NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(
in thousands, except share and per share amounts and as otherwise noted
)
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 specialty surgical hospitals, ambulatory surgery centers (ASCs) and multi-specialty 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 (VIEs), with respect to which the Company is determined to be the primary beneficiary. In the opinion of management, all material adjustments, consisting of normal recurring adjustments, necessary for fair presentation have been included. These consolidated financial statements include all accounts of the Company. All significant intercompany transactions and accounts have been eliminated upon consolidation.
These consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC) for financial information. Accordingly, they 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.
Noncontrolling Interests
- Noncontrolling interests represent third-party equity ownership in certain of our consolidated subsidiaries and are presented as a component of equity, unless the noncontrolling interest holders have certain redemption rights, in which case the carrying amount of such interests is classified as contingently redeemable (between liabilities and equity) or, for mandatorily redeemable noncontrolling interests, in liabilities. See
Note 19 - Noncontrolling interests
for further discussion of noncontrolling interests.
Variable Interest Entities
- VIEs are entities that, by design, either (i) lack sufficient equity to permit the entity to finance its activities independently, or (ii) have equity holders that, as a group, do not have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the entity’s losses, or the right to receive the entity’s residual returns. We consolidate a VIE when we are the primary beneficiary, which is the party that has both (i) the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) through its interests in the VIE, the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. See
Note 19 - Noncontrolling interests
for further discussion of noncontrolling interests.
Use of Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Estimates most consequential to our consolidated financial statements are in the area of revenue recognition. Because a significant portion of our net patient service revenue is associated with services provided on out-of-network basis, with no contractually agreed-upon reimbursement rates from third-party payors, revenues expected to be realized are estimated based on our historical experience with allowable charges by a given payor for the specific service performed. These estimates are subject to ongoing monitoring and adjustment based on actual experience with final settlements and collections.
Other significant estimates include estimates of fair values which management formulates in connection with valuation of assets and liabilities acquired in business combinations and impairment tests of goodwill, intangible assets, property, and certain investments and financial instruments; estimates of useful lives of our property and intangible assets; as well as realizable amounts of accounts receivable and deferred tax assets.
Revenue Recognition
Patient and Net Professional Fees
- Patient and net professional fees are reported at the estimated net realizable amounts from third-party payors, patients and others for services rendered at the health facilities we operate and consist primarily of fees for the use of our facilities. These revenues also include management fees from locations we manage because the revenues are derived from third-party payers, patients, and other. Such revenues are recognized when the ultimate collection is estimable and reasonably assured, which typically is when the related medical procedures are performed. Net patient revenues are stated at the ultimate amounts expected to be collected (net of any patient discounts and contractual and other adjustments of third-party payors). Our revenues exclude any amounts billed for physicians’ services, which are billed separately by the physicians to the patient or third-party payor.
The amounts actually collected by the Company from third-party payors, including private insurers, vary among payors, even for identical medical procedures. As such, in estimating net patient service revenues, management evaluates payor mix, (among private health insurance plans, workers’ compensation insurers, government payor plans and patients), historical settlement and payment data for a given payor and type of medical procedure, and current economic conditions and revises its revenue estimates as necessary in subsequent periods. For services subject to contracted rates with third-party payors, revenues are recognized net of applicable contractual adjustments.
The Company also manages healthcare facilities that recognize patient and net professional fees for the services they provide. The Company earns management fees based on a percentage of collections of the facilities, less certain expenses incurred by the facilities. The Company acts as an agent in these scenarios and recognizes revenues on a net basis. The net revenues are earned in the same manner and timing as net patient service revenues discussed above.
Contracted Marketing Revenues
- Contracted marketing revenue is comprised of payments from specialty surgical hospitals, ASC’s and other ancillary service providers through marketing services agreements. The services include licensing, marketing, patient intake, and upfront education services. Revenue is recognized on a gross basis upon the performance of the marketing service and corresponding medical procedure when ultimate collection is measurable and reasonably assured.
Factoring Revenues
- Factoring revenues represent revenues generated from certain accounts receivables purchased from third parties (typically, practicing physicians) in the ordinary course of business. Purchase price is determined either by a flat fee per medical procedure (reflecting a discount to the face amount of the receivable), as dictated per the agreement, or as a percentage of final collections. At the time of purchase, Nobilis acquires the right to collect the full amount of the receivable and assumes all associated financial risk. Costs related to billings and collections are borne by the Company, without any recourse to the third party seller and reflected as a component of operating expenses. Factoring revenues represent the excess of collections of purchased receivables over their acquisition cost and are recognized over the period from purchase to collection.
Advertising and Marketing Costs
Advertising costs are expensed as they are incurred. Advertising expense for the years ended
December 31, 2017
,
2016
and 2015 was
$37.4 million
,
$43.8 million
, and
$35.0 million
, respectively. The Company utilizes many media outlets for marketing to patients which include internet, TV, radio, print, seminar and billboard advertising. Advertising and marketing expense is recorded within both the operating expenses: general and administrative and corporate costs: general and administrative line items within the consolidated statements of income.
Cash
Cash is defined as cash on-hand and demand deposits. The Company maintains its cash in various financial institutions, which at times may exceed federally insured amounts. At
December 31, 2017
and
2016
, our cash deposits exceeded such federally insured limits. Management believes that this risk is not significant. We have not experienced any losses in such accounts, and we believe we are not exposed to any significant credit risks on cash.
Trade Accounts Receivable, net
Trade accounts receivable, net consists of net patient service revenues and factoring revenues recorded at their net realizable amounts, while contracted marketing revenues are recognized at the fees due from the facilities for marketing services performed pursuant to governing contractual arrangements.
On a periodic basis, we evaluate receivables based on the age of the receivable, history of past collections and current credit and economic conditions and adjust the carrying amount accordingly. An account is written off when it is determined that all collection efforts have been exhausted. The Company does not accrue finance or interest charges on accounts receivable. An allowance for uncollectible patient receivables balances, including receivables from non-partner surgeons, is maintained at a level which the Company believes is adequate to absorb probable credit losses.
Medical Supplies
Medical supplies consist of various surgical supplies and medications and are carried at the lower of cost or market using the first-in, first-out method. The market value of inventories is determined based on the estimated selling price in the ordinary course of business less the estimated costs of sale, and a reasonable profit margin based on the effort required to sell the inventories. The Company had
no
write-downs in the carrying amounts of medical supplies inventories for the years ended
December 31, 2017
,
2016
, or 2015.
Property and Equipment, net
Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Property under capital leases and the related obligation for future lease payments are initially recorded at an amount equal to the lesser of fair value of the property and equipment or the present value of the future lease payments. Leasehold improvements are amortized over the lesser of the estimated useful life of the asset or the term of the lease. Maintenance and repairs are charged to expense when incurred.
We evaluate our long-lived assets for possible impairment annually or whenever events or changes in circumstances indicate that the carrying amount of the asset, or related group of assets, may not be recoverable from estimated future undiscounted cash flows expected to arise from their use and ultimate disposition. If the estimated future undiscounted cash flows are lower than the carrying amount of the assets, we determine the amount of impairment, if any, as the excess of the carrying amount of the long-lived asset over its estimated fair value. The fair value of the assets is estimated based on appraisals, established market values of comparable assets or internal estimates of discounted future net cash flows expected to result from the use and ultimate disposition of the asset. The estimates of these future cash flows are based on assumptions and projections we believe to be reasonable and supportable. They require our subjective judgments and take into account assumptions about revenue and expense growth rates. These assumptions may vary by type of facility and presume stable, improving or, in some cases, declining results at our medical facilities, depending on their specific operating circumstances.
Goodwill and Intangibles
Goodwill represents the excess of the cost of an acquired business over the acquisition-date fair value of the net identifiable assets acquired. Goodwill is reviewed for impairment on an annual basis or more frequently if events or circumstances indicate potential impairment. Such review is performed at the reporting unit level, whereby goodwill balances and identifiable assets and liabilities are assigned to a reporting unit to which they relate. For this purpose, the Company currently has
two
reporting units which are aligned with its business segments.
The Company’s goodwill evaluation for each reporting unit is based on both qualitative and quantitative assessments regarding the fair value of goodwill relative to its carrying amount. The Company assesses qualitative factors to determine if the fair value of its reporting units is more likely than not to exceed its carrying amount, including goodwill. In the event the Company determines that it is more likely than not that a reporting unit’s fair value is lower than its carrying amount, quantitative testing is performed comparing carrying amount of the reporting unit to estimated fair value. Fair value estimates are based on appraisals, established market prices for comparable assets or internal estimates of discounted future net cash flows. If the fair value of the reporting unit exceeds the carrying amount, goodwill is not impaired. If the carrying amount exceeds the fair value, an impairment charge is recognized for the excess of the carrying amount of goodwill over its implied fair value.
Indefinite-lived intangible assets consisting of trade names, trademarks, and Medicare and hospital licenses, are not amortizable; however, are evaluated for impairment on an annual basis. Intangible assets subject to amortization, which consist of non-compete agreements, internally developed software, hospital management agreements, trade secret methodology, trade names, and customer relationships, are carried at cost less accumulated amortization, which is calculated on a straight-line basis over the asset’s estimated useful life. The estimated useful lives of our intangibles are as follows:
|
|
|
|
Intangible Asset
|
Estimated Useful Lives (in years)
|
|
|
Non-compete agreements
|
2-10
|
Internally developed software
|
5
|
Hospital management agreements
|
10-12
|
Trade secret methodology
|
10
|
Physician relationships
|
20
|
Trade names
|
8
|
Customer relations
|
12
|
Investments in Unconsolidated Affiliates
Investments in unconsolidated affiliates include the Company’s investments in non-marketable equity securities that do not represent a controlling financial interest in the investee. Such investment balances are included in the Company’s consolidated balance sheets in other long-term assets, and include investments accounted for using the equity and the cost method of accounting. Where the Company exercises significant influence over the investee, the Company accounts for its investment under the equity method of accounting. In other cases, the investments in unconsolidated affiliates are accounted for using the cost method of accounting. Whether or not the Company exercises significant influence with respect to an investee depends on an evaluation of several factors including, among others, representation on the investee’s board of directors, ability to participate in setting operating, financial and other policies of the investee, and ownership level.
Under the equity method of accounting, the carrying amount of the investment is adjusted each reporting period for the Company’s pro rata share of investee’s earnings (which also are reflected in other expense (income) in the Company’s consolidated statements of income) and any distributions received. Cost-method investments are stated at cost, adjusted only to reflect any other-than-temporary impairment in value or return of the capital invested through a distribution or disposition. Earnings on cost-method investments, if any, are recognized in other expense (income) when dividends or other distributions of earnings are declared.
Investments in unconsolidated affiliates are reviewed for impairment at least annually and any impairment loss that is other than temporary is recognized in the consolidated statements of earnings, with no future recovery in value recognized.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
A deferred tax asset will be reduced by a valuation allowance when, based on the Company’s estimates, it is more likely than not that a portion of those assets will not be realized in a future period. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character and in the related jurisdiction in the future. In evaluating our ability to recover our deferred tax assets, we consider the available positive and negative evidence, including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income.
The Company accounts for uncertain income tax positions in accordance with the accounting guidance in Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) Topic 740,
Income Taxes
. Using that guidance, tax positions are recognized by the Company in the financial statements when it is more-likely-than-not the position will be sustained upon examination by the tax authorities. The Company’s policy is to recognize interest and penalties accrued on any uncertain income tax benefits as a component of income tax expense.
