Notes to Consolidated Financial Statements
(unaudited)
NOTE 1 – COMPANY DESCRIPTION
Nobilis Health Corp. and Subsidiaries (“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 trade 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. The Company consolidates subsidiaries in which it holds, directly or indirectly, more than 50% of the voting rights and variable interest entities, with respect to which the Company is determined to be the primary beneficiary. In the opinion of management, material adjustments, consisting of normal recurring adjustments, necessary for fair presentation have been included. All significant intercompany transactions and accounts have been eliminated upon consolidation.
The accompanying interim consolidated financial statements have not been audited by the Company’s independent registered public accounting firm, except the Consolidated Balance Sheet at
December 31, 2017
, which is derived from previously audited consolidated financial statements.
These consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. Therefore, these interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017
(“2017 Annual Report”) filed with the SEC on March 12, 2018. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. There have been no material changes to the Company’s critical accounting policies or estimates from those disclosed in the
2017
Annual Report.
Certain reclassifications have been made to prior period amounts to conform to current period financial statement classifications. The reclassifications included in these comparative interim consolidated financial statements represent a change in presentation within the consolidated statement of cash flows for the prior period presented and within Note 7 - Accrued Expenses and Other Current Liabilities to separately state deferred lease liabilities. The reclassifications were deemed to be immaterial to the consolidated financial statements both individually and in the aggregate.
Recently Issued Accounting Pronouncements
In June 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2018-07,
Compensation - Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting
. This update expands the scope of Topic 718 Compensation - Stock Compensation to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The update is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year, with early adoption permitted upon issuance. The Company is currently evaluating the method of adoption and the impact of adopting ASU 2018-07.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
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. The Company also continues to monitor proposals issued by the FASB to clarify the ASU and certain industry implementation issues.
Recently Adopted Accounting Standards
Revenue Recognition
Effective January 1, 2018, we adopted Accounting Standards Updates (ASU) 2014-09,
Revenue from Contracts with Customers
(ASC 606, "new revenue standard") and a series of related ASU's designed to create improved revenue recognition and disclosures to all contracts that were not completed, using the modified retrospective method.
Under the modified retrospective method, the cumulative effect of initially applying the new revenue standard is recorded as an adjustment to the opening balance of retained earnings on the date of initial application; prior periods are not restated. The Company did not identify any changes to the recognition of revenue under ASC 606 as compared to legacy U.S. GAAP. However adoption of the new standard also resulted in changes with regard to the presentation of revenues and the provision for uncollectible accounts. Upon adoption, any estimation of uncollectable amounts that were previously considered allowance for doubtful accounts are generally considered implicit price concessions that are a direct reduction to net operating revenues, with a corresponding reduction in the amounts presented separately as bad debt expense.
Under ASC 606, revenue is recognized 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 new revenue standard provides a principles-based, five-step model to be applied to all contracts with customers. The five steps are to identify the contract(s) with the customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when each performance obligation is satisfied.
The Company’s sources of revenues within the scope of ASC 606 include patient and net professional fees and related ancillary services, management fees, and contracted marketing revenues. These revenues are further discussed within Note 6 - Revenues and Related Trade Accounts Receivable, net.
The Company also recognizes revenues from factoring. Factoring revenues are generated from certain trade accounts receivables purchased from third parties (typically, practicing physicians) in the ordinary course of business, and are accounted for under ASC 860
Transfers and Servicing
. 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.
Other Recently Adopted Accounting Standards
In February 2018, the FASB issued ASU 2018-03,
Technical Corrections and Improvements to Financial Instruments (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities
. This update was issued to clarify certain narrow aspects of guidance concerning the recognition of financial assets and liabilities established in ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. This includes an amendment to clarify that an entity measuring an equity security using the measurement alternative may change its measurement approach to a fair valuation method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would apply to that security and all identical or similar investments of the same issued. The update is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years beginning after June 15, 2018. The Company adopted this pronouncement in the first quarter of 2018 and had no material impact on our consolidated financial statements.
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 ("Elite")
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.
For the
three months ended June 30, 2018
, Elite had
$6.6 million
in net revenues and net income attributable to the Company of
$1.1 million
which is included in the Company's consolidated statement of operations for the
three months ended June 30, 2018
. For the
six months ended June 30, 2018
, Elite had
$13.0 million
in net revenues and net income attributable to the Company of
$2.5 million
which is included in the Company’s consolidated statement of operations for the
six months ended June 30, 2018
.
The costs related to the transaction were
$0.3 million
and were expensed during the fourth quarter in 2017. These costs are included in the corporate general and administrative expenses in the Company’s consolidated statement of operations for the year ended December 31, 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 the analysis during 2018. For the Elite intangible assets, the Company 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 non-compete agreement, and the relief-from-royalty method to estimate the fair value of the trade name. These are included within the intangible assets balance in the table below. To evaluate the contract value of the acquired trade accounts receivable, the Company 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
|
|
|
|
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
|
|
Intangible assets
|
|
47,905
|
|
Goodwill
|
|
46,069
|
|
Total assets acquired
|
|
$
|
113,041
|
|
|
|
|
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.
Unaudited Supplemental Pro Forma Information
The following table presents the unaudited pro forma results of the Company as if all of the business combinations previously discussed had been made on January 1, 2016, the annual period prior to the date of the acquisitions. The pro forma information is based on the Company’s consolidated results of operations for the
three and six
months ended June 30,
2017
. The unaudited supplemental pro forma financial information has been provided for illustrative purposes only and does not purport to be indicative of the actual results that would have been achieved by combining the companies for the periods presented, or of the results that may be achieved by the combined companies in the future. Further, results may vary significantly from the results reflected in the following unaudited supplemental pro forma financial information because of future events and transactions, as well as other factors.
