The Federal False Claims ActJim Berend, Executive Vice President, Chief Financial Officer and Similar State LawsInterim Chief Accounting Officer

The qui tam, or whistleblower, provisionsMr. Berend has entered into a severance agreement with the Company. Under the terms of the federal False Claims Act (“FCA”) allow private individualsseverance agreement, if Mr. Berend’s employment is terminated by the Company for any reason other than a “Termination for Cause” (as defined in the severance agreement) or if he terminates his employment in a “Termination for Good Reason” (as defined in the severance agreement), Mr. Berend will receive a separation payment equal to bring actions on behalf12 months of base salary if the government alleging thattermination occurs during the defendant has defraudedfirst two years after the federal government. Further,commencement of his employment with the government may useCompany, or 18 months of base salary if the FCAtermination occurs more than two years after the commencement of his employment with the Company. This severance payment is subject to prosecute MedicareMr. Berend’s execution of a release agreement releasing the Company and other government program fraud in areas such as coding errors, billing for services not provided and submitting false cost reports. When a private party brings a qui tam action underits affiliates from any claims arising out of his employment with the FCA, the defendantCompany.

Other Named Executive Officers

Dr. House is not made aware ofparty to a severance agreement with the lawsuit until the government has concluded its own investigation or otherwise determined whether it will intervene.

If a defendant is found liable under the FCA, the defendant may be required to pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each separate false claim. There are many potential bases for liability under the FCA. Liability often arises when an entity knowingly submits a false claim for reimbursement to the federal government. The FCA defines the term “knowingly” broadly. Though simple negligence will not give rise to liability under the FCA, submitting a claim with reckless disregard to its truth or falsity constitutes a “knowing” submission under the FCA and, therefore, may create liability. The Fraud Enforcement and Recovery Act of 2009 expanded the scope of the FCA by, among other things, creating liability for knowingly and improperly avoiding repayment of an overpayment received from the government and broadening protections for whistleblowers. Under the Healthcare Reform Law, the FCA is implicated by the knowing failure to report and return an overpayment within 60 days of identifying the overpayment or by the date a corresponding cost report is due, whichever is later.

In some cases, whistleblowers and the federal government have taken the position, and some courts have held, that providers who allegedly have violated other statutes, such as the Anti-Kickback Statute and the Stark Law, have thereby submitted false claims under the FCA. The Healthcare Reform Law clarifies this issue with respect to the Anti-Kickback Statute by providing that submission of claims for services or items generated in violation of the Anti-Kickback Statute constitutes a false or fraudulent claim under the FCA. Every entity that receives at least $5 million annually in Medicaid payments must have written policies for all employees, contractors or agents, providing detailed information about false claims, false statements and whistleblower protections under certain federal laws, including the FCA, and similar state laws. In addition, federal law provides an incentive to states to enact false claims laws comparable to the FCA. A number of states in which we operate, including Texas, have adopted their own false claims provisions as well as their own whistleblower provisions under which a private party may file a civil lawsuit in state court. We have adopted and distributed policies pertaining to the FCA and relevant state laws to all employees and they are a part of our compliance program and Code of Conduct.

HIPAA and Related Security Requirements

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) requires the use of uniform electronic data transmission standards for certain healthcare claims and payment transactions submitted or received electronically, in order to encourage the conducting of commerce electronically. HHS has issued regulations implementing the HIPAA Administrative Simplification Provisions and compliance with these regulations is mandatory for certain of our facilities. The Healthcare Reform Law requires HHS to adopt standards for additional electronic transactions and to establish operating rules to promote uniformity in the implementation of each standardized electronic transaction. As part of these standards, each provider must use a National Provider Identifier, and CMS requires the use of updated standard code sets for certain diagnoses and procedures known as ICD-10 code sets. Implementing the ICD-10 code sets required significant administrative changes, investment in coding technology and software as well as the training of staff involved in the coding and billing process. In addition to these upfront costs of transition to ICD-10, it is possible that our clinics could experience disruption or delays in payment due to technical or coding errors or other implementation issues involving our systems or the systems and implementation efforts of health plans and their business partners. Further, the transition to the more detailed ICD-10 coding system could result in decreased reimbursement if the use of ICD-10 codes result in conditions being reclassified to payment groupings with lower levels of reimbursement than codes assigned under the previous system. However, we believe that the cost of compliance with these regulations has not had, and is not expected to have, a material adverse effect on our cash flows, financial position or results of operations. By regulation, use of the ICD-10 code sets began October 1, 2015.

The privacy and security regulations promulgated under HIPAA extensively regulate the use and disclosure of individually identifiable health information and require covered entities, including health plans and most healthcare providers, to implement administrative, physical and technical safeguards to protect the security of such information. The application of certain provisions of the security and privacy regulations has been proposed to be extended to business associates (entities that handle identifiable health information on behalf of covered entities) and subjects business associates to civil and criminal penalties for violation of the regulations. If this proposal is enacted, these changes would likely require amendments to existing agreements with business associates and would subject business associates and their subcontractors to direct liability under the HIPAA privacy and security regulations. We currently enforce a HIPAA compliance plan, which we believe complies with HIPAA privacy and security requirements and under which a HIPAA compliance group monitors our compliance. The privacy regulations and security regulations have and will continue to impose significant costs on our facilities and on our entities that manage other healthcare providers’ businesses in order to comply with these standards.

Covered entities are required by law to report breaches of unsecured protected health information to affected individuals without unreasonable delay but not to exceed 60 days of discovery of the breach by a covered entity or its agents. Notification must also be made to HHS and, in certain situations involving large breaches, to the media. HHS is required to publish on its website a list of all covered entities that report a breach involving more than 500 individuals. Various state laws and regulations may also require us to notify affected individuals in the event of a data breach involving individually identifiable information.

Violations of the HIPAA privacy and security regulations may result in civil and criminal penalties. In addition, there are numerous other laws and legislative and regulatory initiatives at the federal and state levels addressing privacy and security concerns. Our facilities remain subject to any federal or state privacy-related laws that are more restrictive than the privacy regulations issued under HIPAA. These laws vary and could impose additional penalties and costs to our businesses.

Regulation of Clinical Laboratories

The Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) extended federal oversight to virtually all clinical laboratories by requiring that they be certified by the federal government or by a federally-approved accreditation agency. CLIA requires that all clinical laboratories meet quality assurance, quality control and personnel standards. Standards for testing under CLIA are based on the complexity of the tests performed by the laboratory, with tests classified as “high complexity,” “moderate complexity,” or “waived.”

Laboratories performing high complexity testing are required to meet more stringent requirements than moderate complexity laboratories. Laboratories performing only waived tests, which are tests determined to have a low potential for error and requiring little oversight, may apply for a certificate of waiver exempting them from most of the requirements of CLIA. Several facilities operated or managed by USMD and its subsidiaries are CLIA certified to perform high complexity testing. In addition, we manage several smaller testing sites that are authorized under CLIA to perform moderate complexity testing or have received certificate of waiver. The sanctions for failure to comply with CLIA requirements include suspension, revocation or limitation of a laboratory’s CLIA certificate, which is necessary to conduct business, cancellation or suspension of the laboratory’s approval to receive Medicare and/or Medicaid reimbursement, as well as significant fines and/or criminal penalties.

We are also subject to state and local laboratory regulation. We believe that we are in compliance with all applicable laboratory requirements, but these regulations are subject to expansion, amendment or changes in interpretation. Our laboratories, and those we manage, have continuing programs to ensure that operations meet all regulatory requirements.

Accountable Care Organizations and Pilot Projects.

The Affordable Care Act requires HHS to establish a Medicare Shared Savings Program that promotes accountability and coordination of care through the creation of ACOs. The program allows providers, physicians and other designated professionals and suppliers to form ACOs and voluntarily work together to invest in infrastructure and redesign delivery processes to achieve high quality and efficient delivery of services. The program is intended to produce savings as a result of improved quality and operational efficiency. ACOs that achieve quality performance standards established by HHS will be eligible to share in a portion of the amounts saved by the Medicare program. HHS has significant discretion to determine key elements of the program, including what steps providers must take to be considered an ACO, how to decide if Medicare program savings have occurred, and what portion of such savings will be paid to ACOs. In addition, HHS will determine to what degree hospitals, physicians and other eligible participants will be able to form and operate an ACO without violating certain existing laws, including the Civil Monetary Penalty Law, the Anti-Kickback Statute and the Stark law. However, the Affordable Care Act does not authorize HHS to waive other laws that may impact the ability of hospitals and other eligible participants to participate in ACOs, such as antitrust laws.

Environmental Regulation

We are subject to compliance with various federal, state and local environmental laws, rules and regulations, including the disposal of medical waste generated by our healthcare facilities. Our environmental compliance costs are not significantCompany, and we do not anticipate that they will be significant inat this time entering into such an agreement. We routinely evaluate the future.

Antitrust Laws

The federal governmentcosts and most states have enacted antitrust laws that prohibit certain typesbenefits of conduct deemedproviding severance benefits to be anti-competitive. These laws prohibit price fixing, concerted refusalour executives and could at a future time determine to deal, market monopolization, price discrimination, tying arrangements, acquisitions of competitors and other practices that have, or may have, an adverse effect on competition. Violations of federal or state antitrust laws can result in various sanctions, including criminal and civil penalties. Antitrust enforcement in the healthcare industry is currentlyenter into such a priority of the Federal Trade Commission. We believe we are in compliance with such federal and state laws.severance agreement.

