NOBILIS HEALTH MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Transcription

1 NOBILIS HEALTH MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the Three and Twelve Months Ended December 31, 2014

2 The following management discussion and analysis (MD&A) of the financial condition and results of operations of Nobilis Health Corp. and Subsidiaries (the Company or NHC ) for the three and twelve months ended December 31, 2014 is provided as of March 23, It is supplemental to, and should be read in conjunction with, the financial statements of the Company for the years ended December 31, 2014 and The Company s financial statements are prepared in accordance with accounting principles generally accepted in Canada ( Canadian GAAP ), specifically, International Financial Reporting Standards. Substantially all of the Company s operating cash flows are in U.S. dollars and, accordingly, all amounts presented herein are stated in thousands of U.S. dollars, except share and per share data, unless otherwise indicated. FORWARD LOOKING INFORMATION This MD&A contains forward-looking information (as defined under applicable securities laws). Forwardlooking information is typically identified by words such as believe, expect, forecast, anticipate, intend, estimate, goal, plan, and project and similar expressions of future or conditional verbs such as will, may, should, could, or would. These statements reflect current beliefs and are based on information currently available to management. Forward-looking information in this MD&A includes, without limitation, statements made under the headings Liquidity, Capital Resources and Financial Conditions, Financial Instruments, Adopting of New Accounting Standards and Developments, and Outlook. By its very nature, forward-looking information involves significant known and unknown risks, uncertainties and assumptions. Important assumptions relating to the forward-looking information contained in this MD&A include expansion, capital expenditures, currency risks, natural disasters, competitive conditions, and gross economic conditions. Many factors could cause our actual results, performance, or achievements to be materially different from any future anticipated results, performance, or achievements that may be expressed or implied by such forward-looking information, including, without limitation, general economic conditions, general business risks inherent in the healthcare facility industry, including changing surgeon and patient preferences, numerous federal, state and local laws, competition from other healthcare providers, payor mix and our dependence on payment from third-party payors, including private insurers, managed care organizations and government healthcare programs, the financial and operating attributes of NHC as at the date hereof, and the successful attainment of goals related to any proposed new business plan and future growth opportunities. For a description of risks that could cause our actual results to materially differ from our current expectations, please see the section titled Risk Factors in NHC s Annual Information Form dated March 23, 2015, filed with Canadian securities regulators. Although the forward-looking information contained in this MD&A is based upon what management believes are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-looking statements. Should one or more of these risks or uncertainties materialize or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by the forward-looking information. Certain statements regarding forward-looking information included in this MD&A may be considered financial outlook for purposes of applicable securities laws, and such financial outlook may not be appropriate for purposes other than this MD&A. All forward-looking information in this MD&A is qualified by these cautionary statements. The forward-looking statements in this MD&A are made as of the date hereof and except as required by law we do not intend, and do not assume any obligation, to update or revise these forward-looking statements. 2

3 CORPORATE OVERVIEW Nobilis Health Corp. ( NHC ) together with its subsidiaries (collectively, Nobilis, Company, us, we, or our ) 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. Our registered office is located at Suite 400, 570 Granville Street, Vancouver, British Columbia V6C 3P1 and our corporate office is located at 4120 Southwest Freeway, Suite 150, Houston, Texas The Company is a corporation formed to indirectly acquire and/or manage ambulatory surgery centers (ASCs) and healthcare facilities in the United States. We own and manage nine healthcare facilities (the Nobilis Facilities ) in Texas and Arizona; two MRI centers, an urgent care center, one hospital and five ambulatory surgery centers, referred to as the "Nobilis ASCs" of which three are located in Houston, Texas, one in Dallas, Texas and one in Scottsdale, Arizona. In December 2014, the Company expanded its services to health care marketing when it acquired 100% interests of Athas Health, LLC ( Athas ). Details of business developments that occurred prior to January 1, 2013, have been disclosed in the Company s previous public filings. Medical Ambulatory Surgical Suites, L.P. ( Kirby Partnership ) In November 2013, the Company sold 15.1% of its ownership interest in the Kirby Partnership to existing physician limited partners, effectively decreasing the Company s ownership interest to 25%. Houston Microsurgery Institute, LLC ( MSIH ) In March 2013, the Company redeemed the remaining equity interests held by physician limited partners at MSIH, effectively increasing the Company s ownership interests to 97.7%. In October 2013, MSIH ceased operating as an ASC and Northstar Healthcare Surgery Center Houston, LLC ( NHSC-H ) took over all existing operations of MSIH. NHSC-H In August 2013, the Company formed a limited liability company, NHSC-H, which is owned 100% by Northstar Healthcare Acquisitions, LLC ( NHA ), the Company s wholly owned subsidiary. The new entity commenced operations in October 2013, by taking over all pre-existing operations from MSIH. Microsurgery Institute, LLC ( MSID ) In August 2013, the Company purchased all outstanding ownership interest from the physician limited partners at MSID, increasing the Company s ownership interest to 100%. NHC ASC Dallas, LLC ( NHC ASC Dallas ) In July 2013, the Company formed a limited liability company, NHC ASC Dallas, which was owned 100% by NHA. In October 2013, the Company syndicated a private placement for certain physicians to become members in NHC ASC Dallas. The Company assigned 100% of its equity interest in MSID to NHC ASC Dallas, of which the Company owns 35% as a result of syndication. Northstar Healthcare Surgery Center Scottsdale, LLC ( NHSC-S ) In December 2013, the Company formed a limited liability company, NHSC-S, which is owned 100% by NHA. NHSC-S was formed to operate as an ASC, utilizing assets purchased from a former Brown Hand Center outpatient surgery center. Such assets were acquired through a business combination in December

