The liabilities of the consolidated VIE are obligations of the VIE and the creditors have no recourse to USMD
Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2016
(Unaudited)
Note 1 Description
of Business, Basis of Presentation and Recently Issued Accounting Pronouncements
Description of Business:
USMD Holdings, Inc. (USMD or the Company) is an early-stage physician-led integrated health system. An integrated
health system is considered early-stage when it has not yet established all the components necessary to be considered a fully integrated health system. Through its subsidiaries and affiliates, the Company provides healthcare services to patients and
management and operational services to hospitals and other healthcare service providers. The Company provides healthcare services to patients in physician clinics, hospitals and other healthcare facilities, including cancer treatment centers and
anatomical pathology and clinical laboratories. A wholly owned subsidiary of the Company is the sole member of a Texas Certified Non-Profit Health Organization that owns and operates a multi-specialty physician group practice (USMD Physician
Services) in the Dallas-Fort Worth, Texas metropolitan area.
Through other wholly owned subsidiaries, the Company provides
management and operational services to two general acute care hospitals in the Dallas-Fort Worth, Texas metropolitan area and provides management and/or operational services to three cancer treatment centers in three states. Of these managed
entities, the Company has noncontrolling ownership interests in the two hospitals and one cancer treatment center. In addition, the Company wholly owns and operates one Independent Diagnostic Testing Facility (IDTF), two clinical
laboratories, one anatomical pathology laboratory and one cancer treatment center in the Dallas-Fort Worth, Texas metropolitan area.
On
December 18, 2015, as part of the Companys strategic plan to build a fully integrated physician-led health system, the Company sold its lithotripsy services (Lithotripsy Services) business (see Note 2). The sale included the
management services business as well as controlling and noncontrolling interests in the Companys lithotripsy service provider entities. The Company retained a noncontrolling interest in one lithotripsy service provider entity. In its existing
form, the lithotripsy business was not a core component of an integrated health system and, therefore, was not aligned with the strategic objectives of the Company.
Basis of Presentation:
The unaudited
condensed consolidated financial statements and related notes of the Company have been prepared in conformity with accounting principles generally accepted in the United States (GAAP) for interim financial statements and pursuant to the
rules and regulations of the Securities and Exchange Commission (the SEC) for interim reporting. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been
condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information in this report not misleading. These condensed consolidated financial statements reflect all
adjustments that, in the opinion of the Companys management, are necessary for fair presentation of the condensed consolidated financial statements. The December 31, 2015 condensed consolidated balance sheet data was derived from audited
financial statements but does not include all disclosures required by GAAP. The operating results for the interim periods are not necessarily indicative of results for the full fiscal year. These condensed consolidated financial statements should be
read in conjunction with the Companys Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on April 14, 2016. Certain prior year amounts have been reclassified to conform to current year
presentation.
The condensed consolidated financial statements include the accounts of the Company, entities controlled by the Company
through its direct or indirect ownership of a majority interest and any other entities in which the Company has a controlling financial interest. The Company consolidates VIEs where the Company is the primary beneficiary. The primary beneficiary of
a VIE is the party that has both the power to direct the activities that most significantly impact the VIEs economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the
VIE. The Company consolidates entities in which it or its wholly owned subsidiary is the general partner or managing member and the limited partners or members, respectively, do not have sufficient rights to overcome the presumption of the
Companys control. The Company eliminates all significant intercompany accounts and transactions in consolidation.
The Company uses
the equity method to account for investments in entities it or its wholly owned subsidiaries do not control, but over which it or its wholly owned subsidiaries have the ability to exercise significant influence. The Company does not consolidate
equity method investments, but rather measures them at their initial cost and subsequently adjusts their carrying values through income for the Companys respective share of earnings or losses during the period.
8
USMD HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements-(Continued)
June 30, 2016
(Unaudited)
Recently Issued or Adopted Accounting Pronouncements:
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with
Customers (ASU 2014-09). ASU 2014-09 requires revenue recognition 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. ASU 2014-09 provides a single 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
contact, 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 provisions of ASU 2014-09 may be applied either
retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of the update recognized at the date of the initial application along with additional disclosures. ASU 2014-09 will be effective for the Company
beginning January 1, 2018. Management is evaluating the impact that adoption of ASU 2014-09 will have on the Companys consolidated financial statements.
In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedients (ASU 2016-12). ASU 2016-12 addresses transition, collectibility, non-cash consideration and the presentation of sales and other similar taxes. ASU 2016-12 does not change the core principles of ASU 2014-09, but rather
address implementation issues and is intended to result in more consistent application. ASU 2016-12 will be effective for the Company beginning January 1, 2018. Management is evaluating the impact that adoption of ASU 2016-12 will have on the
Companys consolidated financial statements.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers
(Topic 606): Identifying Performance Obligations and Licensing (ASU 2016-10). ASU 2016-10 clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue
recognition standard. ASU 2016-10 will be effective for the Company beginning January 1, 2018. Management is evaluating the impact that adoption of ASU 2016-10 will have on the Companys consolidated financial statements.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent
Considerations Reporting Revenue Gross versus Net) (ASU 2016-08). ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. ASU 2016-08 will be effective for the Company beginning January 1,
2018. Management is evaluating the impact that adoption of ASU 2016-08 will have on the Companys consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-09 Compensation Stock Compensation:
Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 changes certain aspects of accounting for share-based payment awards to employees, including the accounting for income taxes, application of
estimated rates of forfeiture and statutory tax withholding requirements. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those years. Early adoption is permitted. Management
is evaluating the impact that adoption of ASU 2016-09 will have on the Companys consolidated financial statements.
In February
2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (ASU 2015-02). ASU 2015-02 changes the analysis that a company must perform to determine whether it should
consolidate certain legal entities. All legal entities are subject to reevaluation under the updated guidance. ASU 2015-02 eliminates the presumption that a general partner should consolidate a limited partnership, eliminates the consolidation model
specific to limited partnerships, modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities and affects the evaluation of fee arrangements in the VIE primary beneficiary determination.
The Company adopted ASU 2015-02 effective January 1, 2016. Adoption of this guidance did not have a material impact on the Companys consolidated financial position, results of operations or cash flows. See Note 3 Variable Interest
Entities.