The unaudited supplemental pro forma financial information presented below has been prepared by adjusting the historical results of the Company to include historical results of the acquired businesses described above and was then adjusted: (i) to increase amortization expense resulting from intangible assets acquired; (ii) to reduce interest expense from debt which was retained by the seller upon acquisition of the respective businesses and concurrently increase the Company's interest expense based upon the purchase price; and (iii) to increase depreciation expense for the incremental increase in the value of property and equipment acquired; (iv) to decrease expenses for management services which were provided by the preceding parent entity and to concurrently
increase expenses for management services which are now provided by the Company; (v) to adjust earnings per share to reflect the common shares issued as part of the purchase consideration. The unaudited supplemental pro forma financial information does not include adjustments to reflect the impact of other cost savings or synergies that may result from these acquisition.
The following table shows our pro forma results for the
three and six
months ended June 30, 2017 (
in thousands, except per share amounts
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
2017
|
|
|
|
|
|
|
Revenue
|
|
|
$
|
90,254
|
|
|
$
|
171,518
|
|
Income from operations
|
|
|
$
|
12,819
|
|
|
$
|
15,423
|
|
Net income (loss) attributable to Nobilis Health Corp.
|
|
|
$
|
2,840
|
|
|
$
|
1,682
|
|
Net income (loss) per basic common share
|
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
Pro-forma adjustments for 2018 are not applicable as all of the entities mentioned above were acquired prior to the
three and six
months ended June 30, 2018.
NOTE 4 – INVESTMENTS IN ASSOCIATES
In March 2016, the Company acquired a
58%
interest in Athelite Holdings LLC ("Athelite"), a holding company with a
70%
interest in Dallas Metro Surgery Center LLC ("Dallas Metro"), a company formed to provide management services to a Hospital Outpatient Department (HOPD). In April 2016, Athelite interest in Dallas Metro was reduced to
62%
. The Athelite investment is accounted for as an equity method investment as the Company did not obtain the necessary level of control for the investment to be accounted for as a business combination. This is due to the fact that the Company does not have the ability to directly appoint a majority of the board members of Dallas Metro or independently make strategic operational decisions. The carrying value as of
June 30, 2018
was
$0.4 million
. The investment is classified as other long-term assets in the Consolidated Balance Sheets.
NOTE 5 – FINANCIAL INSTRUMENTS AND CONCENTRATION
The Company is exposed to risks that arise from its use of financial instruments. This note describes the Company’s objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect to these risks is presented throughout these consolidated financial statements.
Principal financial instruments
The principal financial instruments used by the Company, from which financial instrument risk arises, are as follows:
•
Trade accounts receivable and other receivables
•
Investments in associates
•
Accounts payable, accrued liabilities and other current liabilities
•
Other liabilities and notes payable
•
Capital leases
•
Lines of credit
•
Debt
•
Warrants
•
Non-employee stock options
The carrying amounts of the Company’s cash, trade accounts receivable and other receivables, accounts payable, accrued liabilities, other current liabilities and other liabilities as reflected in the consolidated financial statements approximate fair value due to their short term maturity. The estimated fair value of the Company's other long-term debt instruments approximate their carrying amounts as the interest rates approximate the Company's current borrowing rate for similar debt instruments of comparable maturity, or have variable interest rates.
Financial instruments - risk management
The Company’s financial instrument risks include, but are not limited to the following:
•
Credit risk
•
Market risk
•
Liquidity risk
•
Interest rate risk
Credit risk
Credit risk is the risk of financial loss to the Company if a patient, non-partner surgeon or insurance company fails to meet its contractual obligations. The Company, in the normal course of business, is exposed mainly to credit risk on its trade accounts receivable from insurance companies, other third-party payors, and physicians. Trade accounts receivables are net of applicable bad debt reserves, which are established based on specific credit risk associated with insurance companies, payors and other relevant information.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due and arises from the Company’s management of working capital. The Company’s objective to managing liquidity risk is to ensure that it will have sufficient cash to allow it to meet its liabilities when they become due. To achieve this objective, it seeks to maintain cash balances (or agreed credit facilities) to meet expected requirements. The liquidity risk of the Company and its subsidiaries is managed centrally by the Company’s finance function. The Company believes that there are currently no concerns of its ability to meet its liabilities as they become due for the foreseeable future.
Market risk
Market risk is the risk that the fair value of future cash flows of financial instruments will fluctuate due to changes in interest rates and/or foreign currency exchange rates.
Interest rate risk
The Company entered into a revolving line of credit that, from time to time, may increase interest rates based on market index.
The following tables set forth certain information with respect to the Company’s payor concentration. Patient and net professional fee revenues by payor are summarized below for the applicable periods:
MEDICAL SEGMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
Payors
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Private insurance and other private pay
|
|
96.9
|
%
|
|
97.4
|
%
|
|
97.4
|
%
|
|
97.4
|
%
|
Workers compensation
|
|
1.4
|
%
|
|
1.3
|
%
|
|
1.2
|
%
|
|
1.8
|
%
|
Medicare
|
|
1.7
|
%
|
|
1.3
|
%
|
|
1.4
|
%
|
|
0.8
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
MARKETING SEGMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
Payors
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Private insurance and other private pay
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Workers compensation
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Medicare
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
CONSOLIDATED SEGMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
Payors
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Private insurance and other private pay
|
|
97.1
|
%
|
|
97.6
|
%
|
|
97.5
|
%
|
|
97.5
|
%
|
Workers compensation
|
|
1.3
|
%
|
|
1.2
|
%
|
|
1.1
|
%
|
|
1.7
|
%
|
Medicare
|
|
1.6
|
%
|
|
1.2
|
%
|
|
1.4
|
%
|
|
0.8
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Three facilities represent approximately
80%
and
88%
of the Company's contracted marketing revenues for the
three months ended June 30, 2018
and
2017
, respectively, and
82%
and
84%
for the
six months ended June 30, 2018
and
2017
.