Other Fraud and Abuse Provisions

The Social Security Act also imposes criminal and civil penalties for submitting false claims to Medicare and Medicaid. False claims include billing for services not rendered, misrepresenting actual services rendered in order to obtain higher reimbursement and cost report fraud. Like the Anti-Kickback Statute, these provisions are very broad. Further, the Social Security Act contains civil penalties for conduct including improper coding and billing for unnecessary goods and services. Civil penalties may be imposed for the failure to report and return an overpayment within 60 days of identifying the overpayment or by the date a corresponding cost report is due, whichever is later. To avoid liability, providers must, among other things, carefully and accurately code claims for reimbursement, promptly return overpayments and accurately prepare cost reports.

HIPAA broadened the scope of the fraud and abuse laws by adding several criminal provisions for healthcare fraud offenses that apply to all health benefit programs. HIPAA also created new enforcement mechanisms to combat fraud and abuse, including the Medicaid Integrity Program and an incentive program under which individuals can receive up to $1,000 for providing information on Medicare fraud and abuse that leads to the recovery of at least $100 of Medicare funds. In addition, federal enforcement officials now have the ability to exclude from Medicare and Medicaid any investors, officers and managing employees associated with business entities that have committed healthcare fraud. Additionally, HIPAA establishes a violation for the payment of inducements to Medicare or Medicaid beneficiaries in order to influence those beneficiaries to order or receive services from a particular provider or practitioner.

Some of these provisions, including the federal Civil Monetary Penalty Law, require a lower burden of proof than other fraud and abuse laws, including the Anti-Kickback Statute. Civil monetary penalties that may be imposed under the federal Civil Monetary Penalty Law range from $10,000 to $50,000 per act, and in some cases may result in penalties of up to three times the remuneration offered, paid, solicited or received. In addition, a violator may be subject to exclusion from federal and state healthcare programs. Federal and state governments increasingly use the federal Civil Monetary Penalty Law, especially where they believe they cannot meet the higher burden of proof requirements under the Anti-Kickback Statute.

Compliance Program

We maintain a compliance program that reflects our commitment to complying with laws and regulations applicable to our business and meeting our ethical obligations in conducting our business (the “Compliance Program”). We believe our Compliance Program provides a solid framework to meet this commitment; the Compliance Program includes the following:

The foundation of our Compliance Program is our Code of Conduct, which is intended to be a comprehensive statement of the ethical and legal standards governing the daily activities of our employees, affiliated professionals, independent contractors, officers and directors. All our personnel are required to abide by and annually attest to reading and complying with the Code of Conduct. In addition, all employees and affiliated professionals are expected to report incidents that they believe in good faith may be in violation of our Code of Conduct. We maintain a toll-free hotline to permit individuals to report compliance concerns on an anonymous basis and obtain answers to questions about our Code of Conduct. Our Compliance Program, including our Code of Conduct, is administered by our Chief Compliance Officer with oversight by our Chief Executive Officer, Corporate Compliance Committee and Board of Directors. Copies of our Code of Conduct are available on our website, www.usmd.com. Our Internet website and the information contained therein or connected thereto are not incorporated into or deemed a part of this Form 10-K.

Professional and General Liability Coverage

We maintain professional and general liability insurance policies with third-party insurers, subject to deductibles, policy aggregates, exclusions and other restrictions, in accordance with standard industry practice. We believe that our insurance coverage is appropriate based upon our claims experience and the nature and risks of our business. Our business entails an inherent risk of claims of

medical malpractice against our physicians and us. We contract and pay premiums for professional liability insurance that indemnifies us and our healthcare professionals on a claims-made basis for losses incurred related to medical malpractice litigation. Professional liability coverage is required in order for our physicians to maintain hospital privileges.

Employees

As of December 31, 2015, we had a total of 1,577 employees, including 227 physicians and 43 physician extenders. None of our employees is a party to a collective bargaining agreement and we consider our relationships with our employees to be good.

Available Information

We file annual, quarterly and current reports, proxy statements and other information electronically with the Securities and Exchange Commission (the “SEC”). You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains a website that contains annual, quarterly and current reports, proxy statements and other information that issuers (including USMD) file electronically with the SEC. The SEC’s website is www.sec.gov.

Our website is www.usmd.com. You can access our Investors Relations webpage through this website by clicking on the heading “Investor Relations” followed by the “SEC Filings” link. We make available, free of charge, on or through our SEC Filings webpage, our annual reports on Form 10-K, quarterly reports on Form 10-Q, registration statements on Form S-4 and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or the Securities Act of 1933, as amended (the “Securities Act”), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The information provided on our website is not part of this Annual Report on Form 10-K and is therefore not incorporated by reference unless such information is specifically referenced elsewhere in this Annual Report on Form 10-K.

Not applicable for smaller reporting companies.

Not applicable for smaller reporting companies.

We maintain our principal executive office at 6333 North State Highway 161, Irving, Texas. We occupy approximately 27,000 square feet of space under a long-term lease that expires in 2023 and includes an option for us to renew the lease for up to five years beyond that date. We also lease approximately 60,000 square feet of space in two separate locations for our business office operations.

In addition to our principal executive office and business office operations, as of December 31, 2015, we leased through various entities 57 healthcare facilities to support our operations. Our clinical leases, which represent the largest portion of our rent expense, have various terms ranging from one month to 12 years and monthly lease payments ranging from $900 to $95,000. We expect to be able to renew each of our leases or to lease comparable facilities on terms commercially acceptable to us.

All of our properties are located in the Dallas/Fort Worth, Texas metropolitan area. We believe our present facilities are substantially adequate to meet our current and near-term projected needs.

We are from time to time subject to litigation and claims arising in the ordinary course of business, including claims for damages from medical negligence, employment disputes and breach of contract. We believe that the ultimate resolution of any such proceedings, whether the underlying claims are recoverable under our professional and general liability insurance policies or not, will not have a material adverse effect on our financial condition, results of operations or cash flows. For more information regarding legal proceedings in which we are involved, see Note 17, Commitments and Contingencies, to our December 31, 2015 Consolidated Financial Statements, included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report.

Item 4.

Mine Safety Disclosures

Not applicable.

PART II

Our common stock is traded on the NASDAQ Capital Market under the symbol “USMD.” As of March 14, 2016, there were 518 holders of record of our common stock. This does not include persons who hold our common stock in nominee or “street name” accounts through brokers or banks.Summary Compensation Table

The following table sets forthsummarizes the high and low sales prices per share ofcompensation earned by, awarded to or paid to our common stock as reported on the NASDAQ Capital Market fornamed executive officers in the years ended December 31, 2015 and 2014. As we are a smaller reporting company, our “named executive officers” include our Principal Executive Officer and our two most highly compensated executive officers other than our Principal Executive Officer for fiscal year 2015.

USMD did not declare or pay cash dividends during

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth information regarding equity-based awards granted by the Company as of December 31, 2015 or 2014. We have no plans to pay any cash dividends on our named executive officers.

DIRECTOR COMPENSATION

The Board of Directors is responsible for the foreseeable futureoverall management and insteaddirection of the Company’s operations. The Board of Directors has established a compensation plan to retain earnings, ifprovide for compensation for individuals who serve in the capacity of a director. Director compensation consists of an annual retainer, meeting attendance fees, fees for service on the Audit Committee, and potential awards of equity compensation.

The Chairman of our Board, Dr. House, is a member of our executive management team. He receives compensation for his service as a director in addition to any employment compensation he may receive for future operations,providing non-directorial services to finance the growthCompany. Below is a summary of director compensation.

Director Compensation Policy

Annual Retainer for Directors and Board Chairman- Each director receives an annual retainer of $40,000 for his or her services to the Board. The Chairman of the business and service debt. Any decision to declare and pay dividendsBoard receives an additional $40,000 stipend, or a total annual retainer of $80,000.

Meeting Attendance- Each director receives $3,000 for each Board meeting that the director attends in person or, alternatively, $1,500 for each Board meeting the director attends telephonically or electronically.

Audit Committee Stipends- Each director serving on the Audit Committee receives an annual stipend of $15,000. The Chairman of the Audit Committee also receives an additional $15,000 stipend, or a total stipend of $30,000, for services as Chairman of the Audit Committee.

Equity Compensation- Each director may, in the future, will be made ateligible to receive options to purchase up to 25,000 shares of the discretionCompany’s common stock but only upon the achievement by the Company of our boardcertain financial performance targets established by the Board. The Board did not establish financial performance targets for 2014 and did not pay any such equity compensation to its directors. The Board has not established any such financial performance targets for calendar year 2015.

Payment of directors and will depend on, among other things, our resultsBoard Compensation in Cash or Stock

Effective September 1, 2012, the Board of operations, cash requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant. In addition, credit agreements with our lenders restrict our abilityDirectors authorized its Chairman to pay dividends.

Not applicable for smaller reporting companies.

The purpose of this section, Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), isdirector compensation to provide a narrative explanation of our financial statements from the perspective of our management that enables investors to better understand our business, to enhance our overall financial disclosures, to provide the context within which our financial information may be analyzed and to provide information about the quality of, and potential variability of, our financial condition, results of operations and cash flows. The MD&A should be read in conjunction with the accompanying consolidated financial statements and related notes included in this Annual Report on Form 10-K.