In April 2015, the FASB issued ASU No. 2015-03 Interest Imputation of Interest (Subtopic 835-30):
Simplifying
the Presentation of Debt Issuance Costs
(ASU 2015-03). ASU 2015-03 requires that debt issuance costs be presented as a direct deduction from the carrying amount of the related debt liability, consistent with the presentation of
debt discounts. Upon adoption, the
9
USMD HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements-(Continued)
June 30, 2016
(Unaudited)
standard requires prior period financial statements to be retrospectively adjusted. Prior to the issuance of ASU 2015-03, debt issuance costs were required to be presented as deferred assets,
separate from the related debt liability. ASU 2015-03 does not change the recognition and measurement requirements for debt issuance costs. The Company adopted ASU 2015-03 effective January 1, 2016. In accordance with the new guidance, the Company
reclassified debt issuance costs previously included in other assets to long-term debt in the first quarter of 2016 and conformed prior periods. Adoption of this guidance did not have a material impact on the Companys consolidated financial
position, results of operations or cash flows.
In April 2015, the FASB issued ASU No. 2015-05 Intangibles Goodwill and Other
Internal Use Software (Subtopic 350-40): Customers Accounting for Fees Paid in Cloud Computing Arrangement (ASU 2015-05). ASU 2015-05 addresses accounting for fees paid by a customer in cloud computing arrangements
such as (i) software as a service, (ii) platform as a service (iii) infrastructure as a service and (iv) other similar hosting arrangements. ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software
license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement
does not include a software license, the customer should account for the arrangement as a service contract. The Company adopted ASU 2015-05 effective January 1, 2016. Adoption of this guidance did not have an impact on the Companys
consolidated financial position, results of operations or cash flows.
Note 2 Sale of Lithotripsy Services Business
On December 18, 2015, in line with the Companys strategic plan to build an integrated physician-led health system, the Company sold
its Lithotripsy Services business. The Lithotripsy Services business was engaged in the formation, promotion and management of partnerships and other entities that provide the technical portion of lithotripsy procedures to hospitals, surgery
centers, physician practices and other healthcare facilities. At the time of the sale, the Lithotripsy Services business provided management and/or operational services to 21 lithotripsy service providers located primarily in the South Central
United States. Of those managed entities, the Lithotripsy Services business had minority ownership interests in 19 of the lithotripsy service providers. In addition, the Lithotripsy Services business wholly owned and operated two lithotripsy service
providers in North Texas. The sale included the management services business as well as controlling and noncontrolling interests in the Companys lithotripsy service provider entities. The Company retained a noncontrolling interest in one
lithotripsy service provider entity. Except as noted in the preceding sentence, all ownership interests in and held by the Company were sold. As a result of the sale, the Company no longer provides management or operational services to or serves as
the general partner of any lithotripsy service provider. In its existing form, the Lithotripsy Services business was not a core component of an integrated health system and, therefore, was not aligned with the strategic objectives of the Company.
The Lithotripsy Services business was sold for $19.8 million in cash subject to working capital and other adjustments and before purchase
price adjustments for indebtedness and transaction costs. The Company received proceeds of $10.3 million after adjustments for indebtedness, transaction costs and amounts placed into escrow. At June 30, 2016, $2.0 million remains in escrow to
satisfy indemnification obligations, which is recorded as restricted cash on the Companys consolidated balance sheet. The Company resolved working capital true-ups in the second quarter of 2016. For the six months ended June 30, 2015, the
pre-tax profit of the Lithotripsy Services business was $6.4 million, inclusive of amounts attributable to noncontrolling interests. For the six months ended June 30, 2015, the pre-tax profit of the Lithotripsy Services business attributable to USMD
Holdings, Inc. was $1.6 million.
Included in the sale of the Lithotripsy Services business was the sale of a controlling interest in one
previously wholly owned, consolidated lithotripsy partnership. The Company retained a limited partnership interest in this partnership. As a result of the sale, the Company deconsolidated the partnership and began accounting for its remaining
investment using the equity method. Effective on the date of deconsolidation, as an equity method investee, the partnership will be considered a related party. Except for its limited partner interest, the Company has no continuing involvement with
the partnership. The partnership provides lithotripsy services to two equity method investees of the Company.
10
USMD HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements-(Continued)
June 30, 2016
(Unaudited)
Note 3 Variable Interest Entity
In connection with the adoption of ASU 2015-02, the Company evaluated all of its investments to determine the investments that meet the
definition of a VIE and which of the VIEs meet the primary beneficiary requirements for consolidation.
Non-Consolidated Variable Interest
Entities:
Metro I Stone Management, Ltd. (Metro) is a limited partnership which provides lithotripsy services to the
Companys hospitals and other healthcare entities. The Company is a single limited partner in Metro with a 60% equity interest. The third party general partner owns the remaining 40% partnership interest and has the power to direct all
activities of the entity. The Company does not have substantive kick-out rights or substantive participation rights.
The Company
evaluated its equity interest in Metro to determine if the entity is a VIE. The Company evaluated whether Metros equity at risk, as defined by GAAP, is considered to be insufficient to finance its activities without additional support and,
whether the holders of the equity lack the characteristics of a controlling financial interest. The Company concluded that Metro is a variable interest entity as our equity interests are non-substantive and therefore, lack the characteristics
of a controlling financial interest.
In order to determine whether the Company is Metros primary beneficiary and therefore would
consolidate the variable interest entity, the Company considered whether it has i) the power to direct the activities of Metro that most significantly impact its economic performance and ii) the obligation to absorb losses of Metro that could
potentially be significant to it, or the right to receive benefits from Metro that could potentially be significant to it. The Company concluded that the limited partnership is structured such that the Company does not have the power to direct the
activities of Metro that most significantly impact its economic performance, and therefore Metro is not consolidated.
The carrying value
of this investment was $6.5 million as of June 30, 2016 and is included in the condensed consolidated balance sheets as investments in nonconsolidated affiliates. The Companys maximum exposure to losses correlates to its 60% equity interest.
In addition, the Company has not provided any financial support to Metro as of June 30, 2016.
