still evaluating the possible effects of the new standard. Moreover, industry guidance is continuing to develop around this issue, and any conclusions in the final industry guidance that is inconsistent with the Company’s application could result in changes to the Company’s expectations regarding the impact that this new accounting standard could have on the Company’s financial statements.
NOTE 3 – ACQUISITIONS
The Company accounts for all transactions that represent business combinations using the acquisition method of accounting, where the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquired entity are recognized and measured at their fair values on the date the Company obtains control in the acquiree. Such fair values that are not finalized for reporting periods following the acquisition date are estimated and recorded as provisional amounts. Adjustments to these provisional
amounts during the measurement period (defined as the date through which all information required to identify and measure the consideration transferred, the assets acquired, the liabilities assumed and any noncontrolling interests has been obtained, limited to one year from the acquisition date) are recorded as of the date of acquisition. Any material impact to comparative information for periods after acquisition, but before the period in which adjustments are identified, is recognized during the measurement period in the reporting period in which the adjustment amounts are determined.
2017 Transactions:
The Company completed the acquisition of the operating assets of Hamilton Vein Center (HVC), Hamilton Physician Services, LLC, a Texas limited liability company (“HPS”), Carlos R. Hamilton, III, M.D., P.A. a Texas Professional Association (“PA”) (HPS and PA are each a “Seller” and collectively “Sellers”), and Carlos R. Hamilton III, M.D, a resident of the State of Texas (“Owner”). The Company, Northstar Healthcare Acquisitions, L.L.C. ("Buyer"), Sellers and Owner entered into an amended and restated purchase agreement (the “Amended and Restated Asset Purchase Agreement”) dated as of March 8, 2017.
Buyer received substantially all of the operating assets of Sellers in exchange for an aggregate purchase price of approximately
$13.3 million
, comprised of
$8.3 million
in cash and
$5.0 million
in the form of a convertible note. The note is convertible to cash or stock at the Company's election, and is payable in
two
equal installments over a
two
-year period.
As part of the Amended and Restated Purchase Agreement,
$0.5 million
of the cash purchase price was held back and is subject to certain indemnification provisions. On the twelve-month anniversary of closing,
50%
of the amount held back, less any amounts paid as, or claimed as, indemnification, will be paid to the Owner. The remaining amounts held back, less any amounts paid as, or claimed as, indemnification, will be paid to the Owner on the twenty-four-month anniversary of closing.
As a result of the acquisition, the Company has recognized
$8.4 million
of goodwill within our Medical Segment. The Company believes that the goodwill is primarily comprised of the business opportunities to be gained through the expanded geographical coverage as well as the access to a new physician group.
Revenues and net loss for the three months ended June 30, 2017, are
$3.6 million
and
$0.2 million
, respectively. Revenues and net loss for the six months ended June 30, 2017, are
$4.8 million
and
$0.3 million
, respectively.
The costs related to the transaction were nominal and were expensed during the six months ended June 30, 2017. These costs are included in the corporate general and administrative expenses in the Company’s Consolidated Statement of Operations for the six months ended June 30, 2017.
The fair values assigned to certain assets acquired and liabilities assumed in relation to the Company's acquisition have been prepared on a preliminary basis with information currently available and are subject to change. Specifically, the Company is still in the process of assessing the fair value of trade accounts receivable, goodwill and working capital. The Company expects to finalize its analysis during 2017.
|
|
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Recognized as of Acquisition Date
|
|
Measurement Period Adjustments
(1)
|
|
March 8, 2017
|
|
|
|
|
|
|
Assets acquired:
|
|
|
|
|
|
Cash
|
$
|
438
|
|
|
$
|
—
|
|
|
$
|
438
|
|
Trade accounts receivable
|
747
|
|
|
—
|
|
|
747
|
|
Prepaid expenses and other current assets
|
42
|
|
|
—
|
|
|
42
|
|
Medical Supplies
|
295
|
|
|
—
|
|
|
295
|
|
Property and equipment
|
2,359
|
|
|
611
|
|
|
2,970
|
|
Other long-term assets
|
—
|
|
|
—
|
|
|
—
|
|
Intangible assets
|
—
|
|
|
1,900
|
|
|
1,900
|
|
Goodwill
|
10,828
|
|
|
(2,410
|
)
|
|
8,418
|
|
Total assets acquired
|
$
|
14,709
|
|
|
$
|
101
|
|
|
$
|
14,810
|
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
|
Trade accounts payable
|
$
|
612
|
|
|
$
|
(203
|
)
|
|
$
|
409
|
|
Refunds payable
|
347
|
|
|
(347
|
)
|
|
—
|
|
Accrued liabilities
|
524
|
|
|
67
|
|
|
591
|
|
Current portion of capital lease
|
69
|
|
|
—
|
|
|
69
|
|
Long-term portion of capital leases
|
39
|
|
|
—
|
|
|
39
|
|
Total liabilities assumed
|
$
|
1,591
|
|
|
$
|
(483
|
)
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|
$
|
1,108
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|
|
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Consideration:
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Cash
|
$
|
8,321
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|
|
$
|
—
|
|
|
$
|
8,321
|
|
Convertible promissory note
|
5,000
|
|
|
—
|
|
|
5,000
|
|
Working capital adjustment
|
(203
|
)
|
|
584
|
|
|
381
|
|
Total consideration
|
$
|
13,118
|
|
|
$
|
584
|
|
|
$
|
13,702
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|
(1)
The measurement period adjustments reflect changes in the estimated fair values of certain assets and liabilities. The measurement period adjustments were recorded to reflect new information obtained about facts and circumstances existing as of the date the acquisition was consummated and did not result from intervening events subsequent to that date.
2016 Transactions:
On October 28, 2016, the Company acquired Arizona Vein and Vascular Center, LLC (AVVC) and its
four
affiliated surgery centers operating as Arizona Center for Minimally Invasive Surgery, LLC (ACMIS), (collectively, “AZ Vein”) from Dr. L. Philipp Wall, M.D., P.C. for a total purchase price of
$22.0 million
comprised of
$17.5 million
in cash,
$2.25 million
in Nobilis common shares,
$2.25 million
in the form of a convertible note and
$0.1 million
earn-out arrangement to be paid in cash based on a trailing 12 month earnings before interest, income taxes, depreciation and amortization (EBITDA) of AZ Vein and the purchased assets.
In addition,
$1.1 million
of the cash purchase price was held back and is subject to certain indemnification provisions. On the twelve-month anniversary of closing,
50%
of the amount held back, less any amounts paid as, or claimed as, indemnification, will be paid to Dr. Wall. The remaining amount held back, less any amounts paid as, or claimed as, indemnification, will be paid to Dr. Wall on the twenty-four-month anniversary of closing.
Dr. Wall was the sole equity holder for both AVVC and ACMIS and started the companies in 2007 and 2012, respectively. AVVC and ACMIS
are leading clinical and surgical providers for vascular, radiology, podiatry, and general surgery, with five locations in the Phoenix and Tucson metropolitan areas.
The acquisition expands Nobilis' presence in two high-growth geographic markets, Phoenix and Tucson, and increases its multi-specialty offering with new vascular surgical specialties within a group of established physician partners.
As a result of the acquisition, the Company has recognized
$16.1 million
of goodwill within our Medical Segment. The Company believes that the goodwill is primarily comprised of the business opportunities to be gained through the expanded geographical coverage as well as the access to a new physician group.