4 Spring Northwest Management, LLC ( SNWM ) In January 2014, the Company acquired an ownership interest of 31.78% in SNWM, derived through both a direct and indirect investment. The Company also now holds a 31.78% interest in both of SNWM s fully owned subsidiaries, Spring Creek Urgent Care, LLC ( SCUC ) and Spring Creek Imaging LLC ( SCI ). Spring Northwest Operating, LLC ( SNWO ) In January 2014, the Company acquired an ownership interest of 32.14% in SNWO, derived through both a direct and indirect investment. Willowbrook Imaging, LLC ( WIM ) In January 2014, the Company acquired an ownership interest of 22.22% in WIM, derived through both a direct and indirect investment. KIRPA Holdings, LLC ( KIRPA ) In January 2014, the Company acquired a 40% ownership interest in KIRPA. KIRPA holds a controlling interest in SNWM, SCUC, SCI and SNWO. GRIP Medical Diagnostics, LLC ( GRIP ) In January 2014, the Company acquired a 40% ownership interest in GRIP. GRIP holds a controlling interest in WIM. Northstar Healthcare Northwest Houston Management, LLC ( NHNHM ) In January 2014, the Company formed a limited liability company, NHNHM, which is owned 100% by NHA. NHNHM was formed to manage the financial investment in SNWM, SCUC, SCI, SNWO, WIM, KIRPA and GRIP. Northstar Healthcare Dallas Management, LLC ( NHDM ) In April 2014, the Company formed a limited liability company, NHDM, which is owned 50% by NHA and 50% by physician limited partners. NHDM was formed to provide management services to NHC-ASC Dallas. First Nobilis, LLC ( First Nobilis ) In September 2014, the Company and a third party formed First Nobilis, a Texas limited liability company. First Nobilis is owned 51% by NHA and 49% by the third party. First Nobilis formed two subsidiary Texas limited liability companies to be the new operating entities. First Nobilis Hospital, LLC ( FNH ) In September 2014, the Company formed a limited liability company, FNH, which is owned 100% by First Nobilis. FNH was formed to operate as a hospital under First Nobilis. First Nobilis Surgical Center, LLC ( FNSC ) In September 2014, the Company formed a limited liability company, FNSC, which is owned 100% by First Nobilis. FNSC was formed to operate as a surgical center under First Nobilis. 4

5 Athas and Associated Investments On December 1, 2014 the Company closed an agreement in which the Company acquired all the individual member interests of Athas for a total consideration of approximately $31.2 million to expand its marketing services. As part of the acquisition, the Company acquired Athas investment ownership in two other ASCs and one hospital, 87.5% in the Elite Orthopedic & Spine Surgery Center, LLC ( Elite Ortho ) and 15% in the Elite Sinus Spine and Ortho, LLC ( Elite Sinus ), and 10% in Elite Hospital Management, LLC ( Elite Hospital ). Financials of these entities are part of the Company s consolidated financials under cost method of accounting. Subsidiaries Subsidiaries are all entities over which the Company has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are not consolidated from the date that control ceases. The accounting policies of subsidiaries have been changed where necessary to align them with our policies. Details of the Company s subsidiaries at December 31, 2014, are as follows: Name of subsidiary Principle activity Location Ownership Active entities: Northstar Healthcare Holdings, Inc. Financial Houston, TX 100.0% Northstar Healthcare Acquisitions, LLC Financial Houston, TX 100.0% Northstar Healthcare Subco, LLC Financial Houston, TX 100.0% Northstar Healthcare Management Company, LLC Financial Houston, TX 100.0% The Palladium for Surgery - Dallas, Ltd. Financial Dallas, TX 100.0% Northstar Healthcare Surgery Center - Houston, LLC ASC Houston, TX 100.0% Northstar Healthcare Surgery Center - Scottsdale, LLC ASC Scottsdale, AZ 100.0% Northstar Healthcare Limited Partner, LLC Financial Houston, TX 100.0% Northstar Healthcare General Partner, LLC Financial Houston, TX 100.0% Northstar Healthcare Northwest Houston Management, LLC Financial Houston, TX 100.0% Athas Health, LLC Marketing Dallas, TX 100.0% Athas Administration, LLC Financial Dallas, TX 100.0% Athas Holdings, LLC Financial Dallas, TX 100.0% The Palladium for Surgery - Houston, Ltd. Financial Houston, TX 91.9% First Nobilis, LLC Financial Houston, TX 51.0% First Nobilis Hospital, LLC Hospital Houston, TX 51.0% First Nobilis Surgical Center, LLC ASC Houston, TX 51.0% Northstar Healthcare Dallas Management, LLC Financial Houston, TX 50.0% KIRPA Holdings, LLC Financial Houston, TX 40.0% GRIP Medical Diagnostics, LLC Financial Houston, TX 40.0% Microsurgery Institute, LLC ASC Dallas, TX 35.0% NHC ASC - Dallas, LLC Financial Dallas, TX 35.0% Spring Northwest Operating, LLC Financial Houston, TX 32.1% Spring Northwest Management, LLC Financial Houston, TX 31.8% Spring Creek Urgent Care, LLC Urgent Care Houston, TX 31.8% Spring Creek Imaging, LLC Imaging Houston, TX 31.8% Medical Ambulatory Surgical Suites, L.P. ASC Houston, TX 25.0% Willowbrook Imaging, LLC Imaging Houston, TX 22.2% Non-active entities: Houston Microsurgery Institute, LLC Financial Houston, TX 97.7% 5

