Adeptus Health (ADPTQ) 10-Q 2015 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

OR

◻ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from      to      .

Commission file number: 001-36520

ADEPTUS HEALTH INC.

(Exact name of registrant as specified in its charter)

Delaware	46-5037387
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2941 Lake Vista Drive Lewisville, TX	75067
(Address of principal executive offices)	(Zip Code)

(972) 899-6666

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ◻ 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ◻ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	◻	Accelerated filer	◻
Non-accelerated filer	☒	Smaller reporting company	◻

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ◻ No ☒ 

The number of shares of the registrant’s Class A common stock, par value $0.01 per share, outstanding was 14,257,599 as of October 26, 2015.  The number of shares of the registrant’s Class B common stock, par value $0.01 per share, outstanding was 6,510,738 as of October 26, 2015. 

ADEPTUS HEALTH INC. and SUBSIDIARIES

FORM 10-Q

INDEX 

PART I.	FINANCIAL INFORMATION	6
Item 1.	Financial Statements (Unaudited):	6
	Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014	6
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014	7
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2015 and 2014	8
	Condensed Consolidated Statement of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2015	9
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014	10
	Notes to Condensed Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	46
PART II.	OTHER INFORMATION	48
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Mine Safety Disclosure	49
Item 5.	Other Information	49
Item 6.	Exhibits	49

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GENERAL

Unless the context otherwise indicates or requires, references in this Quarterly Report on Form 10-Q to the “Company,” “we,” “us” and “our” refer to Adeptus Health Inc. and its consolidated subsidiaries after giving effect to the Reorganization Transactions (“Reorganization”) described herein and the Initial Public Offering (“IPO”) described herein and to Adeptus Health LLC and its consolidated subsidiaries prior to the Reorganization and IPO.

On June 30, 2014, we completed our initial public offering of 5,321,414 shares of our Class A common stock at a price to the public of $22.00 per share and received net proceeds of approximately $96.2 million, after deducting underwriting discounts and commissions and offering expenses. We used the net proceeds from the initial public offering to purchase limited liability company units of Adeptus Health LLC, or LLC Units, from Adeptus Health LLC. Adeptus Health LLC used the proceeds it received as a result of our purchase of LLC Units to cause First Choice ER, LLC to reduce outstanding borrowings under its senior secured credit facility, to make a $2.0 million one-time payment to an affiliate of a significant stockholder in connection with the termination of an advisory services agreement and for general corporate purposes. An additional 313,586 shares were also sold by an affiliate of a significant stockholder.

On May 11, 2015, we completed a public offering of 1,572,296 shares of our Class A common stock at a price to the public of $63.75 per share and received net proceeds of approximately $94.5 million, after deducting underwriting discounts and commissions and offering expenses. We used the net proceeds from the offering to purchase, for cash, 1,572,296 LLC Units. An additional 842,704 shares were also sold by an affiliate of a significant stockholder.

On July 29, 2015, we completed a public offering of 2,645,277 shares of our Class A common stock at a price to the public of $105.00 per share and received net proceeds of approximately $265.9 million, after deducting underwriting discounts and commissions and offering expenses. We used the net proceeds from the offering to purchase, for cash, 2,645,277 LLC Units. An additional 1,264,723 shares were also sold by an affiliate of a significant stockholder.

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts included in this Form 10-Q, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, our results of operations, financial position and our business outlook, business trends and other information, may be forward-looking statements. Words such as “estimates,” “expects,” “contemplates,” “will,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” “may,” “should” and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, estimates and projections will result or be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Form 10-Q. Such risks, uncertainties and other important factors that could cause actual results to differ include, among others, the risks, uncertainties and factors set forth under Part I., Item 1A.“Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, subsequent filings and in this report, as such risk factors may be updated from time to time in our periodic filings with the SEC, and are accessible on the SEC’s website at www.sec.gov, and also include the following:

· Our ability to implement our growth strategy;

· Our ability to maintain sufficient levels of cash flow to meet growth expectations;

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· Our ability to protect our brand;

· Federal and state laws and regulations relating to our facilities, which could lead to the incurrence of significant penalties by us or require us to make significant changes to our operations;

· Our ability to locate available facility sites on terms acceptable to us;

· Competition from hospitals, clinics and other emergency care providers;

· Our dependence on payments from third-party payors;

· Our ability to source and procure new products and equipment to meet patient preferences;

· Our reliance on Medical Properties Trust (“MPT”) and the MPT Master Funding and Development Agreements;

· Disruptions in the global financial markets leading to difficulty in borrowing sufficient amounts of capital to finance the carrying costs of inventory, to pay for capital expenditures and operating costs;

· Our ability or the ability of our healthcare system partners to negotiate favorable contracts or renew existing contracts with third-party payors on favorable terms;

· Significant changes in our payor mix or case mix resulting from fluctuations in the types of cases treated at our facilities;

· Significant changes in rules, regulations and systems governing Medicare and Medicaid reimbursements;

· Material changes in IRS revenue rulings, case law or the interpretation of such rulings;

· Shortages of, or quality control issues with, emergency care-related products, equipment and medical supplies that could result in a disruption of our operations;

· The intense competition we face for patients, physician use of our facilities, strategic relationships and commercial payor contracts;

· The fact that we are subject to significant malpractice and related legal claims;

· The growth of patient receivables or the deterioration in the ability to collect on those accounts;

· The impact on us of PPACA, which represents a significant change to the healthcare industry;

· Ensuring our continued compliance with HIPAA, which could require us to expend significant resources and capital;

· We will be required to have our internal controls over financial reporting audited starting with our annual report for the year ended December 31, 2015 and we may not be able to comply with the applicable requirements for the audited period;

· Upon consummation of the public offering, which closed in August 2015, affiliates of Sterling Partners no longer have consent rights with respect to certain significant corporate actions, including the hiring and firing of our chief executive officer, any change in control and any significant acquisitions, divestitures and equity issuances; and

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· The factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 under Part I, “Item 1 A, Risk Factors.”