Consolidated Variable Interest Entities:
The Company is an equal co-member of a Texas non-profit corporation that has been approved by the Texas Medical Board as a Certified Non-Profit
Health Organization (WNI-DFW). WNI-DFW has a contractual arrangement to manage patient care by providing or arranging for the provision of all the necessary healthcare services for a health plans given Medicare Advantage patient population in
the North Texas area served by WNI-DFW. Pursuant to the arrangement, WNI-DFW receives a fixed fee per patient under what is typically known as a risk contract. Risk contracting, or full risk capitation, refers to a model in which an
entity receives from the third party payer a fixed payment per member per month for a defined patient population, and the entity is then responsible for arranging and/or providing all of the healthcare services required by that patient population.
The entity accomplishes this by managing patient care and by contracting with healthcare providers to provide needed healthcare services for the patient population. In such a model, the contracting entity is then responsible for incurring or paying
for the cost of healthcare services required by that patient population. The entity generates a net surplus if the cost of all healthcare services provided to the patient population is less than the payments received from the third party payer and
it generates a net deficit if the cost of such services is higher than the payments received. WNI-DFW commenced operations on June 1, 2013.
The Company evaluated whether it has a variable interest in WNI-DFW, whether WNI-DFW is a VIE and whether the Company has a controlling
financial interest in WNI-DFW. The Company concluded that it has a variable interest in WNI-DFW on the basis of its capital contribution to WNI-DFW and because WNI-DFW has entered into a Primary Care Physician Agreement (PCP Agreement)
with USMD Physician Services. WNI-DFWs equity at risk, as defined by GAAP, is considered to be insufficient to finance its activities without additional support, and, therefore, WNI-DFW is considered a VIE.
In order to determine whether the Company has a controlling financial interest in WNI-DFW and, thus, is WNI-DFWs primary beneficiary,
the Company considered whether it has i) the power to direct the activities of WNI-DFW that most significantly impact its economic performance and ii) the obligation to absorb losses of WNI-DFW that could potentially be significant to it or the
right to receive benefits from WNI-DFW that could potentially be significant to it. The Company concluded that the members, the board of directors and the executive management team of WNI-DFW are structured in a way that neither member nor its
designee has the
11
USMD HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements-(Continued)
June 30, 2016
(Unaudited)
individual power to direct the activities of WNI-DFW that most significantly impact its economic performance. Management considered whether the various service and support agreements between
WNI-DFW and its members (or their affiliates) provide either variable interest party with this power and concluded that the PCP Agreement between USMD Physician Services and WNI-DFW does provide to USMD Physician Services the power to direct such
activities. Under the PCP Agreement, USMD Physician Services is responsible for providing many services related to the growth of the patient population of WNI-DFW, the management of that populations healthcare needs, and the provision of
required healthcare services to those patients. The Company has concluded that the success or failure of USMD Physician Services in conducting these activities will most significantly impact the economic performance of WNI-DFW. In addition, the
Companys variable interests in WNI-DFW obligate the Company to absorb deficits and provide it with the right to receive benefits that could potentially be significant to WNI-DFW. As a result of this analysis, the Company concluded that it is
the primary beneficiary of WNI-DFW and therefore consolidates the balance sheets, results of operations and cash flows of WNI-DFW. The Company performs a qualitative assessment of WNI-DFW on an ongoing basis to determine if it continues to be the
primary beneficiary.
The following table summarizes the carrying amounts of the assets and liabilities of WNI-DFW included in the
Companys consolidated balance sheets (after elimination of intercompany transactions and balances) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
December 31,
2015
|
|
|
|
(unaudited)
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,024
|
|
|
$
|
13,254
|
|
Accounts receivable
|
|
|
6,713
|
|
|
|
2,353
|
|
Prepaid expenses
|
|
|
424
|
|
|
|
22
|
|
Deferred tax asset
|
|
|
4,153
|
|
|
|
4,568
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
25,314
|
|
|
$
|
20,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,104
|
|
|
$
|
2,517
|
|
Other accrued liabilities
|
|
|
12,893
|
|
|
|
14,141
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
$
|
17,997
|
|
|
$
|
16,658
|
|
|
|
|
|
|
|
|
|
|
The assets of WNI-DFW can only be used to settle obligations of WNI-DFW. The creditors of WNI-DFW have no
recourse to the general credit of the Company. Upon notification from WNI-DFW, the Company is contractually obligated to fund certain cash requirements of WNI-DFW. Pursuant to such a notification, in January 2014, the Company advanced WNI-DFW
$0.7 million. The results of operations and cash flows of WNI-DFW are included in the Companys consolidated financial statements.
For the three and six months ended June 30, 2016, WNI-DFW contributed capitated revenue of $28.4 million and $56.7 million,
respectively, and income before provision for income taxes of $3.9 million and $10.6 million (after elimination of intercompany transactions), respectively. For the three and six months ended June 30, 2015, WNI-DFW contributed capitated revenue
of $24.0 million and $47.1 million, respectively, and income before provision for income taxes of $3.0 million and $6.0 million, respectively (after elimination of intercompany transactions).
Estimated Medical Claims Liability
In
connection with the operations of WNI-DFW, the Company makes estimates related to incurred but not reported (IBNR) medical claims of WNI-DFW. The patient population to which WNI-DFW provides health services has limited medical claims
activity from which claims-based actuarial judgments can be made. In addition, the full population is relatively small for precise actuarial determinations. Therefore, in addition to calculating IBNR claims using an actuarial estimate based on
historical medical claims activity, management includes an adjustment factor based on broader patient populations deemed to be similar in risk profile to the WNI-DFW managed patient population. If actual results are not consistent with the
Companys estimate, the Company may be exposed to variances in medical services and supplies expense that may be material. At June 30, 2016 and December 31, 2015, the Company has recorded an estimated IBNR liability of $11.5 million and $13.1
million, respectively, which are included in other accrued liabilities.