Revenues and net loss for the three months ended June 30, 2017, are
$1.2 million
and
$1.6 million
, respectively. Revenues and net loss for the six months ended June 30, 2017, are
$3.1 million
and
$3.1 million
, respectively.
The costs related to the transaction were
$0.3 million
and were expensed during the year ended December 31, 2016. These costs are included in the corporate general and administrative expenses in the Company’s Consolidated Statement of Operations for the year ended December 31, 2016.
We finalized our purchase price allocation during the second quarter of 2017. The final fair values of the identifiable assets acquired and liabilities assumed at the date of acquisition is summarized in the following table (
in thousands
):
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Recognized as of Acquisition Date
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Measurement Period Adjustments
(1)
|
|
October 28, 2016
|
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|
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|
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Assets acquired:
|
|
|
|
|
|
Cash
|
$
|
261
|
|
|
$
|
—
|
|
|
$
|
261
|
|
Trade accounts receivable
|
3,472
|
|
|
—
|
|
|
3,472
|
|
Prepaid expenses and other current assets
|
188
|
|
|
—
|
|
|
188
|
|
Medical Supplies
|
191
|
|
|
—
|
|
|
191
|
|
Property and equipment
|
2,745
|
|
|
—
|
|
|
2,745
|
|
Other long-term assets
|
6
|
|
|
—
|
|
|
6
|
|
Intangible assets
|
1,700
|
|
|
—
|
|
|
1,700
|
|
Goodwill
|
17,185
|
|
|
(1,041
|
)
|
|
16,144
|
|
Total assets acquired
|
$
|
25,748
|
|
|
$
|
(1,041
|
)
|
|
$
|
24,707
|
|
|
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|
Liabilities assumed:
|
|
|
|
|
|
Trade accounts payable
|
$
|
996
|
|
|
$
|
—
|
|
|
$
|
996
|
|
Accrued liabilities
|
273
|
|
|
—
|
|
|
273
|
|
Current portion of capital leases
|
472
|
|
|
—
|
|
|
472
|
|
Long-term portion of capital leases
|
666
|
|
|
—
|
|
|
666
|
|
Total liabilities assumed
|
$
|
2,407
|
|
|
$
|
—
|
|
|
$
|
2,407
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|
|
|
|
|
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|
Consideration:
|
|
|
|
|
|
Cash
|
$
|
17,500
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|
|
$
|
—
|
|
|
$
|
17,500
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|
Stock issued
|
2,250
|
|
|
—
|
|
|
2,250
|
|
Convertible promissory note
|
2,250
|
|
|
—
|
|
|
2,250
|
|
Working capital adjustment
|
1,241
|
|
|
(1,041
|
)
|
|
200
|
|
Earnout consideration
|
100
|
|
|
—
|
|
|
100
|
|
Total consideration
|
$
|
23,341
|
|
|
$
|
(1,041
|
)
|
|
$
|
22,300
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|
(1)
The measurement period adjustments reflect changes in the estimated fair values of certain assets and liabilities. The measurement period adjustments were recorded to reflect new information obtained about facts and circumstances existing as of the date the acquisition was consummated and did not result from intervening events subsequent to that date.
Unaudited Supplemental Pro Forma Information
The following table presents the unaudited pro forma results of the Company as if all of the business combinations previously discussed had been made on January 1, 2016. The pro forma information is based on the Company’s consolidated results of operations for the three and
six
months ended June 30, 2017 and 2016. The unaudited supplemental pro forma financial information has been provided for illustrative purposes only and does not purport to be indicative of the actual results that would have been achieved by combining the companies for the periods presented, or of the results that may be achieved by the combined companies in the future. Further, results may vary significantly from the results reflected in the following unaudited supplemental pro forma financial information because of future events and transactions, as well as other factors.
The unaudited supplemental pro forma financial information presented below has been prepared by adjusting the historical results of the Company to include historical results of the acquired businesses described above and was then adjusted: (i) to increase amortization expense resulting from intangible assets acquired; (ii) to reduce interest expense from debt which was retained by the seller upon acquisition of the respective businesses and concurrently increase the Company's interest expense based upon the purchase price; and (iii) to increase depreciation expense for the incremental increase in the value of property and equipment acquired; (iv) to decrease expenses for management services which were provided by the preceding parent entity and to concurrently increase expenses for management services which are now provided by the Company; (v) to adjust earnings per share to reflect the common shares issued as part of the purchase consideration. The unaudited supplemental pro forma financial information does not include adjustments to reflect the impact of other cost savings or synergies that may result from these acquisition.
The following table shows our pro forma results for the three and
six
months ended
June 30, 2017
and 2016 (
in thousands, except per share amounts
):
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Three Months Ended June 30,
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Six Months Ended June 30,
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2017
|
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2016
|
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2017
|
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2016
|
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Revenue
|
|
$
|
79,962
|
|
|
$
|
67,161
|
|
|
$
|
150,866
|
|
|
$
|
127,011
|
|
Income (loss) from operations
|
|
$
|
7,385
|
|
|
$
|
2,422
|
|
|
$
|
3,275
|
|
|
$
|
(10,424
|
)
|
Net income (loss) attributable to Nobilis Health Corp.
|
|
$
|
1,585
|
|
|
$
|
6,971
|
|
|
$
|
(1,740
|
)
|
|
$
|
(874
|
)
|
Net income (loss) per basic common share
|
|
$
|
0.02
|
|
|
$
|
0.09
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
NOTE 4 – INVESTMENTS IN ASSOCIATES
In March 2016, the Company acquired a
58%
interest in Athelite Holdings LLC ("Athelite"), a holding company with a
70%
interest in Dallas Metro Surgery Center LLC ("Dallas Metro"), a company formed to provide management services to a Hospital Outpatient Department (HOPD). In April 2016, Athelite interest in Dallas Metro was reduced to
62%
. The Athelite investment is accounted for as an equity method investment as the Company did not obtain the necessary level of control for the investment to be accounted for as a business combination. This is due to the fact that the Company does not have the ability to directly appoint a majority of the board members of Dallas Metro or independently make strategic operational decisions. The carrying value as of
June 30, 2017
was
$0.4 million
. The investment is classified as other long-term assets in the Consolidated Balance Sheets.
NOTE 5 – FINANCIAL INSTRUMENTS AND CONCENTRATION
The Company is exposed to risks that arise from its use of financial instruments. This note describes the Company’s objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect to these risks is presented throughout these consolidated financial statements.
Principal financial instruments
The principal financial instruments used by the Company, from which financial instrument risk arises, are as follows:
|
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•
|
Accounts receivable and other receivables
|
|
|
•
|
Investments in associates
|
|
|
•
|
Accounts payable, accrued liabilities and other current liabilities
|
|
|
•
|
Other liabilities and notes payable
|
|
|
•
|
Non-employee stock options
|
The carrying amounts of the Company’s cash, accounts receivable and other receivables, accounts payable, accrued liabilities, other current liabilities and other liabilities as reflected in the consolidated financial statements approximate fair value due to their short term maturity. The estimated fair value of the Company's other long-term debt instruments approximate their carrying amounts as the interest rates approximate the Company's current borrowing rate for similar debt instruments of comparable maturity, or have variable interest rates.