We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this report apply only as of the date of this report or as the date they were made and, except as required by applicable law, we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Adeptus Health Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	September 30,		December 31,
	2015		2014
	(unaudited)			(audited)
ASSETS
Current assets
Cash	$	46,310	$	2,002
Restricted cash		9,166		4,795
Accounts receivable, less allowance for doubtful accounts of $30,842 and $13,068, respectively		48,809		37,422
Other receivables and current assets		24,840		17,137
Medical supplies inventory		4,299		4,287
Total current assets		133,424		65,643
Property and equipment, net		72,357		93,892
Investment in unconsolidated joint ventures		43,847		2,100
Deposits		786		1,772
Deferred tax assets		203,257		34,084
Intangibles, net		18,680		20,015
Goodwill		61,009		61,009
Other long-term assets		5,730		4,303
Total assets	$	539,090	$	282,818
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses	$	21,900	$	25,420
Accrued compensation		20,069		13,521
Current maturities of long-term debt		4,448		1,816
Current maturities of capital lease obligations		96		81
Deferred rent		814		607
Total current liabilities		47,327		41,445
Long-term debt, less current maturities		150,204		104,982
Payable to related parties pursuant to tax receivable agreement		187,584		30,039
Capital lease obligations, less current maturities		3,981		4,056
Deferred rent		3,207		2,416
Total liabilities		392,303		182,938
Commitments and contingencies
Shareholders' equity
Preferred stock, par value $0.01 per share; 10,000,000 shares authorized and zero shares issued and outstanding at September 30, 2015		—		—
Class A common stock, par value $0.01 per share; 50,000,000 shares authorized, 14,257,599 and 9,845,016 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively		143		98
Class B common stock, par value $0.01 per share; 20,000,000 shares authorized, 6,510,738 and 10,781,153 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively		65		108
Additional paid-in capital		84,706		51,238
Accumulated other comprehensive loss		(92)		(74)
Retained earnings (deficit)		5,008		(3,351)
Total shareholders' equity		89,830		48,019
Non-controlling interest		56,957		51,861
Total equity		146,787		99,880
Total liabilities and shareholders' equity	$	539,090	$	282,818

The accompanying notes are an integral part of these unaudited financial statements.

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Adeptus Health Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except share data)

	Three months ended				Nine months ended
	September 30,				September 30,
	2015		2014		2015		2014
Revenue:
Patient service revenue	$	101,254	$	66,533	$	301,519	$	163,008
Provision for bad debt		(17,907)		(8,934)		(50,365)		(22,390)
Net patient service revenue		83,347		57,599		251,154		140,618
Management and contract services revenue		4,865		—		8,098		—
Total net operating revenue		88,212		57,599		259,252		140,618
Equity in earnings of unconsolidated joint ventures		4,543		—		7,470		—
Operating expenses:
Salaries, wages and benefits		55,420		38,119		155,424		92,577
General and administrative		13,866		9,221		35,701		26,744
Other operating expenses		13,152		7,414		36,998		17,416
Depreciation and amortization		4,259		3,924		13,538		10,374
Total operating expenses		86,697		58,678		241,661		147,111
Income (loss) from operations		6,058		(1,079)		25,061		(6,493)
Other income (expense):
Gain on contribution to joint venture		—		—		24,250		—
Interest expense		(3,753)		(2,635)		(10,925)		(9,160)
Total other (expense) income		(3,753)		(2,635)		13,325		(9,160)
Income (loss) before provision (benefit) for income taxes		2,305		(3,714)		38,386		(15,653)
Provision (benefit) for income taxes		811		(116)		7,617		142
Net income (loss)		1,494		(3,598)		30,769		(15,795)
Less: Net income (loss) attributable to non-controlling interest		820		(2,001)		18,867		(12,182)
Net income (loss) attributable to Adeptus Health Inc.	$	674	$	(1,597)	$	11,902	$	(3,613)
Net income (loss) per share of Class A common stock:
Basic	$	0.05	$	(0.16)	$	1.05	$	(0.37)
Diluted	$	0.05	$	(0.16)	$	1.05	$	(0.37)
Weighted average shares of Class A common stock:
Basic		13,236,064		9,845,016		11,377,557		9,845,016
Diluted		13,236,064		9,845,016		11,377,557		9,845,016

The accompanying notes are an integral part of these unaudited financial statements.

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Adeptus Health Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)

	Adeptus Health Inc.				Non-controlling Interest				Total
	Three months ended				Three months ended				Three months ended
	September 30,				September 30,				September 30,
	2015		2014		2015		2014		2015		2014
Net income (loss)	$	674	$	(1,597)	$	820	$	(2,001)	$	1,494	$	(3,598)
Other comprehensive loss, net of tax:
Unrealized loss on interest rate contract		(1)		(2)		—		—		(1)		(2)
Comprehensive income (loss)	$	673	$	(1,599)	$	820	$	(2,001)	$	1,493	$	(3,600)

	Adeptus Health Inc.				Non-controlling Interest				Total
	Nine months ended				Nine months ended				Nine months ended
	September 30,				September 30,				September 30,
	2015		2014		2015		2014		2015		2014
Net income (loss)	$	11,902	$	(3,613)	$	18,867	$	(12,182)	$	30,769	$	(15,795)
Other comprehensive loss, net of tax:
Unrealized loss on interest rate contract		(18)		(63)		—		—		(18)		(63)
Comprehensive income (loss)	$	11,884	$	(3,676)	$	18,867	$	(12,182)	$	30,751	$	(15,858)

The accompanying notes are an integral part of these unaudited financial statements.

8

Adeptus Health Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(In thousands)

	Adeptus Health Inc.
									Accumulated
							Additional		Other		Retained		Total		Non-
	Class A shares			Class B shares			Paid-in		Comprehensive		Earnings		Shareholders'		Controlling		Total
	Shares	Amount		Shares	Amount		Capital		Loss		(Deficit)		Equity		Interest		Equity
Balance, December 31, 2014	9,845,016	$	98	10,781,153	$	108	$	51,238	$	(74)	$	(3,351)	$	48,019	$	51,861	$	99,880
Issuance of Class A restricted stock	144,330		2	—		—		(2)		—		—		—		—		—
Issuance of Class A common stock	4,270,415		43	—		—		(43)		—		—		—		—		—
Purchase of Class B common stock	—		—	(4,270,415)		(43)		13,814		—		—		13,771		(13,771)		—
Class A restricted stock withheld on vesting	(2,162)		—	—		—		(205)		—		—		(205)		—		(205)
Stock-based compensation	—		—	—		—		1,946		—		—		1,946		—		1,946
Effects of tax receivable agreement	—		—	—		—		17,958		—		—		17,958		—		17,958
Tax distribution to LLC unit holders	—		—	—		—		—		—		(3,543)		(3,543)		—		(3,543)
Unrealized loss on interest rate contract	—		—	—		—		—		(18)		—		(18)		—		(18)
Net income	—		—	—		—		—		—		11,902		11,902		18,867		30,769
Balance, September 30, 2015	14,257,599	$	143	6,510,738	$	65	$	84,706	$	(92)	$	5,008	$	89,830	$	56,957	$	146,787

The accompanying notes are an integral part of these unaudited financial statements.