Executive Overview

We are an early-stage physician-led integrated health system committed to maintaining the vital doctor-patient relationship that we believe results in higher quality and more affordable patient care. 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. Our focus, and the focus of our healthcare providers, is to deliver higher quality, more convenient, cost effective healthcare to our patients. We believe that our model brings primary care and specialist physicians together and places them in their proper role as leaders of healthcare delivery and that this important shift brings quality and patient satisfaction back to the forefront by making our providers responsible for patient outcomes and the overall clinical experience.

We operate in one physician-led integrated health system segment and through our subsidiaries and affiliates, we provide healthcare services to patients and management and operational services to hospitals and other healthcare providers. We provide healthcare services to patients in physician clinics, hospitals and other healthcare facilities, including cancer treatment centers and anatomical pathology and clinical laboratories. We operate under a traditional fee-for-service model as well as a risk contracting model.

Key Developments

Opportunities and Challenges

We are focused on expanding our physician-led integrated health system in the Dallas-Fort Worth, Texas metropolitan area through the growth of our physician and patient base as well as by increasing the service offerings within our system. We intend to increase our patient base by increasingdetermining the number of primary care and specialist physicians in our system, including increasingshares to issue to directors as board compensation, the number of specialists in our current areas of focus as well as in specialties not currently within our system. We may achieve this through hiring efforts or through the acquisition of or affiliations with physician practices or other healthcare practices that share our vision of patient-first care. Inherent in the expansion of our physician-led integrated health system is a build out of our imaging, clinical and pathological laboratory offerings and implementationprice of a more efficient clinical care model.

A significant elementshare of our growth plan is the expansionCompany’s common stock was established as the greater of our risk services,(a) the average closing price of a share of the Company’s common stock on each trading day for the 30 calendar day period ending on grant date, or population health management business. We intend to accomplish this by expanding in both(b) the Medicare Advantage and commercial markets. We currently serveclosing price of a share of the Medicare Advantage market through WNI-DFW. During 2014 WNI-DFW had a monthly average Medicare Advantage patient population of 7,400, with 8,712 at year end. During 2015 WNI-DFW had a monthly average Medicare Advantage patient population of 9,559, with 9,844 at year end. EffectiveCompany’s common stock on the grant date. On January 1, 2016, WNI-DFW has a Medicare Advantage patient populationthe Chairman again exercise his discretion to determine the form of 9,972. We believecompensation for directors and advised the care coordination and population health management infrastructure we have installed enhances clinical outcomes and eliminates wasteful costs often associated with fee-for-service medical care. Under our WNI-DFW agreement, we receive 86.75% of the Part C premium fordirectors that, Medicare Advantage population, which has provided us with the resources needed to develop the care management infrastructure necessary to enhance our patients’ health at reasonable costs. As we grow our population health management business, we will continue to invest in our care coordination and population health management infrastructure. In January 2015, we completed implementation of leading edge population health management software. We believe this system significantly improves our ability to effectively manage the health of our patient populations. We believe that our clinical model for population health management will generate positive long-term returns; however, we are at risk for Part C covered services, except for transplants, mental health and dialysis, so short-term results can be materially impacted by negative health experiences within our managed patient population.

In December 2013, our physician practice was selected by the Department of Health and Human Services as a Medicare Shared Savings Plan Accountable Care Organization (“ACO”). Doctors, hospitals and healthcare providers establish ACOs in order to work together to provide higher-quality coordinated care to patient populations specified by Medicare, with the intent to produce savings as a result of improved quality and operational efficiency. ACOs share with Medicare any savings generated from lowering the growth in healthcare costs when they meet standards for high quality care. The ACOs must meet quality standards to ensure that savings are achieved through improving care coordination and providing care that is appropriate, safe and timely. CMS evaluates ACO quality performance using quality measures on patient and caregiver experience of care, care coordination and patient safety, appropriate use of preventive health services, and improved care for at-risk populations.

Increasing physician counts and expanding service offerings may have a near-term negative impact on margins as we develop our physician-led integrated health system. Our physician compensation model is designed to fairly compensate physicians in a value-based care paradigm and the success of this model is integral to our future success. We will face operational and cultural challenges in integrating new physicians and components of our patient-centric model, which continues to evolve and is expected to offer numerous opportunities for improving healthcare delivery and growing our business. In addition, the continued development of our physician-led integrated health system will likely require additional capital infusions or other financing.

Selected Operating Statistics

For the periods presented, we had the following operating statistics:

We use various evidence-based quality metrics such as specific cancer screenings to measure how well our physicians manage their patient panels. We believe our quality criteria have enabled us to reduce the total medical cost of care of our managed patients, including reductions in emergency room visits and hospital readmissions. We use these and other metrics to measure the performance of our business.

Industry Trends

Healthcare Reform

The Healthcare Reform Law is intended to decrease the number of uninsured Americans and reduce the overall cost of healthcare. The Healthcare Reform Law attempts to achieve these goals by, among other things, requiring most Americans to obtain health insurance, providing additional funding for Medicaid in states that choose to expand their programs, reducing Medicare and Medicaid Disproportionate Share Hospital payments, expanding the Medicare program’s use of value-based purchasing programs, tying hospital payments to the satisfaction of certain quality criteria, bundling payments to hospitals and other providers, and instituting certain private health insurance reforms. Many provisions within the Healthcare Reform Law could impact us in the future, resulting in potential variances in third-party reimbursement rates, payer mix and patient encounter volumes. The most significant provisions of the Healthcare Reform Law that seek to decrease the number of uninsured individuals mostly became effectivebeginning January 1, 2014, while others have been delayed2016, director compensation would be paid in cash until 2016 and beyond. For instance, the requirement that mid-size employers (defined as groups between 50 and 99 employees) and large-size employers (defined as 100 or more employees) provide health insurance to their employees or pay a per employee fine (the employer mandate) has been delayed several times and is now not scheduled to be fully implemented until 2016. Since its passage in 2010, the Healthcare Reform Law has faced several challenges and further challenges are expected that could impact implementation of these laws, or the law itself. Because of the many variables involved and the staggered implementation timeline, we

cannot predict with any assurance the ultimate effect of the Healthcare Reform Law and related regulations and interpretive legislation on our business. We believe that we are well positioned to respond effectively to the opportunities and challenges presented by this important legislation as a result of our physician-led, high quality, patient-centered care model.

One provision of the Healthcare Reform Law required CMS to establish a Medicare Shared Savings Program that promotes accountability and coordination of care through the creation of ACOs. The program allows certain healthcare providers to voluntarily form ACOs and work together along with other ACO participants to invest in infrastructure and redesign delivery processes to achieve high quality and efficient delivery of services. As an ACO, we will strive to improve the clinical outcomes of our Medicare fee for service patients participating in the ACO and to achieve those improved outcomes at a reduced relative cost. We will have the opportunity to share with CMS in any financial savings created.

Value-Based Care and Patient-Centered Medical Home

We believe the U.S. healthcare system continues to evolve in a manner that focuses on value-based reimbursement systems, with an increasing focus on population health management. As government and commercial payers strive to control healthcare costs and improve healthcare outcomes, we believe payment methodologies and reimbursement trends will continue to evolve, including payment bundling, value-based payment methodologies linked to the quality and coordination of care as well as risk-sharing arrangements such as capitated payments. We believe this evolution favors physician-led integrated health systems and that we are well positioned today to shift to value-based reimbursement systems.

We also believe that patient-centered medical home models, in which a primary care or specialty physician serves as the care coordinator will grow in prominence. We believe our focus on developing a clinically integrated, comprehensive healthcare delivery network, our commitment to patient-centered care, our collaborations such as those with WNI-DFW and other commercial payers, and our experienced management team position us well to respond to these emerging trends and to manage the changing healthcare regulatory and reimbursement environment.

Results of Operations

Year ended December 31, 2015 Compared to Year Ended December 31, 2014Directors’ Compensation Table

The following table summarizes our results of operationsthe compensation earned by or paid to directors for the periods indicated and is used in the discussions that follow (dollars in thousands):

Revenues

The following table summarizes our net operating revenue for the periods indicated and is used in the revenue discussions that follow (dollars in thousands):

-Net Patient Service Revenue

Our NPSR is driven by a patient encounter at one of our physician clinics. A patient sees the physician at one of our clinics and the physician may prescribe services that may be performed at one of our imaging centers, diagnostic laboratories, cancer treatment center or other affiliated healthcare facilities. The NPSR earned at our imaging centers, diagnostic laboratories and cancer treatment center are almost exclusively derived from the physician clinic patient encounter. Our imaging centers, diagnostic laboratories and cancer treatment center only nominally serve patients or conduct tests not derived from our physician clinic patient encounter. For these reasons, we focus on the overall NPSR per patient encounter metric.