NOTE 6 - REVENUES AND RELATED TRADE ACCOUNTS RECEIVABLE
Net Patient and Professional Fees
Net patient and professional fees - Net patient and professional fees include facility fees, ancillary services fees, and management fees for services rendered at the healthcare facilities we operate or manage and consist primarily of fees for the use of those facilities. Facility fees and ancillary services fees are recognized at the date the related medical procedure is performed, which is the point in time the promised services are provided. Given the nature of our business, we have no material post-care performance obligations after the date of the medical procedure. Ancillary services are performed during an episode of care and include neuromonitoring, anesthesia, and professional staffing. Facility fees as well as related ancillary services fees are recognized at the amounts expected to be collected, net of any patient discounts, contractual and other adjustments of third-party payors and any implicit price concessions. Our revenues exclude any amounts billed for physicians’ services, which are billed separately by the physicians to the patient or third-party payor.
Management fees are earned from long-term management agreements entered into with third-party healthcare facilities. The Company’s performance obligation in these arrangements is to manage the day-to-day operations of these facilities for which the Company earns monthly management fees based on a percentage of collections of the facilities, less certain expenses incurred by the facilities during the period. The Company acts as an agent of the contracting healthcare provider in these scenarios and recognizes revenue over the management period as the management services are performed.
The Company estimates patient and net professional fees using the expected value of each patient visit, which is based on the facility in which the service was performed, the services provided and the third-party payor, if one is applicable, that is associated with the encounter.
If a service is provided at an in-network facility, these three parameters are utilized to determine the contract rate for such services.
If a service is provided at an out-of-network facility, these three parameters are utilized along with historical collection experience to determine the applicable expected value.
Payment terms for services vary depending on the benefits available from the patient's insurance provider. In some cases, services provided are not covered by a contract between the Company and the payor. In these instances, payment terms such as timing are not defined. In instances where a contract is in place for services, the timing of payment is required within a specified time frame or interest begins to accrue on the outstanding balance. Given these constraints and the variable nature of the information required by payors, the collection timing is protracted and can be lengthy.
The Company does not disclose the transaction price allocated to unsatisfied performance obligations because its performance obligations have an expected duration of one year or less (facility fees and ancillary services fees) or the promised consideration is variable and relates to a wholly unsatisfied promised service (management fees). As of
June 30, 2018
, our management fee contracts have a remaining duration of approximately five years.
The following table disaggregates the Company’s net patient and professional fees by facility type - i.e., by hospital, ASC, clinic service and ancillary services (
in thousands except case data
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six months ended June 30, 2018
|
|
Net Revenues
(in thousands)
|
|
Number of Cases
|
|
Net Revenues
(in thousands)
|
|
Number of Cases
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospitals
|
$
|
46,275
|
|
|
$
|
50,866
|
|
|
3,247
|
|
|
2,441
|
|
|
$
|
91,944
|
|
|
$
|
92,717
|
|
|
5,962
|
|
|
5,034
|
|
ASCs
|
11,095
|
|
|
8,289
|
|
|
2,859
|
|
|
1,945
|
|
|
23,139
|
|
|
16,402
|
|
|
5,260
|
|
|
3,621
|
|
Clinic service
|
5,172
|
|
|
4,650
|
|
|
—
|
|
|
—
|
|
|
8,237
|
|
|
7,756
|
|
|
—
|
|
|
—
|
|
Ancillary services
|
1,937
|
|
|
13,268
|
|
|
—
|
|
|
—
|
|
|
3,641
|
|
|
25,099
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
64,479
|
|
|
$
|
77,073
|
|
|
6,106
|
|
|
4,386
|
|
|
$
|
126,961
|
|
|
$
|
141,974
|
|
|
11,222
|
|
|
8,655
|
|
Contracted Marketing
Contracted Marketing Revenues - The Company earns contracted marketing revenue for marketing services provided through marketing services agreements with third-party specialty surgical hospitals, ASC’s and other ancillary service providers that are not a part of the Company’s network of licensed facilities. The Company’s performance obligation under these arrangements is to identify candidates for applicable medical procedures through marketing, patient intake, and upfront education efforts for which
we earn a fee based on a percentage of collections from the marketed procedures performed by the outside facilities. Revenue is recognized upon performance of the corresponding medical procedure, which is the point in time our marketing services transfer a benefit to the third-party facilities.
The Company does not disclose the transaction price allocated to unsatisfied performance obligations because the promised consideration is variable and relates to wholly unsatisfied promised services. The Company estimates contracted marketing revenue using the expected value of each successfully marketed medical procedure, which is based on the facility in which the service is performed, the services provided and the third-party payor, if one is applicable. These parameters are utilized along with historical collection experience to determine the contracted marketing fee. Most of our marketing contracts have initial one-year terms with automatic renewals.
Revenues for contract marketing were
$2.3 million
and
$1.6 million
for the
three months ended June 30, 2018
and
2017
, respectively. Revenues for contract marketing were
$2.4 million
and
$3.0 million
for the
six months ended June 30, 2018
, and
2017
, respectively.
All contract marketing revenues, together with factoring revenues, are included in our Marketing segment.
Contract Assets and Liabilities
Payment for services performed is generally received at the date of the related medical procedure or thereafter, at which time the Company has an unconditional right to collection. For management fees, payment is received monthly for the services rendered in the preceding month. As such, the Company does not have any material contract asset or contract liability balances.
Trade Accounts Receivable
A detail of trade accounts receivable, net is as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Trade accounts receivable
|
$
|
136,839
|
|
|
$
|
140,580
|
|
Allowance for doubtful accounts
|
—
|
|
|
(2,598
|
)
|
Receivables purchased
|
6,860
|
|
|
6,540
|
|
Trade accounts receivable, net
|
$
|
143,699
|
|
|
$
|
144,522
|
|
Trade accounts receivable related to accounts greater than 365 days was
$38.8 million
and
$20.4 million
as of
June 30, 2018
and
December 31, 2017
, respectively.