6 Non-controlling interest The Company applies a policy of treating transactions with non-controlling interests as transactions with parties external to the Company. Disposals to minority interests result in gains and losses for the Company and are recorded in the income statement. Changes in a parent s ownership interest in a subsidiary that do not result in the loss of control are accounted for within equity. Nobilis Facilities The Nobilis Facilities ( Nobilis Facilities ) are licensed ambulatory surgery centers, a licensed hospital and other healthcare facilities that provide scheduled surgical procedures, acute care medical services and diagnostic testing in a limited number of clinical specialties, which enables them to develop routines, procedures and protocols to maximize operating efficiency and productivity while offering an enhanced healthcare experience for both surgeons and patients. First Nobilis Hospital ( FNH ) and First Nobilis Surgical Center ( FNSC ) make up the most recent additions to the Nobilis Facilities. FNH is a 19 bed acute-care hospital, with four operating rooms and one procedure room located in Bellaire, TX, a city in southwest Harris County, within the Houston metropolitan area. FNSC is an ambulatory surgery center with four operating rooms, sharing a campus with FNH. Together, the Nobilis Facilities have 22 surgical suites, 6 procedure or treatment rooms typically used by pain management specialists or for colonoscopies, 39 pre-operation beds, 36 post-operation or recovery beds, 27 overnight beds and 587 physicians with medical staff privileges (234 of whom performed surgeries in 2014). Traditionally, the Nobilis Facilities do not offer the full range of services typically found in traditional hospitals, but instead focus on certain clinical specialties, including orthopedic surgery, podiatric surgery, ENT, pain management, gastro-intestinal, gynecology, and general surgery. While the addition of First Nobilis Hospital expands the range of services Nobilis will be able to offer, it will continue to focus on these certain specialties with the ability to take on more complex instances. We have included a number of comparative operating statistics, such as cases and procedures performed at the facilities operated by the Nobilis entities for the three and twelve months ended December 31, 2014, compared with the corresponding prior year period. performed are key drivers of our revenues. This information is not intended to provide a comprehensive comparison of financial results, as net patient service revenues vary by patient, insurance carrier, and procedure. 6

7 RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2014 AND FOR THE THREE MONTHS ENDED DECEMBER 31, 2013 (In thousands of U.S. dollars except share and per share amounts) (unaudited) Three months ended December 31, REVENUE Patient and net professional fees $ 36,489 $ 13,505 Contracted marketing revenues 2,171 - Factoring revenues Total revenues 39,601 13,505 COST OF REVENUE GROSS PROFIT 39,400 13,505 OPERATING EXPENSES: Salaries and benefits 5,051 1,842 Drugs and supplies 4,858 2,161 General and administrative 13,715 4,433 Amortization Total operating expenses 24,198 8,621 INCOME FROM OPERATIONS 15,202 4,884 CORPORATE COSTS Salaries and benefits General and administrative 2, Legal expenses (760) 173 Amortization Total corporate costs 2,123 1,760 OTHER EXPENSE (INCOME) Gain on bargain purchase - (2,392) State franchise tax Other (income) expense, net Total other expense 245 (2,249) NET INCOME BEFORE NONCONTROLLING INTERESTS 12,834 5,373 NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS 6,622 2,350 NET INCOME (LOSS) ATTRIBUTABLE TO NOBILIS HEALTH CORP $ 6,212 $ 3,023 NET INCOME (LOSS) PER BASIC COMMON SHARE $ 0.11 $ 0.08 NET INCOME (LOSS) PER FULLY DILUTED COMMON SHARE $ 0.10 $ 0.08 WEIGHTED AVERAGE SHARES OUTSTANDING (BASIC) 54,771,570 37,809,574 WEIGHTED AVERAGE SHARES OUTSTANDING (FULLY DILUTED) 62,043,835 38,653,287 Patient and net professional fees and contracted marketing revenues are reported as the estimated net realizable amounts from patients, third-party payors, and others for services rendered. Revenue is recognized upon the performance of the patient service. The amounts actually collected by the Company from third-party payors, including private insurers vary even for identical procedures performed. An additional factor in the determination of net patient service revenue is the Company s payor mix, as between private health insurance plans, workers compensation, directly from patients and from government payor plans. Management reviews and evaluates historical payment data, payor mix and current economic conditions on a periodic basis and adjusts the estimated 7

8 collections as a percentage of gross billings, which are used to determine net patient service revenue, as required based on final settlements and collections. Total revenue for the three months ended December 31, 2014, totalled $39.6 million, an increase of $26.1 million, or 193.3%, compared to $13.5 million from the prior corresponding period. The newly acquired marketing segment is attributable to $3.4 million of the increase while the medical services segment increased by $22.7 million, or 168.1% compared to $13.5 million from the prior corresponding period. This increase was primarily due to an increase in total case volume, driven by the newly acquired medical services facilities. Operating salaries and benefits for the three months ended December 31, 2014, totalled $5.1 million, an increase of $3.3 million, or 183.3%, compared to $1.8 million from the prior corresponding period. This increase is primarily due to the opening of the NHSC-S, FNH and FNSC locations. Drugs and medical supplies expense for the three months ended December 31, 2014, totalled $4.9 million, an increase of $2.7 million, or 122.7%, compared to $2.2 million from the prior corresponding period. This increase is primarily due to an increase in case volume at all Nobilis Facilities, including the newly acquired facilities, NHSC- S, FNH and FNSC. Operating general and administrative expense for the three months ended December 31, 2014, totalled $13.7 million, an increase of $9.3 million, or 211.4%, compared to $4.4 million from the prior corresponding period. The newly acquired marketing segment is attributable to $1.8 million of the increases while the remainder of $7.5 million is primarily due to an increase in operations associated with the newly acquired medical services facilities and an increase in marketing, physician contracting and revenue cycle expenses. Amortization for the three months ended December 31, 2014, totalled $0.6 million, an increase of $0.4 million, or 200%, compared to $0.2 million from the prior corresponding period. This increase is primarily due to an increase in property and equipment from the NHSC-S location. In total, Corporate costs for the three months ended December 31, 2014, totalled $2.1 million, an increase of $0.3 million, or 16.7%, compared to $1.8 million from the prior corresponding period. The increase was primarily attributable to additional corporate staff related to acquisitions. Net income attributable to non-controlling interests are based on ownership percentages in the Nobilis Facilities that are owned by outside parties. 8