9

Adeptus Health Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Nine months ended
	September 30,
	2015		2014
Cash flows from operating activities:
Net income (loss)	$	30,769	$	(15,795)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Loss from the disposal or impairment of assets		68		3
Depreciation and amortization		13,538		10,374
Deferred tax benefit		6,328		(1,033)
Amortization of deferred loan costs		719		672
Provision for bad debts		50,365		22,390
Gain on contribution to unconsolidated joint venture		(24,250)		—
Equity in earnings of unconsolidated joint ventures		(7,470)		—
Stock-based compensation		1,946		696
Changes in operating assets and liabilities:
Restricted cash		(4,371)		(4,498)
Accounts receivable		(61,753)		(35,560)
Other receivables and current assets		(4,362)		(2,538)
Medical supplies inventory		(852)		(1,982)
Other long-term assets		(591)		45
Accounts payable and accrued expenses		(3,215)		585
Accrued compensation		6,548		3,994
Deferred rent		1,703		1,804
Net cash provided by (used in) operating activities		5,120		(20,843)
Cash flows from investing activities:
Deposits		921		(470)
Proceeds from sale of property and equipment		1,527		2,003
Capital expenditures		(4,916)		(36,830)
Net cash used in investing activities		(2,468)		(35,297)
Cash flows from financing activities:
Proceeds from public offerings, net of underwriters fees and expenses		360,420		96,226
Purchase of limited liability units from LLC Unit holders		(360,420)		—
Proceeds from long-term borrowings		54,000		93,955
Payment of deferred loan costs		(1,572)		(702)
Payments on borrowings		(6,964)		(69,642)
Payment of capital lease obligations		(60)		(39)
Payment of dividends		—		(60,000)
Tax distribution to LLC Unit holders		(3,543)		(9)
Restricted stock forfeited on vesting to satisfy withholding requirements		(205)		—
Contribution from original owner		—		167
Net cash provided by financing activities		41,656		59,956
Net increase in cash and cash equivalents		44,308		3,816
Cash, beginning of period		2,002		11,495
Cash, end of period	$	46,310	$	15,311

See Note 12 for Supplemental Cash Flow Information and Supplemental Noncash Activities

The accompanying notes are an integral part of these unaudited financial statements.

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Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

NOTE 1—ORGANIZATION 

Adeptus Health Inc. (the "Company") was incorporated as a Delaware corporation on March 7, 2014 for the purpose of facilitating an initial public offering of common equity. The Company is a holding company with its sole material asset being a controlling equity interest in Adeptus Health LLC (or “Adeptus Health”). As the sole managing member of Adeptus Health, the Company operates and controls all of the business and affairs of Adeptus Health LLC and, through Adeptus Health and its subsidiaries, conducts its business. Prior to the initial public offering, the Company had not engaged in any business or other activities except in connection with its formation and the initial public offering.

Adeptus Health is a leading patient-centered healthcare organization expanding access to the highest quality emergency medical care through its network of freestanding emergency rooms and partnerships with premier healthcare providers.  In Texas, Adeptus Health or its predecessors began operations in 2002 and owns and operates First Choice Emergency Room.  In Colorado, in partnership with University of Colorado Health, Adeptus Health operates UCHealth Emergency Rooms.  Together with Dignity Health, the Company also operates Dignity Health Arizona General Hospital and freestanding emergency departments in Arizona.  Adeptus Health is the largest network of freestanding emergency rooms in the United States, delivering both major and minor emergency medical services for adult and pediatric patients.  Adeptus Health has experienced rapid growth in recent periods, growing from 14 freestanding facilities at the end of 2012 to 55 freestanding facilities at the end of 2014, and to 74 freestanding facilities at September 30, 2015. In Texas, the Company’s facilities are currently located in Houston, Dallas/Fort Worth, San Antonio and Austin.  In Colorado, facilities are located in Colorado Springs and Denver.  In Arizona, Dignity Health Arizona General Hospital, a full service general hospital, along with its freestanding emergency departments are located in the Phoenix market. 

On June 24, 2014, the Company’s registration statement on Form S-1 (File No. 333-196142) relating to its initial public offering of Class A common stock was declared effective by the Securities and Exchange Commission (“SEC”). The Company sold 4,900,000 shares of Class A common stock in its public offering.  An additional 735,000 shares were sold to the public, of which 313,586 shares were sold by a significant stockholder and 421,414 shares were sold by the Company with the proceeds received by the Company used to purchase an equivalent number of LLC Units from such significant stockholder.  The Company’s stock began trading on the New York Stock Exchange on June 25, 2014 under the symbol “ADPT,” and the initial public offering closed on June 30, 2014.

In connection with the initial public offering, the limited liability company agreement of Adeptus Health LLC was amended and restated to, among other things, modify its capital structure by replacing the different classes of interests previously held by the Adeptus Health LLC owners to a single new class of units called “LLC Units.” In addition, each LLC Unit holder received on a one-for-one basis one share of the Company’s Class B common stock, which entitles the holder to vote on all matters of Adeptus Health Inc. but has no economic rights.  One of the then-existing owners converted a portion of its interest into 4,895,521 shares of the Company’s Class A common stock, which is referred to as the merged entity. The Company and its then-existing owners also entered into an exchange agreement under which they have the right to exchange their LLC Units and shares of Class B common stock for shares of Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. These transactions are collectively referred to as the “Reorganization Transactions.”

In May 2015, an existing stockholder of ADPT (the “Selling Stockholder”) and the Company sold 750,329 and 1,349,671 shares, respectively, of the Company’s Class A common stock in an underwritten public offering at a price of $63.75 per share.  In connection with the offering, the underwriters exercised in full their option to purchase an additional 222,625 from the Company and 92,375 from the Selling Stockholder.  As a result, the total offering size was 2,415,000 shares of common stock.  The Company used the net proceeds from its issuance of and sale of Class A common stock, par value $0.01 per share, to purchase, for cash, 1,572,296 limited liability company units of Adeptus Health LLC, its direct subsidiary, from certain of the unit holders of Adeptus Health LLC, including certain of its

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Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

directors and executive officers.  The Company did not receive any of the proceeds from the sale of shares of common stock of the Company by the Selling Stockholder. 

In July 2015, the Selling Stockholder and the Company sold 1,079,649 and 2,320,351 shares, respectively, of the Company’s Class A common stock in an underwritten public offering at a price of $105.00 per share. In connection with the offering, the underwriters exercised in full their option to purchase an additional 324,926 from the Company and 185,074 from the Selling Stockholder. As a result, the total offering size was 3,910,000 shares of common stock. The Company used the net proceeds from its issuance of and sale of Class A common stock, par value $0.01 per share, to purchase, for cash, 2,645,277 limited liability company units of Adeptus Health LLC, its direct subsidiary, from certain of the unit holders of Adeptus Health LLC, including certain of its directors and executive officers. The Company did not receive any of the proceeds from the sale of shares of common stock of the Company by the Selling Stockholder.

The Company consolidates the financial results of Adeptus Health LLC and its subsidiaries and records non-controlling interest for the economic interest in Adeptus Health LLC held by the non-controlling unit holders. The non-controlling interest ownership percentage as of September 30, 2015 was 31.3%.

Prior to the initial public offering, the Company borrowed under the Senior Secured Credit Facility (See Note 8 Debt for further information) to fund a dividend of $60.0 million to the then-existing  owners which was paid in connection with the consummation of the initial public offering. The Company used proceeds from the initial public offering to repay indebtedness under the Senior Secured Credit Facility from this borrowing.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements and footnotes have been prepared pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally included in audited financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to those rules and regulations. We believe that the disclosures made are adequate to make the information not misleading.

The condensed consolidated financial statements included herein reflect all adjustments (consisting of normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the interim periods presented. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the fiscal year.