12
USMD HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements-(Continued)
June 30, 2016
(Unaudited)
Note 4 Investments in Nonconsolidated Affiliates
The net carrying values and ownership percentages of nonconsolidated affiliates accounted for under the equity method are as follows (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Carrying
Value
|
|
|
Ownership
Percentage
|
|
|
Carrying
Value
|
|
|
Ownership
Percentage
|
|
|
|
|
|
|
USMD Hospital at Arlington, L.P.
|
|
$
|
51,033
|
|
|
|
46.40%
|
|
|
$
|
51,872
|
|
|
|
46.40%
|
|
USMD Hospital at Fort Worth, L.P.
|
|
|
10,577
|
|
|
|
30.88%
|
|
|
|
10,277
|
|
|
|
30.88%
|
|
Other
|
|
|
6,566
|
|
|
|
10%-60%
|
|
|
|
6,702
|
|
|
|
10%-60%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
68,176
|
|
|
|
|
|
|
$
|
68,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2016, USMD Hospital at Arlington, L.P. (USMD Arlington) and USMD Hospital at Fort
Worth, L.P. (USMD Fort Worth) were significant equity investees, as that term is defined by SEC Regulation S-X Rule 8-03(b)(3). Financial information for USMD Arlington and USMD Forth Worth is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
USMD Arlington:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
26,009
|
|
|
$
|
24,738
|
|
|
$
|
49,953
|
|
|
$
|
46,423
|
|
Income from operations
|
|
$
|
6,247
|
|
|
$
|
5,961
|
|
|
$
|
10,208
|
|
|
$
|
10,256
|
|
Net income
|
|
$
|
5,837
|
|
|
$
|
5,753
|
|
|
$
|
8,827
|
|
|
$
|
9,209
|
|
|
|
|
|
|
USMD Fort Worth:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
6,181
|
|
|
$
|
5,766
|
|
|
$
|
12,164
|
|
|
$
|
11,506
|
|
Income from operations
|
|
$
|
926
|
|
|
$
|
382
|
|
|
$
|
1,243
|
|
|
$
|
792
|
|
Net income
|
|
$
|
831
|
|
|
$
|
239
|
|
|
$
|
1,011
|
|
|
$
|
504
|
|
Note 5 Patient Service Revenue
The Companys patient service revenue by payer is summarized in the table that follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
Amount
|
|
|
Ratio of Net
Patient
Service
Revenue
|
|
|
Amount
|
|
|
Ratio of Net
Patient
Service
Revenue
|
|
|
Amount
|
|
|
Ratio of Net
Patient
Service
Revenue
|
|
|
Amount
|
|
|
Ratio of Net
Patient
Service
Revenue
|
|
Medicare
|
|
$
|
15,510
|
|
|
|
32.8
|
%
|
|
$
|
14,888
|
|
|
|
31.5
|
%
|
|
$
|
32,420
|
|
|
|
34.0
|
%
|
|
$
|
28,419
|
|
|
|
31.2
|
%
|
Medicaid
|
|
|
789
|
|
|
|
1.7
|
|
|
|
705
|
|
|
|
1.5
|
|
|
|
1,562
|
|
|
|
1.6
|
|
|
|
1,477
|
|
|
|
1.6
|
|
Managed care and commercial payers
|
|
|
31,129
|
|
|
|
65.8
|
|
|
|
31,931
|
|
|
|
67.6
|
|
|
|
62,514
|
|
|
|
65.5
|
|
|
|
61,946
|
|
|
|
67.9
|
|
Self-pay
|
|
|
1,170
|
|
|
|
2.5
|
|
|
|
843
|
|
|
|
1.8
|
|
|
|
2,470
|
|
|
|
2.6
|
|
|
|
1,676
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient service revenue before provision for doubtful accounts
|
|
|
48,598
|
|
|
|
102.8
|
|
|
|
48,367
|
|
|
|
102.4
|
|
|
|
98,966
|
|
|
|
103.7
|
|
|
|
93,518
|
|
|
|
102.6
|
|
Patient service revenue provision for doubtful accounts
|
|
|
(1,307
|
)
|
|
|
(2.8
|
)
|
|
|
(1,138
|
)
|
|
|
(2.4
|
)
|
|
|
(3,564
|
)
|
|
|
(3.7
|
)
|
|
|
(2,338
|
)
|
|
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient service revenue
|
|
$
|
47,291
|
|
|
|
100.0
|
%
|
|
$
|
47,229
|
|
|
|
100.0
|
%
|
|
$
|
95,402
|
|
|
|
100.0
|
%
|
|
$
|
91,180
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
USMD HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements-(Continued)
June 30, 2016
(Unaudited)
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on managements assessment of the collectability of patient and customer accounts. The
Company regularly reviews this allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances and current economic conditions that may affect a patients or customers ability to
pay. Uncollectible accounts are written off once collection efforts are exhausted. At June 30, 2016 and December 31, 2015, the allowance for doubtful accounts was 13.1% and 11.2%, respectively, of accounts receivable. A summary of the
Companys accounts receivable allowance for doubtful accounts activity is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31,
2015
|
|
|
Provision
for
Doubtful
Accounts
Related to
Patient
Service
Revenue
|
|
|
Provision
for
Doubtful
Accounts
|
|
|
Write-offs,
net of
Recoveries
|
|
|
Balance at
June 30,
2016
|
|
|
|
|
|
|
$
|
2,920
|
|
|
|
3,564
|
|
|
|
105
|
|
|
|
(2,313
|
)
|
|
$
|
4,276
|
|
Note 6 Intangible Assets
The components of amortizable intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Management agreements
|
|
$
|
5,246
|
|
|
$
|
(1,028
|
)
|
|
$
|
4,218
|
|
|
$
|
5,246
|
|
|
$
|
(931
|
)
|
|
$
|
4,315
|
|
Trade names
|
|
|
11,212
|
|
|
|
(9,643
|
)
|
|
|
1,569
|
|
|
|
11,212
|
|
|
|
(9,374
|
)
|
|
|
1,838
|
|
Customer relationships
|
|
|
767
|
|
|
|
(767
|
)
|
|
|
|
|
|
|
767
|
|
|
|
(767
|
)
|
|
|
|
|
Noncompete agreements
|
|
|
12,632
|
|
|
|
(4,824
|
)
|
|
|
7,808
|
|
|
|
12,632
|
|
|
|
(4,193
|
)
|
|
|
8,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,857
|
|
|
$
|
(16,262
|
)
|
|
$
|
13,595
|
|
|
$
|
29,857
|
|
|
$
|
(15,265
|
)
|
|
$
|
14,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2016, aggregate amortization expense of intangible assets
totaled $0.5 million and $1.0 million, respectively. For the three and six months ended June 30, 2015, aggregate amortization expense of intangible assets totaled $0.5 million and $1.1 million, respectively. Total estimated amortization expense
for the Companys intangible assets through the end of 2016 and during the next five years is as follows (in thousands):
|
|
|
|
|
July through December 2016
|
|
$
|
997
|
|
2017
|
|
$
|
1,993
|
|
2018
|
|
$
|
1,992
|
|
2019
|
|
$
|
1,679
|
|
2020
|
|
$
|
1,423
|
|
2021
|
|
$
|
1,417
|
|
14
USMD HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements-(Continued)