9 RESULTS OF OPERATIONS AS A PERCENTAGE OF NET PATIENT SERVICE REVENUE FOR THE THREE MONTHS ENDED DECEMBER 31, 2014 AND FOR THE THREE MONTHS ENDED DECEMBER 31, 2013 (unaudited) Three months ended December 31, TOTAL REVENUES 100.0% 100.0% COST OF REVENUE 0.5% 0.0% GROSS PROFIT 99.5% 100.0% OPERATING EXPENSES: Salaries and benefits 12.8% 13.6% Drugs and supplies 12.3% 16.0% General and administrative 34.6% 32.8% Amortization 1.4% 1.4% Total operating expenses 61.1% 63.8% INCOME FROM OPERATIONS 38.4% 36.2% CORPORATE COSTS Salaries and benefits 1.8% 6.0% General and administrative 5.4% 5.6% Legal expenses -1.9% 1.3% Amortization 0.1% 0.2% Total corporate costs 5.4% 13.1% OTHER EXPENSE (INCOME) Gain on bargain purchase 0.0% -17.7% State franchise tax 0.4% 0.6% Other (income) expense, net 0.2% 0.5% Total other expense 0.6% -16.6% NET INCOME BEFORE NONCONTROLLING INTERESTS 32.4% 39.7% NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS 16.7% 17.4% NET INCOME (LOSS) ATTRIBUTABLE TO NOBILIS HEALTH CORP 15.7% 22.3% Patient and net professional fees and contracted marketing revenues represent the estimated net realizable amounts received from patients and third-party payors, less provisions for contractual adjustments with third-party payors, such as Medicare, or private payors with managed care plans. Both reimbursement and net patient service revenue are the highest from patients with private insurance and other private payment sources and lowest from patients with Medicare. This information is not intended to provide a comprehensive comparison of financial results, as reimbursement by insurance carrier varies based on deductibles, plan coverage and procedures performed. Revenues from private insurance and private payors are generally higher when a facility does not have an innetwork contract with the payor. As of December 31, 2014, the Nobilis Facilities had in-network contracts with two of its key private insurance payors. 9

10 MEDICAL SERVICES SEGMENT NET PATIENT SERVICE REVENUE BY PAYORS OF THE NOBILIS FACILITIES FOR THE THREE MONTHS ENDED DECEMBER 31, 2014 AND 2013 Payors 2014 Net Patient 2013 Net Patient Private insurance and other private pay 97.9% 95.8% Workers compensation 1.7% 2.4% Medicare 0.4% 1.8% TOTAL 100.0% 100.0% MARKETING SEGMENT NET PATIENT SERVICE REVENUE BY PAYORS OF THE NOBILIS FACILITIES FOR THE THREE MONTHS ENDED DECEMBER 31, 2014 AND 2013 Payors 2014 Net Patient 2013 Net Patient Private insurance and other private pay 100.0% 0.0% Workers compensation 0.0% 0.0% Medicare 0.0% 0.0% TOTAL 100.0% 0.0% CONSOLIDATED SEGMENTS NET PATIENT SERVICE REVENUE BY PAYORS OF THE NOBILIS FACILITIES FOR THE THREE MONTHS ENDED DECEMBER 31, 2014 AND 2013 Payors 2014 Net Patient 2013 Net Patient Private insurance and other private pay 98.0% 95.8% Workers compensation 1.7% 2.4% Medicare 0.3% 1.8% TOTAL 100.0% 100.0% 10

11 MEDICAL SERVICES SEGMENT CASE AND PROCEDURE MIX OF THE NOBILIS FACILITIES FOR THE THREE MONTHS ENDED DECEMBER 31, 2014 AND FOR THE THREE MONTHS ENDED DECEMBER 31, 2013 Specialty Pain Management 1, % 4, % % 3, % Musculoskeletal Interventions % % - 0.0% - 0.1% Interventional Headache Procedure - 0.0% - 0.1% - 0.0% - 0.1% Orthopedics % 1, % % % Podiatry % % % % Gastro-intestinal % % % % General Surgery % % % % Plastic & Reconstructive % % - 0.0% - 0.0% Bariatrics % 1, % % % Gynecology % % % % Ear, Nose, Throat (E.N.T.) % % % % TOTAL 3, % 9, % 1, % 5, % MARKETING SEGMENT CASE AND PROCEDURE MIX OF THE NOBILIS FACILITIES FOR THE THREE MONTHS ENDED DECEMBER 31, 2014 AND FOR THE THREE MONTHS ENDED DECEMBER 31, 2013 Specialty Pain Management % % - 0.0% - 0.0% Musculoskeletal Interventions % % - 0.0% - 0.0% Interventional Headache Procedure % % - 0.0% - 0.0% Orthopedics - 0.0% - 0.0% - 0.0% - 0.0% Podiatry - 0.0% - 0.0% - 0.0% - 0.0% Gastro-intestinal - 0.0% - 0.0% - 0.0% - 0.0% General Surgery - 0.0% - 0.0% - 0.0% - 0.0% Plastic & Reconstructive - 0.0% - 0.0% - 0.0% - 0.0% Bariatrics - 0.0% - 0.0% - 0.0% - 0.0% Gynecology - 0.0% - 0.0% - 0.0% - 0.0% Ear, Nose, Throat (E.N.T.) - 0.0% - 0.0% - 0.0% - 0.0% TOTAL % % - 0.0% - 0.0% CONSOLIDATED SEGMENTS CASE AND PROCEDURE MIX OF THE NOBILIS FACILITIES FOR THE THREE MONTHS ENDED DECEMBER 31, 2014 AND FOR THE THREE MONTHS ENDED DECEMBER 31, 2013 Specialty Pain Management 1, % 4, % % 3, % Musculoskeletal Interventions % % - 0.0% - 0.0% Interventional Headache Procedure % % - 0.0% - 0.0% Orthopedics % 1, % % % Podiatry % % % % Gastro-intestinal % % % % General Surgery % % % % Plastic & Reconstructive % % - 0.0% - 0.0% Bariatrics % 1, % % % Gynecology % % % % Ear, Nose, Throat (E.N.T.) % % % % TOTAL 3, % 10, % 1, % 5, % The Company has provided a number of comparative operating statistics, such as cases and procedures performed at the Nobilis Facilities for the three months ended December 31, 2014, compared with the same period in the prior year. This information is not intended to provide a comprehensive comparison of financial results, as gross billings and net patient service revenues vary by patient, insurance carrier and procedure. 11