For patient accounts receivable resulting from revenue recognized prior to January 1, 2018, an allowance for doubtful accounts was established to reduce the carrying value of such receivables to their estimated net realizable value. Under the new revenue standard, which we adopted effective January 1, 2018, the estimated uncollectable amounts are generally considered implicit price concessions that are a direct reduction to trade accounts receivable rather than allowance for doubtful accounts. However, subsequent changes in estimate of collectability due to a change in the financial status of a payor, for example a bankruptcy, will be recognized as bad debt expense in operating expenses. Bad debt expense was
nil
for the
three and six
months ended
June 30, 2018
and
nil
for the
three and six
months ended
June 30, 2017
.
A detail of allowance for doubtful accounts as of
June 30, 2018
and
December 31, 2017
is as follows (
in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
Costs and Expenses
|
|
Reclassification for Implicit Price Concessions
|
|
Write-offs, net
(1)
|
|
Balance at End of Period
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017
|
|
$
|
(750
|
)
|
|
(2,402
|
)
|
|
—
|
|
|
554
|
|
|
$
|
(2,598
|
)
|
Balance as of June 30, 2018
|
|
$
|
(2,598
|
)
|
|
—
|
|
|
2,598
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Adjudication of previously recorded allowance for doubtful accounts
|
From time to time, we transfer to third parties certain of our trade accounts receivable balances on a non-recourse basis in return for advancement on payment to achieve a faster cash collection. As of
June 30, 2018
and
December 31, 2017
, there were no transferred receivables included in trade accounts receivable.
For the three months ended
June 30, 2018
and
2017
, the Company did not receive any advanced payments. For the
six months ended June 30, 2018
and
2017
, the Company received advanced payments of
nil
and
$0.1 million
, respectively. During the same time period, the Company transferred
nil
and
$0.5 million
of receivables, net of advancement of payment.
Athas Health, LLC ("Athas"), Nobilis Health Network Specialist Group, PLLC (NHNSG), NH Clinical Services, PLLC ("NH Clinical") and Premier Health Specialists, LLC ("Premier") purchase receivables from physicians, at a discount, on a non-recourse
basis. The discount and purchase price vary by specialty and are recorded at the date of purchase, which generally occurs
30
to
45
days after the accounts are billed. These purchased receivables are billed and collected by Athas, NHNSG, NH Clinical and Premier and they retain
100%
of what is collected after paying the discounted purchase price. Following the transfer of the receivable, the transferor has no continued involvement and there are no restrictions on the receivables.
Gross revenue from purchased receivables was
$3.5 million
and
$3.1 million
for three months ended
June 30, 2018
and
2017
, respectively. Revenue, net of the discounted purchase price, was
$1.6 million
and
$1.3 million
for the three months ended
June 30, 2018
and
2017
.
Gross revenue from purchased receivables was
$6.1 million
and
$7.5 million
for
six months ended June 30, 2018
and
2017
, respectively. Revenue, net of the discounted purchase price, was
$2.4 million
and
$3.3 million
for
six months ended June 30, 2018
and
2017
, respectively.
Trade accounts receivable for purchased receivables was
$6.9 million
and
$6.5 million
as of
June 30, 2018
and
December 31, 2017
, respectively. Revenue from receivables purchased is recorded in the factoring revenue line item within the Consolidated Statements of Operations.
NOTE 7 – ACCRUED LIABILITIES AND OTHER CURRENT LIABILITIES
The following table presents a summary of items comprising accrued liabilities and other current liabilities in the accompanying Consolidated Balance Sheets is as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Accrued liabilities:
|
|
|
|
Accrued salaries and related benefits
|
$
|
4,819
|
|
|
$
|
4,588
|
|
Contract services
|
4,340
|
|
|
3,836
|
|
Lab expense
|
3,233
|
|
|
6,366
|
|
Deferred lease liability
|
3,418
|
|
|
3,269
|
|
Other
|
13,706
|
|
|
17,334
|
|
Total accrued liabilities
|
$
|
29,516
|
|
|
$
|
35,393
|
|
Other current liabilities:
|
|
|
|
Estimated amounts due to third party payors
|
$
|
5,081
|
|
|
$
|
5,081
|
|
Additional equity interest purchase obligation in conjunction with Elite acquisition
|
4,389
|
|
|
4,389
|
|
Other
|
5,195
|
|
|
6,854
|
|
Total other current liabilities
|
$
|
14,665
|
|
|
$
|
16,324
|
|
NOTE 8 – OTHER LONG-TERM LIABILITIES
The Company assumed real property leases in conjunction with certain business acquisitions which required the Company to pay above market rentals through the remainder of the lease terms. Of the
$2.9 million
balance in other long-term liabilities at
June 30, 2018
, approximately
$2.6 million
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
June 30, 2018
, is
$0.1 million
for the remainder of
2018
,
$0.3 million
for each of
2019
,
2020
,
2021
,
$0.2 million
for
2022
, and
$1.7 million
thereafter.
NOTE 9 – DEBT
BBVA Credit Agreement
On October 28, 2016, the Company ("Borrower") entered into a BBVA Credit Agreement by and among the Company, certain subsidiaries of the Company parties thereto, the lenders from time to time parties thereto (the “Lenders”) with BBVA Compass Bank as Administrative Agent for the lending group.
The principal amount of the term loan (the “Term Loan”) pursuant to the BBVA Credit Agreement is
$52.5 million
, which bears interest on the outstanding principal amount thereof at a rate of the then applicable LIBOR, plus an applicable margin of
4.75%
. The effective rate for the Term Loan as of
June 30, 2018
was
7.08%
. All outstanding principal on the Term Loan under the Credit Agreement is due and payable on October 28, 2021.
The revolving credit facility is
$30.0 million
(the “Revolver”), which bears interest at the then applicable Interest Rate. The effective rate for the Revolver as of
June 30, 2018
was
7.08%
. The maturity date of the Revolver is October 28, 2021. Additionally, the
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
June 30, 2018
, the outstanding balances on the Term Loan and Revolver were
$97.3 million
and
$26.0 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
June 30, 2018
was
9.08%
. 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
June 30, 2018
, 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, 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 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”). This settlement resulted in the derecognition of certain liabilities, including the convertible promissory note of
$2.25 million
discussed herein.