These condensed consolidated financial statements and related notes should be read in conjunction with the Company’s December 31, 2014 audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed with the SEC on February 27, 2015.

Accounting Policies and Use of Estimates

The preparation of financial statements in conformity with GAAP requires our management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant accounting policies and estimates include: the useful lives of fixed assets, revenue recognition, allowances for doubtful accounts, leases, reserves for employee health benefit obligations, stock-based

12

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

compensation, and other contingencies.  Actual results could differ from these estimates. For greater detail regarding these accounting policies and estimates, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Segment and Geographic Information

The Company’s chief operating decision maker is our Chief Executive Officer, who reviews financial information presented on a company-wide basis. As a result, the Company determined that it has a single reporting segment and operating unit structure.

All of the Company’s revenue for the three and nine months ended September 30, 2015 and 2014 was earned in the United States.

Cash and Cash Equivalents and Concentrations of Risk

The Company includes all securities with a maturity date of six months or less at date of purchase as cash equivalents. The Company currently has no cash equivalents. The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant risk related to uninsured bank deposits.

Restricted Cash

The Company is required to restrict cash for letters of credit related to the Master Funding and Development Agreements, as amended, for the first $250.0 million in facility fundings. See Note 11 (Commitments and Contingencies) for more information. Each letter of credit is issued in an amount equal to approximately 50% of one year's base rent relating to completed facilities. As of September 30, 2015 and December 31, 2014, total restricted cash was $9.2 million and $4.8 million, respectively. 

Patient Revenue and Accounts Receivable

Revenues consist primarily of net patient service revenues, which are based on the facilities’ established billing rates less allowances and discounts, principally for patients covered under contractual programs with private insurance companies. Revenue is recognized when services are rendered to patients. Charges for all services provided to insured patients are initially billed and processed by the patients' insurance provider. The Company has agreements with insurance companies that provide for payments to the Company at amounts different from its established rates or as determined by the patient's out of network benefits. Differences between established rates and those set by insurance programs, as well as charity care, employee and prompt pay adjustments, are recorded as adjustments directly to patient service revenue. Amounts not covered by the insurance companies are then billed to the patients. Estimated uncollectible amounts from insured patients are recorded as bad debt expense in the period the services are provided. Collection of payment for services provided to patients without insurance coverage is done at the time of service.

With respect to management and contract service revenues, amounts are recognized as services are provided. The Company is party to two management services agreements under which it provides management services to a hospital facility and freestanding emergency room facilities. As compensation for these services, the Company charges the managed entities a management fee based on a fixed percentage of each entity’s net revenue. The Company also holds minority ownership in these entities.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Net patient service revenue by major payor source for the three and nine months ended September 30, 2015 and 2014 were as follows (in thousands):  

	Three months ended				Nine months ended
	September 30,				September 30,
	2015		2014		2015		2014
Medicare	$	—	$	—	$	—	$	—
Medicaid		—		—		—		—
Commercial		98,617		65,019		292,972		159,755
Self-pay		1,442		1,059		5,433		2,798
Other		1,195		455		3,114		455
Patient Service Revenue		101,254		66,533		301,519		163,008
Provision for bad debt		(17,907)		(8,934)		(50,365)		(22,390)
Net Patient Service Revenue	$	83,347	$	57,599	$	251,154	$	140,618

The Company receives payments from third-party payors that have contracts with the Company in Texas and Colorado prior to the contribution of its Colorado facilities to the joint venture with University of Colorado Health (“UCHealth”) as further described in Note 4. As of September 30, 2015, the Company has a contract with Blue Cross Blue Shield of Texas and two MultiPlan arrangements whereby the Company accesses a number of third-party payors at in-network rates. Four major third-party payors accounted for 85.4%,  84.8%,  85.5% and 84.7% of patient service revenue for the three and nine months ended September 30, 2015 and 2014, respectively. These same payors also accounted for 77.9% and 80.0% of accounts receivable as of September 30, 2015 and December 31, 2014, respectively. The following table sets forth the percentage of patient service revenue earned by major payor source:

	Three months ended				Nine months ended
	September 30,				September 30,
	2015		2014		2015		2014
Payor:
United HealthCare	31.2	%	23.4	%	29.7	%	23.8	%
Blue Cross Blue Shield	21.8		27.1		22.7		27.7
Aetna	18.8		19.6		19.4		19.1
Cigna	13.6		14.7		13.7		14.1
Other	14.6		15.2		14.5		15.3
	100.0	%	100.0	%	100.0	%	100.0	%

Accounts receivable are reduced by an allowance for doubtful accounts. In establishing the Company's allowance for doubtful accounts, management considers historical collection experience, the aging of the account, the payor classification, and patient payment patterns. Amounts due directly from patients represent the Company's highest collectability risk. There were not any significant changes in the estimates or assumptions underlying the calculation of the allowance for doubtful accounts for the three and nine months ended September 30, 2015 and 2014.

The Company treats anyone that is emergent, including patients that may be eligible for Medicare or Medicaid. These services are provided at no charge to the patient. Total charity care was approximately 12.2%,  10.1%,  10.0% and 8.8% of patient service revenue for the three and nine months ended September 30, 2015 and 2014, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Advertising Costs

Advertising costs are expensed as incurred. Advertising expense for the three and nine months ended September 30, 2015 and 2014, was approximately $1.6 million,  $1.7 million, $3.9 million and $3.5 million, respectively, and is included as a component of general and administrative expenses within the unaudited condensed consolidated statements of operations.

Medical Supplies Inventory

Inventory is carried at the lower of cost or market using the first-in, first-out method and consists of a standard set of medical supplies held in stock at all facilities. 

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization computed using the straight-line method over the estimated useful life of each asset. Leasehold improvements are amortized over the shorter of the noncancelable lease term or the estimated useful life of the improvements. When assets are retired, the cost and applicable accumulated depreciation are removed from the respective accounts, and the resulting gain or loss is recognized. Expenditures for normal repairs and maintenance are expensed as incurred. Material expenditures that increase the life of an asset are capitalized and depreciated over the estimated remaining useful life of the asset.

Amortization of assets acquired under capital leases is included as a component of depreciation and amortization expense in the accompanying unaudited condensed consolidated statements of operations. Amortization is calculated using the straight-line method over the shorter of the useful lives or the term of the underlying lease agreements.

Fair Value of Financial Instruments

The carrying amounts of the Company's financial instruments, including cash, receivables, accounts payable and accrued liabilities approximate their fair value due to their relatively short maturities. At September 30, 2015 and December 31, 2014, the carrying value of the Company's long-term debt was based on the current interest rates and approximates its fair value.

Derivative Instruments and Hedging Activities

The Company recognizes all derivative instruments as either assets or liabilities in the balance sheet at their respective fair values. For derivatives not designated as a hedging instrument, changes in the fair value are recorded in net earnings immediately. For derivatives designated in hedging relationships, changes in the fair value are either offset through earnings against the change in fair value of the hedged item attributable to the risk being hedged or recognized in accumulated other comprehensive income, to the extent the derivative is effective at offsetting the changes in cash flows being hedged until the hedged item affects earnings.