12 A case is defined as a patient visit or a discharge on a specific date of service. A procedure is defined as the actual surgery or surgeries that are performed on the date of service. As a result, there may be more than a single procedure performed during a specific case. Total cases for the three months ended December 31, 2014, were 3,697, representing an increase of 1,886 cases or 104.1% from the 1,811 cases in the prior corresponding period. The newly acquired marketing segment is attributable to 424 of the increase while the medical services segment increased by 1,462 cases, or 80.7%, from 1,811 the prior corresponding period. Case volume primarily increased under bariatric and pain management surgeries. Procedure volume for the three months ended December 31, 2014, increased by 73.4% from 5,977 to 10,367. Since case reimbursement is based on case type, a decrease in the number of procedures per case has no effect on reimbursement and net patient service revenue per case. 12

13 RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2014 AND FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2013 (In thousands of U.S. dollars except share and per share amounts) (unaudited) Twelve months ended December 31, REVENUE Patient and net professional fees $ 80,917 $ 31,128 Contracted marketing revenues 2,171 - Factoring revenues Total revenues 84,029 31,128 COST OF REVENUE GROSS PROFIT 83,828 31,128 OPERATING EXPENSES: Salaries and benefits 11,933 5,329 Drugs and supplies 11,094 4,423 General and administrative 31,791 10,648 Amortization 1, Total operating expenses 56,347 21,050 INCOME FROM OPERATIONS 27,481 10,078 CORPORATE COSTS Salaries and benefits 2,386 2,285 General and administrative 4,082 2,228 Legal expenses Amortization Total corporate costs 6,648 5,402 OTHER EXPENSE Gain on bargain purchase - (2,392) State franchise tax Other expense 571 (1) Total other expense 1,051 (2,216) NET INCOME BEFORE NONCONTROLLING INTERESTS 19,782 6,892 NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS 13,062 5,476 NET INCOME (LOSS) ATTRIBUTABLE TO NOBILIS HEALTH CORP $ 6,720 $ 1,416 NET INCOME (LOSS) PER BASIC COMMON SHARE $ 0.14 $ 0.04 NET INCOME (LOSS) PER FULLY DILUTED COMMON SHARE $ 0.14 $ 0.04 WEIGHTED AVERAGE SHARES OUTSTANDING (BASIC) 46,517,815 36,793,950 WEIGHTED AVERAGE SHARES OUTSTANDING (FULLY DILUTED) 48,781,348 37,637,662 Patient and net professional fees and contracted marketing revenues are reported as the estimated net realizable amounts from patients, third-party payors, and others for services rendered. Revenue is recognized upon the performance of the patient service. The amounts actually collected by the Company from third-party payors, including private insurers vary even for identical procedures performed. An additional factor in the determination of net patient service revenue is the Company s payor mix, as between private health insurance plans, workers compensation, directly from patients and from government payor plans. Management reviews and evaluates 13

14 historical payment data, payor mix and current economic conditions on a periodic basis and adjusts the estimated collections as a percentage of gross billings, which are used to determine net patient service revenue, as required based on final settlements and collections. Total revenues for the twelve months ended December 31, 2014, totalled $84.0 million, an increase of $52.9 million or 170.1%, compared to $31.1 million from the prior corresponding period. The newly acquired marketing segment is attributable to $3.4 million of the increase while the medical services segment increased by $49.5 million, or 159.2% compared to $31.1 million from the prior corresponding period. The increase in total revenues was due to an increase in total case volume and the addition of the newly acquired facilities. Operating salaries and benefits for the twelve months ended December 31, 2014, totalled $11.9 million, an increase of $6.6 million or 124.5% from the prior corresponding period. This increase is primarily due to increased case volumes and the opening of the NHSC-S, FNH and FNSC locations. Drugs and medical supplies expense for the twelve months ended December 31, 2014, totalled $11.1 million, an increase of $6.7 million or 152.3% from the prior corresponding period. This increase is primarily due to an increase in case volume at all Nobilis Facilities. Operating general and administrative expense for the twelve months ended December 31, 2014, totalled $31.8 million, an increase of $21.2 million or an increase of 200.0% from the prior corresponding period. The newly acquired marketing segment is attributable to $1.8 million of the increases while the remainder of the $19.4 million is due to an increase in operations associated with the newly acquired medical services facilities and an increase in marketing expense, physician contracting and revenue cycle expenses. Amortization for the twelve months ended December 31, 2014, totalled $1.5 million, an increase of $0.8 million or 114.3% from the prior corresponding period. This increase is primarily due to an increase in property and equipment from the NHSC-S location. In total, Corporate costs for the twelve months ended December 31, 2014, totalled $6.6 million, an increase of $1.2 million or 22.2% from the prior corresponding period. The increase was primarily attributable to additional corporate staff and legal expenses related to marketing and acquisitions. Net income attributable to non-controlling interests are based on ownership percentages in the Nobilis Facilities that are owned by outside parties. 14