Financial instruments - risk management
The Company’s financial instrument risks include, but are not limited to the following:
|
|
•
|
Other market price risk
|
Credit risk
Credit risk is the risk of financial loss to the Company if a patient, non-partner surgeon or insurance company fails to meet its contractual obligations. The Company, in the normal course of business, is exposed mainly to credit risk on its accounts receivable from insurance companies, other third-party payors, and physicians. Accounts receivables are net of applicable bad debt reserves, which are established based on specific credit risk associated with insurance companies, payors and other relevant information.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due and arises from the Company’s management of working capital. The Company’s objective to managing liquidity risk is to ensure that it will have sufficient cash to allow it to meet its liabilities when they become due. To achieve this objective, it seeks to maintain cash balances (or agreed credit facilities) to meet expected requirements. The liquidity risk of the Company and its subsidiaries is managed centrally by the Company’s finance function. The Company believes that there are currently no concerns of its ability to meet its liabilities as they become due for the foreseeable future.
The following tables set forth certain information with respect to the Company’s payor concentration. Patient and net professional fee revenues by payor are summarized below for the applicable periods:
MEDICAL SEGMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
Payors
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Private insurance and other private pay
|
|
97.4
|
%
|
|
96.4
|
%
|
|
97.0
|
%
|
|
96.2
|
%
|
Workers compensation
|
|
1.3
|
%
|
|
3.1
|
%
|
|
1.8
|
%
|
|
3.4
|
%
|
Medicare
|
|
1.3
|
%
|
|
0.5
|
%
|
|
0.8
|
%
|
|
0.4
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
MARKETING SEGMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
Payors
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Private insurance and other private pay
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Workers compensation
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Medicare
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
CONSOLIDATED SEGMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
Payors
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Private insurance and other private pay
|
|
97.6
|
%
|
|
96.9
|
%
|
|
97.5
|
%
|
|
96.7
|
%
|
Workers compensation
|
|
1.2
|
%
|
|
2.7
|
%
|
|
1.7
|
%
|
|
3.0
|
%
|
Medicare
|
|
1.2
|
%
|
|
0.4
|
%
|
|
0.8
|
%
|
|
0.3
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Market risk
Market risk is the risk that the fair value of future cash flows of financial instruments will fluctuate due to changes in interest rates and/or foreign currency exchange rates.
Interest rate risk
The Company entered into a revolving line of credit that, from time to time, may increase interest rates based on market index.
NOTE 6 – TRADE ACCOUNTS RECEIVABLE, NET
A detail of trade accounts receivable, net as of
June 30, 2017
and
December 31, 2016
is as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Trade accounts receivable
|
$
|
104,992
|
|
|
$
|
121,599
|
|
Allowance for doubtful accounts
|
(750
|
)
|
|
(750
|
)
|
Receivables transferred
|
(518
|
)
|
|
(309
|
)
|
Receivables purchased
|
6,695
|
|
|
4,411
|
|
Trade accounts receivable, net
|
$
|
110,419
|
|
|
$
|
124,951
|
|
Bad debt expense was
nil
for the
three and six
months ended
June 30, 2017
, respectively. Bad debt expense was
nil
for the
three and six
months ended
June 30, 2016
, respectively.
A detail of allowance for doubtful accounts as of
June 30, 2017
and December 31, 2016 is as follows (
in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
Costs and Expenses
|
|
Recovery
|
|
Write-offs, net
(1)
|
|
Balance at End of Period
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
(5,165
|
)
|
|
$
|
(750
|
)
|
|
$
|
1,135
|
|
|
$
|
4,030
|
|
|
$
|
(750
|
)
|
Balance as of June 30, 2017
|
|
$
|
(750
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Adjudication of previously recorded allowance for doubtful accounts
|
From time to time, we transfer to third parties certain of our accounts receivable balances on a non-recourse basis in return for advancement on payment to achieve a faster cash collection. As of
June 30, 2017
and
December 31, 2016
, there remained a balance of
$0.5 million
and
$0.3 million
, respectively, in transferred receivables pursuant to the terms of the original agreement.
For the three months ended
June 30, 2017
and
2016
, the Company received advanced payments of
nil
and
$0.2 million
, respectively. During the same time period, the Company transferred
$0.0 million
and
$2.0 million
of receivables, net of advancement of payment. Concurrently, upon collection of these transferred receivables, payment will be made to the transferee. For the six months ended
June 30, 2017
and
2016
, the Company received advanced payments of
$0.1 million
and
$0.5 million
, respectively. During the same time period, the Company transferred
$0.5 million
and
$4.1 million
of receivables, net of advancement of payment.
Athas Health, LLC ("Athas"), Nobilis Health Network Specialist Group (NHNSG), PLLC and Premier Health Specialists, LLC ("Premier") purchase receivables from physicians, at a discount, on a non-recourse basis. The discount and purchase price vary by specialty and are recorded at the date of purchase, which generally occurs
30
to
45
days after the accounts are billed. These purchased receivables are billed and collected by Athas, NHNSG and Premier and they retain
100%
of what is collected after paying the discounted purchase price. Following the transfer of the receivable, the transferor has no continued involvement and there are no restrictions on the receivables.
Gross revenue from purchased receivables was
$3.1 million
and
$3.5 million
for the three months ended
June 30, 2017
and
2016
, respectively. Revenue, net of the discounted purchase price, was
$1.3 million
and
$2.0 million
for the three months ended
June 30, 2017
and
2016
, respectively. Gross revenue from purchased receivables was
$7.5 million
and
$6.6 million
for the six months ended
June 30, 2017
and
2016
, respectively. Revenue, net of the discounted purchase price, was
$3.3 million
and
$3.5 million
for the six months ended
June 30, 2017
and
2016
, respectively.
Accounts receivable for purchased receivables was
$6.7 million
and
$4.4 million
for the
six
months ended
June 30, 2017
and year-ended
December 31, 2016
, respectively. Revenue from receivables purchased is recorded in the factoring revenue line item within the Consolidated Statements of Operations.
NOTE 7 – ACCRUED LIABILITIES AND OTHER CURRENT LIABILITIES
The following table presents a summary of items comprising accrued liabilities and other current liabilities in the accompanying Consolidated Balance Sheets as of
June 30, 2017
and
December 31, 2016
(
in thousands
):
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Accrued liabilities:
|
|
|
|
Accrued salaries and related benefits
|
$
|
3,855
|
|
|
$
|
3,333
|
|
Contract services
|
3,840
|
|
|
3,766
|
|
Lab expense
|
9,229
|
|
|
5,402
|
|
Other
|
16,479
|
|
|
17,644
|
|
Total accrued liabilities
|
$
|
33,403
|
|
|
$
|
30,145
|
|
Other current liabilities:
|
|
|
|
Estimated amounts due to third party payors
|
$
|
6,195
|
|
|
$
|
6,286
|
|
Other
|
3,646
|
|
|
1,275
|
|
Total other current liabilities
|
$
|
9,841
|
|
|
$
|
7,561
|
|
NOTE 8 – OTHER LONG-TERM LIABILITIES
The Company assumed real property leases in conjunction with certain business acquisitions which required the Company to pay above market rentals through the remainder of the lease terms. Of the
$3.8 million
balance in other long-term liabilities at
June 30, 2017
, approximately
$2.9 million
of which relates to unfavorable leases. The unfavorable lease liability is amortized as a reduction to rent expense over the contractual periods the Company is required to make rental payments under the leases. Estimated amortization of unfavorable leases for the five years and thereafter subsequent to
December 31, 2016
, is
$0.2 million
for the remainder of
2017
,
$0.3 million
for
2018
,
2019
,
2020
,
2021
, and
$1.9 million
thereafter.