June 30, 2016
(Unaudited)
Note 7 Other Accrued Liabilities
Other accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
December 31,
2015
|
|
Accrued payables
|
|
$
|
2,789
|
|
|
$
|
4,502
|
|
Accrued bonus
|
|
|
1,017
|
|
|
|
1,949
|
|
Other accrued liabilities
|
|
|
733
|
|
|
|
757
|
|
IBNR claims payable
|
|
|
11,521
|
|
|
|
13,052
|
|
Medical claims payable
|
|
|
1,352
|
|
|
|
793
|
|
Income taxes payable
|
|
|
96
|
|
|
|
335
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,508
|
|
|
$
|
21,388
|
|
|
|
|
|
|
|
|
|
|
Note 8 Long-Term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
December 31,
2015
|
|
USMD Holdings, Inc.:
|
|
|
|
|
|
|
|
|
Credit Agreement:
|
|
|
|
|
|
|
|
|
Term loan, net of unamortized debt issuance of $36 and $74 at June 30, 2016 and December 31, 2015,
respectively
|
|
$
|
6,714
|
|
|
$
|
6,676
|
|
Revolving credit facility
|
|
|
|
|
|
|
|
|
USMD Arlington related party advance, net of unamortized discount and debt issuance costs of $237
and $ 278 at June 30, 2016 and December 31, 2015, respectively
|
|
|
14,761
|
|
|
|
14,721
|
|
Convertible subordinated notes due 2019, net of unamortized discount and debt issuance costs of
$2,061 and $2,398 at June 30, 2016 and December 31, 2015, respectively
|
|
|
22,281
|
|
|
|
21,944
|
|
Convertible subordinated notes due 2020 (including $700 related party notes), net of $15 and $17
debt issuance costs at June 30, 2016 and December 31, 2015, respectively
|
|
|
5,035
|
|
|
|
5,033
|
|
Other loans payable
|
|
|
686
|
|
|
|
909
|
|
Capital lease obligations
|
|
|
7,417
|
|
|
|
7,535
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt and capital lease obligations
|
|
|
56,894
|
|
|
|
56,818
|
|
Less: current portion
|
|
|
(10,853
|
)
|
|
|
(8,607
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital lease obligations, less current portion
|
|
$
|
46,041
|
|
|
$
|
48,211
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt Maturities
Maturities of the Companys long-term debt at June 30, 2016, excluding unamortized debt discounts, are as follows for the years indicated
(in thousands):
|
|
|
|
|
July through December 2016
|
|
$
|
6,926
|
|
2017
|
|
|
3,910
|
|
2018
|
|
|
3,872
|
|
2019
|
|
|
28,193
|
|
2020
|
|
|
8,891
|
|
Thereafter
|
|
|
36
|
|
|
|
|
|
|
Total
|
|
$
|
51,828
|
|
|
|
|
|
|
15
USMD HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements-(Continued)
June 30, 2016
(Unaudited)
Note 9 Fair Value of Financial Instruments
Financial instruments consist mainly of cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings and long-term
debt. The carrying value of financial instruments with a short-term or variable-rate nature approximates fair value and are not presented in the table below. The carrying value and estimated fair value of the Companys financial instruments
that may not approximate fair value are set forth in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Carrying
Value
|
|
|
Fair Value
|
|
|
Carrying
Value
|
|
|
Fair Value
|
|
Term loan
|
|
$
|
6,714
|
|
|
$
|
6,714
|
|
|
$
|
6,676
|
|
|
$
|
6,676
|
|
Convertible subordinated notes due 2019
|
|
$
|
22,281
|
|
|
$
|
21,127
|
|
|
$
|
21,944
|
|
|
$
|
17,805
|
|
Convertible subordinated notes due 2020
|
|
$
|
5,035
|
|
|
$
|
8,135
|
|
|
$
|
5,033
|
|
|
$
|
4,307
|
|
Other loans payable
|
|
$
|
686
|
|
|
$
|
624
|
|
|
$
|
909
|
|
|
$
|
898
|
|
At June 30, 2016 and December 31, 2015, the carrying value of the Companys Term Loan approximates
fair value due to recent amendment of the debt and its short-term nature. No events have occurred subsequent to issuance and amendment of the Term Loan to substantially impact the estimated borrowing rate applicable to the Term Loan.
The Company estimates the fair value of the convertible subordinated notes as the sum of the independently estimated fair values of the debt
host instrument and embedded conversion option (Level 3 fair value measurement). The Company calculates the present value of future principal and interest payments of the debt host using estimated borrowing rates for similar subordinated debt or
debt for which the Company could use to retire the existing debt. The convertible subordinated notes due 2020 issued in 2015 have effective interest rates that are higher than the effective interest rates of the convertible subordinated notes due
2019. Consequently, the estimated borrowing rate used in the calculation of 2015 fair value was increased commensurate with the borrowing rate of the convertible subordinated notes due 2020. The fair value of the embedded conversion option is valued
using a Black-Scholes option pricing model. Quoted market prices are not available for the convertible subordinated notes.
The Company
estimates current borrowing rates for its other loans payable by adjusting the discount factor of the obligations at the balance sheet date by the variance in borrowing rates between the issuance dates and balance sheet date (Level 2 fair value
measurement). If the creditworthiness of the Company has significantly changed from the debt issuance date, management estimates the applicable borrowing rate based on the current facts and circumstances. Quoted market prices are not available for
the Companys long-term debt.
Note 10 Share-Based Payment
Pursuant to the USMD Holdings, Inc. 2010 Equity Compensation Plan (the Equity Compensation Plan), the Company may issue up to
2.5 million equity awards to employees, nonemployee directors and nonemployee service providers in the form of stock options, stock and stock appreciation rights. Stock options may be granted with a contractual life of up to ten years. At June
30, 2016, the Company had 0.5 million shares available for grant under the Equity Compensation Plan.