Patient encounter based clinic NPSR increased $3.6 million or 2.0%, net of a $2.2 million increase in the provision for doubtful accounts. Patient encounters remained flat and RVUs increased 2.5% for thefiscal year ended December 31, 2015. Director compensation for Dr. House is excluded from this table because he is a named executive officer whose total compensation from the Company in year 2015 as compared tois disclosed in the year ended December 31, 2014. NPSR per patient encounter increased 1.9% due to a favorable change in case mix and a favorable shift in payer mix. The shift in payer mix was reflected by a decrease in utilization by Medicare and Medicaid beneficiaries from 40% to 39% of gross charges. The $0.7 million decrease at the cancer treatment center is primarily due to a 1.3% decline in fractions treated at the cancer treatment center and a $0.3 million decrease related to a decline in certain commercial payer reimbursement rates. We anticipate downward pricing pressure to continue to negatively impact NPSR at the cancer treatment center during 2016.Summary Compensation Table for executive officers above.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Our Equity Compensation Plans

The provision for doubtful accounts related to patient service revenue increased $2.2 millionBoard approved a USMD Holdings, Inc. 2010 Equity Compensation Plan (the “Plan”) for the year ended December 31, 2015 as comparedpurpose of providing certain employees, directors, consultants and advisors of the Company with the opportunity to the year ended December 31, 2014. Year over year comparative overall collections have slowed resulting in an increase in gross patient accounts receivable, further agingreceive grants of accounts receivableincentive stock options, nonqualified stock options, stock appreciation rights and an increase in the provision for doubtful accounts.restricted stock. We believe the slowed collection rate is temporaryPlan will encourage the participants to contribute materially to our growth, thereby benefiting our shareholders, and partially attributablewill align the economic interests of the participants with those of the shareholders.

At the 2014 Annual Meeting of Stockholders, the Company’s stockholders approved an amendment to an information technology system conversionthe Plan that occurredincreased the number of shares of common stock reserved for issuance under the Plan from 1,000,000 to 2,500,000. In addition, the amendment provides that any and all of the shares reserved for issuance may be issuable in late July 2015 and efforts to initiate new billing processes for the IDTF at USMD Arlington that opened in August 2015.

Other physician revenue represents non-clinic physician premium payments for quality measures, on-call pay and physician recruitment agreement revenues and decreased to $4.4 million for the year ended December 31, 2015 from $4.6 million for the year ended December 31, 2014. The decrease is primarily attributable to a $0.4 million decline in revenue from physician recruitment agreements and a $0.2 million decrease in premium payments for quality measures offset by a $0.5 million increase in on-call pay.

- Capitated Revenueform of incentive stock options, nonqualified stock options, stock appreciation rights and/or restricted stock.

In June 2013, WNI-DFW began operationsaddition, in July, 2014, the Board submitted for approval to Ventures, the Company’s majority shareholder, and we began recording capitated revenue associated withVentures approved by written consent, the consolidated operations of WNI-DFW. Capitated revenue is correlated to capitated membership counts as well as the health riskadoption of the patient population being managed; the population risk impacts the “per member per month” rate earned. Capitated revenue increased $29.3 million to $95.8 million for the year ended December 31, 2015 from $66.5 million in 2014.USMD Salary Deferral Plan. The growth in membership counts at WNI-DFW accounted for $19.6 million of the increase and a rise in the aggregate risk score assigned to our managed Medicare Advantage population accounted for $9.7 million of the increase. We anticipate expanding our capitated member counts through WNI-DFW and other entities focused on the Medicare Advantage market as we execute our strategy to move from an early-stage integrated health

system to a fully integrated health system. During 2014, we invested in systems to train and monitor our physicians and staff with the intent to improve the accuracy of physician documentation and coding of patient conditions. We believe these efforts have resulted in a more accurate assessment by CMS of the risk score of our managed Medicare Advantage population.

- Management and Other Services Revenue

Management services revenue includes revenue earned through the provision of management and support services to our nonconsolidated managed entities and is generated through our management of hospitals, cancer treatment centers and, prior to the sale of our Lithotripsy Services business, lithotripsy centers. Management and other services revenue decreased 8.2% to $20.9 million for the year ended December 31, 2015 from $22.7 million in 2014 for the reasons noted below.

Hospital management revenue earned from USMD Arlington and USMD Fort Worth decreased $0.1 million or 0.5% in 2015 as compared to 2014. An unfavorable shift to a lower acuity surgical case mix at the hospitals contributed $0.6 million to the decrease in hospital management revenue and was offset by an increase of $0.3 million in the contractual inflation adjustment to reimbursable support costs and a $0.2 million increase related to an increase in surgical case volume and a favorable change in commercial versus government payer mix.

Lithotripsy management revenue decreased $0.1 million, or 9.8%, in 2015 as compared to 2014. Lithotripsy case volume at the managed lithotripsy entities decreased 6.9% while management revenue per managed lithotripsy case remained flat. The decrease in lithotripsy case volume is primarily attributable to the sale of our Lithotripsy Services business. As of the date of sale of our Lithotripsy Services business, we no longer earn lithotripsy management revenue.

Cancer treatment center management revenue decreased $1.3 million or 35.6% in 2015 as compared to 2014. We earn cancer treatment center management revenue by charging the cancer treatment center a contracted management fee that is based on a percentage of the managed entity’s account collections, net income, a combination of collections and net income, or a fixed monthly fee and reimbursement of variable support costs. We negotiate the management fee with each cancer treatment center and the fee differs between managed entities. Shifts in the level of activity between managed entities affect the price mix of cancer treatment center management revenue. In 2014, contractual management arrangements with three cancer treatment centers were terminated and in January 2015, a contractual management arrangement with one additional cancer treatment center was terminated. The net effect of the contract terminations and the opening of new cancer treatment centers resulted in a $1.2 million decrease in consolidated cancer treatment center management revenue in 2015 as compared to 2014. Same facility cancer center collections declined 6.8%, contributing $0.1 million to the decline. Same facility year over year individual entity contractual rates did not change in 2015 as compared to 2014 rates.

Other services revenue primarily consists of healthcare information technology consulting services provided to third parties and income related to the early termination of management agreements. Other services revenue decreased $0.4 million or 11.4% as compared to 2014. In the second quarter of 2014, we entered into a settlement agreement and recognized $0.4 million as a result of the early termination of a management agreement.

- Lithotripsy Revenue

Prior to the sale of the Lithotripsy Services business, we recognized lithotripsy revenue, which consisted of the revenue of the consolidated lithotripsy entities. Lithotripsy revenue decreased $0.5 million or 2.2% to $21.1 million for the year ended December 31, 2015 from $21.6 million in 2014. Lithotripsy entity case counts decreased 1.3% resulting in a decrease in lithotripsy revenue of $0.3 million in 2015 as compared to 2014. A decrease in average aggregate contract rate for the consolidated lithotripsy entities, due to shifts in utilization and negotiated rate changes year over year, resulted in a $0.2 million decline. As of the date of sale of our Lithotripsy Services business, we no longer earn lithotripsy revenue.

Operating Expenses

Salaries, wages and employee benefits increased $2.8 million to $169.2 million for the year ended December 31, 2015 from $166.4 million in 2014. Physician and physician extenders salary expense decreased $0.2 million primarily due to the new physician compensation model. Effective July 2014, we began phasing in a new physician compensation model that we believe increases physician productivity, quality and profitability. Full implementation of the terms of this compensation model was originally scheduled to occur in January 2016; however, we accelerated implementation of many of the key components of the model to July 2015. As a result of the accelerated implementation, physician salaries decreased during the six months ended December 31, 2015 relative to the run rate experienced since the plan became effective. In addition, during the six months ended December 31, 2015, physician and extender salary expense incurred per RVU generated and as a percent of NPSR declined as compared to salary expense incurred prior to July 2015. We anticipate continued reduction in the relative run rate in 2016 and future years.

Non-physician salary and wages expense increased $5.1 million, net of the impact from outsourcing our revenue cycle function in the fourth quarter of 2014. As a result of the outsourcing, for the year ended December 31, 2015, salaries and wages were reduced by $3.4 million as compared to 2014. The increase in non-physician salary expense is primarily related to a growth in headcount of non-physician medical management and staff intended to improve the productivity and efficiency of the physicians and clinics and to support the growth of our population health management program. This increase in headcount is net of the revenue cycle outsourcing. Merit raises accounted for an additional $1.0 million of the increase and we incurred a $0.6 million year over year increase in bonus expense. Employee benefit costs increased $1.8 million, net of the impact from outsourcing our revenue cycle function in 2014. The increase was primarily due to increases in payroll taxes and health benefits expense. Contract labor costs increased $0.2 million.

Medical services and supplies expense includes external medical claims costs associated with population health management (WNI-DFW) as well as medical services and supplies associated with all patients, such as drugs, medications and general medical supplies. Medical services and supplies expense increased $25.9 million to $105.9 million for the year ended December 31, 2015 from $80.0 million in 2014. WNI-DFW medical services expense increased $19.6 million to $73.6 million for the year ended December 31, 2015 from $54.0 million in 2014. The increase in medical services expense was driven by a 29.5% increase in WNI-DFW capitated member months. Over the same period, capitated revenue increased $29.3 million. Medical services expense of WNI-DFW includes the direct medical cost of caring for the patient population including incurred but not reported (“IBNR”) medical claims. In addition, for the year ended December 31, 2015, drug supplies expense increased $6.0 million as compared to 2014, commensurate with the increase in drug supplies revenue. The remaining net increase in medical services and supplies of $0.3 million is primarily due to an increase in medical supplies expense.

Rent expense increased $2.2 million to $18.1 million for the year ended December 31, 2015 from $15.9 million in 2014 due primarily to an increase in leased square footage.