NOTE 9 – DEBT
BBVA Credit Agreement
On October 28, 2016 the Company entered into a BBVA Credit Agreement by and among the Company, certain subsidiaries of the Company parties thereto, the lenders from time to time parties thereto (the “Lenders”) with BBVA Compass Bank as Administrative Agent for the lending group.
The principal amount of the term loan (the “Term Loan”) pursuant to the BBVA Credit Agreement is
$52.5 million
, which bears interest on the outstanding principal amount thereof at a rate of the then applicable LIBOR, plus an applicable margin ranging from
3.0%
to
3.75%
(depending on the Company’s consolidated leverage ratio), with an option for the interest rate to be set at the then applicable Base Rate (the “Interest Rate”). The effective rate for the Term Loan as of
June 30, 2017
was
5.16%
. All outstanding principal on the Term Loan under the Credit Agreement is due and payable on October 28, 2021. The revolving credit facility is
$30.0 million
(the “Revolver”), which bears interest at the then applicable Interest Rate. The effective rate for the Revolver as of
June 30, 2017
was
5.16%
. The maturity date of the Revolver is October 28, 2021. Additionally, Borrower may request additional commitments from the Lenders in the maximum amount of
$50 million
, either by increasing the Revolver or creating new term loans. As of
June 30, 2017
, the outstanding balances on the Term Loan and Revolver were
$51.1 million
and
$18.0 million
, respectively.
The BBVA Compass Credit Agreement contains two financial covenants that are tested beginning on December 31, 2016. The consolidated leverage ratio may not exceed (i)
2.75
to 1.00 as of the last day of any fiscal quarter from December 31, 2016 through and including September 30, 2018 (ii)
2.50
to 1.00 from December 31, 2018 through and including September 30, 2019 (iii)
2.25
to 1.00 from December 31, 2019 through and including September 30, 2020 and (iv)
2.00
to 1.00 from December 31, 2020 and thereafter, subject to covenant holidays upon the occurrence of certain conditions. The second financial covenant requires the loan parties to maintain a minimum consolidated fixed charge coverage ratio of not less than
2.00
to 1.00.
The Loan Agreement also contains customary events of default, including, among others, the failure by the Borrower to make a payment of principal or interest due under the BBVA Credit Agreement, the making of a materially false or misleading representation or warranty by any loan party, the failure by the Borrower to perform or observe certain covenants in the BBVA Credit Agreement, a change of control, and the occurrence of certain cross-defaults, subject to customary notice and cure provisions. Upon the occurrence of an event of default, and so long as such event of default is continuing, the Administrative Agent could declare the amounts outstanding under the BBVA Credit Agreement due and payable.
The Company entered into Amendment No. 1 to BBVA Credit Agreement and Waiver, dated as of March 3, 2017, by and among NHA, certain subsidiaries of the Company party thereto, Compass Bank, and other financial institutions (the "Amendment"). The purpose of the Amendment was to (i) modify the definition of “Permitted Acquisition” to require Lender approval and consent for any acquisition which is closing during the 2017 fiscal year; (ii) modify certain financial definitions and covenants, including, but not limited to, an increase to the maximum Consolidated Leverage Ratio to
3.75
to 1.00 for the period beginning September 30, 2016 and ending September 30, 2017, and an increase to the Consolidated Fixed Charge Coverage Ratio to
1.15
to 1.00 for the period beginning September 30, 2016 and ending June 30, 2017; (iii) waive the Pro Forma Leverage Requirement in connection with the previously reported HVC; and (iv) provide each Lender’s consent to the HHVC acquisition. The Amendment also contained a limited waiver of a specified event of default. As of
June 30, 2017
, the Company was in compliance with its covenants.
Loan origination fees are deferred and the net amount is amortized over the contractual life of the related loans.
Convertible Promissory Note - AZ Vein
In conjunction with our purchase of AZ Vein, we entered into a
$2.25 million
convertible promissory note. The convertible promissory note bears interest at
5%
per annum and matures on the date that is 36 months from closing. The convertible promissory note (outstanding principal but excluding accrued and unpaid interest) can be converted into common shares of NHC (the "Conversion Shares"), at the sole discretion of NHC and NHA, on the maturity date. The number of Conversion Shares will be based on a price per share equal to the quotient obtained by dividing the conversion amount by the volume weighted average price of the common shares on the New York Stock Exchange (NYSE) in the trailing ten trading days prior to the maturity date. There are no pre-payment penalties.
Convertible Promissory Note - HVC
In conjunction with our purchase of HVC, we entered into a
$5.0 million
convertible promissory note. The convertible promissory matures on March 8, 2019, bears interest at
5%
per annum and is payable in
two
equal installments over a
two
-year period. The convertible promissory note (outstanding principal but excluding accrued and unpaid interest) can be converted into common shares of NHC (the "Conversion Shares"), at the sole discretion of NHC and NHA, on the maturity date. The number of Conversion Shares will be based on a price per share equal to the quotient obtained by dividing the conversion amount by the volume weighted average price of the common shares on the NYSE in the trailing ten trading days prior to the maturity date. There are no pre-payment penalties.
Debt consisted of the following (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
|
|
|
Lines of credit
|
|
$
|
18,000
|
|
|
$
|
15,000
|
|
Term loan
|
|
51,144
|
|
|
52,500
|
|
Convertible promissory note
|
|
7,250
|
|
|
2,250
|
|
Gross debt
|
|
76,394
|
|
|
69,750
|
|
Less: unamortized debt issuance costs
|
|
(2,189
|
)
|
|
(1,957
|
)
|
Debt, net of unamortized debt issuance costs
|
|
74,205
|
|
|
67,793
|
|
Less: current, net of unamortized debt issuance costs
|
|
(4,627
|
)
|
|
(2,220
|
)
|
Long-term debt, net
|
|
$
|
69,578
|
|
|
$
|
65,573
|
|
Future maturities of debt as of
June 30, 2017
are as follows (
in thousands
):
|
|
|
|
|
|
June 30, 2017
|
|
|
2017
|
$
|
5,125
|
|
2018
|
7,375
|
|
2019
|
5,250
|
|
2020
|
5,250
|
|
2021
|
53,394
|
|
Total
|
$
|
76,394
|
|
NOTE 10 – FAIR VALUE MEASUREMENTS
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including warrant and stock option derivative liabilities. There have been no transfers between fair value measurement levels during the
six
months ended
June 30, 2017
and
2016
.