Payments in Common Stock
For services rendered in 2015 as members of the Companys Board of Directors, the Company elected to compensate directors in common stock
of the Company in lieu of cash. Grant dates occur on the last day of each quarter for services rendered during that quarter. Shares granted are fully vested, non-forfeitable and granted pursuant to the Equity Compensation Plan. On February 21,
2016, in payment of Board of Directors compensation earned October 1, 2015 through December 31, 2015, the Company issued to members of the Companys Board of Directors 21,522 previously granted shares of its common stock with an
aggregate grant date fair value of $161,000.
Pursuant to the Equity Compensation Plan, on March 4, 2015, in payment of certain
compensation accrued at December 31, 2015, the Company granted 4,447 shares of its common stock to a member of senior management. The shares had a grant date fair value of $35,000 and were issued on March 13, 2016.
16
USMD HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements-(Continued)
June 30, 2016
(Unaudited)
Certain consultants to the Company have agreed to be partially compensated in common stock
for services rendered. Shares granted are fully vested and non-forfeitable. Pursuant to the Equity Compensation Plan, during the year ended December 31, 2015, the Company granted to the consultants 6,613 shares of its common stock with a grant
date fair value of $95,000, which were issued on March 13, 2016. On July 22, 2016, the Company issued to one of the consultants 856 previously granted shares of its common stock with an aggregate grant date fair value of $7,000.
The Company acquired certain assets of a general surgery practice in 2015 and elected to issue the former owners common stock equal to
$200,000 divided by the closing price of the stock on the date of issuance, or 26,666 shares. Shares granted are fully vested and non-forfeitable. The shares were issued on February 5, 2016.
Note 11 Earnings (loss) per Share
Basic earnings (loss) per share is computed by dividing net income (loss) attributable to the Companys stockholders by the
weighted-average number of common shares outstanding during the period, including fully vested common shares that have been granted, but not yet issued. Diluted earnings (loss) per share is based on the weighted-average number of common shares
outstanding plus the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Securities that are potentially dilutive to common shares include outstanding stock options and the convertible
subordinated notes. Potential common shares are excluded from the computation of diluted earnings per common share when the effect would be antidilutive.
Dilutive potential common shares related to stock options are calculated in accordance with the treasury stock method, which assumes that
proceeds from the exercise of stock options are used to purchase common shares at the average market price during the period. Proceeds from the exercise of stock options include the amount the employee must pay for exercising stock options, the
amount of compensation cost for future services that the Company has not yet recognized and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible. The number of shares remaining represents
the potentially dilutive effect of the securities. Stock options are only dilutive to the extent that the average market price of common stock during the period exceeds the exercise price of the options.
Dilutive common shares related to the convertible subordinated notes are calculated in accordance with the if-converted method. Under the
if-converted method, if dilutive, net income (loss) attributable to the Companys stockholders is adjusted to add back the amount of after-tax interest charges recognized in the period, including any deemed interest from a beneficial conversion
feature, and the convertible subordinated notes are assumed to have been converted with the resulting common shares added to weighted average shares outstanding. These securities are only dilutive to the extent that the after-tax interest charges
per common share exceed basic earnings per share.
17
USMD HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements-(Continued)
June 30, 2016
(Unaudited)
The following table presents a reconciliation of the numerators and denominators of basic and
diluted earnings (loss) per share and the computation of basic and diluted earnings (loss) per share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to USMD Holdings, Inc. - basic
|
|
$
|
(4,035
|
)
|
|
$
|
(2,109
|
)
|
|
$
|
(6,671
|
)
|
|
$
|
(6,770
|
)
|
Effect of potentially dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on convertible notes, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to USMD Holdings, Inc. - diluted
|
|
$
|
(4,035
|
)
|
|
$
|
(2,109
|
)
|
|
$
|
(6,671
|
)
|
|
$
|
(6,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
11,394
|
|
|
|
10,355
|
|
|
|
11,394
|
|
|
|
10,300
|
|
Effect of potentially dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible subordinated notes due 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible subordinated notes due 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding assuming dilution
|
|
|
11,394
|
|
|
|
10,355
|
|
|
|
11,394
|
|
|
|
10,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share attributable to USMD Holdings, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.35
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(0.66
|
)
|
Diluted
|
|
$
|
(0.35
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(0.66
|
)
|
The following table presents the potential shares excluded from the diluted earnings (loss) per share
calculation because the effect of including theses potential shares would be antidilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Stock options
|
|
|
799
|
|
|
|
916
|
|
|
|
786
|
|
|
|
916
|
|
Convertible subordinated notes due 2019
|
|
|
1,042
|
|
|
|
1,042
|
|
|
|
1,042
|
|
|
|
1,042
|
|
Convertible subordinated notes due 2020
|
|
|
461
|
|
|
|
461
|
|
|
|
461
|
|
|
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,302
|
|
|
|
2,419
|
|
|
|
2,289
|
|
|
|
2,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12 Commitments and Contingencies
Financial Guarantees
As of June 30, 2016,
the Company had issued guarantees to third parties of the indebtedness and other obligations of certain of its current and one former nonconsolidated investees. Should the investees fail to pay the obligations due, the Company could be required to
make payments totaling an aggregate of $24.0 million. The guarantees provide for recourse against the investee; however, generally, if the Company was required to perform under the guarantees, recovery of any amount from investees would be unlikely.
Included in the guarantee amount above is the Companys guarantee of 46.4% of the obligations of USMD Arlington that were incurred to finance the Advance to the Company. If the Company was required to perform under that guarantee or record a
liability for that guarantee, its obligations under the Advance would likely decrease by an equal amount. The remaining terms of these guarantees range from 23 to 143 months. The Company records a liability for performance under financial guarantees
when, upon review of available financial information of the nonconsolidated affiliate and in consideration of pertinent factors, management determines that it is probable it will have to perform under the respective guarantee and the liability is
reasonably estimable. The Company has not recorded a liability for these guarantees, as it believes it is not probable that it will have to perform under these agreements.