Fair Value
Certain financial instruments are reported at fair value on our consolidated balance sheets. Under fair value measurement accounting guidance, fair value is defined as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants, (i.e., an exit price). To estimate an exit price, a three-level hierarchy is used. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or a liability, into three levels. Level 1 inputs are unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority. Level 2 inputs are inputs other than quoted prices within Level 1 that are observable for the asset or
liability, either directly or indirectly (such as quoted prices for similar assets or liabilities). Level 3 inputs are unobservable inputs for the asset or liability and have the lowest priority (such as cash-flow assumptions formulated by management).
The valuation techniques that may be used to measure fair value include a market approach, an income approach and a cost approach. A market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. An income approach uses valuation techniques to convert future cash flow amounts to a single present amount based on current market expectations, including present value techniques, option-pricing models and the excess earnings method. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).
Leases
Certain leases to which the Company is party as a lessee are classified as capital leases whenever the terms of the lease transfer to the Company substantially all of the risks and rewards of ownership. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated statements of income on a straight-line basis over the period of the lease as rent expense.
Foreign Currency
The Company has no significant business operations outside the United States and, therefore, the functional currency and the local currency for its business operations is the U.S. Dollar (“USD”). The accompanying consolidated statements are also presented in USD, the Company’s reporting currency.
From time to time monetary assets and liabilities may be denominated in foreign currency, and, if so, will be translated at the exchange rate in effect as of the balance sheet date, with resulting gains or losses included within the consolidated statements of income. Revenues and expenses denominated in foreign currencies are translated into USD at the average foreign currency exchange rate for the period.
Stock-Based Compensation
The Company recognizes all stock-based compensation to employees, including grants of employee stock options, in the consolidated financial statements based on their grant-date fair values. The Company values its stock options awarded using the Black-Scholes option pricing model. Restricted stock awards are valued at the grant-date closing market price. Stock-based compensation costs are recognized over the vesting period, which is the period during which the employee is required to provide service in exchange for the award.
In the past, the Company has issued stock-based awards to non-employees. The fair value of these option awards is estimated when the award recipient completes the contracted professional services. The Company recognizes expense for the estimated total value of the awards during the period from their issuance until performance completion, at which time the estimated expense is adjusted to the final value of the award as measured at performance completion. Because our non-employee stock options were issued with exercise prices denominated in Canadian Dollars, upon performance completion, their fair values are reclassified from equity to liabilities and remeasured to fair value each reporting period, with remeasurement gains and losses recognized in other expense (income) in our consolidated statements of income.
Net Income per Common Share
We calculate net income per common share by dividing net income available for common shareholders by the weighted average number of common shares outstanding during the period. Fully diluted income per share is computed using the weighted average number of common and potential common shares outstanding during the period. Potential common shares include those that may be issued upon redemption of units granted under the Company’s restricted stock unit and Share Option Plans or shares issued upon conversion of convertible debt.
Segment Reporting
The Company reports segment information based on how the chief operating decision maker, along with other members of management, organize and utilize financial and operational data in determining how to allocate resources and assess performance.
The Company’s business lines are classified into
two
reportable business segments outside of corporate which include a Medical Segment and a Marketing Segment. The Medical Segment provides the operation or management of specialty surgical hospitals, outpatient facilities and other related health care services. The Marketing Segment provides direct-to-consumer marketing efforts which educate patients on their healthcare options. Factoring activities are included in the Marketing Segment, as such activities only pertain to patient services that result from the Company’s Marketing Segment efforts.
We evaluate performance based on income from operations of the respective business segments prior to the allocation of corporate office expenses. Transactions between segments are eliminated in consolidation. Our corporate office provides general and administrative and support services to our
two
revenue-generating segments. Management allocates costs between segments for selling, general and administrative expenses and depreciation expense.
Recently Issued Accounting Pronouncements
In January 2017, the FASB issued ASU 2017-03,
Accounting Changes and Error Corrections
(Topic 250)
and Investments – Equity Method and Joint Ventures
(Topic 323):
Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings
. The amendment provides guidance to the Company in relation to the disclosure of the impact that ASU 2014-09, ASU 2016-02 and ASU 2016-13 will have on the Company’s financial statements when adopted. The Company does not expect that the adoption of this update has or will have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01,
Business Combination
(Topic 805):
Clarifying the Definition of a Business
. This amendment clarifies the definition of a business to assist entities when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or business. For public companies, this ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted for the transactions that occur before the issuance date or effective date of the amendment, only when the transaction has not been reported in financial statements that have been issued or made available for issuance. The Company does not expect that the adoption of this update will have a material impact on our consolidated financial statements.
In August 2016, the FASB issued 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. For public entities, ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In March 2016,the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
. Under the new guidance in ASU 2016-09, companies can continue to estimate forfeitures or they can elect to account for forfeitures as they occur by reversing compensation cost when the award is forfeited. If a company elects to account for forfeitures as they occur, they will still be required to estimate forfeitures when issuing replacement awards in a business combination or when awards are modified.
The Company elected to continue to estimate forfeitures.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842) ("ASU 2016-02") which supersedes FASB ASC Topic 840,
Leases
(Topic 840) and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The Company is currently evaluating the method of adoption and the impact of adopting ASU 2016-02 on its results of operations, cash flows and financial position.
In January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments-Overall
(Topic 825):
Recognition and Measurement of Financial Assets and Financial Liabilities
. This update changes how entities account for and measure the fair value of certain equity investments and updates the presentation and disclosure of certain financial assets and liabilities. This new ASU is effective for annual and interim periods beginning on or after December 15, 2017, and for interim periods within those fiscal years, with early adoption permitted. The Company does not expect that the adoption of this update will have a material impact on its consolidated financial statements.
Recently Adopted Accounting Standards
In March 2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation
(Topic 718):
Improvements to Employee Share-Based Payment Accounting
("ASU 2016-09"). ASU 2016-09 impacts several aspects of the accounting for share-based payment transactions, including classification of certain items on the consolidated statements of cash flows and accounting for income taxes. Specifically, the ASU requires that excess tax benefits and tax deficiencies (the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes) be recognized as income tax expense or benefit in the consolidated statements of income, introducing a new element of volatility to the provision for income taxes. ASU 2016-09 is effective on January 1, 2017, with early adoption permitted. The Company adopted this ASU in the first quarter of 2017. This adoption did not have an impact on the Company's financial statements.
In October 2016, the FASB issued ASU No. 2016-17,
Interests Held through Related Parties That Are under Common Control
. This standard modifies existing guidance with respect to how a decision maker that holds an indirect interest in a VIE through a common control party determines whether it is the primary beneficiary of the VIE as part of the analysis of whether the VIE would need to be consolidated. Under the ASU, a decision maker would need to consider only its proportionate indirect interest in the VIE held through a common control party. Previous guidance had required the decision maker to treat the common control party’s interest in the VIE as if the decision maker held the interest itself. As a result of the ASU, in certain cases, previous consolidation conclusions may change. The standard is effective January 1, 2017 with retrospective application to January 1, 2016. The Company adopted this ASU in the first quarter of 2017. This adoption did not have an impact on the Company's financial statements.
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. This adoption did not have an impact on the Company's financial statements.
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. This adoption did not have an impact on the Company's financial statements.
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 Contracts 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,
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, noncash 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.
In September 2017, the FASB issued ASU 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606),
Leases
(Topic 840), and
Leases
(Topic 842):
Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments
. The amendment delays the mandatory adoption of Topic 606 and Topic 842 for certain entities, revises the guidance related to performance-based incentive fees in Topic 605 and revises the guidance related to leases in Topic 840 and Topic 842. The revisions to the lease guidance eliminate language specific to certain sale-leaseback arrangements, guarantees of lease residual assets and loans made by lessees to owner-lessors. Also included is an amendment to Topic 842 to retain the guidance in Topic 840 covering the impact of changes in tax rates on investments in leveraged leases. This guidance, which is effective immediately, generally relates to the adoption of Topic 606 and Topic 842. The Company does not expect the amendments will impact our consolidated financial statements.
In November 2017, the FASB issued ASU 2017-14,
Income Statement – Reporting Comprehensive Income
(Topic 220),
Revenue Recognition
(Topic 605), and
Revenue from Contracts with Customers
(Topic 606):
Amendments to SEC Paragraphs Pursuant to the Staff Accounting Bulletin (“SAB”) No. 116 and SEC Release No. 33-10403
. This ASU amended, superseded and added certain SEC paragraphs in Topic 220, Topic 605 and Topic 606 to reflect the August 2017 issuance of SEC Staff Accounting Bulletin (SAB) 116 and SEC Release No. 33-10403. The SEC staff issued SAB 116 to align its revenue guidance with Accounting Standards Codification (ASC) 606. For public business entities, this update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted.
The Company has completed our evaluation of the new revenue standard and has adopted and elected the modified retrospective method of ASC 606 in the first quarter of 2018. The adoption of this standard will require the Company to expand its current revenue disclosures, however, will not have a material impact on financial results.
Disclosure of qualitative and quantitative measures will be disclosed in our footnotes inside our first quarterly filing after adoption. These disclosures will explain in depth our different revenue sources and certain information about them including any impact on our current processes or controls. The disclosure rules require us to disaggregate revenues to provide a clearer view into how the Company earns revenues, as well as provide information regarding the nature, amount, timing, and uncertainty and cash flows arising from contracts with customers. This disclosure will be continuously monitored for changes. The Company is currently preparing drafts of the new revenue disclosures for our revenue recognition steering committee that will be provided in the first quarter of 2018.
NOTE 3 - BUSINESS 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:
Elite Management Companies
On November 15, 2017, pursuant to
four
separate Membership Interest Purchase Agreements (the “Purchase Agreements”), Northstar Healthcare Surgery Center - Houston, LLC ("NHSC") and Nobilis Health Corp. (the "Company"), (NHSC and the Company are each a "Buyer" and collectively "Buyers") and Elite Surgical Affiliates (ESA) and other membership interests, (Elite and other membership interests are each a "Seller" and collectively "Sellers") finalized the Purchase Agreements dated as of November 15, 2017 ("Elite Transaction"). The Company purchased ownership interests in Elite Sinus Spine and Ortho LLC, Elite Center for Minimally Invasive Surgery, LLC, Houston Metro Ortho and Spine Surgery Center LLC and Elite Hospital Management LLC (collectively the "Management Companies", “Elite” or "Elite Management Companies").
The Company purchased Elite for approximately
$64.7 million
, comprised of
$53.6 million
in cash,
$4.4 million
as contractual obligation to purchase additional equity interests,
$3.5 million
in the form of a convertible promissory note,
$2.5 million
in form of escrow and
$0.7 million
in shares of common stock and stock options in order to acquire
53.8%
of the Sellers’ ownership interests in Management Companies responsible for
three
ambulatory surgery centers and
one
surgical hospital in the greater Houston area. Under U.S. GAAP our equity position effectively increased
3.7%
from
50.1%
to
53.8%
due to an obligation to
purchase ESA's 15.1 remaining equity units within the first year after the acquisition date for a fixed price of
$4.4 million
. As a result, noncontrolling interest is
46.2%
. The noncontrolling interest was measured using Finnerty's (2012) Average-Strike Put Option Model (the "Finnerty Model") at its acquisition-date fair value and incorporates the discount for lack of marketability.
The Finnerty Model assumes that the put option is struck at the average price of the stock over the period from valuation date to expiration date.
The
$2.5 million
in escrow was held back and is subject to certain indemnification provisions. On the twelve-month anniversary of closing,
100%
of the amount held back, less any amounts paid as, or claimed as, indemnification, will be paid to the Sellers.
As a result of the acquisition, the Company has recognized
$46.1 million
of goodwill within our Medical Segment, of which,
$27.4 million
is expected to be deducted for tax purposes. The Company believes that the goodwill is primarily comprised of the business opportunities to be gained through the expanded case volume as well as the access to additional physicians.
Subsequent to the acquisition date of November 15, 2017, Elite had
$5.9 million
in net revenues and net income of
$2.7 million
which is included in the Company’s consolidated statement of income for the year ended December 31, 2017.