Other operating expenses consist primarily of management fees, consulting and professional fees, purchased services, repairs and maintenance, utilities and other expense. Other operating expenses increased 21.6% to $39.7 million for the year ended December 31, 2015 from $32.7 million in 2014. The increase is primarily related to management fees, outsourced revenue cycle costs and EHR incentive income. Medical management and administrative fees incurred at WNI-DFW increased $1.6 million in 2015 as compared to 2014. As WNI-DFW member counts and revenues grow, and as WNI-DFW gains efficiencies in its provision of care coordination and overall medical management services, we anticipate that medical management fees incurred at WNI-DFW will continue to increase. In 2015, we have incurred $3.6 million of expense related to the outsourcing of our revenue cycle process that began in November 2014, an increase of $3.0 million as compared to 2014. In addition, EHR incentive income, which is recorded as contra expense, decreased $1.3 million in 2015 as compared to 2014.

As a result of our 2014 annual goodwill impairment review, we recorded goodwill impairment of $20.3 million in our Cancer Treatment Services reporting unit. The impairment of goodwill was primarily the result of a reduction in the near-term and long-term projected operating results and cash flows utilized in assessing goodwill for impairment. The reduction in forecast amounts was primarily related to delays in the Company’s ability to execute its strategic plan commensurate with its past forecasts exacerbated by a decrease in actual results of the reporting unit in 2014.

Depreciation and amortization decreased $7.0 million for the year ended December 31, 2015 as compared to 2014, due primarily to an $8.4 million intangible asset impairment charge taken in May 2014. The $1.4 million net increase in depreciation and amortization is comprised of increases in fixed asset depreciation and amortization and intangible asset amortization. Fixed asset depreciation and amortization increased $1.3 million primarily due to additions to leasehold improvements and medical equipment, particularly as related to the opening of our IDTF at USMD Arlington. Intangible asset amortization increased $0.1 million as certain trade names converted from indefinite-lived to finite-lived assets concurrent with the 2014 impairment.

Other Income, net

Other income, net increased $16.5 million to $25.0 million for the year ended December 31, 2015 from $8.5 million in 2014 primarily resulting from aggregate gains of $18.1 million related to the sale of our Lithotripsy Services business, offset by a $1.3 million decrease in equity in income of nonconsolidated affiliates and a $0.7 million increase in net interest expense.

In 2015, we recorded an $11.8 million gain on the sale of the Lithotripsy Services business. In addition, included in the sale of the Lithotripsy Services business was the sale of a controlling interest in one previously wholly owned, consolidated lithotripsy partnership in which we retained a limited partnership interest. As a result of the sale, we deconsolidated the partnership and recorded a non-cash gain of $6.3 million related to remeasurement of the retained investment to its fair value at the date of sale of the controlling interest. Further adding to the year over year increase in other gain (loss), in 2015, we recorded a $0.2 million gain on the sale of ownership interests and, in 2014, we had a $0.2 million loss on extinguishment of debt.

The decrease in equity in income of nonconsolidated entities was the result of a $1.8 million decrease in the equity in income of USMD Fort Worth offset by a $0.4 million increase at USMD Arlington. In addition, comparative equity in income of the remaining nonconsolidated affiliates increased $0.1 million, primarily due to the January 2015 sale of our ownership interest in a cancer treatment center that had been generating losses.

Provision (Benefit) for Income Taxes

Our effective tax rates were 1.0% and 19.5% for the years ended December 31, 2015 and 2014, respectively. The 2015 variance from the statutory rate is primarily due to the tax impact of net income attributable to noncontrolling interests when pre-tax income approximates the net income attributable to noncontrolling interests. The 2014 variance from the statutory rate is primarily due to the impact that net income attributable to noncontrolling interests has on the tax rate when a pretax loss exists (as it did for 2014) offset by the tax effect of the goodwill impairment. The net income attributable to noncontrolling interests tax component was flat; however, its impact on the tax rates varied significantly due to the pre-tax results in each period.

Net Income Attributable to Noncontrolling Interests

Noncontrolling interests eliminate the income or loss attributable to non-USMD ownership interests in our consolidated entities. Net income attributable to noncontrolling interests increased $0.1 million to $9.6 million for the year ended December 31, 2015 from $9.5 million in 2014. The change is related to an increase in net income of the consolidated lithotripsy entities.

Liquidity and Capital Resources

Our principal uses of cash are for working capital requirements, financing obligations and capital expenditures. Our primary sources of liquidity include existing cash, cash flows from operations including distributions from USMD Arlington and USMD Fort Worth and borrowings under our revolving credit facility. In addition, we apply various mechanisms to manage cash flows, including utilizing our common stock as a form of liquidity. We continue to explore potential sources of additional liquidity. Liquidity provided by distributions from USMD Arlington and USMD Fort Worth can vary materially depending on hospital profitability and the individual cash requirements of the hospital. Additionally, we anticipate distributions from USMD Arlington to be lower than historical distributions due to the mechanics of repayment of certain borrowings from USMD Arlington (see Financing Activities below). At December 31, 2015, we had $16.3 million of cash and cash equivalents available for general corporate purposes. This amount is net of $9.7 million of restricted cash and $13.3 million of cash held by WNI-DFW, which is only available for use by WNI-DFW. As further described in theCredit Agreement section below, we are required to maintain a compensating balance of $6.8 million as collateral for our borrowings under our credit agreement. We believe that these sources of cash and cash management techniques will be adequate to fund our working capital requirements, debt service obligations, ongoing capital expenditures and other ongoing cash needs until 2019, when certain convertible subordinated notes are due.

We may utilize our common stock as a form of liquidity, primarily in payment of certain compensation and when acquiring physician practices. Our physician compensation model allows for up to 25% of the base salary of certain physicians to be deferred under certain conditions, and later paid in cash, our common stock, or a combination of both. The payment of deferred amounts in cash, if any, will generally occur within 45 days of the end of a given quarter and as soon as reasonably practicable following the end of the quarter if paid in common stock, if any, subject to compliance with law. During the year ended December 31, 2015, we granted and issued common stock with a grant date fair value of $7.4 million in payment of compensation amounts due to physicians. We do not anticipate deferring physician salaries in 2016.

We may also utilize our common stock to pay certain compensation deferred under our Salary Deferral Plan (the “Deferral Plan”). Participation in the Deferral Plan is limited to certain of our executives and permits us to defer the payment of a predetermined portion of a participant’s base salary to the end of each calendar quarter. TheIf any employee elects to participate in the Salary Deferral Plan, the plan administrator decides afterwill decide at the end of each quarter whether deferred amounts will be paid in the form of cash, shares of common stock or a combination of both. The payment of deferred amounts in cash, if any, will occur within 45 days of the end of a given quarter and on or prior to March 14 of the following calendar year if paid in common stock, if any, subject to compliance with law. During the year ended December 31, 2015, we granted and issued common stock with a grant date fair value of $1.0 million in payment of compensation amounts deferred under the Deferral Plan in 2015 and 2014. No executives have elected to participate in the Deferral Plan in 2016.

Shares of common stock issued pursuant to the Deferral Plan or in payment of deferred physician compensation are issued from the shares of common stock authorized for issuance under the USMD Holdings, Inc. 2010 Equity Compensation Plan, as amended.

As we execute our physician-led integrated health system strategy in 2016, we anticipate making significant capital investments, primarily as related to the opening of another IDTF, the continued consolidation and expansion of our physician clinics and investments in certain information technology infrastructure. Significant capital investments, including expansion related capital investments, may be financed through long-term debt or lease arrangements, funded with borrowings under the revolving credit facility, if available, or paid for with existing cash. As we execute our strategy to expand our physician-led integrated health system, we will continue to invest in our infrastructure and incur acquisition and integration costs. Significant expansion may be financed with our equity and/or additional indebtedness or through lease arrangements. As our business model matures, we believe cash flows from operations will provide the

cash flow necessary to support integration costs and infrastructure investment. However, certain growth plans and infrastructure investment may be curtailed depending upon the availability of cash and additional sources of financing. In addition, our WNI-DFW joint venture may require cash advances from us.

Our credit agreement provides for a revolving credit facility (“Revolver”) commitment of up to $10.0 million through December 21, 2016, subject to certain financial covenants. The Revolver is available for working capital needs and capital expenditures (up to $1.5 million per year), both subject to certain criteria. At December 31, 2015, we had no borrowings under the Revolver and no amounts were available to borrow under the Revolver, as calculated per the financial covenants in our credit agreement. Our ability to borrow amounts under the Revolver is limited and our credit agreement limits our ability to incur additional indebtedness. We continue to seek additional liquidity and believe that such liquidity may be available to us through alternative debt/equity financings. We believe that additional financing will enable us to continue execution of our expansion strategy. However, there is no guarantee we will be able to find such additional liquidity. In addition, adequate funds may not be available when needed or may be available only on terms not acceptable to us. If we are unable to secure additional financing on terms acceptable to us, our growth could be materially adversely impacted. Even if we secure additional financing, such financing could have a negative impact on our long-term cash flows and results of operations and may be dilutive to existing stockholders.

The following table summarizes our cash flows for the periods indicated and is used in the discussions that follow (in thousands):

Operating Activities

For the year ended December 31, 2015, we had cash flows from liabilities of $5.4 million offset by cash used for current assets of $6.5 million.

At December 31, 2015, accounts receivable, net decreased $1.5 million as compared to December 31, 2014. NPSR accounts receivable, net increased $2.6 million due to an increase in NPSR over the comparative period and an increase in average days sales outstanding in accounts receivable (“DSO”). Average NPSR DSO increased to 41 days at December 31, 2015 from 39 days at December 31, 2014. The sale of the Lithotripsy Services business reduced non-NPSR accounts receivable by $2.9 million, which was offset by an increase in non-NPSR accounts receivable at WNI-DFW of $1.0 million.