The following table summarizes our assets and liabilities measured at fair value on a recurring basis as of
June 30, 2017
and
December 31, 2016
, aggregated by the level in the fair value hierarchy within which those measurements fall (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Quoted Prices in
Active Markets for
Identical Assets and
Liabilities
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Total
|
December 31, 2016:
|
|
|
|
|
|
|
|
Warrant and stock option derivative liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
902
|
|
|
$
|
902
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
902
|
|
|
$
|
902
|
|
June 30, 2017:
|
|
|
|
|
|
|
|
Warrant and stock option derivative liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
715
|
|
|
$
|
715
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
715
|
|
|
$
|
715
|
|
In certain cases, where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3 within the valuation hierarchy. Level 3 liabilities that were measured at estimated fair value on a recurring basis consist of warrant and stock option derivative liabilities. The estimated fair values of the warrant and stock option derivative liabilities were measured using the Black-Scholes valuation model (refer to
Note 12 - Warrants and options liabilities
). Due to the nature of valuation inputs, the valuation of the warrants is considered a Level 3 measurement.
The remaining outstanding warrants and stock options expired in May of 2017. The balance of the Company's warrant and stock option derivative liabilities is
zero
as of June 30, 2017.
NOTE 11 – SHARE BASED COMPENSATION
Stock Options
The Company granted a total of
440,000
and
615,000
stock options during the
three and six
months ended
June 30, 2017
, respectively. Of the options granted during the three months ended
June 30, 2017
,
250,000
of those vested immediately and
190,000
vest ratably over a
three
-year period. Of the options granted during the six months ended
June 30, 2017
,
250,000
of those vest immediately and
365,000
vest ratably over a
three
-year period. During the
six
months ended
June 30, 2017
,
605,000
options were forfeited, with various vesting periods.
The following table summarizes stock option activity for the
six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Shares Underlying
Options
|
|
Weighted-
Average Exercise
Price
|
|
Weighted-Average
Remaining Life
(years)
|
|
|
|
|
|
|
Outstanding at January 1, 2016
|
5,465,000
|
|
|
$
|
2.97
|
|
|
9.2
|
|
Granted
|
2,107,075
|
|
|
$
|
2.03
|
|
|
9.6
|
|
Exercised
|
(1,081,250
|
)
|
|
$
|
1.91
|
|
|
—
|
|
Forfeited
|
(500,000
|
)
|
|
$
|
1.64
|
|
|
—
|
|
Outstanding at June 30, 2016
|
5,990,825
|
|
|
$
|
2.89
|
|
|
9.1
|
|
Exercisable at
|
|
|
|
|
|
Exercisable at June 30, 2016
|
2,129,575
|
|
|
$
|
2.24
|
|
|
8.7
|
|
Exercisable at
|
|
|
|
|
|
Outstanding at January 1, 2017
|
7,544,025
|
|
|
$
|
2.61
|
|
|
9.0
|
|
Granted
|
615,000
|
|
|
$
|
1.61
|
|
|
9.8
|
|
Exercised
|
—
|
|
|
$
|
—
|
|
|
—
|
|
Forfeited
|
(605,000
|
)
|
|
$
|
3.14
|
|
|
—
|
|
Outstanding at June 30, 2017
|
7,554,025
|
|
|
$
|
2.49
|
|
|
8.6
|
|
Outstanding at
|
|
|
|
|
|
Exercisable at June 30, 2017
|
3,773,400
|
|
|
$
|
2.32
|
|
|
8.3
|
|
The above table includes
650,000
options issued to non-employees,
600,000
of them are exercisable, and all are still outstanding at
June 30, 2017
. Refer to
Note 12 - Warrants and options liabilities
for discussion regarding the classification of these options within the Company's Consolidated Balance Sheets.
The total intrinsic value of stock options exercised was
nil
and
$1.3 million
during the
six
months ended
June 30, 2017
and
2016
, respectively. There were
no
options exercised during 2017.
The Company recorded total stock compensation expense relative to employee stock options of
$0.2 million
and
$1.7 million
for the three months ended
June 30, 2017
and
2016
, respectively, and
$1.8 million
and
$3.4 million
for the six months ended June 30, 2017 and 2016, respectively.
The fair values of the employee stock options used in recording compensation expense are computed using the Black-Scholes option pricing model. The table below shows the assumptions used in the model for options awarded during the
six
months ended
June 30, 2017
and
2016
.
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
|
|
|
Expected price volatility
|
87% - 91%
|
|
116% - 117%
|
Risk free interest rate
|
1.78% - 2.14%
|
|
1.33% - 1.53%
|
Expected annual dividend yield
|
0%
|
|
0%
|
Expected option term (years)
|
5 - 6
|
|
5 - 6
|
Expected forfeiture rate
|
3.1% - 11.6%
|
|
0.5% - 11.0%
|
Grant date fair value per share
|
$0.99 - $1.81
|
|
$1.73 - $2.34
|
Grant date exercise price per share
|
$1.35 - 2.32
|
|
$1.99 - 2.78
|
For stock options, the Company recognizes share based compensation net of estimated forfeitures and revises the estimates in the subsequent periods if actual forfeitures differ from the estimates. Forfeiture rates are estimated based on historical experience as well as expected future behavior.
NOTE 12 – WARRANTS AND OPTIONS LIABILITIES
Warrants and Options Issued in Private Placements
The Company issued warrants and compensatory options in connection with private placements completed in December 2013, September 2014 and May 2015. These warrants and options have exercise prices denominated in Canadian dollars and as such may not be considered indexed to our stock which is valued in U.S. dollars. Hence, these warrants and options are classified as liabilities under the caption “Warrants and Options Derivative Liability” and recorded at estimated fair value at each reporting date, computed using the Black-Scholes valuation method. Changes in the liability from period to period are recorded in the Consolidated Statements of Operations under the caption “Change in fair value of warrant and stock option derivative liabilities”.
The estimated fair values of warrants and options accounted for as liabilities were determined on the date of the private placements and at each balance sheet date following using the Black-Scholes pricing model with the following inputs:
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
|
|
|
Risk free interest rate
|
0.62%
|
|
|
0.26% - 0.59%
|
|
Expected life in years
|
0.15
|
|
|
0.25 - 1.15
|
|
Expected volatility
|
63
|
%
|
|
91% - 112%
|
|
Expected dividend yield
|
0
|
%
|
|
0
|
%
|
The changes in fair value of the warrants and options (excluding non-employees) liability during the
six
months ended
June 30, 2017
and
2016
were as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
|
|
|
Balance at beginning of year
|
$
|
3
|
|
|
$
|
2,109
|
|
Issuance of warrants and options
|
—
|
|
|
—
|
|
Transferred to equity upon exercise
|
—
|
|
|
—
|
|
Change in fair value recorded in earnings
|
(3
|
)
|
|
(1,308
|
)
|
Balance as of June 30, 2017 and 2016
|
$
|
—
|
|
|
$
|
801
|
|
As of
June 30, 2017
, there were
no
warrants or options outstanding. The remaining outstanding warrants and stock options expired in May of 2017. The balance of the Company's warrant and stock option derivative liabilities is zero as of June 30, 2017.
Options Issued to Non-Employees
As discussed in
Note 11 - Share based compensation
, in 2014 the Company issued options to professionals providing services to the organization. These professionals do not meet the definition of an employee under U.S. GAAP. At
June 30, 2017
, there were
650,000
options outstanding of which,
600,000
are exercisable to these non-employees.
Under U.S. GAAP, the value of these option awards is determined at the performance completion date. The Company recognizes expense for the estimated total value of the awards during the period from their issuance until performance completion since the professional services are being rendered during this time. The total expense recognized is adjusted to the final value of the award as determined on the performance completion date.