The costs related to the transaction were
$0.3 million
and were expensed during the year ended December 31, 2017. These costs are included in the corporate general and administrative expenses in the Company’s consolidated statement of income for the year ended December 31, 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, property and equipment, intangibles, goodwill, leases and working capital adjustment. The Company expects to finalize our analysis during 2018. For the Elite intangible assets, we used the multi-period excess earnings method to estimate the fair value of the hospital department management agreements, the with-and-without method to estimate the fair value of a noncompete agreement, and the relief-from-royalty method to estimate the fair value of the trade name. This are included within the intangible assets balance in the table below. To evaluate the contract value of the acquired accounts receivable, we compared historical trended accrued revenue and collections to determine the appropriate amount to record at time of acquisition.
The following table summarizes the preliminary fair values of the identifiable assets acquired and liabilities assumed at the date of acquisition (
in thousands
):
|
|
|
|
|
Management Companies Combined
|
November 15, 2017
|
|
|
Net assets acquired:
|
|
Cash
|
$
|
150
|
|
Trade accounts receivable
|
6,490
|
|
Prepaid expenses and other current assets
|
145
|
|
Property and equipment
|
11,225
|
|
Other long-term assets
|
1,057
|
|
Goodwill
|
46,069
|
|
Intangible assets
|
47,905
|
|
Total assets acquired
|
$
|
113,041
|
|
|
|
Net liabilities assumed:
|
|
Trade accounts payable
|
$
|
499
|
|
Accrued liabilities
|
674
|
|
Total liabilities assumed
|
$
|
1,173
|
|
|
|
Consideration:
|
|
Cash
|
$
|
53,620
|
|
Noncontrolling interests
|
47,124
|
|
Future obligation - payment for additional equity interests
|
4,389
|
|
Convertible promissory note
|
3,500
|
|
Escrow
|
2,500
|
|
Stock issued
|
500
|
|
Stock options issued
|
235
|
|
Total consideration
|
$
|
111,868
|
|
DeRosa Medical, P.C. ("DeRosa")
On September 13, 2017, the Company purchased DeRosa in exchange for
$0.9 million
in cash. DeRosa adds
three
additional primary care clinics to Nobilis' health network. As a result of the acquisition, the Company has recognized
$0.7 million
of goodwill within our Medical Segment, of which,
100%
is expected to be deductible for tax purposes. The Company believes that the goodwill is primarily comprised of the business opportunities to be gained through the expanded geographical coverage as well as the access to a new physician group.
Hamilton Vein Center (HVC)
The Company completed the acquisition of the operating assets of 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
$13.6 million
, comprised of
$8.3 million
in cash,
$5.0 million
in the form of a convertible promissory note and an additional
$0.3 million
purchase price increase related to a working capital adjustment. More information about the convertible promissory note is discussed in Note 12 - Debt.
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
$8.3 million
of goodwill within our Medical Segment, of which,
100%
is expected to be deducted for tax purposes. The Company believes that the goodwill is primarily comprised of the business opportunities to be gained through the expanded geographical coverage as well as the access to a new physician group.
HVC had net revenues and net loss for the year ended December 31, 2017 of
$11.7 million
and
$(2.0) million
, respectively.
The costs related to the transaction were nominal and were expensed during the year ended December 31, 2017. These costs are included in the corporate general and administrative expenses in the Company’s consolidated statement of income for the year ended December 31, 2017.
We finalized our purchase price allocation during the third 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
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized as of Acquisition Date
|
|
Measurement Period Adjustments
(1)
|
|
March 8, 2017
|
|
|
|
|
|
|
Assets acquired:
|
|
|
|
|
|
Cash
|
$
|
438
|
|
|
$
|
—
|
|
|
$
|
438
|
|
Trade accounts receivable
|
747
|
|
|
(150
|
)
|
|
597
|
|
Prepaid expenses and other current assets
|
42
|
|
|
—
|
|
|
42
|
|
Medical Supplies
|
295
|
|
|
—
|
|
|
295
|
|
Property and equipment
|
2,359
|
|
|
611
|
|
|
2,970
|
|
Intangible assets
|
—
|
|
|
1,900
|
|
|
1,900
|
|
Goodwill
|
10,828
|
|
|
(2,499
|
)
|
|
8,329
|
|
Total assets acquired
|
$
|
14,709
|
|
|
$
|
(138
|
)
|
|
$
|
14,571
|
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
|
Trade accounts payable
|
$
|
612
|
|
|
$
|
(203
|
)
|
|
$
|
409
|
|
Refunds payable
|
347
|
|
|
(347
|
)
|
|
—
|
|
Accrued liabilities
|
524
|
|
|
(83
|
)
|
|
441
|
|
Current portion of capital lease
|
69
|
|
|
—
|
|
|
69
|
|
Long-term portion of capital leases
|
39
|
|
|
—
|
|
|
39
|
|
Total liabilities assumed
|
$
|
1,591
|
|
|
$
|
(633
|
)
|
|
$
|
958
|
|
|
|
|
|
|
|
Consideration:
|
|
|
|
|
|
Cash
|
$
|
8,321
|
|
|
$
|
—
|
|
|
$
|
8,321
|
|
Convertible promissory note
|
5,000
|
|
|
—
|
|
|
5,000
|
|
Working capital adjustment
|
(203
|
)
|
|
495
|
|
|
292
|
|
Total consideration
|
$
|
13,118
|
|
|
$
|
495
|
|
|
$
|
13,613
|
|
(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:
Arizona Vein and Vascular
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., for a total purchase price of
$22.3 million
comprised of
$17.5 million
in cash,
$2.25 million
in Nobilis common shares,
$2.25 million
in the form of a convertible promissory note,
$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 and an additional
$0.2 million
purchase price increase related to a working capital adjustment. More information about the convertible promissory note is discussed in Note 12 - Debt.
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, of which,
100.0%
is expected to be deducted for tax purposes. The Company believes that the goodwill is primarily comprised of the business opportunities to be gained through the expanded geographical coverage as well as the access to a new physician group.
AZ Vein had net revenues and net (loss) for the year ended December 31, 2017, of
$4.4 million
and
$(9.2) 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 income for the year ended December 31, 2016.
The Company incurred expenses related to certain representations and warranties that were provided in the agreement and incurred damages. The Company estimated in 2017 that no amounts would be paid to Dr. Wall under the hold back or promissory note. The changes are not reflected in the opening balance sheet below and the
$3.5 million
is included in other income in our consolidated statements of income for the year ended December 31, 2017. In February 2018, subsequent to the reporting period, the Company entered into a settlement agreement in connection with contract disputes that arose during the year with the seller of the Company's acquisition of AZ Vein.
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
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized as of Acquisition Date
|
|
Measurement Period Adjustments
(1)
|
|
October 28, 2016
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
Consideration:
|
|
|
|
|
|
Cash
|
$
|
17,500
|
|
|
$
|
—
|
|
|
$
|
17,500
|
|
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
|
|
(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 - 2017
The following table presents the unaudited pro forma results of the Company as if the 2017 business combinations previously discussed had been made on January 1, 2016. The pro forma information is based on the Company’s consolidated statements of income for the years ended December 31, 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 2017 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 years ended December 31, 2017 and 2016 (
in thousands, except per share amounts
):
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
Revenue
|
|
$
|
336,586
|
|
|
$
|
346,158
|
|
Income from operations
|
|
$
|
39,420
|
|
|
$
|
34,263
|
|
Net income attributable to Nobilis Health Corp.
|
|
$
|
7,808
|
|
|
$
|
12,723
|
|
Net income per basic common share
|
|
$
|
0.10
|
|
|
$
|
0.17
|
|
Unaudited Supplemental Pro Forma Information - 2016
The following table presents the unaudited pro forma results of the Company as if the 2016 business combination previously discussed had been made on January 1, 2015. The pro forma information is based on the Company’s consolidated statements of income for the years ended December 31, 2016 and 2015. 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 2016 acquired business described above and was then adjusted: (i) to increase amortization expense resulting from the intangible assets acquired; (ii) to adjust earnings per share to reflect the common shares issued as part of the purchase consideration; (iii) to reduce interest expense from debt which was retained by the seller upon acquisition of the respective businesses; (iv) to adjust the carrying value of net property and equipment to its fair value and to increase depreciation expense for the incremental increase in the value of property and equipment; (v) to decrease expenses for management services which were provided by the preceding parent entity and to concurrently increase expenses for management services which are now provided by the Company; and (vi) to adjust noncontrolling interest to properly reflect the minority ownership percentages which were not purchased by the Company. The unaudited supplemental pro forma financial information does not include adjustments to reflect the impact of other cost savings or synergies that may result from these acquisition.
The following table shows our pro forma results for the year ended
December 31, 2016
and 2015 (
in thousands, except per share amounts
):
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2016
|
2015
|
|
|
|
|
Revenue
|
|
$
|
299,944
|
|
$
|
253,624
|
|
Income from operations
|
|
$
|
13,135
|
|
$
|
30,903
|
|
Net income attributable to Nobilis Health Corp.
|
|
$
|
8,052
|
|
$
|
52,868
|
|
Net income per basic common share
|
|
$
|
0.08
|
|
$
|
0.77
|
|
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. 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 December 31, 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 of these risks is presented throughout these consolidated financial statements.
Principal financial instruments
The principal financial instruments used by the Company, from which financial instrument risk arises, are as follows:
|
|
•
|
Accounts receivable and other receivables
|
|
|
•
|
Investments in associates
|
|
|
•
|
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, other liabilities as reflected in the consolidated financial statements approximate fair value due to the short term maturity of these items. The estimated fair value of our other long-term debt instruments approximate their carrying amounts as the interest rates approximate our current borrowing rate for similar debt instruments of comparable maturity, or have variable interest rates.
Financial instruments - risk management
The Company is exposed through its operations to the following financial risks:
|
|
•
|
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.
Market risk
Market risk is the risk that the fair value of future cash flows of the 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.
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 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.
Concentrations
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:
|
|
|
|
|
|
|
|
|
|
|
Payors
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Private insurance and other private pay
|
|
97.3
|
%
|
|
96.6
|
%
|
|
95.5
|
%
|
Workers compensation
|
|
1.5
|
%
|
|
3.0
|
%
|
|
4.1
|
%
|
Medicare
|
|
1.2
|
%
|
|
0.4
|
%
|
|
0.4
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Payors
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Private insurance and other private pay
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Workers compensation
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Medicare
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
CONSOLIDATED SEGMENTS
|
|
|
|
|
|
|
|
|
|
|
Payors
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Private insurance and other private pay
|
|
97.5
|
%
|
|
97.1
|
%
|
|
95.6
|
%
|
Workers compensation
|
|
1.4
|
%
|
|
2.6
|
%
|
|
4.0
|
%
|
Medicare
|
|
1.1
|
%
|
|
0.3
|
%
|
|
0.4
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Four
facilities represent approximately
96%
of the Company’s contracted marketing revenue for the year-ended
December 31, 2017
, and
four
facilities represent approximately
95%
of the Company’s contracted marketing accounts receivable as of
December 31, 2017
.
NOTE 6 - TRADE ACCOUNTS RECEIVABLE
A detail of trade accounts receivable, net as of December 31,
2017
and
2016
is as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Trade accounts receivable
|
|
$
|
140,580
|
|
|
$
|
121,599
|
|
Allowance for doubtful accounts
|
|
(2,598
|
)
|
|
(750
|
)
|
Receivables transferred
|
|
—
|
|
|
(309
|
)
|
Receivables purchased
|
|
6,540
|
|
|
4,411
|
|
Trade accounts receivable, net
|
|
$
|
144,522
|
|
|
$
|
124,951
|
|
Accounts receivable related to accounts greater than 365 days was
$20.4 million
and
$0.6 million
for the years ending December 31, 2017 and 2016, respectively.