For the year ended December 31, 2015, we had cash flows of $3.4 million from other accrued liabilities and accrued payroll. Cash flows of $3.2 million from other accrued liabilities are due primarily to a $2.5 million growth-related increase in the IBNR and medical claims payable balances at WNI-DFW and a $1.2 million increase in accrued payables, offset by cumulative decreases of $0.6 million in income tax payables, current deferred rent and accrued bonus. Cash flows of $0.3 million from accrued payroll are primarily due to a $1.6 million increase in the medical claims payable balance related to our self-insured employee medical benefit plan that began in January 2015 and a net increase of $1.5 million in payroll and payroll tax balances due to payroll timing differences between 2015 and 2014. This was offset by a $5.0 million decrease in compensation amounts due to physicians, including a non-cash component of $2.0 million that was paid with shares of our common stock. In addition, accrued payroll decreased $0.2 million related to the sale of the Lithotripsy Services business. During 2015, non-cash activity also includes $0.5 million of employee compensation accrued at December 31, 2014 that was paid for with shares of our common stock. In addition, we had cash flows from other noncurrent liabilities of $2.2 million, primarily due to an increase in deferred rent related to rent abatements at newly leased clinic facilities.

Investing Activities

Net cash provided by investing activities of $4.4 million in 2015 was primarily attributable to proceeds from the sale of the Lithotripsy Services business offset by capital expenditures. During 2014, we entered into a lease agreement with USMD Arlington (a nonconsolidated affiliate) to lease medical office building space to build an IDTF. Construction began in 2015 and expenditures for leasehold improvements totaled $1.8 million. The IDTF opened in August 2015. In addition, we had capital expenditures of $0.8 million for information technology, $0.7 million of expenditures for equipment and furniture and $0.3 million of expenditures for leasehold improvements. We anticipate minimum capital expenditures of $2.0 million in 2016.

Financing Activities

In 2015 we issued $20.0 million of debt with deferred principal payments and in 2013 we issued $24.3 million of debt with deferred principal payments. In December 2014, we restructured our credit agreement (see Credit Agreement below) resulting in principal payments on and proceeds from long-term debt of $6.8 million. Additionally, in 2014, we used a restricted cash compensating balance to repay a $5.0 million term loan and repaid the $3.0 million balance outstanding under the Revolver.

As a result of the credit agreement restructuring and debt payoffs in 2014, payments on long-term debt were significantly lower during 2015 as compared to 2014. We anticipate payments on long-term debt and capital leases to increase substantially in 2016 as amounts outstanding under the credit agreement become due in December 2016 and as we begin making payments under capital lease and financing arrangements that commenced in 2015.

On September 18, 2015, we executed an amendment to our partnership agreement with USMD Arlington to allow for a one-time special distribution to us from USMD Arlington. We received proceeds from the special distribution of $14.76 million, net of lender fees of $0.2 million. We have determined that the special distribution is, in substance, a debt arrangement (the “Advance”). The Advance accrues interest that is payable to USMD Arlington at the 30-Day London Interbank Offered Rate (“LIBOR”) plus a margin of 2.85% (3.27% at December 31, 2015). In addition, we are required to pay the limited partners of USMD Arlington a pre-determined quarterly financing fee equal to 3.22% per annum of the scheduled outstanding balance at the end of each month. To the extent available, principal and interest payments due on the Advance will be withheld monthly from USMD Arlington distributions otherwise due to us. If distributions to us withheld by USMD Arlington for any three month period ending in February, May, August or November during the debt term are less than principal and interest payments due for that three month period, we will make payments in amounts equal to the difference between amounts withheld from distributions and amounts due for that three month period. Subject to the preceding terms, principal payments of $312,500 are due monthly beginning December 31, 2016 and the debt matures November 28, 2020. If we fail to make payments due under the terms of the Advance, our ownership interest in USMD Arlington may be reduced and the ownership interest of the limited partners of USMD Arlington may be proportionally increased.

On April 29, 2015, we issued convertible subordinated notes due 2020 in the principal amount of $1.55 million (the “2020-11 Convertible Notes”) to certain investors in a private unregistered offering. The 2020-11 Convertible Notes mature on November 1, 2020 and bear interest at a fixed rate of 7.25% per annum. Interest will be paid monthly, in cash or in shares of our common stock as we elect, on the last day of each month commencing on May 31, 2015. Principal is due in full at maturity. We may prepay the 2020-11 Convertible Notes, in whole or in part, at any time after April 29, 2016 without penalty. Each noteholder will have the right at any time after April 29, 2016, prior to the payment in full of the 2020-11 Convertible Note, to convert all or any part of the unpaid principal balance of the 2020-11 Convertible Note into shares of our common stock at the rate of one share of common stock for each $10.61 of principal. The conversion rate will be appropriately adjusted for stock splits, mergers or other fundamental corporate transactions. The indebtedness represented by the 2020-11 Convertible Notes is expressly subordinate to and junior and subject in right of payment to the prior payment in full in cash of all our senior indebtedness, which includes indebtedness in connection with our credit agreement.

Effective March 13, 2015, we issued convertible subordinated notes payable in the aggregate principal amount of $3.5 million (the “2020-09 Convertible Notes”) to certain investors in a private unregistered offering. The 2020-09 Convertible Notes mature on September 1, 2020 and bear interest at a fixed rate of 7.75% per annum. Interest payments are due and payable on the last day of each month and may be paid in cash or in shares of our common stock, as we elect. Principal is due in full upon maturity. We may prepay the 2020-09 Convertible Notes, in whole or in part, at any time after March 13, 2016 without penalty. Each noteholder has the right at any time after March 13, 2016, prior to the payment in full of the 2020-09 Convertible Note, to convert all or any part of the unpaid principal balance of its 2020-09 Convertible Note into shares of our common stock at the rate of one share of common stock for each $11.10 of principal. The conversion price will be appropriately adjusted for stock splits, mergers or other fundamental corporate transactions. The indebtedness represented by the 2020-09 Convertible Notes is expressly subordinate to and junior and subject in right of payment to the prior payment in full in cash of all our senior indebtedness, which includes indebtedness in connection with our credit agreement.

Credit Agreement

For the principal terms and more detailed summary of activity of our Credit Agreement (the “Credit Agreement”), see Note 11, Long-Term Debt and Capital Lease Obligations, to our December 31, 2015 Consolidated Financial Statements, included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report.

On December 22, 2014, we entered into an amendment to our credit agreement (as amended, the “Credit Agreement”) with Southwest Bank as sole lender and administrative agent (“Administrative Agent”), which governs certain loans from the Administrative Agent. The loans provided under the Credit Agreement consist of a $6.75 million term loan (“Term Loan”) and the Revolver. The obligations under the Credit Agreement are secured by substantially all of the assets of USMD and its wholly owned subsidiaries, subject to certain exceptions.

The maturity date of the Term Loan is December 21, 2016 and it bears interest at a fixed rate of 1.80%. The Credit Agreement requires us to maintain a compensating balance of $6.75 million, which is presented as restricted cash on our consolidated balance sheet. The collateralized compensating balance is held in a segregated account with the Administrative Agent and is governed by a deposit account control agreement executed in connection with a previous amendment to the Credit Agreement. The account bears interest at a rate of 0.55% per annum. We do not have the right to withdraw funds from such deposit account without the prior written consent of the Administrative Agent. We may, however, prepay the Term Loan at any time, in whole or in part, with the cash held in the segregated account. Once the Term Loan was fully cash collateralized, we were no longer required to make scheduled principal payments on the Term Loan and the outstanding principal balance of the Term Loan is due and payable at maturity. Proceeds from borrowings under the Term Loan were used to repay in full other lenders previously party to the Term Loan.

The maturity date of the Revolver is December 21, 2016. Interest on amounts outstanding under the Revolver is due monthly and accrues, at our option, at the 30-Day LIBOR plus 3.50%, or the U.S. prime rate plus 0.50%, with a floor of 4.00% in either case. An unused commitment fee is payable quarterly on the undrawn portion of the Revolver at a rate of 0.50% per annum. Proceeds from borrowings under the Revolver are available to finance our working capital needs and to finance up to $1.5 million of capital expenditures each year.

The Credit Agreement requires us to meet a senior leverage ratio of no greater than 1.00:1.00 in order to borrow funds under the Revolver and to pay down the borrowings under the Revolver in the event its senior leverage ratio exceeds 1.00:1.00. Beginning on September 30, 2016, the Credit Agreement requires us to maintain a fixed charge coverage ratio of at least 1.25:1.00. Both covenants are calculated on a rolling four quarter basis. However, not more than once during any period of four consecutive fiscal quarters, we are permitted to maintain compliance with its financial covenants if the fixed charge coverage ratio is at least 1.00:1.00 and the senior leverage ratio is no greater than 1.25:1.00. Under the Credit Agreement, if the Term Loan is fully cash collateralized and there are no borrowings under the Revolver, the fixed charge coverage ratio will not be tested in any fiscal quarter ending on or after September 30, 2016, and the senior leverage ratio will not be tested in any fiscal quarter ending on or after September 30, 2015. The Credit Agreement contains a number of covenants that, among other things, limit or restrict our ability to dispose of assets, incur additional indebtedness, make dividend and other restricted payments, create liens securing other indebtedness and enter into restrictive agreements. As of December 31, 2015, we were in compliance with the financial covenant requirements of our Credit Agreement. The Credit Agreement allows for a maximum amount of capital expenditures of $6.0 million in 2016.