The Company only enters into derivative contracts that it intends to designate as a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). For all hedging relationships, the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged, how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method used to measure ineffectiveness. The Company also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. For

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Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or years during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

The Company discontinues hedge accounting prospectively when it determines that the derivative is no longer effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised or the cash flow hedge is dedesignated because a forecasted transaction is not probable of occurring.

In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in its fair value in earnings. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and recognizes immediately in earnings gains and losses that were accumulated in other comprehensive income related to the hedging relationship.

Lease Accounting

The Company determines whether to account for its facility leases as operating or capital leases depending on the underlying terms of the lease agreement. This determination of classification is complex and requires significant judgment relating to certain information including the estimated fair value and remaining economic life of the facilities, the Company's cost of funds, minimum lease payments and other lease terms. The lease rates under the Company's lease agreements are subject to certain conditional escalation clauses that are recognized when probable or incurred and are based on changes in the consumer price index or certain operational performance measures. As of September 30, 2015, the Company leased 73 facilities, 72 of which the Company classified as operating leases and one of which the Company classified as a capital lease.

Income Taxes

We provide for income taxes using the asset and liability method. This approach recognizes the amount of federal, state and local taxes payable or refundable for the current year, as well as deferred tax assets and liabilities for the future tax consequence of events recognized in the consolidated financial statements and income tax returns. Deferred income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates.

A valuation allowance is required when it is more-likely-than-not that some portion of the deferred tax assets will not be realized. Realization is dependent on generating sufficient future taxable income.

We file a consolidated federal income tax return. State income tax returns are filed on a separate, combined or consolidated basis in accordance with relevant state laws and regulations. LPs, LLPs, LLCs and other pass-through entities that we consolidate file separate federal and state income tax returns. We include the allocable portion of each pass-through entity’s income or loss in our federal income tax return. We allocate the remaining income or loss of each pass-through entity to the other partners or members who are responsible for their portion of the taxes.

Estimated tax expense (benefit) of approximately $0.8 million, $(0.1) million, $7.6 million and $0.1 million are included in the provision for income taxes in the financial statements for the three and nine months ended September 30, 2015 and 2014, respectively. The Company's estimate of the potential outcome of any uncertain tax positions is subject to management's assessment of relevant risks, facts, and circumstances existing at that time. The Company uses a more likely than not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

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Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

To the extent that the Company's assessment of such tax position changes, the change in estimate is recorded in the period in which the determination is made. The Company reports tax related interest and penalties as a component of the provision for income tax and operating expenses, respectively, if applicable. The Company has not recognized any uncertain tax positions.

Deferred Rent

The Company records rent expense for operating leases on a straight-line basis over the life of the related leases. The Company has certain facility and equipment leases that allow for leasehold improvements allowance, free rent, and escalating rental payments. Straight-line expenses that are greater than the actual amount paid are recorded as deferred rent and amortized over the life of the lease.

Variable Interest Entities

The Company follows the guidance in ASC 810-10-15-14 in order to determine if we are the primary beneficiary of a variable interest entity (“VIE”) for financial reporting purposes.  We consider whether we have the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and whether we have the obligation to absorb losses or the right to receive returns that would be significant to the VIE. We consolidate a VIE when we are the primary beneficiary of the VIE. At September 30, 2015, the Company determined that it has one joint venture interest which it considers a VIE for which it is not the primary beneficiary.  Accordingly, we account for this investment in joint venture using the equity method.

Investment in Unconsolidated Joint Ventures

Investments in unconsolidated companies in which the Company exerts significant influence but does not control or otherwise consolidate are accounted for using the equity method. As of September 30, 2015, the Company accounted for 14 freestanding facilities associated with our joint venture with University of Colorado Health and our Arizona hospital and its three freestanding departments associated with our joint venture with Dignity Health using the equity method. The Company has an ownership interest of 49.9% in each joint venture.

These investments are included as investment in unconsolidated joint ventures in the accompanying unaudited condensed consolidated balance sheets.

Equity in earnings of unconsolidated joint ventures consists of (i) the Company’s share of the income (loss) generated from its non-controlling equity investment in one full-service healthcare hospital facility and three freestanding emergency rooms in Arizona, and (ii) the Company’s preferred return and its share of the income (loss) generated from its non-controlling equity investment in 14 freestanding emergency rooms in Colorado. Because the operations are central to the Company’s business strategy, equity in earnings of unconsolidated joint ventures is classified as a component of operating income in the accompanying unaudited condensed consolidated statements of operations. The Company has contracts to manage the facilities, which results in the Company having an active role in the operations of the facilities and devoting a significant portion of its corporate resources to the fulfillment of these management responsibilities.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard will become effective for the Company on January 1, 2018. Early application is permitted to the original effective date of January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its

17

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation: Amendments to the Consolidation Analysis” (Topic 810). This standard modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2015 and requires either a retrospective or a modified retrospective approach to adoption. Early adoption is permitted.  We are currently evaluating the potential impact of this standard on our consolidated financial position, results of operations and cash flows.

In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs"(Subtopic 835-30), which changes the presentation of debt issuance costs in financial statements. ASU No. 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. ASU No. 2015-03 is effective for annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The new guidance will be applied retrospectively to each prior period presented. The Company will implement the provisions of ASU 2015-03 as of January 1, 2016.

We do not believe any other recently issued, but not yet effective, revisions to authoritative guidance will have a material effect on our condensed consolidated financial position, results of operations or cash flows.

NOTE 3—PROPERTY AND EQUIPMENT

Property and equipment consisted of the following (in thousands):

	September 30,		December 31,
	2015		2014
Leasehold improvements	$	72,757	$	77,354
Computer equipment		4,973		3,700
Medical equipment		4,110		4,213
Office equipment		4,963		4,307
Automobiles		243		243
Land		6,758		8,276
Construction in progress		603		8,835
Buildings		4,667		4,667
		99,074		111,595
Less accumulated depreciation		(26,717)		(17,703)
Property and equipment, net	$	72,357	$	93,892

Assets under capital leases totaled approximately $4.2 million as of September 30, 2015 and December 31, 2014, respectively, and were included within the buildings component of net property and equipment. Accumulated depreciation associated with these capital lease assets totaled approximately $0.5 million and $0.3 million as of September 30, 2015 and December 31, 2014, respectively. 

NOTE 4—INVESTMENT IN UNCONSOLIDATED JOINT VENTURES

Joint Venture with Dignity Health

On October 22, 2014, the Company announced its expansion into Arizona through a joint venture with Dignity Health, one of the nation’s largest health systems. The partnership started with Dignity Health Arizona General Hospital,

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Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

a full-service general hospital facility in Laveen, Arizona, and includes providing for additional access to emergency medical care in the Phoenix area. As of September 30, 2015, the joint venture with Dignity Health in Arizona has threefreestanding emergency departments in Arizona. 