Bad debt expense was $
2.4 million
,
$0.8
million and
$3.6 million
for the years ended December 31, 2017,
2016
and
2015
, respectively.
A detail of allowance for doubtful accounts as of December 31, 2017 and 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:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2017
|
|
$
|
(750
|
)
|
|
$
|
(2,402
|
)
|
|
$
|
—
|
|
|
$
|
554
|
|
|
$
|
(2,598
|
)
|
Year ended December 31, 2016
|
|
$
|
(5,165
|
)
|
|
$
|
(750
|
)
|
|
$
|
1,135
|
|
|
$
|
4,030
|
|
|
$
|
(750
|
)
|
(1)
Adjudication of previously recorded allowance for doubtful accounts
|
From time to time, we transfer to third parties certain of our accounts receivable payments on a non-recourse basis in return for advancement on payment to achieve a faster cash collection. As of December 31,
2017
and
2016
, there remained a balance of
nil
and
$0.3 million
, respectively, in transferred receivables pursuant to the terms of the original agreement.
For the years ended December 31,
2017
,
2016
and
2015
, the Company received advanced payments of
nil
,
$0.6 million
and
$1.7 million
, respectively. During the same time period, the Company transferred
nil
,
$5.2 million
and $
7.6 million
of receivables, net of advancement of payment. Concurrently, upon collection of these transferred receivables, payment will be made to the transferee.
Athas Health, LLC ("Athas"), Nobilis Health Network Specialist Group, PLLC (NHNSG), Premier Health Specialists, LLC ("Premier") and NH Clinical Services, PLLC ("NH Clinical) 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
50
to
60
days after the accounts are billed. These purchased receivables are billed and collected by Athas, NHNSG, Premier and NH Clinical 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
$16.6 million
,
$15.8 million
and
$11.5 million
for the years ended December 31,
2017
,
2016
and 2015, respectively. Revenue, net of the discounted purchase price, was
$9.3 million
,
$8.7 million
and
$6.6 million
for the years ended December 31,
2017
,
2016
and 2015, respectively.
Accounts receivable for purchased receivables was
$6.5 million
and
$4.4 million
for the years ended December 31,
2017
and
2016
, respectively. Revenue from receivables purchased is recorded in the factoring revenue line item within the consolidated statements of income.
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment, net consisted of the following as of December 31,
2017
and
2016
(
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
Telephone equipment
|
|
$
|
411
|
|
|
$
|
374
|
|
Computer hardware
|
|
2,363
|
|
|
1,863
|
|
Computer software
|
|
4,031
|
|
|
2,824
|
|
Furniture and office equipment
|
|
2,395
|
|
|
1,726
|
|
Medical equipment
|
|
41,287
|
|
|
28,158
|
|
Leasehold improvements
|
|
17,689
|
|
|
8,605
|
|
Building
|
|
12,607
|
|
|
12,520
|
|
Construction in progress
|
|
617
|
|
|
859
|
|
|
|
81,400
|
|
|
56,929
|
|
Less: accumulated depreciation
|
|
(29,841
|
)
|
|
(20,206
|
)
|
Property and equipment, net
|
|
$
|
51,559
|
|
|
$
|
36,723
|
|
Depreciation expense for the years ended December 31,
2017
,
2016
and
2015
was
$9.7 million
,
$7.1 million
, and
$3.7 million
, respectively.
NOTE 8 - INTANGIBLE ASSETS
Intangible assets at December 31,
2017
and
2016
consist of the following (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Historical
Cost
|
|
Additions
|
|
Accumulated
Amortization
|
|
Accumulated
Impairment
|
|
Net Book
Value
|
|
Historical
Cost
|
|
Additions
|
|
Accumulated
Amortization
|
|
Accumulated
Impairment
|
|
Net Book
Value
|
Finite Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
$
|
2,961
|
|
|
$
|
1,009
|
|
|
$
|
1,671
|
|
|
$
|
—
|
|
|
$
|
2,299
|
|
|
$
|
2,761
|
|
|
$
|
200
|
|
|
$
|
1,258
|
|
|
$
|
—
|
|
|
$
|
1,703
|
|
Internally developed software
|
1,980
|
|
|
—
|
|
|
1,221
|
|
|
—
|
|
|
759
|
|
|
1,980
|
|
|
—
|
|
|
825
|
|
|
—
|
|
|
1,155
|
|
Hospital management agreements
|
—
|
|
|
45,905
|
|
|
368
|
|
|
—
|
|
|
45,537
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Trade secret methodology
|
5,620
|
|
|
—
|
|
|
1,733
|
|
|
—
|
|
|
3,887
|
|
|
5,620
|
|
|
—
|
|
|
1,170
|
|
|
—
|
|
|
4,450
|
|
Physician relationships
|
2,800
|
|
|
—
|
|
|
467
|
|
|
—
|
|
|
2,333
|
|
|
2,800
|
|
|
—
|
|
|
327
|
|
|
—
|
|
|
2,473
|
|
Tradenames
|
—
|
|
|
1,200
|
|
|
20
|
|
|
—
|
|
|
1,180
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Customer relationships
|
500
|
|
|
—
|
|
|
108
|
|
|
—
|
|
|
392
|
|
|
500
|
|
|
—
|
|
|
66
|
|
|
—
|
|
|
434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
2,260
|
|
|
1,700
|
|
|
—
|
|
|
900
|
|
|
3,060
|
|
|
1,160
|
|
|
1,100
|
|
|
—
|
|
|
—
|
|
|
2,260
|
|
Trademark
|
5,610
|
|
|
—
|
|
|
—
|
|
|
600
|
|
|
5,010
|
|
|
5,610
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,610
|
|
Medicare license
|
8,498
|
|
|
—
|
|
|
—
|
|
|
7,401
|
|
|
1,097
|
|
|
8,498
|
|
|
—
|
|
|
—
|
|
|
7,401
|
|
|
1,097
|
|
Hospital license
|
436
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
436
|
|
|
36
|
|
|
400
|
|
|
—
|
|
|
—
|
|
|
436
|
|
Total
|
$
|
30,665
|
|
|
$
|
49,814
|
|
|
$
|
5,588
|
|
|
$
|
8,901
|
|
|
$
|
65,990
|
|
|
$
|
28,965
|
|
|
$
|
1,700
|
|
|
$
|
3,646
|
|
|
$
|
7,401
|
|
|
$
|
19,618
|
|
Amortization expense was
$1.9 million
,
$1.7 million
and
$0.9 million
for the years ended December 31,
2017
,
2016
and
2015
, respectively. Estimated amortization of intangible assets for the five years and thereafter subsequent to
December 31, 2017
is as follows (
in thousands
):
|
|
|
|
|
Year ending December 31,
|
2018
|
$
|
6,567
|
|
2019
|
6,335
|
|
2020
|
5,584
|
|
2021
|
5,584
|
|
2022
|
5,584
|
|
Thereafter
|
26,733
|
|
Total
|
$
|
56,387
|
|
The weighted average remaining useful life of finite lived intangibles at December 31, 2017 was
9.8 years
.
The weighted average remaining useful life of our hospital management agreements at December 31, 2017 was
10.1
years.
During our annual impairment test of indefinite lived intangible assets, it was determined tradenames related to our Medical Segment and Marketing Segment were impaired for
$0.9 million
, and
$0.6 million
, respectively, in the fourth quarter of 2017. The Company used the relief of royalty method under the income approach method of valuation. Significant assumptions used to determine fair value under the relief of royalty method include future trends in sales, a royalty rate and a discount rate applied to the forecast revenue stream. The impairments are a result of increasing costs and lower projected volumes in business associated with specific tradenames and trademarks.
The impairments are within other expense in our consolidated statements of income.
NOTE 9 - GOODWILL
The following tables provide information on changes in the carrying amount of goodwill, which is included in the accompanying consolidated balance sheets as of December 31,
2017
and
2016
(
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Cost
|
|
$
|
254,515
|
|
|
$
|
200,461
|
|
Accumulated impairment losses
|
|
(138,443
|
)
|
|
(138,443
|
)
|
Total
|
|
$
|
116,072
|
|
|
$
|
62,018
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
2017
|
|
2016
|
BALANCE - beginning of period
|
|
$
|
200,461
|
|
|
$
|
183,276
|
|
Business combinations:
|
|
|
|
|
AZ Vein
|
|
—
|
|
|
17,185
|
|
AZ Vein measurement period adjustment
|
|
(1,040
|
)
|
|
—
|
|
Elite Management Companies
|
|
46,069
|
|
|
—
|
|
HVC
|
|
8,329
|
|
|
—
|
|
DeRosa
|
|
696
|
|
|
—
|
|
Total cost
|
|
$
|
254,515
|
|
|
$
|
200,461
|
|
|
|
|
|
|
Accumulated impairment
|
|
|
|
|
BALANCE - beginning of period
|
|
$
|
(138,443
|
)
|
|
$
|
(138,443
|
)
|
Impairment charges during the period
|
|
—
|
|
|
—
|
|
Total accumulated impairment
|
|
$
|
(138,443
|
)
|
|
$
|
(138,443
|
)
|
The Company did not record any goodwill impairment charges for the years ended December 31,
2017
,
2016
or
2015
.
NOTE 10 - ACCRUED LIABILITIES AND OTHER CURRENT LIABILITES
The following table presents a summary of items comprising accrued liabilities and other current liabilities in the accompanying consolidated balance sheets as of December 31,
2017
and
2016
(
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Accrued liabilities:
|
|
|
|
|
Accrued salaries and benefits
|
|
$
|
4,588
|
|
|
$
|
3,333
|
|
Contract Services
|
|
3,836
|
|
|
2,393
|
|
Lab expense
|
|
6,366
|
|
|
5,402
|
|
Other
|
|
20,603
|
|
|
19,017
|
|
Total accrued liabilities
|
|
$
|
35,393
|
|
|
$
|
30,145
|
|
|
|
|
|
|
Other current liabilities:
|
|
|
|
|
Estimated amounts due to third party payors
|
|
$
|
5,081
|
|
|
$
|
6,286
|
|
Additional equity interest purchase obligations in conjunction with Elite acquisition
|
|
4,389
|
|
|
—
|
|
Other
|
|
6,854
|
|
|
1,275
|
|
Total other current liabilities
|
|
$
|
16,324
|
|
|
$
|
7,561
|
|
NOTE 11 - OTHER LONG-TERM LIABILITIES
The Company assumed real property leases as part of certain acquisitions which required the Company to pay above market rentals through the remainder of the lease terms. Of the
$3.0 million
balance in other long-term liabilities at
December 31, 2017
, approximately
$2.8 million
of that balance relates to unfavorable leases. The unfavorable lease liability is amortized as a reduction to rent expense over the contractual periods the Company is required to make rental payments under the leases. Estimated amortization of unfavorable leases for the five years and thereafter subsequent to
December 31, 2017
, is
$0.3 million
for 2018, 2019, 2020 and 2021,
$0.2 million
for 2022 and
$1.7 million
thereafter.
NOTE 12 - 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 A”) 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 of
4.75%
The effective rate for the Term Loan as of December 31, 2017 was
6.44%
. 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 December 31, 2017 was
6.11%
. 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. The Company executed Amendment No. 2 to the BBVA Credit agreement and exercised its option to extend our commitments. The Company created ("Term Loan B") and added
$50 million
in debt on November 15, 2017 (discussed further below). As of December 31, 2017, the outstanding balance on Term Loan A, Term Loan B and the Revolver were
$50.5 million
,
$50.0 million
and
$18.0 million
, respectively.
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.