15 RESULTS OF OPERATIONS AS A PERCENTAGE OF NET PATIENT SERVICE REVENUE FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2014 AND FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2013 (unaudited) Twelve months ended December 31, TOTAL REVENUES 100.0% 100.0% COST OF REVENUE 0.2% 0.0% GROSS PROFIT 99.8% 100.0% OPERATING EXPENSES: Salaries and benefits 14.2% 17.1% Drugs and supplies 13.2% 14.2% General and administrative 37.8% 34.2% Amortization 1.8% 2.1% Total operating expenses 67.0% 67.6% INCOME FROM OPERATIONS 32.8% 32.4% CORPORATE COSTS Salaries and benefits 2.8% 7.3% General and administrative 4.9% 7.2% Legal expenses 0.1% 2.6% Amortization 0.1% 0.3% Total corporate costs 7.9% 17.4% OTHER EXPENSE Gain on bargain purchase 0.0% -7.7% State franchise tax 0.6% 0.6% Other expense 0.7% 0.0% Total other expense 1.3% -7.1% NET INCOME BEFORE NONCONTROLLING INTERESTS 23.6% 22.1% NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS 15.5% 17.6% NET INCOME (LOSS) ATTRIBUTABLE TO NOBILIS HEALTH CORP 8.1% 4.5% Patient and net professional fees and contracted marketing revenues represents the estimated net realizable amounts received from patients and third-party payors, less provisions for contractual adjustments with third-party payors, such as Medicare, or private payors with managed care plans. Both reimbursement and net patient service revenue are the highest from patients with private insurance and other private payment sources and lowest from patients with Medicare. This information is not intended to provide a comprehensive comparison of financial results, as reimbursement by insurance carrier varies based on deductibles, plan coverage and procedures performed. Net patient service revenue from private insurance and private payors are generally higher when a facility does not have an in-network contract with the payor. As of December 31, 2014, the Nobilis Facilities had in-network contracts with two of its key private insurance payors. 15

16 MEDICAL SERVICES SEGMENT NET PATIENT SERVICE REVENUE BY PAYORS OF THE NOBILIS FACILITIES FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 Payors 2014 Net Patient 2013 Net Patient Private insurance and other private pay 97.0% 92.4% Workers compensation 2.3% 4.5% Medicare 0.7% 3.1% TOTAL 100.0% 100.0% MARKETING SEGMENT NET PATIENT SERVICE REVENUE BY PAYORS OF THE NOBILIS FACILITIES FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 Payors 2014 Net Patient 2013 Net Patient Private insurance and other private pay 100.0% 0.0% Workers compensation 0.0% 0.0% Medicare 0.0% 0.0% TOTAL 100.0% 0.0% CONSOLIDATED SEGMENTS NET PATIENT SERVICE REVENUE BY PAYORS OF THE NOBILIS FACILITIES FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 Payors 2014 Net Patient 2013 Net Patient Private insurance and other private pay 97.1% 92.4% Workers compensation 2.2% 4.5% Medicare 0.7% 3.1% TOTAL 100.0% 100.0% 16

17 MEDICAL SERVICES SEGMENT CASE AND PROCEDURE MIX OF THE NOBILIS FACILITIES FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 Specialty Pain Management 3, % 13, % 2, % 11, % Musculoskeletal Interventions % % - 0.0% - 0.0% Interventional Headache Procedure - 0.0% - 0.0% - 0.0% - 0.0% Orthopedics % 2, % % 2, % Podiatry % 1, % % 1, % Gastro-intestinal % % % % General Surgery % 1, % % 1, % Plastic & Reconstructive % % - 0.0% - 0.0% Bariatrics 1, % 3, % % % GYN % % % % Ear, Nose, Throat (E.N.T.) % 2, % % 1, % TOTAL 8, % 25, % 5, % 19, % MARKETING SEGMENT CASE AND PROCEDURE MIX OF THE NOBILIS FACILITIES FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 Specialty Pain Management % % - 0.0% - 0.0% Musculoskeletal Interventions % % - 0.0% - 0.0% Interventional Headache Procedure % % - 0.0% - 0.0% Orthopedics - 0.0% - 0.0% - 0.0% - 0.0% Podiatry - 0.0% - 0.0% - 0.0% - 0.0% Gastro-intestinal - 0.0% - 0.0% - 0.0% - 0.0% General Surgery - 0.0% - 0.0% - 0.0% - 0.0% Plastic & Reconstructive - 0.0% - 0.0% - 0.0% - 0.0% Bariatrics - 0.0% - 0.0% - 0.0% - 0.0% Gynecology - 0.0% - 0.0% - 0.0% - 0.0% Ear, Nose, Throat (E.N.T.) - 0.0% - 0.0% - 0.0% - 0.0% TOTAL % % - 0.0% - 0.0% CONSOLIDATED SEGMENTS CASE AND PROCEDURE MIX OF THE NOBILIS FACILITIES FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 Specialty Pain Management 3, % 13, % 2, % 11, % Musculoskeletal Interventions % % - 0.0% - 0.0% Interventional Headache Procedure % % - 0.0% - 0.0% Orthopedics % 2, % % 2, % Podiatry % 1, % % 1, % Gastro-intestinal % % % % General Surgery % 1, % % 1, % Plastic & Reconstructive % % - 0.0% - 0.0% Bariatrics 1, % 3, % % % Gynecology % % % % Ear, Nose, Throat (E.N.T.) % 2, % % 1, % TOTAL 8, % 26, % 5, % 19, % 17