Convertible Subordinated Notes Due 2019

Effective September 1, 2013, we issued convertible subordinated notes due 2019 in the aggregate principal amount of $24.3 million (the “2019-03 Convertible Notes”) to certain limited partners of USMD Arlington to acquire their limited partnership interests in USMD Arlington. The 2019-03 Convertible Notes bear interest at a fixed rate of 5.00% per annum and mature on March 1, 2019. Interest payments are due and payable on the last day of each month and the principal is due upon maturity. We have the option to prepay the 2019-03 Convertible Notes, in whole or in part, at any time after September 1, 2014 without penalty. Each noteholder has the right at any time after September 1, 2014 to convert all or any part of the unpaid principal balance of its 2019-03 Convertible Note into shares of common stock of USMD at the rate of one share of common stock for each $23.37 of principal. The conversion price will be appropriately adjusted for stock splits, mergers or other fundamental corporate transactions. The conversion option has no cash

settlement provisions. The 2019-03 Convertible Notes are convertible into 1,041,577 of our common shares at a conversion price of $23.37 per share. The indebtedness represented by the 2019-03 Convertible Notes is expressly subordinate to all senior indebtedness of USMD currently outstanding or incurred in the future, which includes its indebtedness under the Credit Agreement. We intend to fund the required interest payments under the 2019-03 Convertible Notes with available cash balances, cash provided by operating activities and distributions from USMD Arlington and USMD Fort Worth.

At the date of execution of the 2019-03 Convertible Notes, the commitment date, the conversion price was less than the fair value of shares our common stock. We recognized the intrinsic value of the conversion option’s in-the-money portion as a $3.7 million beneficial conversion discount to the debt with an offsetting entry to additional paid-in capital. The beneficial conversion discount is being accreted to the 2019-03 Convertible Notes using the effective interest method over 66 months until they mature on March 1, 2019. The 2019-03 Convertible Notes have an effective interest rate of 8.50%. Recognition of the beneficial conversion discount results in a temporary book-tax basis difference in the debt instrument. Accordingly, on September 1, 2013, we recorded a $1.3 million deferred tax liability with an offsetting entry to additional paid-in capital.

Off-Balance Sheet Arrangements

Except for guarantees discussed below, we do not have any arrangements that qualify as off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

As of December 31, 2015, we had issued guarantees to third parties of the indebtedness and other obligations of certain of our current and one former nonconsolidated investees. Should the investees fail to pay the obligations due, we could be required to make payments totaling an aggregate of $24.6 million. The guarantees provide for recourse against the investee; however, if we are required to perform under one or more guarantees, recovery of any amount would be unlikely. Included in the guarantee amount above is our guarantee of 46.4% of the obligations of USMD Arlington that were incurred to finance the Advance to us. If we were required to perform under that guarantee or record a liability for that guarantee, our obligations under the Advance would likely decrease by an equal amount. The remaining terms of these guarantees range from 31 to 149 months. We record 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 it is probable that we will have to perform under the guarantee and the liability is reasonably estimable. We have not recorded a liability for these guarantees, as we believe the likelihood that we will have to perform under these agreements is remote.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In preparing these consolidated financial statements, we make judgments and estimates that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that we believe to be relevant at the time we prepare our consolidated financial statements. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

Our significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies and Pronouncements, to our December 31, 2015 consolidated financial statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, as they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Where we have provided sensitivity analyses in the “Effect if Actual Results Differ from Assumptions” columns below, the variance assumptions used in those analyses are based on outcomes that we consider reasonably likely to occur.

Description		Judgments and Uncertainties		Effect if Actual Results Differ from Assumptions
Revenue Recognition – Patient Service Revenue
We record patient service revenue during the period healthcare services are provided based upon estimated net realizable amounts due from third-party payers and patients, which includes an estimate of revenue earned but not billed. Amounts we receive for patient services paid by patients and third-party payers such as managed care health plans and commercial insurers, governmental programs, such as Medicare and Medicaid, and other payers are generally less than our customary charges and patient service revenue is recorded net of these contractual allowances and discounts. All physician practice and ancillary services contractual allowance calculations are subject to monthly review by management.		Net patient service revenue includes amounts estimated by management to be reimbursable by third-party payers. The process of calculating contractual allowances requires us to estimate the payment amount based on third-party payer contract provisions. Discounts off customary charges result from the reduction of our customary charges to prospectively established fee schedule amounts and other contract provisions. The estimates of contractual allowances on charges posted for the period involve payer-specific estimates of patient service revenue based on the most significant contractual reimbursement methodologies such as percent of charges, fixed fee schedules and multi-procedure discounting. However, the calculations do not take into consideration all contract provisions that may limit reimbursement, but provide an estimate of net realizable value. Revenue is adjusted when the parties (insurer and patient/guarantor) obligated under the contract have tendered payment on the claim. During 2015 we experienced a material weakness related to our estimates of contractual allowances. For more information regarding the material weakness, see Part II, Item 9A, Controls and Procedures, of this Annual Report.		If the actual contractual reimbursement percentage under government programs and managed care contracts differed by 1% from our estimated reimbursement percentage, net patient service revenue for the year ended December 31, 2015 would have changed by $0.2 million. Final settlements under some of these programs are subject to adjustment based on administrative review and audit by third parties. If the actual reimbursement percentage of unbilled charges differed by 1% from our estimated reimbursement percentage, net patient service revenue for the year ended December 31, 2015 would have changed by a nominal amount. Final settlements under some of these programs are subject to adjustment based on administrative review and audit by third parties.

Description		Judgments and Uncertainties		Effect if Actual Results Differ from Assumptions
Allowance for Doubtful Accounts
Accounts receivable primarily consist of amounts due from third-party payers and patients of our healthcare facilities. We also have accounts receivable from healthcare entities that we provide management and lithotripsy services to. The primary collection risks relate to uninsured patient accounts, including patient accounts for which the primary insurance carrier has paid the amounts covered by the applicable agreement, but patient responsibility amounts (deductibles, coinsurance amounts and copayments) remain outstanding. Bad debt expense and the allowance for doubtful accounts relate primarily to amounts due directly from patients. We write off uncollectible accounts once collection efforts are exhausted.		We estimate the allowance for doubtful accounts by reserving a percentage of all accounts receivable based on collection history, adjusted for expected recoveries and, if present, anticipated changes in trends that may affect collection. Management relies on the results of detailed reviews of historical collection and write-off data as a primary source of information in estimating the collectibility of its accounts receivable. We perform this analysis monthly, utilizing monthly accounts receivable collection and write-off data. We also regularly review our overall reserve adequacy by monitoring historical cash collections as a percentage of trailing net revenue less bad debt expense. We believe our monthly updates to the allowance for doubtful accounts provide reasonable valuations of our accounts receivable. To date, these routine changes in estimates have not resulted in material adjustments to our allowance for doubtful accounts, bad debt expense or period-to-period comparisons of its results of operations.		If actual results are not consistent with our assumptions and judgments, we may be exposed to gains or losses that could be material. Changes in general economic conditions, payer mix, or trends in federal governmental and private employer healthcare coverage could affect our estimate of the allowance for doubtful accounts, collection of accounts receivable, financial position, results of operations, and cash flows. If the actual bad debt percentage differed by 10% from its estimated bad debt rate, net patient service revenue and net accounts receivable for the year ended December 31, 2015 would have changed by approximately $0.3 million.