The Company entered into Amendment No. 2 to BBVA Credit Agreement, dated November 15, 2017, by and among Northstar Healthcare Acquisitions, L.L.C., a Delaware limited liability company and wholly owned subsidiary of Nobilis Health Corp., and Northstar Healthcare Holdings, Inc., a Delaware corporation, entered into the Amendment and certain subsidiaries of the Company. The purpose of the Amendment was to finance the aforementioned Elite acquisition, thereby increasing the aggregate principal amount by
$50.0
million through issuance of the Term B Loan. The Term B Loan bears interest on the outstanding principal amount at a rate of the then applicable LIBOR, plus an applicable margin of
6.75%
. The effective rate for the Term B Loan as of December 31, 2017 was
8.17%
. All outstanding principal on the Term Loan under the Credit Agreement matures on November 15, 2022.
The BBVA Compass Credit Agreement contains three financial covenants that are tested beginning on December 31, 2017. The consolidated leverage ratio may not exceed (i)
4.00
to 1.00 as of the last day of any fiscal quarter from December 31, 2017 through and including September 30, 2018 (ii)
3.75
to 1.00 from December 31, 2018 through and including September 30, 2019 (iii)
3.50
to 1.00 from December 31, 2019 and thereafter, subject to covenant holidays upon the occurrence of certain conditions. The consolidated modified fixed charge ratio must be at a minimum (i)
1.25
to 1.00 as of the last day of any fiscal quarter from September 30, 2017 through and including December 31, 2018 (ii)
1.30
to 1.00 from March 31, 2019 through and including December 31, 2019 (iii)
1.35
to 1.00 from March 31, 2020 and thereafter, subject to covenant holidays upon the occurrence of certain conditions.The consolidated fixed charge ratio must be at a minimum (i)
1.25
to 1.00 as of the last day of any fiscal quarter
from September 30, 2017 through and including December 31, 2017 (ii)
1.10
to 1.00 from March 31, 2018 through and including December 31, 2019 (iii)
1.35
to 1.00 from March 31, 2020 and thereafter, subject to covenant holidays upon the occurrence of certain conditions.
As of December 31, 2017, the Company was in compliance with its covenants.
Substantially all of the Company’s assets are pledged as collateral to secure the Facility.
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.
In February 2018, subsequent to the reporting period, the Company entered into a settlement agreement in connection with contract disputes that arose during the year with the sellers of the Company's acquisition of AZ Vein. This settlement resulted in the derecognition of certain liabilities, including the convertible promissory note of
$2.25 million
discussed herein. See Note 3 - Business Acquisitions for more information.
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 the Company (the "Conversion Shares"), at the sole discretion of the Company, 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.
Convertible Promissory Note - Elite
In conjunction with our purchase of Elite, we entered into a
$3.5 million
convertible promissory note. The convertible promissory note matures on November 15, 2019, bears interest at
6.75%
per annum and is payable in
three
installments over a
two
year period. The interest payments are due quarterly. The promissory note (outstanding principal but excluding accrued and unpaid interest) may be converted into common shares of the Company (the "Conversion Shares"), only upon the occurrence of both (i) default by Maker, as defined in the promissory note, and (ii) the election of the Sellers as defined in the promissory note. 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 lesser of (i) the closing bid price of the common shares on the trading day immediately prior to the conversion date, or (ii) the volume weighted average price of the common shares on NYSE in the trailing
ten
trading days prior to the maturity date. There are no pre-payment penalties.
Debt at
December 31, 2017
consisted of the following (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Lines of credit
|
|
$
|
18,000
|
|
|
$
|
15,000
|
|
Term loan
|
|
100,488
|
|
|
52,500
|
|
Convertible promissory notes
|
|
8,500
|
|
|
2,250
|
|
Gross debt
|
|
126,988
|
|
|
69,750
|
|
Less: unamortized debt issuance costs
|
|
(6,103
|
)
|
|
(1,957
|
)
|
Debt, net of unamortized debt issuance costs
|
|
120,885
|
|
|
67,793
|
|
Less: current maturities of debt, net of unamortized debt issuance costs
|
|
(8,016
|
)
|
|
(2,220
|
)
|
Long-term debt, net
|
|
$
|
112,869
|
|
|
$
|
65,573
|
|
Future maturities of debt as of December 31,
2017
are as follows (
in thousands
):
|
|
|
|
|
Year ending December 31,
|
|
2018
|
$
|
10,032
|
|
2019
|
9,375
|
|
2020
|
5,125
|
|
2021
|
62,456
|
|
2022
|
40,000
|
|
Total
|
$
|
126,988
|
|
NOTE 13 - OPERATING LEASES
The Company occupies ASC, specialty surgical hospital, multi-specialty clinic and corporate business spaces under operating lease agreements. The Company also leases certain medical equipment. The minimum rental commitments under non-cancellable operating leases, with terms in excess of one year subsequent to December 31,
2017
, are as follows (
in thousands
):
|
|
|
|
|
Year ending December 31,
|
|
2018
|
$
|
15,848
|
|
2019
|
14,739
|
|
2020
|
12,989
|
|
2021
|
12,621
|
|
2022
|
9,442
|
|
Thereafter
|
55,477
|
|
Total future commitment
|
121,116
|
|
Less: minimum sublease income to be received
|
(19,302
|
)
|
Total future commitment, net of sublease income
|
$
|
101,814
|
|
Rent expense was
$13.2 million
,
$11.0 million
and
$9.1 million
for the years ended December 31,
2017
,
2016
and
2015
, respectively.
The Company subleases certain facility spaces and records rental income in other income in our consolidated statements of income. The future minimum rentals with terms in excess of one year subsequent to December 31,
2017
, are as follows (
in thousands
):
|
|
|
|
|
Year ending December 31,
|
|
|
2018
|
$
|
2,471
|
|
2019
|
2,535
|
|
2020
|
2,295
|
|
2021
|
2,200
|
|
2022
|
1,683
|
|
Thereafter
|
8,118
|
|
Total future sublease income
|
$
|
19,302
|
|
NOTE 14 - CAPITAL LEASES
The Company holds various capital leases for medical equipment which contain bargain purchase options at the end of the lease terms. The remaining minimum capital lease obligations, with terms in excess of one year subsequent to December 31,
2017
, are as follows (
in thousands
):
|
|
|
|
|
Year ending December 31,
|
|
|
|
2018
|
$
|
4,239
|
|
2019
|
3,426
|
|
2020
|
2,332
|
|
2021
|
2,284
|
|
2022
|
1,925
|
|
Thereafter
|
5,670
|
|
Total minimum rentals
|
19,876
|
|
Less amounts representing interest
|
(3,960
|
)
|
Total Capital lease obligations
|
$
|
15,916
|
|
Medical equipment with a cost of
$12.1
million and
$11.0
million were held under capital leases for the years ended December 31, 2017, and 2016, respectively. Capital leases had accumulated depreciation of
$3.2 million
and
$3.7 million
for the years ended December 31,
2017
and
2016
.
NOTE 15 - 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 years ended December 31,
2017
,
2016
or 2015.
The following table summarizes our assets and liabilities measured at fair value on a recurring basis as of December 31,
2017
and
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
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017:
|
|
|
|
|
|
|
|
|
Warrant and stock option derivative liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
384
|
|
|
$
|
384
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
384
|
|
|
$
|
384
|
|
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 18 - Warrants and options liabilities
. Due to the nature of valuation inputs, the valuation of the warrants is considered a Level 3 measurement.
The estimated fair value of our other long-term debt instruments, approximate their carrying amounts as the interest rates approximate our current borrowing rate for similar debt instruments of comparable maturity, or have variable interest rates.
The remaining outstanding warrants and stock options expired in May of 2017. The balance of the Company's current portion of warrant and stock option derivative liabilities is
zero
as of December 31, 2017. All remaining liabilities are long-term.
NOTE 16 - SHAREHOLDERS' EQUITY
In total, the Company has issued
78,183,802
and
77,805,014
of its common shares as of December 31,
2017
and
2016
, respectively. The Company has unlimited authorized shares. There is no par value assigned to our common shares.
On June 30, 2015, the Company, entered into an agreement with Athas, certain seller parties (the “Athas Sellers”) to the Membership Interest Purchase Agreement dated as of November 26, 2014 (the “MIPA”) and certain other parties. Pursuant to the Agreement, the Athas Sellers agreed to reduce by
836,029
the number of common shares, in the aggregate, that were to be issued on the first and second anniversaries of the MIPA’s closing as contingent purchase price payments (the “Contingent Shares”). In addition, the Agreement accomplished (i) the financing of a
$2.7 million
debt owed by counterparties to the Agreement, (ii) recoupment of
$1.7 million
of indemnified expenses, and (iii) indemnification of counterparties with respect to litigation. Also pursuant to the Agreement, the Company accelerated the issuance of the remaining
3,830,638
Contingent Shares, resulting in a
$5.7 million
adjustment to additional paid in capital.
Shareholder equity activity for 2016 is primarily related to employee share based compensation, discussed further in
Note 17 - Share based compensation
and the issuance of
750,000
unregistered common shares in conjunction with the acquisition of AZ Vein, discussed further in Note 3 - Business Acquisitions.
Shareholder equity activity for 2017 is primarily related to employee share based compensation, discussed further in
Note 17 - Share based compensation
and the issuance of
378,788
unregistered common shares in conjunction with the acquisition of HVC and Elite, discussed further in Note 3 - Business Acquisitions.
NOTE 17 - SHARE BASED COMPENSATION
Restricted Share Unit Plan
During 2008, the Board of Directors (BOD) of the Company approved the adoption of a Restricted Share Unit (RSU) Plan for employees. Restricted Share Units (RSUs) may be granted to employees of Nobilis at the sole discretion of the BOD.
Subject to the BOD’s ability to accelerate the vesting of the RSUs if it determines circumstances so warrant, each RSU would generally vest in full on the third anniversary of the date of grant; provided that if there is a change of control of the Company prior to the vesting date of the RSUs and a participant is terminated (or resigns for good reason) within six months following such change of control, a pro rata portion of their unvested RSUs would vest up to the date of the change of control.
Upon vesting of his or her RSUs, a participant would be entitled to receive on the vesting date, at the discretion of the BOD either: (a) a lump sum cash payment equal to the number of RSUs multiplied by an average closing price of the common shares on the Toronto Stock Exchange on the redemption date, net of any applicable deductions and withholdings; or (b) that number of common shares equal to the number of RSUs credited to the participant’s RSU account, such common shares to be issued from the Company. The participant receives the benefit on, or as soon as practicable after, the vesting date, but in no event later than
90
days after the vesting date. Unlike share options, RSUs do not require the payment of any monetary consideration to the Company.
Whenever cash dividends are paid on the Company’s common shares, dividend equivalents in the form of additional RSUs would be credited to each Participant and will become part of his or her award under the RSU Plan. The RSUs representing dividend equivalents would vest and be paid at the same time and in the same manner as the RSUs to which the dividend equivalents pertain.
In the event of a Participant’s termination of employment, voluntary or by cause, with the Company prior to any vesting date, the Participant’s rights to any unvested RSUs would be immediately and irrevocably forfeited. If the Participant’s employment with the Company terminates on account of death or disability or is terminated by the Company without cause prior to any vesting date, the Participant would become vested in a prorated portion of his or her unvested RSUs, based on the number of months that have elapsed in the then current vesting period as of the date of termination.
During the year ended December 31, 2015,
two
key executives experienced triggering events, as defined in their employee agreements, which accelerated all unrecognized share compensation expense on their outstanding RSUs. As a result of this acceleration, the Company recognized a non-cash charge of
$4.5 million
of share compensation expense.
The Company recorded total compensation expense relative to RSU’s of
nil
for both years ended December 31, 2017 and 2016, and
$5.4 million
for the years ended December 31, 2015.