The estimated values of the option awards are determined using the Black-Scholes pricing model with the following inputs:
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
|
|
|
Risk free interest rate
|
1.50% - 1.72%
|
|
0.86% - 1.01%
|
|
Expected life in years
|
3 - 4
|
|
4 - 5
|
|
Expected volatility
|
81% - 85%
|
|
112% - 116%
|
|
Expected dividend yield
|
0%
|
|
0
|
%
|
For the three month periods ended
June 30, 2017
and 2016, the Company recorded a recovery for non-employee stock options of a nominal amount and a nominal expense for non-employee stock options, respectively. For the six month periods ended
June 30, 2017
and 2016, the Company recorded a recovery for non-employee stock options of a nominal amount and an expense for non-employee stock options of
$0.1 million
, respectively. The changes in fair value of the liability related to vested yet un-exercised options issued to non-employees during the six months ended
June 30, 2017
and 2016 were as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
Balance at beginning of year
|
$
|
899
|
|
|
$
|
842
|
|
Vested during the period
|
—
|
|
|
533
|
|
Change in fair value recorded in earnings
|
(184
|
)
|
|
(392
|
)
|
Balance as of June 30, 2017 and 2016
|
$
|
715
|
|
|
$
|
983
|
|
Options issued to non-employees are reclassified from equity to liabilities on the performance completion date. Under U.S. GAAP, such options may not be considered indexed to our stock because they have exercise prices denominated in Canadian dollars. Hence, these will be classified as liabilities under the caption “Warrant and stock option liabilities” and recorded at estimated fair value at each reporting date, computed using the Black-Scholes valuation method. Changes in the liability from period to period will be recorded in the Consolidated Statements of Operations under the caption “Change in fair value of warrant and stock option liabilities”. At
June 30, 2017
, there were
0.6 million
unexercised non-employee options requiring liability classification.
NOTE 13 – EARNINGS PER SHARE
Basic net earnings attributable to Nobilis common shareholders, per common share, excludes dilution and is computed by dividing net earnings attributable to Nobilis common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net earnings attributable to Nobilis common shareholders, per common share, is computed by dividing net earnings attributable to Nobilis common shareholders by the weighted-average number of common shares outstanding during the period plus any potential dilutive common share equivalents, including shares issuable upon the vesting stock option awards, warrants and RSUs as determined under the treasury stock method.
A detail of the Company’s earnings per share is as follows (
in thousands, except for share and per share amounts
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
Net income (loss) attributable to Nobilis Health Corp.
|
$
|
1,585
|
|
|
$
|
4,806
|
|
|
$
|
(813
|
)
|
|
$
|
(159
|
)
|
Weighted average common shares outstanding
|
77,805,014
|
|
|
76,754,950
|
|
|
77,805,014
|
|
|
75,780,695
|
|
Net income (loss) per common share
|
$
|
0.02
|
|
|
$
|
0.06
|
|
|
$
|
(0.01
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
Net income (loss) attributable to Nobilis Health Corp.
|
$
|
1,585
|
|
|
$
|
4,806
|
|
|
$
|
(813
|
)
|
|
$
|
(159
|
)
|
Weighted average common shares outstanding
|
77,805,014
|
|
|
76,754,950
|
|
|
77,805,014
|
|
|
75,780,695
|
|
Dilutive effect of stock options, warrants, RSUs
|
310,228
|
|
|
861,396
|
|
|
—
|
|
|
—
|
|
Weighted average common shares outstanding diluted
|
78,115,242
|
|
|
77,616,886
|
|
|
77,805,014
|
|
|
75,780,695
|
|
Net income (loss) per fully diluted share
|
$
|
0.02
|
|
|
$
|
0.06
|
|
|
$
|
(0.01
|
)
|
|
$
|
—
|
|
NOTE 14 – NONCONTROLLING INTERESTS
Noncontrolling interests at
June 30, 2017
and
December 31, 2016
represent an
8.1%
interest in The Palladium for Surgery - Houston,
75%
interest in the Kirby Surgical Center,
65%
interest in Microsurgery Institute,
2.3%
interest in Houston Microsurgery Institute,
50%
in Northstar Healthcare Dallas Management,
65%
in NHC ASC – Dallas,
49%
in First Nobilis Hospital,
40%
in First Nobilis Hospital Management,
45%
in Hermann Drive Surgical Hospital,
25%
in Scottsdale Liberty Hospital and
10%
in Series 1 Best Choice Anesthesia & Pain.
Agreements with the third-party equity owners in NHC - ASC Dallas and First Nobilis give these owners limited rights to require the Company to repurchase their equity interests upon the occurrence of certain events, none of which were probable of occurring as of
June 30, 2017
and
December 31, 2016
. The contingently redeemable noncontrolling interests associated with these entities are classified in the Company’s Consolidated Balance Sheets as “temporary” or mezzanine equity. Changes in contingently redeemable noncontrolling interests are as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NHC - ASC Dallas
|
|
First Nobilis
|
|
Total
|
|
|
|
|
|
|
Balance at January 1, 2016
|
$
|
3,393
|
|
|
$
|
8,832
|
|
|
$
|
12,225
|
|
Distributions
|
(2,928
|
)
|
|
(599
|
)
|
|
(3,527
|
)
|
Net (loss) income attributable to noncontrolling interests
|
(68
|
)
|
|
5,674
|
|
|
5,606
|
|
Total contingently redeemable noncontrolling interests at December 31, 2016
|
$
|
397
|
|
|
$
|
13,907
|
|
|
$
|
14,304
|
|
|
|
|
|
|
|
Balance at January 1, 2017
|
$
|
397
|
|
|
$
|
13,907
|
|
|
$
|
14,304
|
|
Distributions
|
—
|
|
|
—
|
|
|
—
|
|
Net income attributable to noncontrolling interests
|
187
|
|
|
683
|
|
|
870
|
|
Total contingently redeemable noncontrolling interests at June 30, 2017
|
$
|
584
|
|
|
$
|
14,590
|
|
|
$
|
15,174
|
|
Certain of our consolidated subsidiaries that are less than wholly owned meet the definition of a Variable Interest Entity (VIE), and we hold voting interests in all such entities. We consolidate the activities of VIE’s for which we are the primary beneficiary. In order to determine whether we own a variable interest in a VIE, we perform qualitative analysis of the entity’s design, organizational structure, primary decision makers and relevant agreements. Such variable interests include our voting interests, and may also include other interests and rights, including those gained through management contracts.
Since our core business is the management and operation of health care facilities, our subsidiaries that are determined to be VIE’s represent entities that own, manage and operate such facilities. Voting interests in such entities are typically owned by us, by physicians practicing at these facilities (or entities controlled by them) and other parties associated with the operation of the facilities. In forming such entities, we typically seek to retain operational control and, as a result, in some cases, voting rights we hold are not proportionate to the economic share of our ownership in these entities, which causes them to meet the VIE definition. We consolidate such VIE’s if we determine that we are the primary beneficiary because (i) we have the power to direct the activities that most significantly impact the economic performance of the VIE via our rights and obligations associated with the management and operation of the VIE’s health care facilities, and (ii) as a result of our obligation to absorb losses and the right to receive residual returns that could potentially be significant to the VIE, which we have through our equity interests.