Convertible Promissory Note - HVC
In conjunction with our purchase of HVC, we entered into a
$5.0 million
convertible promissory note. The convertible promissory note matures on March 8, 2019, bears interest at
5%
per annum and is payable in
two
equal installments over a
two
-year period. The convertible promissory note (outstanding principal but excluding accrued and unpaid interest) can be converted into common shares of NHC (the "Conversion Shares"), at the sole discretion of NHC and NHA, on the maturity date. The number of Conversion Shares will be based on a price per share equal to the quotient obtained by dividing the conversion amount by the volume weighted average price of the common shares on the NYSE in the trailing
ten
trading days prior to the maturity date. There are no pre-payment penalties.
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 as of
June 30, 2018
and
December 31, 2017
consisted of the following (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
Lines of credit
|
|
$
|
26,000
|
|
|
$
|
18,000
|
|
Term loan
|
|
97,269
|
|
|
100,488
|
|
Convertible promissory notes
|
|
7,500
|
|
|
8,500
|
|
Gross debt
|
|
130,769
|
|
|
126,988
|
|
Less: unamortized debt issuance costs
|
|
(5,433
|
)
|
|
(6,103
|
)
|
Debt, net of unamortized debt issuance costs
|
|
125,336
|
|
|
120,885
|
|
Less: current debt, net of unamortized debt issuance costs
|
|
(9,514
|
)
|
|
(8,016
|
)
|
Long-term debt, net
|
|
$
|
115,822
|
|
|
$
|
112,869
|
|
Future maturities of debt as of
June 30, 2018
are as follows (
in thousands
):
|
|
|
|
|
|
June 30, 2018
|
|
|
2018
|
$
|
5,813
|
|
2019
|
9,375
|
|
2020
|
5,125
|
|
2021
|
70,456
|
|
2022
|
40,000
|
|
Total
|
$
|
130,769
|
|
NOTE 10 – FAIR VALUE MEASUREMENTS
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including warrant and stock option derivative liabilities. There have been no transfers between fair value measurement levels during the
six
months ended
June 30, 2018
.
The following table summarizes our assets and liabilities measured at fair value on a recurring basis as of
June 30, 2018
and the Company's fiscal year ended
December 31, 2017
, 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, 2017:
|
|
|
|
|
|
|
|
Warrant and stock option derivative liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
384
|
|
|
$
|
384
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
384
|
|
|
$
|
384
|
|
June 30, 2018:
|
|
|
|
|
|
|
|
Warrant and stock option derivative liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
228
|
|
|
$
|
228
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
228
|
|
|
$
|
228
|
|
In certain cases, where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3 within the valuation hierarchy. Level 3 liabilities that were measured at estimated fair value on a recurring basis consist of warrant and stock option derivative liabilities.
The estimated fair values of the warrant and stock option derivative liabilities were measured using the Black-Scholes valuation model (refer to Note 12 - Options liabilities). Due to the nature of valuation inputs, the valuation of the warrants is considered a Level 3 measurement.
The remaining outstanding warrants expired in May of 2017. The balance of the Company's warrants is
zero
as of
June 30, 2018
.
NOTE 11 – SHARE BASED COMPENSATION
Stock Options
The Company granted a total of
280,000
and
650,000
stock options during the three and
six months ended June 30, 2018
, respectively. Of the options granted during the three months ended
June 30, 2018
,
250,000
of those vested immediately and
30,000
vest ratably over
one
and
three
-year periods. Of the options granted during the
six months ended June 30, 2018
,
350,000
of those vested immediately and
300,000
vest ratably over
one
and
three
-year periods. During the
six months ended June 30, 2018
,
325,000
options were forfeited, with various vesting periods.
The following table summarizes stock option activity for the
six
months ended
June 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Shares Underlying
Options
|
|
Weighted-
Average Exercise
Price
|
|
Weighted-Average
Remaining Life
(years)
|
|
|
|
|
|
|
Outstanding at January 1, 2017
|
7,544,025
|
|
|
$
|
2.61
|
|
|
9.0
|
|
Granted
|
615,000
|
|
|
$
|
1.61
|
|
|
9.8
|
|
Exercised
|
—
|
|
|
$
|
—
|
|
|
—
|
|
Forfeited
|
(605,000
|
)
|
|
$
|
3.14
|
|
|
—
|
|
Outstanding at June 30, 2017
|
7,554,025
|
|
|
$
|
2.49
|
|
|
8.6
|
|
Exercisable at
|
|
|
|
|
|
Exercisable at June 30, 2017
|
3,773,400
|
|
|
$
|
2.32
|
|
|
8.3
|
|
Exercisable at
|
|
|
|
|
|
Outstanding at January 1, 2018
|
8,864,025
|
|
|
$
|
2.17
|
|
|
8.5
|
|
Granted
|
650,000
|
|
|
$
|
1.34
|
|
|
9.8
|
|
Exercised
|
(66,667
|
)
|
|
$
|
0.97
|
|
|
—
|
|
Forfeited
|
(325,000
|
)
|
|
$
|
2.61
|
|
|
—
|
|
Outstanding at June 30, 2018
|
9,122,358
|
|
|
$
|
2.11
|
|
|
8.2
|
|
Outstanding at
|
|
|
|
|
|
Exercisable at June 30, 2018
|
6,263,703
|
|
|
$
|
2.21
|
|
|
7.9
|
|
The above table includes
500,000
options issued to a non-employee,
500,000
of these are exercisable, and all are still outstanding at
June 30, 2018
. Refer to Note 12 - Options liabilities for discussion regarding the classification of these options within the Company's consolidated balance sheets.
The total intrinsic value of stock options exercised was
nil
during the
six
months ended
June 30, 2018
and
2017
. There were no options exercised during the six months ended
June 30, 2017
. Assuming all stock options outstanding were fully vested at
June 30, 2018
, the total intrinsic value of in-the-money outstanding stock options would have been
nil
at
June 30, 2018
.