Joint Venture with UCHealth

On April 21, 2015, the Company announced the formation of a joint venture with UCHealth to enhance access to emergency medical care in Colorado.  The Company contributed the 12 existing freestanding emergency rooms it held in Colorado and the related business associated with these facilities to the joint venture.  The contribution of the controlling interest in these facilities and their operations was deemed a change of control for accounting purposes, and as such, the Company has recorded a gain of $24.3 million on the contribution of the previously fully owned facilities during the nine months ended September 30, 2015. As of September 30, 2015, the joint venture had 14 freestanding facilities under the UCHealth partnership.

Pursuant to the terms of the joint venture agreement, the Company receives an annual preferred return up to a specified amount on its investment in the joint venture prior to proportionate distributions to the partners.

Joint Venture with Ochsner Health System

In September 2015, the Company announced the formation of a new partnership with New Orleans-based Ochsner Health System to enhance access to emergency medical care in Louisiana. The joint venture will include a hospital and multiple freestanding emergency departments in locations still to be determined.

The Company accounts for each of these joint ventures under the equity method of accounting as an investment in unconsolidated joint ventures, as the Company’s level of influence is significant but does not reach the threshold of controlling the entity.

The following summarizes the unaudited results of operations of our equity method investees, which represents 100% of their activities for the periods presented (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2015		2014		2015		2014
Statement of Operations Data:
Net patient service revenue		25,691		—		46,354		—
Total operating expenses		21,596		—		40,622		—
Net income	$	4,095	$	—	$	5,732	$	—

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Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 5—GOODWILL AND OTHER INTANGIBLE ASSETS

The following table summarizes the change in goodwill during the nine months ended September 30, 2015 (in thousands):  

Balance at December 31, 2014	$	61,009
Adjustments		—
Balance at September 30, 2015	$	61,009

The following table summarizes the change in intangible assets during the nine months ended September 30, 2015 (in thousands):

	Noncompete		Trade		Domain
	Agreements		Names		Names		Total
Balance at December 31, 2014	$	3,115	$	9,300	$	7,600	$	20,015
Additions		—		—		—		—
Amortization		(1,335)		—		—		(1,335)
Balance at September 30, 2015	$	1,780	$	9,300	$	7,600	$	18,680

NOTE 6—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

As of September 30, 2015, the Company maintained one interest rate cap agreement with notional amount totaling $37.5 million. This agreement has the economic effect of capping the LIBOR variable component of the Company's interest rate at a maximum of 3.00% on an equivalent amount of the Company's Term Loan debt. The cap agreement was entered into in November 2013 at a cost of $0.09 million and expires on November 30, 2016. This cap agreement is designated as a cash flow hedge and, as a result, changes in the fair values of this cap agreement are reported in other comprehensive income. As of September 30, 2015, approximately $0.1 million of deferred losses on derivative instruments are included in other comprehensive income. The cap agreement does not contain credit-risk contingent features.

The following table summarizes the Company's derivative instruments (in thousands):  

		September 30,		December 31,
		2015		2014
	Balance Sheet Location	Fair Value		Fair Value
Derivative designated as hedging instruments
Interest rate contracts	Other long-term assets	$	—	$	19

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Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7—ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following (in thousands):

	September 30,		December 31,
	2015		2014
Accounts payable	$	7,800	$	14,133
Accrued expenses		7,254		4,431
Accrued tax distribution to LLC Unit holders		4,246		4,246
Other		2,600		2,610
Total accounts payable and accrued expenses	$	21,900	$	25,420

NOTE 8—DEBT

The components of debt consisted of the following (in thousands):

	September 30,		December 31,
	2015		2014
Term loan	$	75,000	$	75,000
Delayed draw term loan		79,000		25,000
Revolving credit		—		5,500
Other financing agreements		652		1,298
		154,652		106,798
Less current maturities		(4,448)		(1,816)
	$	150,204	$	104,982

On October 31, 2013, the Company entered into a Senior Secured Credit Facility (the “Facility”) for a $75.0 million term loan which matures on October 31, 2018. The Facility includes an additional $165.0 million delayed draw term loan commitment, which expired in April 2015, and a $10.0 million revolving commitment that matures on October 31, 2018. All of the Company's assets are pledged as collateral under the Facility. The borrowing under the Facility is used by the Company to provide financing for working capital, capital expenditures and for new facility expansion and replaced the Company's existing credit facility.

On March 31, 2014, the Company amended the Facility to, among other things, increase the maximum aggregate amount permitted to be funded by Medical Properties Trust (“MPT”) under the MPT Agreements to $250.0 million. See Note 11 (Commitments and Contingencies) for more information.

On June 11, 2014, the Company entered into a second amendment to the Facility to, among other things, provide for a borrowing under the delayed draw term loan in an aggregate principal amount of up to $75.0 million, up to $60.0 million in principal amount of which will be used to make specified distributions and up to $10.0 million in principal amount of which will be used to repay certain revolving loans.  On June 11, 2014, the Company drew $75.0 million and made the $60.0 million dividend distribution on June 24, 2014.

On April 20, 2015, the Company amended the Facility to, among other things, increase the maximum aggregate amount permitted to be funded by MPT under the MPT Agreements to $500.0 million.

Borrowings under the Facility bear interest, at our option, at a rate equal to an applicable margin over (a) a base rate determined by reference to the highest of (1) the prime rate, (2) the federal funds effective rate plus 0.50% and (3) LIBOR for an interest period of one month plus 1%, or (b) LIBOR for the applicable interest period. The margin for

21

Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

the Facility is 6.50% in the case of base rate loans and 7.50% in the case of LIBOR loans. The Facility includes an unused line fee of 0.50% per annum on the revolving commitment and delayed draw term loan commitment, a draw fee of 1.0% of the principal amount of each borrowing on the delayed draw term loan and an annual Agency fee of $0.1 million. In April 2015, the Company drew $30.0 million on the delayed draw term loan prior to its expiration. At December 31, 2014, the Company had $80.2 million available under the delayed draw term commitment. The Company had approximately $9.5 million and $4.0 million available under the revolving commitment at September 30, 2015 and December 31, 2014, respectively.

The original principal amount of the term loan requires quarterly installments of $0.5 million on the last day of each fiscal quarter commencing with the fiscal quarter ending December 31, 2015 and escalating to $0.9 million for each fiscal quarter ending after December 31, 2016. The delayed draw term loan requires quarterly installments in an amount based on the repayment calculation contained in the Facility on the last day of each fiscal quarter commencing with the fiscal quarter ending December 31, 2015. The Company is required to repay the aggregate principal amount of all revolving loans outstanding on the maturity date, October 31, 2018.

The Facility contains certain affirmative covenants, negative covenants, and financial covenants which are measured on a quarterly basis. As of September 30, 2015, the Company was in compliance with all covenant requirements.