18
USMD HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements-(Continued)
June 30, 2016
(Unaudited)
Purchase Commitments
In connection with arrangements to lease equipment for the new IDTF at USMD Arlington, the Company entered into service and maintenance
agreements for the equipment. Future minimum payments due under these service agreements are as follows (in thousands):
|
|
|
|
|
2016
|
|
$
|
802
|
|
2017
|
|
|
885
|
|
2018
|
|
|
883
|
|
2019
|
|
|
883
|
|
2020
|
|
|
756
|
|
Thereafter
|
|
|
79
|
|
|
|
|
|
|
Total
|
|
$
|
4,288
|
|
|
|
|
|
|
Gain Contingency - Sale of Interest in Equity Method Investee
Effective January 31, 2015, a subsidiary of the Company sold for $1.6 million its interest in a cancer treatment center that it accounted
for under the equity method of accounting. The investment had a carrying value of $159,000. The interest was sold to the other owner of the cancer treatment center. The buyer issued a promissory note to the Company for the $1.6 million sale price;
however, the Company concluded that only $159,000 of the note was reasonably assured of collection and recorded a note receivable in that amount. Upon collection of the $159,000 note receivable, the Company began recognizing gain on the sale as
additional payments are received. For the three and six months ended June 30, 2016, the Company recognized an aggregate gain on the sale of $31,000 and $100,000, respectively, which is recorded in other gain on the Companys condensed
consolidated statement of operations. The Company had provided management services to the cancer treatment center under a long term contract and the contract was terminated with the sale of its ownership interest.
Litigation
The Company is from time to
time subject to litigation and related claims and arbitration matters arising in the ordinary course of business, including claims relating to contracts and financial obligations, partnership or joint venture entity disputes and, with respect to
USMD Physician Services, claims arising from the provision of professional medical services to patients. In some cases, plaintiffs may seek damages, including punitive damages that may not be covered by insurance. In other cases, claims may not be
covered by insurance at all. The Company maintains professional and general liability insurance through commercial insurance carriers for claims and in amounts that the Company believes to be sufficient for its operations, although, potentially,
some claims may exceed the scope and amount of coverage in effect. The Company expenses as incurred legal costs associated with litigation or other loss contingencies.
The Company accrues for a contingent loss when it is both probable that a liability has been incurred and the amount of the loss can be
reasonably estimated. Significant judgment is required in both the determination of the probability of a loss and the determination as to whether a loss is reasonably estimable. These determinations are updated at least quarterly and are adjusted to
reflect the effects of negotiations, settlements, rulings, advice of legal counsel and technical experts and other information and events pertaining to a particular matter. To the extent there is a reasonable possibility that probable losses could
exceed amounts already accrued, if any, and the additional loss or range of loss is estimable, management discloses the additional loss or range of loss. For matters where the Company has evaluated that a loss is not probable, but is reasonably
possible, the Company will disclose an estimate of the possible loss or range of loss or make a statement that such an estimate cannot be made.
For lawsuits and claims where the Company can reasonably estimate a range of loss, the Company estimates a reasonably possible range of loss
of $0.1 million to $0.7 million. In the remaining lawsuits and the potential claims, the parties are in the early stages of discovery and/or the plaintiffs have not made specific demands for damages. Due to these circumstances, the Company is unable
to estimate a reasonably possible range of loss related to these lawsuits and claims. The Company is insured against the claims described above and believes based on the facts known to date that any damage award related to such claims would be
recoverable from its insurer.
The Company is subject to various additional claims and legal proceedings that have arisen in the ordinary
course of its business activities. Management believes that any liability that may ultimately result from the resolution of these matters will not have a material adverse effect on the financial condition, results of operations or cash flows of the
Company.
19
USMD HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements-(Continued)
June 30, 2016
(Unaudited)
Arbitration Judgment
On February 16, 2016, an arbitrator awarded the Company $1.1 million including damages, fees and interest to date. The award will continue
to accrue interest until paid. The arbitration hearing stemmed from the early termination of a long-term contract by an entity to which the Company was providing management services. An order confirming the final judgment was entered by the
court on March 31, 2016. For the three and six months ended June 30, 2016, the Company recognized revenue of $0.8 million, which is recorded in management and other services revenue on the Companys condensed consolidated statement of
operations.
Financial Advisory Commitment
The Company has in place with an investment banking firm a financial advisory services agreement, as amended, (FAS Agreement).
Under the FAS Agreement, the Company may be obligated to compensate the firm in cash for certain financial transactions, depending on the transaction type and size, in amounts generally equal to the greater of a minimum $1.0 million to $3.0 million,
a percentage of the potential transaction value, or a fee to be determined in the future based on prevailing market rates for the services provided, subject to the review and restrictions imposed by the Financial Industry Regulatory Authority as
further defined in the FAS Agreement. If the Company enters into a qualifying financial transaction during a one year to thirty month period subsequent to termination of the FAS Agreement, depending on the transaction type and size, the investment
banking firm may be entitled to compensation under the terms of the FAS Agreement. The FAS Agreement remains in effect until terminated by either party. Pursuant to the FAS Agreement, $3.0 million of proceeds from the sale of the Lithotripsy
Services business was paid to the investment banking firm. In connection with the fee for the sale of the Lithotripsy Services business, the FAS Agreement was amended to provide for a future credit of up to $1.0 million to be applied against fees
incurred in future transactions. Except as noted above, the Company has not closed any transaction for which compensation is due or was paid to the investment banking firm.
Build-to-Suit Lease
For build-to-suit
lease arrangements, the Company evaluates lease terms to assess whether, for accounting purposes, it should be the owner of the construction project. Under build-to-suit lease arrangements, to the extent the Company is involved in the construction
of structural improvements or takes construction risk prior to commencement of a lease, the Company establishes assets and liabilities for the estimated construction costs of the shell facility. Improvements to the facility during the construction
project are capitalized, and, to the extent funded by a tenant improvement allowance, the facility financing obligation is increased. Upon occupancy of facilities under build-to-suit leases, the Company assesses whether these arrangements qualify
for sales recognition under the sale-leaseback accounting guidance. If the Company continues to be the deemed owner for accounting purposes, the facilities are accounted for as financing obligations. Payments the Company makes under leases in which
it is considered the owner of the facility are allocated to land rental expense, based on the relative values of the land and building at the commencement of construction, reductions of the facility financing obligation and interest expense
recognized on the outstanding obligation. To the extent gross future payments do not equal the recorded liability, the liability is settled upon return of the facility to the lessor. Any difference between the book value of the assets and remaining
facility obligation are recorded in other income (expense), net.