The following table summarizes the carrying amount of the assets and liabilities of our material VIE’s included in the Company’s Consolidated Balance Sheets (after elimination of intercompany transactions and balances) (
in thousands
):
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
|
|
Total cash and short term investments
|
$
|
5,920
|
|
|
$
|
3,445
|
|
Total accounts receivable
|
25,906
|
|
|
18,845
|
|
Total other current assets
|
1,769
|
|
|
1,664
|
|
Total property and equipment
|
16,931
|
|
|
16,804
|
|
Total other assets
|
190
|
|
|
190
|
|
Total assets
|
$
|
50,716
|
|
|
$
|
40,948
|
|
|
|
|
|
Total accounts payable
|
$
|
2,474
|
|
|
$
|
4,119
|
|
Total other liabilities
|
4,605
|
|
|
5,263
|
|
Total accrued liabilities
|
15,369
|
|
|
11,538
|
|
Long term - capital lease
|
12,034
|
|
|
11,169
|
|
Noncontrolling interest
|
(9,066
|
)
|
|
(8,892
|
)
|
Total liabilities
|
$
|
25,416
|
|
|
$
|
23,197
|
|
NOTE 15 – INCOME TAXES
The Company is a corporation subject to federal income tax at a statutory rate of
35%
of pretax earnings. The Company estimates an annual effective income tax rate of
39.6%
for U.S. and none for Canada based on the projected results for the year and applies this rate to income before taxes to calculate income tax expense.
The net tax expense for the six months ended June 30, 2017 was
$0.7 million
, resulting in an effective tax rate of approximately
39.9%
, compared to an income tax benefit of
$2.2 million
with an effective tax rate of approximately
34.6%
for the prior corresponding period. The net tax expense amount includes
$0.6 million
and
$0.5 million
tax expense for states in which the Company operates for the six months ended June 30, 2017 and 2016, respectively. The Company did not recognize any foreign tax expense or benefit for the six months ended June 30, 2017 and 2016, as the Company had a full valuation allowance against deferred tax assets.
The following items caused the second quarter effective income tax rate to be different from the statutory rate:
|
|
•
|
Canada is excluded from the worldwide annual effective tax rate calculation because Canada has losses but does not expect to realize them, which increases the effective tax rate by approximately
0.3%
for the six months ended June 30, 2017.
|
|
|
•
|
All of the Partnership’s earnings are included in the Company’s net income; however, the Company is not required to record income tax expense or benefit with respect to the portion of the Partnership’s earnings allocated to its noncontrolling public limited partners, which increases the first quarter effective tax rate by approximately
1.0%
for the six months ended June 30, 2017.
|
The Company received notification from the Internal Revenue Service to examine the 2014 federal income tax return for First Nobilis, LLC that the Company owns
51%
.
Based on management’s analysis, the Company did not have any uncertain tax positions as of June 30, 2017.
NOTE 16 – BUSINESS SEGMENT INFORMATION
A summary of the business segment information for the three and six months ended
June 30, 2017
and
2016
is as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
Medical
|
Marketing
|
Corporate
|
Total
|
|
|
|
|
|
Revenues
|
$
|
77,122
|
|
$
|
2,840
|
|
$
|
—
|
|
$
|
79,962
|
|
Operating expenses
|
61,899
|
|
3,975
|
|
—
|
|
65,874
|
|
Corporate costs
|
—
|
|
—
|
|
6,703
|
|
6,703
|
|
Income (loss) from operations
|
15,223
|
|
(1,135
|
)
|
(6,703
|
)
|
7,385
|
|
Change in fair value of warrant and option liabilities
|
—
|
|
—
|
|
188
|
|
188
|
|
Interest expense (income)
|
258
|
|
(8
|
)
|
1,113
|
|
1,363
|
|
Other expense
|
$
|
305
|
|
$
|
—
|
|
25
|
|
330
|
|
Income (loss) before income taxes
|
$
|
14,660
|
|
$
|
(1,127
|
)
|
$
|
(8,029
|
)
|
$
|
5,504
|
|
|
|
|
|
|
Other data:
|
|
|
|
|
Depreciation and amortization expense
|
$
|
2,297
|
|
$
|
431
|
|
$
|
80
|
|
$
|
2,808
|
|
Income tax expense (benefit)
|
$
|
131
|
|
$
|
27
|
|
$
|
2,091
|
|
$
|
2,249
|
|
Capital expenditures
|
$
|
1,637
|
|
$
|
1,090
|
|
$
|
100
|
|
$
|
2,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
Medical
|
Marketing
|
Corporate
|
Total
|
|
|
|
|
|
Revenues
|
$
|
55,295
|
|
$
|
6,576
|
|
$
|
—
|
|
$
|
61,871
|
|
Operating expenses
|
50,084
|
|
4,139
|
|
—
|
|
54,223
|
|
Corporate costs
|
—
|
|
—
|
|
7,593
|
|
7,593
|
|
Income (loss) from operations
|
5,211
|
|
2,437
|
|
(7,593
|
)
|
55
|
|
Change in fair value of warrant and option liabilities
|
—
|
|
—
|
|
(1,657
|
)
|
(1,657
|
)
|
Interest expense
|
352
|
|
2
|
|
333
|
|
687
|
|
Other income
|
$
|
(310
|
)
|
$
|
(128
|
)
|
$
|
(721
|
)
|
$
|
(1,159
|
)
|
Income (loss) before income taxes
|
$
|
5,169
|
|
$
|
2,563
|
|
(5,548
|
)
|
2,184
|
|
|
|
|
|
|
Other data:
|
|
|
|
|
Depreciation and amortization expense
|
$
|
1,593
|
|
$
|
388
|
|
$
|
76
|
|
$
|
2,057
|
|
Income tax expense (benefit)
|
$
|
281
|
|
$
|
47
|
|
$
|
(659
|
)
|
$
|
(331
|
)
|
Capital expenditures
|
$
|
1,206
|
|
$
|
—
|
|
$
|
296
|
|
$
|
1,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
Medical
|
Marketing
|
Corporate
|
Total
|
|
|
|
|
|
Revenues
|
$
|
141,928
|
|
$
|
6,336
|
|
$
|
—
|
|
$
|
148,264
|
|
Operating expenses
|
122,357
|
|
7,608
|
|
—
|
|
129,965
|
|
Corporate costs
|
—
|
|
—
|
|
14,049
|
|
14,049
|
|
Income (loss) from operations
|
19,571
|
|
(1,272
|
)
|
(14,049
|
)
|
4,250
|
|
Change in fair value of warrant and option liabilities
|
—
|
|
—
|
|
(187
|
)
|
(187
|
)
|
Interest expense (income)
|
518
|
|
(8
|
)
|
2,108
|
|
2,618
|
|
Other (income) expense
|
(25
|
)
|
(8
|
)
|
105
|
|
72
|
|
Income (loss) before income taxes
|
$
|
19,078
|
|
$
|
(1,256
|
)
|
$
|
(16,075
|
)
|
$
|
1,747
|
|
|
|
|
|
|
Other data:
|
|
|
|
|
Depreciation and amortization expense
|
$
|
4,254
|
|
$
|
812
|
|
$
|
163
|
|
$
|
5,229
|
|
Income tax expense
|
$
|
444
|
|
$
|
55
|
|
$
|
199
|
|
$
|
698
|
|
Intangible assets, net
|
$
|
8,610
|
|
$
|
12,159
|
|
$
|
—
|
|
$
|
20,769
|
|
Goodwill
|
$
|
50,386
|
|
$
|
19,011
|
|
$
|
—
|
|
$
|
69,397
|
|
Capital expenditures
|
$
|
4,253
|
|
$
|
2,215
|
|
$
|
168
|
|
$
|
6,636
|
|
Total assets
|
$
|
219,977
|
|
$
|
45,785
|
|
$
|
44,327
|
|
$
|
310,089
|
|
Total liabilities
|
$
|
65,334
|
|
$
|
6,720
|
|
$
|
80,392
|
|
$
|
152,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
Medical
|
Marketing
|
Corporate
|
Total
|
|
|
|
|
|
Revenues
|
$
|
101,503
|
|
$
|
11,641
|
|
$
|
—
|
|
$
|
113,144
|
|
Operating expenses
|
97,600
|
|
8,758
|
|
—
|
|
106,358
|
|