The Company recorded total stock compensation expense relative to employee stock options of
$0.8 million
and
$0.2 million
for the three months ended
June 30, 2018
and
2017
, respectively, and
$1.7 million
and
$1.6 million
for
six
months ended
June 30, 2018
and
2017
.
The fair values of the employee stock options used in recording compensation expense are computed using the Black-Scholes option pricing model. The table below shows the assumptions used in the model for options awarded during the
six
months ended
June 30, 2018
and
2017
.
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
|
|
|
Expected price volatility
|
80% - 91%
|
|
87% - 91%
|
Risk free interest rate
|
2.45% - 2.84%
|
|
1.78% - 2.14%
|
Expected annual dividend yield
|
0%
|
|
0%
|
Expected option term (years)
|
5 - 6
|
|
5-6
|
Expected forfeiture rate
|
7.4% - 12.9%
|
|
3.1% - 11.6%
|
Grant date fair value per share
|
$0.95 - $1.15
|
|
$0.99 - $1.81
|
Grant date exercise price per share
|
$1.22 - $1.57
|
|
$1.35 - $2.32
|
For stock options, the Company recognizes share based compensation net of estimated forfeitures and revises the estimates in the subsequent periods if actual forfeitures differ from the estimates. Forfeiture rates are estimated based on historical experience as well as expected future behavior.
NOTE 12 – OPTIONS LIABILITIES
Options Issued to Non-Employees
In 2014, the Company issued
650,000
options to professionals providing services to the organization. These professionals did not meet the definition of an employee under U.S. GAAP. During 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. At
June 30, 2018
, there were
500,000
options outstanding all of which are fully vested and exercisable to the remaining non-employee professional.
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.
Options issued to non-employees are reclassified from liabilities to equity 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 derivative liabilities” and recorded at estimated fair value at each reporting date, computed using the Black-Scholes valuation method. Changes in the liability from period to period will be recorded in the Consolidated Statements of Operations under the caption “Change in fair value of warrant and stock option derivative liabilities”. At
June 30, 2018
, there were
500,000
unexercised non-employee options requiring liability classification.
The changes in fair value of the liability related to vested yet unexercised options issued to non-employees during the
six
months ended
June 30, 2018
and
2017
were as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
Balance at beginning of year
|
$
|
384
|
|
|
$
|
899
|
|
Vested during the period
|
—
|
|
|
—
|
|
Change in fair value recorded in earnings
|
(156
|
)
|
|
(184
|
)
|
Balance as of June 30, 2018 and 2017
|
$
|
228
|
|
|
$
|
715
|
|
NOTE 13 – EARNINGS PER SHARE
Basic net earnings attributable to Nobilis common shareholders, per common share, excludes dilution and is computed by dividing net earnings attributable to Nobilis common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net earnings attributable to Nobilis common shareholders, per common share, is computed by dividing net earnings attributable to Nobilis common shareholders by the weighted-average number of common shares outstanding during the period plus any potential dilutive common share equivalents, including shares issuable upon the vesting stock option awards determined under the treasury stock method, or potentially convertible shares related to our convertible promissory notes determined under the if-converted method, whichever method is more dilutive.
A detail of the Company’s earnings per share is as follows (
in thousands, except for share and per share amounts
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
Net income (loss) attributable to Nobilis Health Corp.
|
$
|
885
|
|
|
$
|
1,585
|
|
|
$
|
(2,967
|
)
|
|
$
|
(813
|
)
|
Weighted average common shares outstanding
|
78,186,000
|
|
|
77,805,014
|
|
|
78,184,907
|
|
|
77,805,014
|
|
Net income (loss) per common share
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
Net income (loss) attributable to Nobilis Health Corp.
|
$
|
885
|
|
|
$
|
1,585
|
|
|
$
|
(2,967
|
)
|
|
$
|
(813
|
)
|
Dilutive effect of convertible debt interest
|
49
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income (loss) attributable to Nobilis Health Corp.
after assumed conversion
|
$
|
934
|
|
|
$
|
1,585
|
|
|
$
|
(2,967
|
)
|
|
$
|
(813
|
)
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
78,186,000
|
|
|
77,805,014
|
|
|
78,184,907
|
|
|
77,805,014
|
|
Dilutive effect of stock options and convertible debt
|
3,967,945
|
|
|
310,228
|
|
|
—
|
|
|
—
|
|
Diluted weighted average common shares for assumed conversion
|
82,153,945
|
|
|
78,115,242
|
|
|
78,184,907
|
|
|
77,805,014
|
|
Net income (loss) per common share
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
Since the Company reflected a net loss during the six months ended June 30, 2018 and 2017, the effect of considering any common stock equivalents would have been anti-dilutive. As a result, a separate computation of dilutive loss per share is not presented.