The Company has entered into an arrangement to lease the majority of
medical office building space in a shell facility that was under construction at the date of lease inception. In addition to its normal tenant improvements, the Company was required to install the heating, ventilation and cooling equipment and
systems for its leased portion of the building. Additionally, the Company was at risk for any construction cost overruns associated with these specific structural and tenant improvements. As a result, the Company concluded that for accounting
purposes, it was the deemed owner of the building during the construction period. The landlord incurred an estimated $4.4 million of construction costs and the Company incurred $0.1 million for tenant improvements. During construction, the Company
recorded these amounts as construction in progress, with a corresponding build-to-suit construction financing obligation. Upon completion of the construction of the facility in December 2015, the Company evaluated derecognition of the asset and
liability under the provisions for sale-leaseback transactions. The Company concluded that it had forms of continuing economic involvement in the facility, and therefore did not comply with the provisions for sale-leaseback accounting. Instead, the
lease will be accounted for as a financing obligation and lease payments will be attributed to (1) a reduction of the principal financing obligation; (2) imputed interest expense; and (3) land lease expense representing an imputed
cost to lease the underlying land of the facility, which is considered an operating lease. In addition, the Company recorded the underlying building asset and will depreciate it over the buildings estimated useful life of 40 years. At the
conclusion of the lease term, the Company would de-recognize both the net book values of the asset and financing obligation. At June 30, 2016, the Company has recorded a $4.4 million financing obligation in other long-term liabilities in the
accompanying condensed consolidated balance sheet.
20
USMD HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements-(Continued)
June 30, 2016
(Unaudited)
Under the lease, after a five month rent abatement, the Company is required to pay an initial
base rent of $36,000 per month, increasing 3% per year, as well as all its share of building operating expenses. The lease term expires March 31, 2026 and the Company has an option to extend the lease term for two consecutive terms of five
years each.
At June 30, 2016, future minimum rent payments under the build-to-suit lease are as follows (in thousands):
|
|
|
|
|
2016
|
|
$
|
218
|
|
2017
|
|
|
448
|
|
2018
|
|
|
461
|
|
2019
|
|
|
475
|
|
2020
|
|
|
489
|
|
Thereafter
|
|
|
2,816
|
|
|
|
|
|
|
Total
|
|
$
|
4,907
|
|
|
|
|
|
|
Operating Lease Commitments
As part of its current initiatives, the Company has begun consolidating certain physician clinics into newly leased, larger clinic locations
that more effectively centralize and align physicians and ancillary services. In connection with this initiative, the Company has entered into new leases and renewed existing leases of medical office building space. Generally, the Company enters
into leases for existing medical office building space or for space in a completed building shell and then constructs normal tenant improvements to meet its needs, subject to landlord approval. The leases provide for tenant improvement allowances to
fund the design and construction of the tenant improvements. The Company records improvements to the leased space as leasehold improvements, including the improvements financed by the landlord. Tenant improvement allowances financed by the landlord
are also recorded to deferred rent and amortized as a reduction to rent expense over the term of the lease beginning at the asset in-service date.
Future minimum rental commitments under non-cancelable operating leases are as follows (in thousands):
|
|
|
|
|
July through December 2016
|
|
$
|
8,028
|
|
2017
|
|
|
13,488
|
|
2018
|
|
|
11,739
|
|
2019
|
|
|
10,555
|
|
2020
|
|
|
9,102
|
|
Thereafter
|
|
|
35,060
|
|
|
|
|
|
|
Total
|
|
$
|
87,972
|
|
|
|
|
|
|
21
USMD HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements-(Continued)
June 30, 2016
(Unaudited)
Note 13 Related Party Transactions
The Company provides management, clinical and support services to various nonconsolidated affiliates in which it has limited partnership or
ownership interests. Management and other services revenue and accounts receivable from these entities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management and Other Services Revenue
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
USMD Arlington
|
|
$
|
2,863
|
|
|
$
|
2,765
|
|
|
$
|
5,634
|
|
|
$
|
5,392
|
|
USMD Fort Worth
|
|
|
850
|
|
|
|
815
|
|
|
|
1,690
|
|
|
|
1,629
|
|
Other equity method investees
|
|
|
573
|
|
|
|
351
|
|
|
|
1,065
|
|
|
|
748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,286
|
|
|
$
|
3,931
|
|
|
$
|
8,389
|
|
|
$
|
7,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
USMD Arlington
|
|
$
|
829
|
|
|
$
|
967
|
|
USMD Fort Worth
|
|
|
446
|
|
|
|
383
|
|
Other equity method investees
|
|
|
236
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,511
|
|
|
$
|
1,400
|
|
|
|
|
|
|
|
|
|
|
One previously consolidated lithotripsy entity that was a component of the sale of the Lithotripsy Services
business historically provided lithotripsy services to USMD Arlington and USMD Fort Worth. For the three and six months ended June 30, 2015, the Company recognized lithotripsy revenues from USMD Arlington and USMD Fort Worth totaling $0.5 million
and $0.9 respectively.
The Company leases space from USMD Arlington for certain of its physicians and its Arlington-based cancer
treatment center. For the three months ended June 30, 2016 and 2015, the Company recognized rent expense related to USMD Arlington totaling $0.7 million and $0.5 million, respectively. For the six months ended June 30, 2016 and 2015, the Company
recognized rent expense related to USMD Arlington totaling $1.3 million and $1.0 million, respectively.
WNI-DFW, the Companys
consolidated VIE that operates under a population health management model, records medical services expense for its patients that are treated at USMD Arlington and USMD Fort Worth. Medical services expense incurred by WNI-DFW with these entities and
its related accounts payable are as follows (in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Services Expense
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
USMD Arlington
|
|
$
|
491
|
|
|
$
|
720
|
|
|
$
|
781
|
|
|
$
|
1,145
|
|
USMD Fort Worth
|
|
|
138
|
|
|
|
132
|
|
|
|
245
|
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
629
|
|
|
$
|
852
|
|
|
$
|
1,026
|
|
|
$
|
1,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
USMD Arlington
|
|
$
|
124
|
|
|
$
|
198
|
|
USMD Fort Worth
|
|
|
16
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
140
|
|
|
$
|
264
|
|
|
|
|
|
|
|
|
|
|
22