In June 2015, the Company entered into a twelve month finance agreement totaling approximately $0.8 million, with a fixed interest rate of 3.5%, to finance the renewal of certain insurance policies. In 2014, the Company entered into finance agreements totaling approximately $1.9 million to finance the renewal of certain insurance policies. The finance agreements have fixed interest rates ranging between 2.49% and 3.25% with principal being repaid over 9 to 11 months. In October 2013, the Company renewed certain insurance policies and entered into a finance agreement totaling approximately $0.8 million. The finance agreement has a fixed interest rate of 1.93% with principal being repaid over 9 months.

NOTE 9—TRANSACTIONS WITH RELATED PARTIES

The Company made payments to a significant shareholder of the Company for management services related to an advisory services agreement and reimbursement of certain expenses. The total amount paid to this related party was approximately $20,000,  $20,000,  $24,000 and $0.6 million for the three and nine months ended September 30, 2015 and 2014, respectively.  In connection with the consummation of the initial public offering, the advisory services agreement was terminated and the Company paid a one-time termination payment fee of $2.0 million in July 2014.

The Company made payments for contractor services to various related-party vendors, which totaled approximately $32,000,  $36,000,  $93,000 and $102,000 for the three and nine months ended September 30, 2015 and 2014, respectively.

NOTE 10—EMPLOYEE BENEFIT PLANS

The Company provides a 401(k) savings plan to all employees who have met certain eligibility requirements, including performing one month of service with the Company. The 401(k) plan permits matching and discretionary employer contributions. During the nine months ended September 30, 2015 and 2014, the Company contributed approximately $0.9 million and $0.5 million to the 401(k) Plan for 2014 and 2013 matching contributions, respectively.

22

Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 11—COMMITMENTS AND CONTINGENCIES

Litigation and Asserted Claims

The Company is a party to various legal proceedings arising in the ordinary course of business. While, management believes the outcome of pending litigation and claims will not have a material adverse effect on the Company's consolidated financial condition, operations, or cash flows, litigation is subject to inherent uncertainties. 

Insurance Arrangements

The Company is self-insured for employee health benefits. Accruals for losses are provided based upon claims experience and actuarial assumptions, including provisions for incurred but not reported losses. At September 30, 2015 and December 31, 2014, the Company has an accrual of approximately $0.8 million and $0.7 million, respectively, for incurred but not reported claims, which is included in accrued compensation within the condensed consolidated balance sheets.

The Company is insured for worker's compensation claims up to $1.0 million per accident and per employee with a policy limit of $1.0 million. The Company submits periodic payments to its insurance broker based upon estimated payroll. Worker's compensation expense for the three and nine months ended September 30, 2015 and 2014 was approximately $72,000,  $20,000,  $217,000 and $203,000. The Company is insured for professional liability claims up to $1.0 million per incident and $3.0 million per facility with an aggregate policy limit of $20.0 million.

Leases

The Company leases certain medical facilities and equipment under various noncancelable operating leases. In June 2013, the Company entered into an initial MPT Agreement (the “Initial MPT Agreement”) with an affiliate of Medical Properties Trust (“MPT”) to fund future facility development and construction. The lessor to the MPT Agreement will acquire parcels of land, fund the ground-up construction of new freestanding emergency room facilities and lease the facilities to the Company upon completion of construction. Under the terms of the agreement, the lessor is to fund all hard and soft costs, including the project purchase price, closing costs and pursuit costs for the assets relating to the construction of up to twenty-five facilities with a maximum aggregate funding of $100.0 million. Each completed project will be leased for an initial term of 15 years, with three 5-year renewal options. The Company follows the guidance in ASC 840, Leases, and ASC 810, Consolidation, in evaluating the lease as a build-to-suit lease transaction to determine whether the Company would be considered the accounting owner of the facilities during the construction period. In applying the accounting guidance, the Company concluded that the one facility completed in 2013 under this arrangement qualified for capitalization.

In July 2014, the Company entered into an additional Master Funding and Development Agreement (the “Additional MPT Agreement” and, together with the Initial MPT Agreement, the “MPT Agreements”) with MPT to fund future new freestanding emergency rooms and hospitals. This agreement is separate from and in addition to the Company’s Initial MPT Agreement. The Additional MPT Agreement allows for an additional maximum aggregate funding of $150.0 million. All other material terms remain consistent with the Initial MPT Agreement.

On April 20, 2015, the Company entered into an amendment to the Additional MPT Agreement which adds an additional aggregate funding of $250.0 million, increasing the maximum aggregate funding under all of the MPT Agreements to $500.0 million. All newly constructed facilities under the MPT Agreements will have initial terms of 15 years, with three five-year renewal options.

In addition to the MPT Agreements, the Company has entered into similar agreements with certain developers to fund and lead the development efforts on the construction of future facilities. As of September 30, 2015, the Company

23

Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

had total receivables of $11.3 million from the lessor to the MPT agreements and certain other developers for soft costs incurred for facilities currently under development.

The Company leases approximately 80,000 square feet for its corporate headquarters. Lease expense associated with this lease was $0.4 million, $0.4 million, $1.2 million and $1.0 million for the three and nine months ended September 30, 2015 and 2014, respectively.

Future minimum lease payments required under noncancelable operating leases and future minimum, capital lease payments as of September 30, 2015 were as follows (in thousands):  

	Capital		Operating
Years ending December 31,	leases		leases
2015 (3 months)	$	131	$	10,255
2016		533		40,510
2017		543		38,209
2018		554		33,965
2019		565		28,124
Thereafter		5,512		271,019
Total future minimum lease payments	$	7,838	$	422,082
Less: Amounts representing interest		(3,761)
Present value of minimum lease payments		4,077
Current portion of capital lease obligations		96
Long-term portion of capital lease payments	$	3,981

Rent expense totaled approximately $7.8 million, $3.8 million, $22.1 million and $8.7 million for the three and nine months ended September 30, 2015 and 2014, respectively and is included as a component of other operating expenses within the unaudited condensed consolidated statements of operations.  The Company has sublease agreements with the joint ventures in Arizona and Colorado, under which the Company subleases certain freestanding emergency room facilities, ground leases and equipment leases to the joint ventures.  Under these agreements, the Company received $3.6 million and $6.8 million during the three and nine months ended September 30, 2015, respectively, as rental income which is accounted for as a reduction of rent expense.

NOTE 12—SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information and supplemental noncash activities consisted of the following for the nine months ended September 30 (in thousands):

	September 30, 2015		September 30, 2014
Supplemental cash flow information:
Interest paid	$	10,147	$	6,715
Taxes paid		1,650		581
Supplemental noncash activities:
Acquisition of property and equipment in accounts payable and accrued expenses	$	—	$	3,642
Assets acquired through capital lease		—		287
Note payable for other financing agreements		818		662
Contribution of assets to joint venture		12,027		—
Accrual of owner distributions		—		474

24

Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 13—STOCK BASED COMPENSATION

In connection with the initial public offering, the Company’s Board of Directors adopted the Adeptus Health Inc. 2014 Omnibus Incentive Plan (the “Omnibus Incentive Plan”).  The Omnibus Incentive Plan provides for the granting of stock options, restricted stock and other stock-based or performance-based awards to directors, officers, employees, consultants and advisors of the Company and its affiliates. The total number of shares of Class A common stock that may be issued under the Omnibus Incentive Plan is 1,033,500.  At September 30, 2015, 192,120 stock-based awards had been issued under the Omnibus Incentive Plan (excluding forfeitures) and 841,380 stock-based awards remained available for equity grants.