There were
no
RSU grants during the year. The Company had no outstanding RSU’s at December 31,
2017
or
2016
, respectively.
Share Option Plan
In 2012, the BOD approved the adoption of a Share Option Plan for insiders, employees, and service providers (or "Participants" or "Optionees"). Share options may be granted at the sole discretion of the BOD. The exercise price of an option is determined by the BOD at the time of grant and shall not be less than the current market price. The term of each option is determined by the BOD and shall not exceed
10
years. If an Optionee shall cease to be a Participant for cause, no option held by such Optionee shall be exercisable following the date on which such Optionee ceases to be a Participant.
If an Optionee ceases to be a Participant for any reason other than for cause, any option held by such Optionee at such time shall remain exercisable in full at any time, and in part from time to time, for a period of
90
days after the date on which the Optionee ceases to be a Participant. If the Participant’s employment with the Company terminates on account of death, any option held by such Participant at the date of death shall be exercisable in whole or in part only by the person or persons to whom the rights of the Participant’s options pass to by will or laws of descent.
The maximum number of RSUs and share options that may be issued under the combined plans is equal to
20.0%
of the Company’s issued and outstanding common shares.
The Company granted a total of
2,590,000
share options during the year ended December 31,
2017
. Of the options issued,
925,000
of those vested immediately,
180,000
vest ratably over a
two
year period, and
1,485,000
vest ratably over a
three
year period. During the year,
1,270,000
were forfeited, with various vesting periods.
Under the current share option plan, the Company had approximately
6.8 million
share options available for future issuance as of December 31,
2017
.
The following table summarizes stock option activity for the years ended December 31,
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
|
|
4,357,075
|
|
|
$
|
2.06
|
|
|
9.5
|
|
Exercised
|
|
(1,283,750
|
)
|
|
$
|
2.39
|
|
|
—
|
|
Forfeited
|
|
(994,300
|
)
|
|
$
|
3.45
|
|
|
—
|
|
Outstanding at December 31, 2016
|
|
7,544,025
|
|
|
$
|
2.61
|
|
|
9.0
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2016
|
|
2,768,817
|
|
|
$
|
2.45
|
|
|
8.6
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2017
|
|
7,544,025
|
|
|
$
|
2.61
|
|
|
9.0
|
|
Granted
|
|
2,590,000
|
|
|
$
|
1.50
|
|
|
9.8
|
|
Exercised
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
Forfeited
|
|
(1,270,000
|
)
|
|
$
|
3.41
|
|
|
—
|
|
Outstanding at December 31, 2017
|
|
8,864,025
|
|
|
$
|
2.17
|
|
|
8.5
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2017
|
|
5,120,307
|
|
|
$
|
2.24
|
|
|
8.2
|
|
The table above includes
500,000
options issued to non-employees,
all
of which are exercisable, and all are still outstanding at December 31,
2017
. See
Note 18 - Warrants and options liabilities
for discussion regarding the accounting and classification of these options in the balance sheet.
The total intrinsic value of share options exercised was
nil
and
$1.6 million
for the years ended December 31,
2017
and
2016
, respectively. There were no options exercised during 2017. The total intrinsic value for all in-the-money vested outstanding stock options at December 31,
2017
and
2016
was nominal and
$0.8 million
, respectively. Assuming all stock options outstanding at
December 31, 2017
were vested, the total intrinsic value of the in-the-money outstanding stock options would have been
nominal
.
The Company recorded total stock compensation expense relative to employee stock options of
$2.7 million
,
$6.0 million
and
$6.1 million
for the years ended December 31,
2017
,
2016
and 2015, respectively.
The fair values of the employee share options used in recording compensation expense are computed using the Black-Scholes option pricing model ("Black-Scholes"). The following table below shows the assumptions used in the model for options awarded during the years ended December 31,
2017
,
2016
, and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Expected price volatility
|
|
86% - 91%
|
|
|
86% - 117%
|
|
|
113% - 122%
|
|
Risk free interest rate
|
|
1.78% - 2.27%
|
|
|
1.03% - 2.20%
|
|
|
1.34% - 1.87%
|
|
Expected annual dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
$
|
—
|
|
Expected option term (years)
|
|
5 - 6
|
|
|
5 - 6
|
|
|
5 - 6
|
|
Expected forfeiture rate
|
|
3.1% - 11.6%
|
|
|
0.5% - 11.6%
|
|
|
1.3% - 5.0%
|
|
Grant date fair value per share
|
|
$0.91 - $1.81
|
|
|
$1.41 - $2.41
|
|
|
$2.53 - $6.10
|
|
Grant date exercise price per share
|
|
$1.32 - $2.32
|
|
|
$1.92 - $2.82
|
|
|
$2.97 - $6.31
|
|
For stock options, the Company recognizes share-based compensation net of estimated forfeitures and revises the estimates in the subsequent periods if actual forfeitures differ from the estimates. Forfeiture rates are estimated based on historical experience as well as expected future behavior.
NOTE 18 - 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 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 income 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:
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
0.62%
|
|
0.26% - 0.62%
|
|
0.00% - 0.65%
|
Expected life in years
|
|
0.15
|
|
0.25 - 1.15
|
|
0.25 - 2.0
|
Expected volatility
|
|
63%
|
|
71% - 112%
|
|
71% - 96%
|
Expected dividend yield
|
|
—%
|
|
—%
|
|
—%
|
The changes in fair value of the warrants and options (excluding non-employees) liability during the years ended December 31,
2017
,
2016
and 2015 were as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
3
|
|
|
$
|
2,109
|
|
|
$
|
6,657
|
|
Issuance of warrants and options
|
|
—
|
|
|
—
|
|
|
12,797
|
|
Transferred to equity upon exercise
|
|
—
|
|
|
—
|
|
|
(9,050
|
)
|
Change in fair value recorded in earnings
|
|
(3
|
)
|
|
(2,106
|
)
|
|
(8,295
|
)
|
Balance at December 31, 2017 and 2016
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
2,109
|
|
As of
December 31, 2017
, there were
no
warrants or options outstanding related to the private placements discussed above. 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
nil
as of
December 31, 2017
.
Options Issued to Non-Employees
In 2014, the Company issued
650,000
options to professionals providing services to the organization. These professionals do not meet the definition of an employee under U.S. GAAP. At December 31,
2017
, there were
500,000
options outstanding, all of which are exercisable. During the year ended December 31, 2017, one of the two non-employee professionals became an employee of the Company. At this time, the Company revalued the associated
150,000
shares and reclassified
$0.1 million
out of the liability and into equity.
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 option pricing model with the following inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
1.50% - 1.98%
|
|
|
0.86% - 1.76%
|
|
|
0.26% - 1.85%
|
|
Expected life in years
|
|
3
|
|
|
4 - 5
|
|
|
1 - 6
|
|
Expected volatility
|
|
81% - 84%
|
|
|
99% - 118%
|
|
|
74% - 121%
|
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
For the year ended December 31, 2017, the Company recorded a recovery for non-employee stock options of a nominal amount and a nominal expense for non-employee stock options. The Company recorded an expense for non-employee stock options of
$0.1 million
and
$1.7 million
for the year ended December 31,
2016
and
2015
, respectively.
The changes fair value of the liability related to vested yet unexcersised options issued to non-employees during the years ended
December 31, 2017
,
2016
and 2015were as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
899
|
|
|
$
|
841
|
|
|
$
|
—
|
|
Vested during the period
|
|
(109
|
)
|
|
533
|
|
|
1,531
|
|
Change in fair value recorded in earnings
|
|
(406
|
)
|
|
(475
|
)
|
|
(690
|
)
|
Balance as of December 31, 2017 and 2016
|
|
$
|
384
|
|
|
$
|
899
|
|
|
$
|
841
|
|
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 income under the caption “Change in fair value of warrant and stock option derivative liabilities”. At December 31,
2017
, there were
500,000
unexercised non-employee options requiring liability classification.
NOTE 19 - NONCONTROLLING INTERESTS
In
terests held by unaffiliated parties in consolidated entities are reflected in noncontrolling interest, which represents the noncontrolling partners' share of the underlying net assets of our consolidated subsidiaries. Noncontrolling interest that is not redeemable is reported in the equity section of the consolidated balance sheets.
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 December 31, 2017 and 2016. The contingently redeemable noncontrolling interests associated with these entities are classified in the Company’s balance sheet as “temporary” or mezzanine equity. Changes in contingently redeemable noncontrolling interests follow (
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
|
|
149
|
|
|
2,708
|
|
|
2,857
|
|
Total contingently redeemable noncontrolling interests at December 31, 2017
|
|
$
|
546
|
|
|
$
|
16,615
|
|
|
$
|
17,161
|
|
Certain of our consolidated subsidiaries that are less than wholly owned meet the definition of VIEs, and we hold voting interests in all such entities. We consolidate the activities of VIEs 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 VIEs 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 VIEs 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 at December 31, 2017 and 2016 (
in thousands
):
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
Total cash and short term investments
|
$
|
1,709
|
|
|
$
|
3,445
|
|
Total accounts receivable
|
25,385
|
|
|
18,845
|
|
Intercompany
(1)
|
9,021
|
|
|
8,739
|
|
Total other current assets
|
1,918
|
|
|
1,664
|
|
Total property and equipment
|
15,457
|
|
|
16,804
|
|
Total other assets
|
190
|
|
|
190
|
|
Total assets
|
$
|
53,680
|
|
|
$
|
49,687
|
|
|
|
|
|
Total accounts payable
|
$
|
3,617
|
|
|
$
|
4,119
|
|
Total other liabilities
|
1,662
|
|
|
5,263
|
|
Intercompany
(1)
|
41,201
|
|
|
39,391
|
|
Total accrued liabilities
|
14,057
|
|
|
11,538
|
|
Long term - capital lease
|
11,407
|
|
|
11,169
|
|
Noncontrolling interest
|
(9,924
|
)
|
|
(8,892
|
)
|
Total liabilities
|
$
|
62,020
|
|
|
$
|
62,588
|
|
(1)
These intercompany balances are due to/from other Nobilis entities and eliminate upon consolidation of Nobilis Health Corp. The intercompany liabilities net of receivables indicate the VIE's indebtedness to the Company and represents the amounts the Company has advance to these entities over the past years to fund operations.
NOTE 20 - 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 commons 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 of restricted stock awards, stock option awards and stock warrants as determined under the treasury stock method or awards issued from debt conversions under the if converted method.
A detail of the Company’s earnings per share is as follows (
in thousands except for share and per share amounts
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Basic:
|
|
|
|
|
|
|
Net income attributable to Nobilis Health Corp.
|
|
$
|
3,797
|
|
|
$
|
6,449
|
|
|
$
|
50,840
|
|
Weighted average common shares outstanding
|
|
77,852,752
|
|
|
76,453,128
|
|
|
67,015,387
|
|
Net income per common share
|
|
$
|
0.05
|
|
|
$
|
0.08
|
|
|
$
|
0.76
|
|
|
|
|
|
|
|
|
Diluted - treasury stock method:
|
|
|
|
|
|
|
Net income attributable to Nobilis Health Corp.
|
|
$
|
3,797
|
|
|
$
|
6,449
|
|
|
$
|
50,840
|
|
Weighted average common shares outstanding
|
|
77,852,752
|
|
|
76,453,128
|
|
|
67,015,387
|
|
Dilutive effect of stock options, warrants, RSU's
|
|
335,845
|
|
|
1,109,367
|
|
|
8,217,396
|
|
Weighted average common shares outstanding diluted (treasury method)
|
|
78,188,597
|
|
|
77,562,495
|
|
|
75,232,783
|
|
Net income per fully diluted share
|
|
$
|
0.05
|
|
|
$
|
0.08
|
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
Diluted - if converted method:
|
|
|
|
|
|
|
Net income attributable to Nobilis Health Corp.
|
|
$
|
3,797
|
|
|
$
|
6,449
|
|
|
$
|
50,840
|
|
Weighted average common shares outstanding
|
|
77,852,752
|
|
|
76,453,128
|
|
|
67,015,387
|
|
Dilutive effect of convertible debt
|
|
2,631,579
|
|
|
—
|
|
|
—
|
|
Weighted average common shares outstanding diluted (if converted method)
|
|
80,484,331
|
|
|
76,453,128
|
|
|
N/A
|
|
Net income per fully diluted share
|
|
$
|
0.05
|
|
|
$
|
0.08
|
|
|
N/A
|
|
Included in the diluted shares "if converted method" calculation and in conjunction with the following acquisitions, there are
2.6 million
potentially convertible shares related to the Convertible Promissory Notes issued to the sellers of HVC. There were
none
for the year ended December 31, 2016 as their effect would have been anti-dilutive.