18 LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION Liquidity refers to an entity s ability to meet its financial obligations and commitments as they become due. The Company is dependent upon cash generated from operating activities of the Nobilis entities, which are the major source of financing for its operations and for meeting its contractual obligations. As of December 31, 2014, the Company had consolidated net working capital of $23.8 million. Cash balances were $7.6 million and total accounts receivable were $42.2 million. Accounts payable and accrued liabilities totalled $19.6 million. In December 2013, the Company issued, through a private placement agreement, 5,862,500 Units, at a price of Cdn$0.80 per Unit. Each Unit consists of one common share in the capital of the Company and one-half of one common share purchase warrant exercisable for one additional share at a price of Cdn$1.10. Through the private placement, the Company raised USD $4.1 million, as of December 31, 2013, net of offering costs of USD $0.3 million. In August 2014, the Company elected to accelerate the expiry date of the common share purchase warrants originally issued by Nobilis as part of its unit private placement completed on December 16, 2013 (the "2013 Private Placement"). Each Warrant entitled the holder thereof to purchase one additional common share of Nobilis at a price of Cdn$1.10. Nobilis received total gross proceeds of Cdn$3,224,375 from the exercise. In September 2014, the Company issued, through a private placement agreement, 5,568,400 Units, at a price of Cdn$1.30 per Unit. Each Unit consists of one common share in the capital of the Company and one-half of one common share purchase warrant exercisable for one additional share at a price of Cdn$1.80. Through the private placement, the Company raised USD$6.1 million, as of December 31, 2014, net of offering costs of USD$0.5 million. RELATED PARTIES In conjunction with the Company s purchase of PFSD, the Company entered into a promissory note with the Company s Chairman, on January 1, The note had a principal balance of $0.4 million at December 31, The principal amount and any accrued and unpaid interest is due on or before January 31, On June 25, 2013, the Company entered into a promissory note receivable with an executive employee of the Company for a principal amount of $0.2 million. The note bears interest at a rate of 5.5% per annum. The term provides that interest will be calculated at a daily rate and all accrued and unpaid interest shall be paid annually on the first day of July of each successive year. The unpaid principal balance together with all accrued but unpaid interest is due in full on or before June 30, In 2013, the Company entered into a Management Services Agreement ( MSA ) with Northstar Pain Management P.A. ( NSPM ). NSPM is owned by the Company s Chairman. Operation of NSPM is designed to support the Company s marketing campaigns. As part of the MSA, the Company provides comprehensive management services to NSPM. At December 31, 2014, the Company is owed $0.6 million from NSPM. Facility lease costs associated with operating leases of approximately $0.4 million were incurred with affiliated entities during the year ended December 31, The minority interest holder of First Nobilis, a fully consolidated entity, is also a partial owner of First Street Hospital, L.P. ( First Street Hospital ) and First Street Surgical Center, L.P. ( First Street Surgical ), both of which have an ongoing business relationship with the Company. At December 31, 2014, the Company has a due-from these related parties of $2.0 million which is partially offset by a due-to of $1.4 million for a net amount owed to the Company of $0.6 million. In addition, the Company leases certain medical equipment from First Street Hospital and 18

19 First Street Surgical. Equipment lease costs of approximately $0.6 million were incurred during the year ended December 31, At December 31, 2014, three of the investors and partial owners of SNWO, WIM and SNWM owe the Company $0.2 million for their investment into the respective entities. Certain of the sellers of Athas are current employees of Athas, including its CEO, Chris Lloyd. The sellers of Athas entered into a promissory note with the Company for $12.0 million, as mentioned in a previous footnote. Certain members of the Company are also members of North American Laserscopic Spine Institute ( NALSI ). In June 2014, NALSI entered into a line of credit agreement with Athas, whereby NALSI may draw up to $0.9 million. The line of credit is subject to a 10.00% interest rate and matures on June 9, The outstanding balance as of December 31, 2014 is $0.5 million. Nobilis maintains certain consulting and marketing agreements with various physicians who are also equity owners in Nobilis entities. These agreements are paid directly out of those entities in which the physicians hold an ownership percentage. The related party transactions mentioned above are measured at exchange amounts agreed upon by both parties. CRITICAL ACCOUNTING ESTIMATES The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Management estimates are required with respect to the valuation of financial instruments, acquired assets and liabilities, intangible assets, goodwill, accounts receivable, inventories, provisions for potential liabilities, determination of net patient service revenue and income tax provisions. Patient and net professional fees of the Company include amounts for services billed to private insurance carriers, federal and state agencies and patients. Billed revenues are recorded net of the estimated contractual adjustments provided for under the reimbursement practices of the majority of these third party payors. Management establishes the contractual allowance adjustments and allowances for doubtful accounts based on historical payment data, current economic conditions and other pertinent facts for each Nobilis Facility. Management reviews and evaluates historical payment data and current economic conditions on a quarterly basis and adjusts its estimates as appropriate. NEW ACCOUNTING STANDARDS AND DEVELOPMENTS Recent accounting pronouncements issued by the International Accounting Standards Board with future effective dates are either not applicable or are not expected to be significant to the Company s interim consolidated financial statements. MANAGEMENT S RESPONSIBILITY FOR FINANCIAL REPORTING AND DISCLOSURE CONTROLS Disclosure Controls and Disclosure controls and procedures within the Company are designed to provide reasonable assurance that all relevant information required to be disclosed in its annual and interim filings and other reports is recorded, processed, summarized and reported on a timely basis and is accumulated and communicated to the Nobilis management. The Company s Chief Executive Officer ( CEO ) and Chief Financial Officer ( CFO ) are responsible for establishing and maintaining the Company s disclosure controls and procedures to provide reasonable assurance that all relevant information required to be disclosed is gathered and reported on a timely basis so that appropriate decisions can be made regarding public disclosure. 19