Corporate costs
|
—
|
|
—
|
|
16,425
|
|
16,425
|
|
Income (loss) from operations
|
3,903
|
|
2,883
|
|
(16,425
|
)
|
(9,639
|
)
|
Change in fair value of warrant and option liabilities
|
—
|
|
—
|
|
(1,699
|
)
|
(1,699
|
)
|
Interest expense
|
745
|
|
3
|
|
623
|
|
1,371
|
|
Other income
|
(1,483
|
)
|
(248
|
)
|
(1,082
|
)
|
(2,813
|
)
|
Income (loss) before income taxes
|
$
|
4,641
|
|
$
|
3,128
|
|
$
|
(14,267
|
)
|
$
|
(6,498
|
)
|
|
|
|
|
|
Other data:
|
|
|
|
|
Depreciation and amortization expense
|
$
|
3,462
|
|
$
|
1,048
|
|
$
|
130
|
|
$
|
4,640
|
|
Income tax expense (benefit)
|
$
|
457
|
|
$
|
71
|
|
$
|
(2,777
|
)
|
$
|
(2,249
|
)
|
Intangible assets, net
|
$
|
5,292
|
|
$
|
13,309
|
|
$
|
—
|
|
$
|
18,601
|
|
Goodwill
|
$
|
25,822
|
|
$
|
19,011
|
|
$
|
—
|
|
$
|
44,833
|
|
Capital expenditures
|
$
|
2,731
|
|
$
|
—
|
|
$
|
296
|
|
$
|
3,027
|
|
Total assets
|
$
|
146,251
|
|
$
|
42,838
|
|
$
|
43,851
|
|
$
|
232,940
|
|
Total liabilities
|
$
|
56,750
|
|
$
|
5,103
|
|
$
|
29,185
|
|
$
|
91,038
|
|
NOTE 17 – RELATED PARTY TRANSACTIONS
In March 2016, the Company acquired an interest in Athelite, a holding company which owns an interest in Dallas Metro, a company formed to provide management services to an HOPD. The Athelite investment is accounted for as an equity method investment (refer to
Note 4 - Investments in associates
). At
June 30, 2017
, the Company had
$3.8 million
in accounts receivable from the HOPD.
As a result of the AZ Vein acquisition in October 2016, an executive of the Company is owed
$2.3 million
,
$1.7 million
and
$1.1 million
related to a convertible promissory note, pre-acquistion and working capital adjustment and a cash holdback, respectively, as of
June 30, 2017
. In addition, the Company entered into agreements to lease facility space with the same executive. Facility lease cost were
$0.5 million
in for the
six
months ended 2017.
Physician Related Party Transactions
Nobilis maintains certain medical directorship, consulting and marketing agreements with various physicians who are also equity owners in Nobilis entities. Material related party arrangements of this nature are described below:
|
|
•
|
In September 2013, the Company entered into a book deal with a physician equity owner. In March 2015, the Company entered into a marketing agreement with that physician equity owner and a marketing services company owned by the physician equity owner’s father. The Company incurred expenses of
nil
and
$1.1 million
as a result of the book deal during the
six
months ended
June 30, 2017
and
2016
, respectively. The Company incurred expenses of
nil
and
$0.3 million
related to the marketing services entity during the
six
months ended
June 30, 2017
and 2016, respectively. The Company incurred expenses of
nil
and
$0.6 million
related to the Consulting services entity during the
six
months ended
June 30, 2017
and 2016, respectively.
|
|
|
•
|
In July 2014, the Company entered into a marketing services agreement with a physician equity owner and an entity owned by that physician equity owner’s brother. The Company incurred expenses of
$0.4 million
and
$0.6 million
to the entity during the
six
months ended
June 30, 2017
and
2016
, respectively.
|
|
|
•
|
In September 2014, the minority interest holder of a fully consolidated entity, who is also a partial owner of two other hospitals, entered into an ongoing business relationship with the Company. At
June 30, 2017
, the Company has a net amount due from these related parties of
$3.1 million
. In addition, the Company leases certain medical equipment and facility space from these related parties. Equipment lease costs of
$1.1 million
, and
$1.1 million
were incurred during the
six
months ended
June 30, 2017
and
2016
, respectively. Facility lease costs of
$0.9 million
and
$0.9 million
were incurred during the
six
months ended
June 30, 2017
and
2016
, respectively.
|
|
|
•
|
In September 2014, the Company entered into a services agreement with a physician equity owner's wife who has financial interests in a related entity. The Company incurred expenses pursuant to service agreements of
nil
and
$0.3 million
to the entity during the
six
months ended
June 30, 2017
and
2016
, respectively.
|
|
|
•
|
In October 2014, the Company entered into a management agreement with an entity controlled by a physician equity owner. In June 2015, the Company expanded the relationship with this physician equity owner to include consulting, marketing, medical supplies, medical directorship and on-call agreements (collectively "service agreements"). The Company incurred expenses of
$1.5 million
and
$1.1 million
in fees owed pursuant to the management agreement to the entity during the
six
months ended
June 30, 2017
and
2016
, respectively. The Company has incurred expenses of
$1.1 million
and
$1.6 million
in fees owed pursuant to the service agreements to the entity during the
six
months ended
June 30, 2017
and
2016
, respectively.
|
|
|
•
|
In April 2017, the minority interest holder of a fully consolidated entity, who is also a member of the Company's board of directors, entered into a ongoing business relationship with the Company. The Company incurred expenses of
$0.2 million
during the six months ended
June 30, 2017
. At
June 30, 2017
, the Company has a net amount due to this related party of
$0.1 million
.
|
NOTE 18 – COMMITMENTS AND CONTINGENCIES
Litigation
In the normal course of our business, we are subject to legal proceedings brought by or against us and our subsidiaries. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially impact the financial position, results of operations or liquidity of the Company.
A statement of claim (complaint), Vince Capelli v. Nobilis Health Corp. et. al, was filed on January 8, 2016 in the Ontario Superior Court of Justice under court file number CV-16-544173 naming Nobilis Health Corp., certain current and former officers and the Company’s former auditors as defendants. The statement of claim seeks to advance claims on behalf of the plaintiff and on behalf of a class comprised of certain of our shareholders related to, among other things, alleged certain violations of the Ontario Securities Act and seeks damages in the amount of
$100 million
plus interest. The defendants intend to vigorously defend against these claims. At this time, the Company believes it is too early to provide a realistic estimate of the Company’s exposure.