NOTE 21 - EMPLOYEE 401K PLAN
Substantially all of our employees, upon qualification, are eligible to participate in our defined contribution 401(k) plan (the “Plan”). Under the Plan, employees may contribute a portion of their eligible compensation, and the Company matches such contributions annually up to a maximum percentage for participants actively employed, as defined by the Plan documents. Plan expenses were approximately
$1.1 million
,
$0.8 million
and
$0.4 million
for the years ended December 31,
2017
,
2016
and 2015, respectively. Such amounts are reflected within both the operating expenses: salaries and benefits and corporate costs: salaries and benefits line items within the accompanying consolidated statements of income.
NOTE 22 - INCOME TAXES
The components of income (benefit) expense for the years-ended December 31,
2017
,
2016
and 2015 are as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
Current
|
|
Total
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
Federal
|
|
$
|
11,695
|
|
|
$
|
56
|
|
|
$
|
11,751
|
|
States and Local
|
|
(12
|
)
|
|
1,261
|
|
|
1,249
|
|
Foreign
|
|
(742
|
)
|
|
—
|
|
|
(742
|
)
|
Change in deferred tax asset valuation allowance
|
|
742
|
|
|
—
|
|
|
742
|
|
Total
|
|
$
|
11,683
|
|
|
$
|
1,317
|
|
|
$
|
13,000
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
Federal
|
|
$
|
3,625
|
|
|
$
|
23
|
|
|
$
|
3,648
|
|
States and Local
|
|
(242
|
)
|
|
1,081
|
|
|
839
|
|
Foreign
|
|
(259
|
)
|
|
—
|
|
|
(259
|
)
|
Change in deferred tax asset valuation allowance
|
|
259
|
|
|
—
|
|
|
259
|
|
Total
|
|
$
|
3,383
|
|
|
$
|
1,104
|
|
|
$
|
4,487
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
Federal
|
|
$
|
8,215
|
|
|
$
|
509
|
|
|
$
|
8724
|
|
States and Local
|
|
—
|
|
|
1,330
|
|
|
1,330
|
|
Foreign
|
|
—
|
|
|
—
|
|
|
—
|
|
Change in deferred tax asset valuation allowance
|
|
(33,250
|
)
|
|
—
|
|
|
(33,250
|
)
|
Total
|
|
$
|
(25,035
|
)
|
|
$
|
1,839
|
|
|
$
|
(23,196
|
)
|
The following table shows the reconciliation between income tax expense reported in our consolidated statements of income and the income tax expense that would have resulted from applying the U.S. federal income tax rate of
34%
to pre-tax income. Though the Company was incorporated in British Columbia, all of the Company’s subsidiaries are incorporated in the United States. Therefore, the Company reconciles the income before income taxes for U.S. tax purposes (
in thousands, except percentages
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Net income before income tax
|
|
$
|
23,281
|
|
|
$
|
11,589
|
|
|
$
|
40,737
|
|
|
|
|
|
|
|
|
U.S. federal income tax rate
|
|
34
|
%
|
|
35
|
%
|
|
34
|
%
|
|
|
|
|
|
|
|
Expected U.S. federal income tax (recovery)
|
|
7,916
|
|
|
4,056
|
|
|
13,851
|
|
Permanent differences / discrete items
|
|
(86
|
)
|
|
(791
|
)
|
|
(1,873
|
)
|
State income tax (net of federal benefit)
|
|
706
|
|
|
585
|
|
|
649
|
|
Valuation allowance
|
|
742
|
|
|
259
|
|
|
(33,250
|
)
|
Change of federal tax rate
|
|
6,160
|
|
|
—
|
|
|
—
|
|
Noncontrolling interests
|
|
(2,054
|
)
|
|
7
|
|
|
(4,106
|
)
|
Others
|
|
(384
|
)
|
|
371
|
|
|
1,533
|
|
Total income tax expense (benefit)
|
|
$
|
13,000
|
|
|
$
|
4,487
|
|
|
$
|
(23,196
|
)
|
The table below sets forth the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities that are reported in our consolidated balance sheets (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
Deferred tax assets (liabilities) :
|
|
|
|
|
Goodwill and fixed assets
|
|
$
|
1,555
|
|
|
$
|
8,768
|
|
Intangibles
|
|
697
|
|
|
785
|
|
Net operating loss carryforwards - U.S.
|
|
2,836
|
|
|
6,014
|
|
Interest carry-forward
|
|
—
|
|
|
1,405
|
|
Net operating loss carryforwards - Foreign
|
|
8,405
|
|
|
7,663
|
|
Allowance for bad debts
|
|
382
|
|
|
265
|
|
Equity compensation
|
|
2,872
|
|
|
4,074
|
|
Accrued bonus
|
|
530
|
|
|
325
|
|
Accrued to cash - 481a
|
|
(163
|
)
|
|
(532
|
)
|
Other
|
|
(120
|
)
|
|
16
|
|
AMT credit
|
|
588
|
|
|
532
|
|
Deferred lease liability
|
|
657
|
|
|
—
|
|
Retention tax credit
|
|
117
|
|
|
—
|
|
Valuation allowance
|
|
(8,405
|
)
|
|
(7,663
|
)
|
Net deferred tax assets
|
|
$
|
9,951
|
|
|
$
|
21,652
|
|
There was a
partial
valuation allowance as of December 31,
2017
and
2016
, respectively. In assessing the need for a valuation allowance, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considered the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income, projections for future taxable income over the periods in which the deferred tax assets are deductible, and the scheduled reversal of deferred tax liabilities, management believes a partial valuation allowance is needed to offset the Canadian net operating loss carryforwards in 2017 and 2016, respectively.
The Company has Canadian net operating loss carryforwards of approximately
$33.6 million
which will begin to expire in 2028 and U.S. net operating loss carryforwards of approximately
$13.5 million
which will begin to expire in 2030. On September 30, 2010 the Company issued
18,778,446
common shares to entities controlled by the then Company Chairman resulting in a change of ownership greater than
50%
. As a result, the U.S. net operating losses are limited by the Internal Revenue Code Section 382.
The Company files income tax returns in the U.S. federal jurisdiction, Canada federal jurisdiction, and several state jurisdictions. Our federal tax returns for 2016, 2015, and 2014 are open for review by taxing authorities. Our Canada and Texas tax returns for 2016, 2015, 2014, and 2013 are open for review by taxing authorities. The Company is not aware of potential interest, penalties or taxes for federal and Canada income tax returns.
The Company received notification from the Internal Revenue Service (IRS) to examine the December 31, 2014 and 2013 Federal income tax return. In addition, First Nobilis, LLC, a
51%
owned entity, received notification from the IRS to examine its December 31, 2014 income tax return. Both cases have been closed with “no change”. Based on management tax analysis, the Company did not have any uncertain tax positions at December 31, 2017 and 2016.
The Tax Cuts and Jobs Act of 2017 was signed into law on December 22, 2017. The law includes significant changes to the U.S. corporate income tax system, including a federal corporate rate reduction from 35% to 21%, the elimination of the corporate alternative minimum tax, the acceleration of depreciation, limitations on the deductibility of interest expense and executive compensation, and the transition of U.S. international taxation from a worldwide tax system to a territorial tax system. In accordance with ASC 740, the impact of a change in tax law is recorded in the period of enactment. Consequently, the Company has recorded a tax expense of
$6.2 million
, primarily due to a re-measurement of deferred tax assets and liabilities at December 22, 2017.