Description		Judgments and Uncertainties		Effect if Actual Results Differ from Assumptions
Impairment of Goodwill and Other Indefinite-Lived Intangible Assets
We test goodwill and other indefinite-lived intangible assets for impairment on an annual basis, or more frequently if circumstances indicate potential impairment. Such circumstances may include (1) a significant adverse change in legal factors or the business climate, (2) an adverse action or assessment by a regulator, or (3) other adverse changes in the assessment of future operations of a reporting unit. We test for goodwill impairment at the reporting unit level, which we have determined is one level below the operating segment level. The impairment test for goodwill uses a two-step approach. Step one compares the fair value of the reporting unit to which goodwill is assigned to its carrying value. If the estimated fair value of a reporting unit exceeds its carrying value, then we conclude that no goodwill impairment has occurred. If the carrying value of a reporting unit exceeds its estimated fair value, a potential impairment is indicated and step two is performed. Step two compares the carrying value of the reporting unit’s goodwill to its implied fair value. In calculating the implied fair value of reporting unit goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities, including unrecognized intangible assets, of that reporting unit based on their fair values, similar to the allocation that occurs in a business combination. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess. If the implied fair value of goodwill exceeds the carrying value, goodwill is not impaired. For the 2015 goodwill impairment analysis, we concluded that there was no impairment. Step one of the 2014 goodwill impairment analysis indicated that the carrying value of the Cancer Treatment Services reporting unit exceeded its estimated fair value. As a result, in order to determine the implied fair value of the reporting unit’s goodwill, we performed the second step of the impairment analysis. The second step analysis indicated that the carrying value of the Cancer Treatment Services reporting unit was in excess of its implied fair value. Accordingly, the Company recorded goodwill impairment of $20.3 million, which was the amount by which the carrying value of the Cancer Treatment Services reporting unit’s goodwill exceeded its implied fair value. To test impairment of acquired indefinite-lived intangible assets (trade names), the fair values are estimated and compared to their carrying values. We recognize an impairment charge when the estimated fair value of the intangible asset is less than the carrying value. We perform our annual impairment tests of goodwill and indefinite-lived intangible assets as of December 31. There were no indefinite-lived trade names or other assets at December 31, 2015.		In estimating the fair value of reporting units, we make estimates and judgments about future cash flows and market valuations using a combination of income, cost and market approaches, as appropriate. We primarily rely on an income approach, specifically a discounted cash flow analysis, which includes assumptions for, among others, discount rates, cash flow projections, growth rates and terminal value rates, all of which require significant judgment. This type of analysis contains uncertainties because it requires management to make assumptions and apply judgment to estimate industry economic factors and the profitability of future business strategies. It is our policy to conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as our future expectations. We estimate the fair value of trade names based on an income approach – relief from royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of the trade name assets. This approach is dependent on a number of factors, including estimates of future growth and trends, royalty rates in the category of intellectual property, discount rates and other variables.		As a result of step one of the 2015 goodwill impairment analysis, the estimated fair value of each reporting unit exceeded its carrying amount. Therefore, the second step was not necessary and no goodwill impairment was recorded. The estimated fair values of both reporting units – Physician and Ancillary Services and Cancer Treatment Center – significantly exceeded their carrying values. Our 2015 goodwill impairment test utilized both a market approach and an income approach. The market approach primarily utilized the guideline company and merger and acquisition methodologies, both based on earnings before interest, taxes, depreciation and amortization multiple estimates. Our 2014 goodwill impairment test included reductions in cash flow forecasts and certain discount rates that were higher than in past years due to delays in the Company’s ability to execute its strategic plan commensurate with its past forecasts. In addition, during 2014, we performed an operational assessment of overhead allocation methodologies. The overhead allocation methodology used in the goodwill impairment analysis was modified to correlate with the results of this assessment. Except for these changes, we have not made material changes in the accounting methodology we use to assess goodwill impairment during the past two years. Changes in the estimates, assumptions and other qualitative factors used to conduct goodwill impairment tests, including future cash flow projections, could indicate that our goodwill is impaired in future periods and could result in a potentially material impairment of goodwill.

Description		Judgments and Uncertainties		Effect if Actual Results Differ from Assumptions
Impairment of Long-Lived Assets and Finite-Lived Intangible Assets
We evaluate our long-lived assets and identifiable acquired intangible assets with finite useful lives for possible impairment whenever circumstances indicate that the carrying value of the asset, or related group of assets, may not be recoverable. Examples include a current expectation that an asset will be disposed of significantly before the end of its previously estimated useful live, a significant adverse change in the extent or manner in which we use an asset or in its physical condition, or a significant decrease in the expected recoverability of an asset. When evaluating long-lived assets for impairment, we compare the carrying value of the asset to the asset’s estimated undiscounted future cash flows. An impairment loss is recognized when the carrying value of the asset or group of assets exceeds the respective fair value. If we recognize an impairment loss, the adjusted carrying value of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated over the remaining useful life of that asset. No long-lived asset or finite-lived intangible asset impairment charges were recorded during the year ended December 31, 2015. As a result of the USMD Health System branding initiative introduced in May 2014, management concluded that the indefinite-lived trade names were finite-lived assets. In 2014, in connection with this change, we performed, with the assistance of independent valuation experts, an impairment test of the carrying value of the trade names to determine whether any impairment existed. We concluded that the estimated fair value of the trade names was less than the associated carrying value and that an impairment write-down was required. As a result of this determination, in May 2014, we recorded an impairment loss of $8.4 million.		Our impairment analyses contain uncertainties because they require us to make assumptions and apply judgment to estimate future cash flows, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows. Fair value of assets is estimated based on appraisals, established market values of comparable assets or internal estimates of discounted future cash flows. The estimated fair values of the trade names were calculated using an income approach – relief from royalty method, which assumes that in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of the trade name asset. The cash flow model we used to estimate the fair value of the trade names involves several assumptions, most significantly, projected revenue growth rates, a pre-tax royalty rate of 1.0% declining to 0.1% over the estimated five year life of the asset and a discount rate of 17%. The actual useful life of the trade names will vary dependent upon certain factors including the availability of funding to execute the USMD Health System branding initiative. If in the future, the estimated useful lives of the trade names change, we will perform an impairment analysis.		We have not made any material changes in the accounting methodology used to assess long-lived or finite-lived intangible asset impairment loss during the past two years. It is reasonably likely that the estimated useful lives of trade names will change in the future. Adjustments to the useful lives of the trade names are primarily dependent upon the availability of funding to execute the USMD Health System branding initiative. Except as noted above, we do not believe there is a reasonable likelihood of a material change in the future estimates or assumptions used to calculate long-lived or finite-lived intangible asset impairment losses. However, if actual results are not consistent with the estimates and assumptions we use in estimating future cash flows, we may be exposed to future impairment losses that could be material.

Description		Judgments and Uncertainties		Effect if Actual Results Differ from Assumptions
Income Taxes
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Income tax receivables and liabilities and deferred tax assets and liabilities are recognized based on the amounts that more likely than not will be sustained upon ultimate settlement with taxing authorities. Our income tax returns, like those of most companies, are periodically audited by domestic tax authorities. These audits include questions regarding our tax filing positions, including the timing and amount of income and deductions and the allocation of income among various tax jurisdictions. At any point in time, many tax years are subject to audit by various tax authorities. In evaluating the exposures associated with our various tax filing positions, we may record a liability for such exposures. A number of years may elapse before a particular matter, for which we have established a liability, is audited and fully resolved or clarified. We adjust our liability for unrecognized tax benefits and income tax provisions in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available.		The determination and evaluation of our provision for income taxes and analysis of uncertain tax positions requires significant judgment and knowledge of federal and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. We evaluate the recoverability of our deferred tax assets and establish a valuation allowance if necessary to reduce our deferred tax assets to an amount that is more likely than not to be realized. Considerable judgment is required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. Although realization is not assured, we believe it is more likely than not that our deferred tax assets will be realized. Deferred tax assets are reduced by a valuation allowance when, based on all available evidence, both positive and negative, and the weight of that evidence to the extent such evidence can be objectively verified, management determines it is more likely than not that all or a portion of the deferred tax assets will not be realized. We consider many factors when evaluating our uncertain tax positions and such judgments are subject to periodic review. Our liability for unrecognized tax benefits contains uncertainties because management is required to make assumptions and apply judgment to estimate the exposures associated with our various filing positions.		We regularly review our deferred income tax assets for recoverability. If we are unable to generate sufficient future taxable income, or if there is a material change in the actual effective income tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to record a valuation allowance, resulting in a substantial increase in our effective tax rate. We regularly review our uncertain tax positions. Although we believe that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material.

Description		Judgments and Uncertainties		Effect if Actual Results Differ from Assumptions
Share-Based Payments
We determine the estimated fair value of our stock option awards to employees and directors at the date of grant using the Black-Scholes option pricing model.		Option pricing models require us to make assumptions and apply judgment to determine the fair value of our awards. These assumptions and judgments include estimating the future volatility of our stock price, the expected life of the option and the risk free interest rate. Changes in these assumptions can materially impact the fair value estimate. As a recently formed public entity with a small public float and very limited trading of our public common shares on the NASDAQ Capital Market, it is not practicable for us to estimate the volatility of our common shares; therefore, we estimate volatility based on the historical volatilities of a small group of companies we consider as close as comparable to USMD as available and an industry index, all equally weighted, over the expected life of the option. We concluded that this combination was more characteristic of our business than a broad industry index. The expected life of awards granted represents the period of time that we expect them to be outstanding based on the “simplified” method, which is allowed for companies that cannot reasonably estimate expected life of options based on historical share option exercise experience. The risk-free interest rate is based on the implied yield of U.S. Treasury zero-coupon securities that correspond to the expected life of the option.		If actual results are not consistent with the assumptions used, the share-based payment expense reported in our financial statements may not be representative of the actual economic cost of the share-based payment. A 10% increase in estimated volatility of awards granted in 2015 would have increased share-based payment expense by $25,000.

Recent Accounting Pronouncements

For information regarding recently issued and adopted accounting pronouncements, see Note 2, Summary of Significant Accounting Policies and Pronouncements, to our December 31, 2015 consolidated financial statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report.

Not applicable for smaller reporting companies.

Item 8.

Financial Statements

INDEX TO USMD HOLDINGS, INC. FINANCIAL STATEMENTS

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS

To the Board of Directors and Stockholders

USMD Holdings, Inc.

We have audited the accompanying consolidated balance sheet of USMD Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2015, and the related statements of operations, stockholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of USMD Holdings, Inc. and subsidiaries as of December 31, 2015, and the results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.

/s/ RSM US LLP

Houston, Texas

April 14, 2016

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

USMD Holdings, Inc.

We have audited the accompanying consolidated balance sheet of USMD Holdings, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2014, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of USMD Holdings Inc.(and subsidiaries)as of December 31, 2014, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ GRANT THORNTON LLP

Dallas, Texas

April 15, 2015

USMD HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

See accompanying notes to consolidated financial statements

USMD HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS – (Continued)

(In thousands, except share data)

The liabilities of the consolidated VIE are obligations of the VIE and the creditors have no recourse to USMD Holdings, Inc.

See accompanying notes to consolidated financial statements

USMD HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

See accompanying notes to consolidated financial statements

USMD HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)