NOTE 14 – 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
June 30, 2018
and
December 31, 2017
. The contingently redeemable noncontrolling interests associated with these entities are classified in the Company’s Consolidated Balance Sheets as “temporary” or mezzanine equity. Changes in contingently redeemable noncontrolling interests are as follows at
June 30, 2018
and
December 31, 2017
(
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NHC - ASC Dallas
|
|
First Nobilis
|
|
Total
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
Balance at January 1, 2018
|
$
|
546
|
|
|
$
|
16,615
|
|
|
$
|
17,161
|
|
Distributions
|
—
|
|
|
(1,617
|
)
|
|
(1,617
|
)
|
Net income (loss) attributable to noncontrolling interests
|
(11
|
)
|
|
232
|
|
|
221
|
|
Total contingently redeemable noncontrolling interests at June 30, 2018
|
$
|
535
|
|
|
$
|
15,230
|
|
|
$
|
15,765
|
|
Certain of our consolidated subsidiaries that are less than wholly owned meet the definition of a Variable Interest Entity (VIE), and we hold voting interests in all such entities. We consolidate the activities of VIEs for which we are the primary beneficiary. In order to determine whether we own a variable interest in a VIE, we perform a 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 VIEs 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 VIEs included in the Company’s Consolidated Balance Sheets (
in thousands
):
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
|
|
|
Total cash and short term investments
|
$
|
973
|
|
|
$
|
1,709
|
|
Total trade accounts receivable
|
20,883
|
|
|
25,385
|
|
Intercompany
(1)
|
9,181
|
|
|
9,021
|
|
Total other current assets
|
1,663
|
|
|
1,918
|
|
Total property and equipment
|
14,020
|
|
|
15,457
|
|
Total other assets
|
190
|
|
|
190
|
|
Total assets
|
$
|
46,910
|
|
|
$
|
53,680
|
|
|
|
|
|
Total accounts payable
|
$
|
5,400
|
|
|
$
|
3,617
|
|
Total other liabilities
|
1,458
|
|
|
1,662
|
|
Intercompany
(1)
|
42,829
|
|
|
41,201
|
|
Total accrued liabilities
|
9,459
|
|
|
14,057
|
|
Long term - capital lease
|
10,714
|
|
|
11,407
|
|
Total liabilities
|
$
|
69,860
|
|
|
$
|
71,944
|
|
(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 15 – INCOME TAXES
The Company is a corporation subject to federal income tax at a statutory rate of
21%
of pretax earnings. The Company estimates an annual effective income tax rate of
19.7%
for U.S. and none for Canada based on the projected results for the year and applies this rate to income before taxes to calculate income tax expense.
The net tax benefit for the
six months ended June 30, 2018
was
$0.2 million
, resulting in an effective tax rate of approximately
13.0%
, compared to an income tax expense of
$0.7 million
with an effective tax rate of approximately
39.9%
for the prior corresponding period, which was subject to a federal income tax statutory rate of
35%
. The net tax expense amount includes
$0.6 million
tax expense for states in which the Company operates for each of the
six months ended June 30, 2018
and
2017
. The Company did not recognize any foreign tax expense or benefit for the
six months ended June 30, 2018
and
2017
, as the Company had a full valuation allowance against deferred tax assets.
The following items caused the first quarter effective income tax rate to be different from the statutory rate:
|
|
•
|
Canada is excluded from the worldwide annual effective tax rate calculation because Canada has historical ordinary losses but does not expect to recognize them and has recorded a full valuation allowance, which increases the effective tax rate by approximately
0.1%
for the
six months ended June 30, 2018
.
|
|
|
•
|
All of the Partnership’s earnings are included in the Company’s net income; however, the Company is not required to record income tax expense or benefit with respect to the portion of the Company’s earnings allocated to its noncontrolling interests, which increases the effective tax rate by approximately
4.6%
for the
six months ended June 30, 2018
.
|
Based on management’s analysis, the Company did not have any uncertain tax positions as of
June 30, 2018
.
NOTE 16 – BUSINESS SEGMENT INFORMATION
A summary of the business segment information for the three and six months ended
June 30, 2018
and
2017
is as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
Medical
|
Marketing
|
Corporate
|
Total
|
|
|
|
|
|
Revenues
|
$
|
65,341
|
|
$
|
3,848
|
|
$
|
—
|
|
$
|
69,189
|
|
Operating expenses
|
54,825
|
|
3,330
|
|
—
|
|
58,155
|
|
Corporate costs
|
—
|
|
—
|
|
6,904
|
|
6,904
|
|
Income (loss) from operations
|
10,516
|
|
518
|
|
(6,904
|
)
|
4,130
|
|
Change in fair value of warrant and option liabilities
|
—
|
|
—
|
|
(217
|
)
|
(217
|
)
|
Interest expense
|
558
|
|
—
|
|
2,734
|
|
3,292
|
|
Other income
|
(252
|
)
|
—
|
|
(928
|
)
|
(1,180
|
)
|
Income (loss) before income taxes
|
$
|
10,210
|
|
$
|
518
|
|
$
|
(8,493
|
)
|
$
|
2,235
|
|
|
|
|
|
|
Other data:
|
|
|
|
|
Depreciation and amortization expense
|
$
|
4,749
|
|
$
|
365
|
|
$
|
94
|
|
$
|
5,208
|
|
Income tax expense
|
$
|
437
|
|
$
|
5
|
|
$
|
53
|
|
$
|
495
|
|
Capital expenditures
|
$
|
586
|
|
$
|
42
|
|
$
|
69
|
|
$
|
697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
Medical
|
Marketing
|
Corporate
|
Total
|
|
|
|
|
|
Revenues
|
$
|
77,122
|
|
$
|
2,840
|
|
$
|
—
|
|
$
|
79,962
|
|
Operating expenses
|
61,899
|
|
3,975
|
|
—
|
|
65,874
|
|
Corporate costs
|
—
|
|
—
|
|
6,703
|
|
6,703
|
|
Income (loss) from operations
|
15,223
|
|