NOTE 23 - BUSINESS SEGMENTS
A summary of the business segment information for
2017
,
2016
and 2015 as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2017
|
|
Medical
|
|
Marketing
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
282,042
|
|
|
$
|
17,675
|
|
|
$
|
—
|
|
|
$
|
299,717
|
|
Operating expenses
|
234,851
|
|
|
15,520
|
|
|
—
|
|
|
250,371
|
|
Corporate expenses
|
—
|
|
|
—
|
|
|
27,037
|
|
|
27,037
|
|
Income (loss) from operations
|
47,191
|
|
|
2,155
|
|
|
(27,037
|
)
|
|
22,309
|
|
Change in fair value of warrant and option liabilities
|
—
|
|
|
—
|
|
|
(432
|
)
|
|
(432
|
)
|
Interest expense (income)
|
1,017
|
|
|
(11
|
)
|
|
5,001
|
|
|
6,007
|
|
Other income
|
(3,882
|
)
|
|
492
|
|
|
(3,157
|
)
|
|
(6,547
|
)
|
Income (loss) before income taxes
|
$
|
50,056
|
|
|
$
|
1,674
|
|
|
$
|
(28,449
|
)
|
|
$
|
23,281
|
|
|
|
|
|
|
|
|
|
Other data:
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
$
|
9,600
|
|
|
$
|
1,660
|
|
|
$
|
343
|
|
|
$
|
11,603
|
|
Income tax expense
|
$
|
1,165
|
|
|
$
|
135
|
|
|
$
|
11,700
|
|
|
$
|
13,000
|
|
Intangible assets, net
|
$
|
54,406
|
|
|
$
|
11,584
|
|
|
$
|
—
|
|
|
$
|
65,990
|
|
Goodwill
|
$
|
97,061
|
|
|
$
|
19,011
|
|
|
$
|
—
|
|
|
$
|
116,072
|
|
Capital expenditures
|
$
|
18,773
|
|
|
$
|
2,753
|
|
|
$
|
301
|
|
|
$
|
21,827
|
|
Total assets
|
$
|
352,228
|
|
|
$
|
50,275
|
|
|
$
|
28,535
|
|
|
$
|
431,038
|
|
Total liabilities
|
$
|
78,830
|
|
|
$
|
8,733
|
|
|
$
|
128,687
|
|
|
$
|
216,250
|
|
Stock consideration given in conjunction with acquisitions
|
$
|
735
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
735
|
|
Convertible promissory note
|
$
|
8,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
Medical
|
|
Marketing
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
Revenues
|
264,642
|
|
|
21,102
|
|
|
—
|
|
|
285,744
|
|
Operating expenses
|
227,439
|
|
|
17,348
|
|
|
—
|
|
|
244,787
|
|
Corporate expenses
|
—
|
|
|
—
|
|
|
30,919
|
|
|
30,919
|
|
Income (loss) from operations
|
37,203
|
|
|
3,754
|
|
|
(30,919
|
)
|
|
10,038
|
|
Change in fair value of warrant and option liabilities
|
—
|
|
|
—
|
|
|
(2,580
|
)
|
|
(2,580
|
)
|
Interest expense
|
1,331
|
|
|
5
|
|
|
2,663
|
|
|
3,999
|
|
Other income
|
(2,367
|
)
|
|
(353
|
)
|
|
(250
|
)
|
|
(2,970
|
)
|
Income (loss) before income taxes
|
$
|
38,239
|
|
|
$
|
4,102
|
|
|
$
|
(30,752
|
)
|
|
$
|
11,589
|
|
|
|
|
|
|
|
|
|
Other data:
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
$
|
6,716
|
|
|
$
|
1,823
|
|
|
$
|
293
|
|
|
$
|
8,832
|
|
Income tax expense
|
$
|
1,067
|
|
|
$
|
155
|
|
|
$
|
3,265
|
|
|
$
|
4,487
|
|
Intangible assets, net
|
$
|
6,884
|
|
|
$
|
12,734
|
|
|
$
|
—
|
|
|
$
|
19,618
|
|
Goodwill
|
$
|
43,007
|
|
|
$
|
19,011
|
|
|
$
|
—
|
|
|
$
|
62,018
|
|
Capital expenditures
|
$
|
9,902
|
|
|
$
|
—
|
|
|
$
|
473
|
|
|
$
|
10,375
|
|
Total assets
|
$
|
214,294
|
|
|
$
|
44,942
|
|
|
$
|
46,199
|
|
|
$
|
305,435
|
|
Total liabilities
|
$
|
69,753
|
|
|
$
|
6,059
|
|
|
$
|
73,144
|
|
|
$
|
148,956
|
|
Stock consideration given in conjunction with acquisitions
|
$
|
2,250
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,250
|
|
Convertible promissory note
|
$
|
2,250
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
Medical
|
|
Marketing
|
|
Corporate
|
|
Total
|
Revenues
|
$
|
205,730
|
|
|
$
|
23,486
|
|
|
$
|
—
|
|
|
$
|
229,216
|
|
Operating expenses
|
145,835
|
|
|
19,885
|
|
|
—
|
|
|
165,720
|
|
Corporate expenses
|
—
|
|
|
—
|
|
|
31,846
|
|
|
31,846
|
|
Income (loss) from operations
|
59,895
|
|
|
3,601
|
|
|
(31,846
|
)
|
|
31,650
|
|
Interest expense
|
351
|
|
|
54
|
|
|
1,192
|
|
|
1,597
|
|
Change in fair value of warrant and option liabilities
|
—
|
|
|
—
|
|
|
(8,985
|
)
|
|
(8,985
|
)
|
Bargain purchase
|
(1,733
|
)
|
|
—
|
|
|
—
|
|
|
(1,733
|
)
|
Other expense (income)
|
488
|
|
|
236
|
|
|
(690
|
)
|
|
34
|
|
Income (loss) before income taxes
|
$
|
60,789
|
|
|
$
|
3,311
|
|
|
$
|
(23,363
|
)
|
|
$
|
40,737
|
|
|
|
|
|
|
|
|
|
Other data:
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
$
|
3,403
|
|
|
$
|
1,128
|
|
|
$
|
156
|
|
|
$
|
4,687
|
|
Income tax expense
|
$
|
898
|
|
|
$
|
238
|
|
|
$
|
703
|
|
|
$
|
1,839
|
|
Intangible assets, net
|
$
|
5,462
|
|
|
$
|
14,157
|
|
|
$
|
—
|
|
|
$
|
19,619
|
|
Goodwill
|
$
|
25,822
|
|
|
$
|
19,011
|
|
|
$
|
—
|
|
|
$
|
44,833
|
|
Capital expenditures
|
$
|
3,653
|
|
|
$
|
249
|
|
|
$
|
478
|
|
|
$
|
4,380
|
|
Total assets
|
$
|
151,324
|
|
|
$
|
42,159
|
|
|
$
|
48,544
|
|
|
$
|
242,027
|
|
Total liabilities
|
$
|
56,407
|
|
|
$
|
3,827
|
|
|
$
|
35,716
|
|
|
$
|
95,950
|
|
NOTE 24 - RELATED PARTIES
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 a hospital outpatient department ("HOPD"). The Athelite investment is accounted for as an equity method investment (refer to Note 4 - Investments in associates). At
December 31, 2017
, the Company had
$3.8 million
in accounts receivable from the HOPD.
As a result of the AZ Vein acquisition in October 2016 and subsequent settlement agreement executed in February 2018 that was previously discussed in Note 3 - Business Acquisitions, an executive of the Company is owed
$2.0 million
, as of
December 31, 2017
. In addition, the Company entered into agreements to lease facility space with the same executive. Facility lease costs were
$1.4 million
in 2017.
As a result of the Elite acquisition in November 2017, the Company made a payment of
$0.8 million
related to the purchase of a Company executive's equity in Elite.
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
,
$2.0 million
and
$1.7 million
as a result of the book deal during the twelve months ended
December 31, 2017
, 2016 and 2015, respectively. The Company incurred expenses of
nil
,
$1.2 million
, and
nil
related to the marketing services entity during the twelve months ended
December 31, 2017
, 2016 and 2015, respectively. The Company incurred expenses of
nil
,
$1.1 million
and
$0.7 million
related to the Consulting services entity during the twelve months ended
December 31, 2017
, 2016 and 2015, respectively.
|
|
|
•
|
In July 2014, the Company entered into a marketing services agreement with a physician equity owner and an entity owned by that physician equity owner’s brother. The Company incurred expenses of
$0.4 million
,
$1.3 million
and
$0.6 million
to the entity during the twelve months ended
December 31, 2017
, 2016 and 2015, 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
December 31, 2017
, the Company has a net amount due from these related parties of
$6.0 million
. In addition, the Company leases certain medical equipment and facility space from these related parties. Equipment lease costs of
$2.1 million
,
$2.2 million
and
$2.3 million
were
|
incurred during the twelve months ended
December 31, 2017
, 2016 and 2015, respectively. Facility lease costs of
$1.8 million
,
$1.8 million
and
$1.7 million
were incurred during the twelve months ended
December 31, 2017
, 2016 and 2015, 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
,
$0.5 million
and
$0.6 million
to the entity during the twelve months ended
December 31, 2017
, 2016 and 2015, 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 and an entity owned by the physician equity owner's wife to include consulting, marketing, medical supplies, medical directorship and on-call agreements (collectively "service agreements"). The Company incurred expenses of
$2.7 million
,
$2.6 million
and
$0.8 million
in fees owed pursuant to the management agreement to the entity during the twelve months ended
December 31, 2017
, 2016 and 2015, respectively. The Company has incurred expenses of
$6.6 million
,
$7.9 million
and
$2.9 million
in fees owed pursuant to the service agreements to the entity during the twelve months ended
December 31, 2017
, 2016 and 2015, respectively.
|
|
|
•
|
In September 2014, the Company entered into a services agreement with an executive officer's brother who has financial interests in a related entity. The Company incurred expenses pursuant to service agreements of
$0.2 million
,
nil
and
nil
to the entity during the twelve months ended
December 31, 2017
, 2016 and 2015, 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 an ongoing business relationship with the Company. The Company incurred expenses of
$1.3 million
and
$0.6 million
during the twelve months ended
December 31, 2017
and 2016, respectively. At
December 31, 2017
, the Company has a net amount due to this related party of
nil
.
|
NOTE - 25 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, including claims for damages for personal injuries, medical malpractice, breach of contracts, and employment related claims. In certain of these actions, plaintiffs' requests payment for damages, including punitive damages that may not be covered by insurance. 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
$80 million
Canadian dollars plus interest. The defendants intend to vigorously defend against these claims. This is a highly defensible case. We are confident in prevailing at trial or achieve a favorable settlement.
NOTE 26 - SUBSEQUENT EVENTS
In February 2018, subsequent to the reporting period, the Company entered into a settlement agreement in connection with contract disputes that arose during the year with the sellers of the Company's acquisition of AZ Vein previously discussed in Note 3 - Business Acquisitions.
SUPPLEMENTAL FINANCIAL INFORMATION
SELECTED QUARTERLY FINANCIAL DATA
(
UNAUDITED
)
The following table presents certain quarterly statement of earnings data for the years ended December 31, 2017, 2016 and 2015. The quarterly statement of earnings data set forth below was derived from the Company’s unaudited financial statements and includes all adjustments, consisting of normal recurring adjustments, which the Company considers necessary for a fair presentation thereof. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full year or predictive of future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2017
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
(in thousands, except per share amounts)
|
Revenues, net
|
$
|
68,302
|
|
|
$
|
79,962
|
|
|
$
|
64,652
|
|
|
$
|
86,801
|
|
Operating (loss) income
|
$
|
(3,135
|
)
|
|
$
|
7,385
|
|
|
$
|
1,283
|
|
|
$
|
16,776
|
|
Net (loss) income
|
$
|
(2,206
|
)
|
|
$
|
3,255
|
|
|
$
|
1
|
|
|
$
|
9,231
|
|
Net income (loss) attributable to noncontrolling
|
$
|
192
|
|
|
$
|
1,670
|
|
|
$
|
(1,013
|
)
|
|
$
|
5,635
|
|
Net (loss) income attributable to Nobilis Health Corp
|
$
|
(2,398
|
)
|
|
$
|
1,585
|
|
|
$
|
1,014
|
|
|
$
|
3,596
|
|
Net (loss) income per common share attributable to Nobilis Health Corp.
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.03
|
)
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
$
|
0.05
|
|
Diluted
|
$
|
(0.03
|
)
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
$
|
0.05
|
|
Total Assets
|
$
|
308,161
|
|
|
$
|
310,089
|
|
|
$
|
317,099
|
|
|
$
|
431,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
(in thousands, except per share amounts)
|
Revenues
|
$
|
51,273
|
|
|
$
|
61,871
|
|
|
$
|
70,683
|
|
|
$
|
101,917
|
|
Operating (loss) income
|
$
|
(9,694
|
)
|
|
$
|
55
|
|
|
$
|
(1,101
|
)
|
|
$
|
20,778
|
|
Net (loss) income
|
$
|
(6,764
|
)
|
|
$
|
2,515
|
|
|
$
|
(2,263
|
)
|
|
$
|
13,614
|
|
Net (loss) income attributable to noncontrolling
|
$
|
(1,799
|
)
|
|
$
|
(2,291
|
)
|
|
$
|
496
|
|
|
$
|
4,247
|
|
Net (loss) income attributable to Nobilis Health Corp.
|
$
|
(4,965
|
)
|
|
$
|
4,806
|
|
|
$
|
(2,759
|
)
|
|
$
|
9,367
|
|
Net (loss) income per common share attributable to Nobilis Health Corp.
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.07
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.13
|
|
Diluted
|
$
|
(0.07
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.13
|
|
Total Assets
|
$
|
228,167
|
|
|
$
|
232,940
|
|
|
$
|
240,983
|
|
|
$
|
305,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
(in thousands, except per share amounts)
|
Revenues, net
|
$
|
37,851
|
|
|
$
|
48,867
|
|
|
$
|
52,483
|
|
|
$
|
90,015
|
|
Operating income
|
$
|
3,883
|
|
|
$
|
1,136
|
|
|
$
|
3,051
|
|
|
$
|
23,580
|
|
Net income
|
$
|
15
|
|
|
$
|
3,379
|
|
|
$
|
13,318
|
|
|
$
|
47,221
|
|
Net income attributable to noncontrolling
|
$
|
4,497
|
|
|
$
|
3,745
|
|
|
$
|
2,375
|
|
|
$
|
2,476
|
|
Net (loss) income attributable to Nobilis Health Corp
|
$
|
(4,482
|
)
|
|
$
|
(366
|
)
|
|
$
|
10,943
|
|
|
$
|
44,745
|
|
Net (loss) income per common share attributable to Nobilis Health Corp
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.07
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.15
|
|
|
$
|
0.61
|
|
Diluted
|
$
|
(0.07
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.14
|
|
|
$
|
0.58
|
|
Total Assets
|
$
|
104,480
|
|
|
$
|
153,518
|
|
|
$
|
105,332
|
|
|
$
|
242,027
|
|