20 The Company s management conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, Based on this evaluation, the CEO and CFO have concluded that our disclosure controls and procedures, as defined in National Instrument , Certification of Disclosure in Issuers Annual and Interim Filings, operated effectively. Internal Control over Financial Reporting The Company s CEO and CFO are responsible for establishing and maintaining adequate internal control over financial reporting. Internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS focusing in particular on controls over information. Management is responsible for establishing and maintaining adequate internal controls over financial reporting. A control system, no matter how well conceived and operated, can provide only reasonable, and not absolute assurance that the objectives of the control system are met. Because of their inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Such inherent limitations in internal controls over financial reporting may result in a more than remote likelihood that a material misstatement would not be prevented or detected on a timely basis. The CEO and CFO have designed internal control over financial reporting, or caused them to be designed under their supervision, to provide reasonable assurance that the financial statements are free of material misstatement. The Company s management, under the direction of the CEO and CFO, assessed the effectiveness of the Company s internal control over financial reporting as of December 31, Based on this assessment, the Company s CEO and CFO have concluded that, as of December 31, 2014, the Company s internal control over financial reporting were operating effectively. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of business, the Company is exposed to market risks arising from adverse changes in the C$/US$ foreign currency exchange rate. Market risk is defined for these purposes as the potential change in the fair market value of financial assets and liabilities resulting from an adverse movement in these rates. The Company had Canadian denominated cash ( Cdn ) of $0.1 million and a nominal amount of trade payables at December 31, RISK FACTORS Please refer to the risk factors, in addition to the risks discussed herein, set out in the Company s Annual Information Form dated March 23, 2015, for a list of the significant risk factors to which the Company is exposed. OUTSTANDING SHARE DATA At December 31, 2014, the Company had 59,418,270 common shares outstanding. OUTLOOK In 2014 Nobilis continued building a solid foundation for the delivery of its unique services and the fourth quarter 2014 financial results demonstrated the viability of the model. The Company is poised to further capitalize on its distinctive position in the market and deliver outstanding results in 2015 Operationally, in addition to the established clinical operations and newly created marketing segment, the Company is in the process of creating revenue enhancement by establishing an ancillary services segment. This new segment will focus on providing ancillary services to the current Nobilis surgical facilities. These three divisions work together to deliver world-class care to patients as well as outstanding value to shareholders. The clinical or facility operations and associated activities continue to advance in sophistication and scale. Nobilismanaged facilities receive outstanding marks for patient experience and couple well with the Company s concierge service mindset. Operationally the company has implemented several new platforms including real- 20

21 time inventory and supply chain management, centralized distribution centers and dynamic scheduling whereby patients are matched with the facility that provides the best combination of convenience and financial reimbursement based upon the patient s type of procedure and insurance carrier. Nobilis marketing division employs a three-pronged approach to patient acquisition. First, it works with select physicians in the traditional partnership model whereby the physicians and the Company jointly own facilities. The doctors bring their patients to the facility and Nobilis provides marketing services to both the facility and the physician practices with the aim of increasing patient flow. Second, Nobilis employs multiple physician contracting mechanisms that allow for the customization of relationships in ways that engender better collaboration and patient satisfaction thereby increasing the volume of procedures at the Company s facilities. Third, Nobilis engages in direct-to-consumer marketing activities. Nobilis saw an expansion of these efforts in the fourth quarter of 2014 with the acquisition of Athas Health ( Athas ), expanding its reach to 11 markets in 7 states. The wholly-owned subsidiary has been a leader in the emerging direct response marketing sector and has a proven track record of attracting patients from nearly every state as well as internationally. Athas utilizes a variety of marketing programs and campaigns across multiple platforms which include print, television, mail and on-line seminars in conjunction with state-of-the art web-based technologies designed to increase the awareness of the Company s brands worldwide. The integration of Athas has provided Nobilis with an operating radius that is significantly greater than most of its competitors since many patients are willing to travel considerable distances to receive treatment. All three of these patient acquisition mechanisms are extremely scalable and provide a superior return on investment compared to the traditional models seen in the healthcare facilities market. The Company is also building a robust ancillary services division. This segment will capture revenues from noncore operations including anesthesia, inter-operative nerve monitoring, preoperative testing and pharmacy services. Not only do these activities provide high margin, diversified revenues but controlling these aspects of the patient experience allows Nobilis to provide a higher level of concierge service. Finally, Nobilis management is constantly evaluating new M&A opportunities. The aforementioned patient acquisition and operational competencies allow for the turnaround of distressed assets thereby providing superior returns relative to greenfield development strategies. Nobilis Health is well positioned to continue delivering outstanding value to all of its major stakeholders in Litigation The Company is involved in disputes or legal actions arising in the ordinary course of business. Management does not believe the outcome of such disputes or legal actions will have a material adverse effect on the Company s financial position, results of operations or cash flows. ADDITIONAL INFORMATION Additional information relating to the Company, including the interim consolidated financial statements for the three and twelve months ended December 31, 2014 and the Company s annual information form, is available on SEDAR at March 23,