(1,135
|
)
|
(6,703
|
)
|
7,385
|
|
Change in fair value of warrant and option liabilities
|
—
|
|
—
|
|
188
|
|
188
|
|
Interest expense (income)
|
258
|
|
(8
|
)
|
1,113
|
|
1,363
|
|
Other expense
|
$
|
305
|
|
$
|
—
|
|
25
|
|
330
|
|
Income (loss) before income taxes
|
$
|
14,660
|
|
$
|
(1,127
|
)
|
$
|
(8,029
|
)
|
$
|
5,504
|
|
|
|
|
|
|
Other data:
|
|
|
|
|
Depreciation and amortization expense
|
$
|
2,297
|
|
$
|
431
|
|
$
|
80
|
|
$
|
2,808
|
|
Income tax expense
|
$
|
131
|
|
$
|
27
|
|
$
|
2,091
|
|
$
|
2,249
|
|
Capital expenditures
|
$
|
1,637
|
|
$
|
1,090
|
|
$
|
100
|
|
$
|
2,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
Medical
|
Marketing
|
Corporate
|
Total
|
|
|
|
|
|
Revenues
|
$
|
128,943
|
|
$
|
4,590
|
|
$
|
—
|
|
$
|
133,533
|
|
Operating expenses
|
111,296
|
|
5,955
|
|
—
|
|
117,251
|
|
Corporate costs
|
—
|
|
—
|
|
13,984
|
|
13,984
|
|
Income (loss) from operations
|
17,647
|
|
(1,365
|
)
|
(13,984
|
)
|
2,298
|
|
Change in fair value of warrant and option liabilities
|
—
|
|
—
|
|
(156
|
)
|
(156
|
)
|
Interest expense
|
820
|
|
—
|
|
5,357
|
|
6,177
|
|
Other income
|
(1,225
|
)
|
—
|
|
(888
|
)
|
(2,113
|
)
|
Income (loss) before income taxes
|
$
|
18,052
|
|
$
|
(1,365
|
)
|
$
|
(18,297
|
)
|
$
|
(1,610
|
)
|
|
|
|
|
|
Other data:
|
|
|
|
|
Depreciation and amortization expense
|
$
|
9,022
|
|
$
|
723
|
|
$
|
188
|
|
$
|
9,933
|
|
Income tax expense (benefit)
|
$
|
691
|
|
$
|
45
|
|
$
|
(945
|
)
|
$
|
(209
|
)
|
Intangible assets, net
|
$
|
52,286
|
|
$
|
10,409
|
|
$
|
—
|
|
$
|
62,695
|
|
Goodwill
|
$
|
97,059
|
|
$
|
19,013
|
|
$
|
—
|
|
$
|
116,072
|
|
Capital expenditures
|
$
|
1,009
|
|
$
|
53
|
|
$
|
276
|
|
$
|
1,338
|
|
Total assets
|
$
|
337,509
|
|
$
|
47,354
|
|
$
|
31,308
|
|
$
|
416,171
|
|
Total liabilities
|
$
|
70,265
|
|
$
|
7,944
|
|
$
|
132,474
|
|
$
|
210,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
Medical
|
Marketing
|
Corporate
|
Total
|
|
|
|
|
|
Revenues
|
$
|
141,928
|
|
$
|
6,336
|
|
$
|
—
|
|
$
|
148,264
|
|
Operating expenses
|
122,357
|
|
7,608
|
|
—
|
|
129,965
|
|
Corporate costs
|
—
|
|
—
|
|
14,049
|
|
14,049
|
|
Income (loss) from operations
|
19,571
|
|
(1,272
|
)
|
(14,049
|
)
|
4,250
|
|
Change in fair value of warrant and option liabilities
|
—
|
|
—
|
|
(187
|
)
|
(187
|
)
|
Interest expense (income)
|
518
|
|
(8
|
)
|
2,108
|
|
2,618
|
|
Other (income) expense
|
(25
|
)
|
(8
|
)
|
105
|
|
72
|
|
Income (loss) before income taxes
|
$
|
19,078
|
|
$
|
(1,256
|
)
|
$
|
(16,075
|
)
|
$
|
1,747
|
|
|
|
|
|
|
Other data:
|
|
|
|
|
Depreciation and amortization expense
|
$
|
4,254
|
|
$
|
812
|
|
$
|
163
|
|
$
|
5,229
|
|
Income tax expense
|
$
|
444
|
|
$
|
55
|
|
$
|
199
|
|
$
|
698
|
|
Intangible assets, net
|
$
|
8,610
|
|
$
|
12,159
|
|
$
|
—
|
|
$
|
20,769
|
|
Goodwill
|
$
|
50,386
|
|
$
|
19,011
|
|
$
|
—
|
|
$
|
69,397
|
|
Capital expenditures
|
$
|
4,253
|
|
$
|
2,215
|
|
$
|
168
|
|
$
|
6,636
|
|
Total assets
|
$
|
219,977
|
|
$
|
45,785
|
|
$
|
44,327
|
|
$
|
310,089
|
|
Total liabilities
|
$
|
65,334
|
|
$
|
6,720
|
|
$
|
80,392
|
|
$
|
152,446
|
|
NOTE 17 – RELATED PARTY TRANSACTIONS
In March 2016, the Company acquired an interest in Athelite, a holding company which owns an interest in Dallas Metro, a company formed to provide management services to an HOPD. The Athelite investment is accounted for as an equity method investment (refer to
Note 4 - Investments in associates
). At
June 30, 2018
, the Company had
$3.8 million
in trade accounts receivable from the HOPD.
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 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
nil
and
$0.4 million
to the entity during the
six
months ended
June 30, 2018
and
2017
, respectively.
|
|
|
•
|
In September 2014, the minority interest holder of a fully consolidated entity, who is also a partial owner of two other hospitals, entered into an ongoing business relationship with the Company. At
June 30, 2018
, the Company has a net amount due from these related parties of
$5.4 million
. In addition, the Company leases certain medical equipment and facility space from these related parties. Equipment lease costs of
$1.0 million
and
$1.1 million
were incurred during the
six
months ended
June 30, 2018
and
2017
, respectively. Facility lease costs of
$0.9 million
were incurred during both the
six
months ended
June 30, 2018
and
2017
, 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
$0.3 million
and
$1.5 million
in fees owed pursuant to the management agreement to the entity during the
six
months ended
June 30, 2018
and
2017
, respectively. The Company has incurred expenses of
$0.7 million
and
$4.3 million
in fees owed pursuant to the service agreements to the entity during the
six
months ended
June 30, 2018
and
2017
, 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
$0.5 million
during the
six
months ended
June 30, 2018
. At
June 30, 2018
, the Company has a net amount due to this related party of
$0.1 million
.
|
NOTE 18 – COMMITMENTS AND CONTINGENCIES
Litigation
In the normal course of our business, we are subject to legal proceedings brought by or against us and our subsidiaries, including claims for damages for personal injuries, medical malpractice, breach of contracts, and employment related claims. In certain of these actions, plaintiffs request 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. At this time, the Company believes it is too early to provide a realistic estimate of the Company’s exposure.