The Company did not issue any restricted shares of Class A common stock during the three months ended September 30, 2015.  During the three months ended September 30, 2014, the Company issued 35,856 restricted shares of Class A common stock.The fair value of these restricted shares of Class A common stock issued during the three months ended September 30, 2014 was $25.10 per share, and these shares vest over a period of six months to 4 years.  During the nine months ended September 30, 2015 and 2014, the Company issued 149,741 and 47,790 restricted shares of Class A common stock, respectively. The fair value of these restricted shares of Class A common stock issued during the nine months ended September 30, 2015 ranged from $35.03 to $93.72 per share, and these shares vest over a period of six months to 4 years.  The fair value of these restricted shares of Class A common stock issued during the nine months ended September 30, 2014 ranged from $22.00 to $25.10 per share, and these shares vest over a period of six months to 4 years.

The Company also has one legacy equity-compensation plan, under which it has issued agreements awarding incentive units (restricted units) in the Company to certain employees and non-employee directors. In conjunction with the Reorganization Transactions, these restricted units were replaced with LLC Units with consistent restrictive terms. The restricted units are subject to such conditions as continued employment, passage of time and/or satisfaction of performance criteria as specified in the agreements. The restricted units vest over 3 to 4 years from the date of grant. The Company used a waterfall calculation, based on the capital structure and payout of each class of debt and equity, and a present value pricing model less marketability discount to determine the fair values of the restricted units. The Company did not issue any incentive units under the legacy plan during the three and nine months ended September 30, 2015 and 2014.

The Company recorded compensation expense of $0.8 million, $0.4 million, $1.8 million and $0.7 million, adjusted for forfeitures, during the three and nine months ended September 30, 2015 and 2014, respectively, related to restricted units with time-based vesting schedules. Compensation expense for the value of the portion of the time-based restricted unit that is ultimately expected to vest is recognized using a straight-line method over the vesting period, adjusted for forfeitures.  On February 18, 2015, our Board of Directors accelerated the vesting of all performance-based units. As a result of the acceleration, the Company recognized $0.1 million of additional stock-based compensation expense for the nine months ended September 30, 2015.

14. INCOME TAXES

The Company makes estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes.

The Company’s provision for income taxes in interim periods is based on our estimated annual effective tax rate. The estimated annual effective tax rate calculation does not include the effect of discrete events that may occur during the year. The effect of these events, if any, is recorded in the quarter in which the event occurs.

25

Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Prior to the Reorganization, we were not a federal taxpayer. The Company’s effective tax rate for the period differs from the statutory rates due primarily to state taxes that are not based on pre-tax income/(loss) but on gross margin resulting in state tax expense with little relation to pre-tax income and even in periods of pretax losses.

The Company’s deferred tax assets of $203.3  million are composed of $201.6 million due to the underlying basis difference in Adeptus Health LLC established upon exchanges of LLC Units to Class A common stock and the liability associated with the tax receivable agreement and $1.7 million related to other temporary differences.

Tax Receivable Agreement

Upon the consummation of the Company’s initial public offering, the Company entered into a tax receivable agreement with the LLC Unit holders after the closing of the offering that provides for the payment from time to time by the Company to the LLC Unit holders of 85% of the amount of the benefits, if any, that the Company is deemed to realize as a result of increases in tax basis and certain other tax benefits related to exchanges of LLC Units pursuant to the exchange agreement, including tax benefits attributable to payments under the tax receivable agreement. These payment obligations are obligations of the Company; however, payments to LLC Unit holders will only be paid as tax benefits for the Company are realized. For purposes of the tax receivable agreement, the benefit deemed realized by the Company was computed by comparing its actual income tax liability (calculated with certain assumptions) to the amount of such taxes that the Company would have been required to pay had there been no increase to the tax basis of the assets of Adeptus Health LLC as a result of the exchanges and had the Company not entered into the tax receivable agreement. The step-up in basis will depend on the fair value of the LLC Units at conversion.

 As of September 30, 2015, the Company has recorded an estimated payable pursuant to the tax receivable agreement of $187.6 million related to exchanges of LLC Units in connection with public offerings and other exchanges that are expected to give rise to certain tax benefits in the future.

15. NET INCOME (LOSS) PER SHARE

Prior to the consummation of the Company’s initial public offering, the Company did not have outstanding common stock. However, in conjunction with the closing of the initial public offering, an existing owner exchanged their LLC Units for shares of the Company’s Class A common stock.  Basic net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by using the weighted average number of common shares outstanding, including potential dilutive shares of common stock assuming the dilutive effect of outstanding stock options and restricted stock using the treasury stock method.

26

Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table sets forth the computation of basic and diluted net income (loss) per common share:

	Three months ended				Nine months ended
	September 30,				September 30,
	2015		2014		2015		2014
Numerator
Net income (loss) attributable to Adeptus Health Inc.	$	674	$	(1,597)	$	11,902	$	(3,613)
Denominator:
Denominator for basic net income (loss) per Class A common share-weighted average shares		13,236,064		9,845,016		11,377,557		9,845,016
Effect of dilutive securities:
Restricted shares		—		—		—		—
Denominator for diluted net income (loss) per Class A common share-weighted average shares		13,236,064		9,845,016		11,377,557		9,845,016
Net income (loss) attributable to Adeptus Health Inc. per Class A common share - Basic	$	0.05	$	(0.16)	$	1.05	$	(0.37)
Net income (loss) attributable to Adeptus Health Inc. per Class A common share - Diluted	$	0.05	$	(0.16)	$	1.05	$	(0.37)

Earnings per share information is not applicable for reporting periods prior to the initial public offering. The shares of Class B common stock do not share in the earnings or losses of Adeptus Health Inc. and are therefore not participating securities. Accordingly, basic and diluted net loss per share of Class B common stock has not been presented.

16. SUBSEQUENT EVENTS

On October 6, 2015, the Company entered into a senior secured credit facility (the “New Facility”) for a $125.0 million term loan and a $50.0 million revolving facility. The New Facility matures on October 6, 2020. The revolving credit facility includes a sub-limit of $15.0 million for letters of credit and a sub-limit of $5.0 million for swing line loans. In addition, the New Facility contains an option to borrow up to an additional $50.0 million under certain conditions. All of the assets of the Company’s subsidiaries are pledged as collateral under the New Facility, and such subsidiaries guarantee the New Facility. Borrowings under the New Facility replace the Company’s existing credit facility and will be used by the Company to provide financing for working capital and capital expenditures.

Borrowings under the New Facility bear interest, at our option, at a rate equal to an applicable margin over (a) a base rate determined by reference to the highest of (1) the prime rate, (2) the federal funds effective rate plus 0.50% and (3) LIBOR for an interest period of one month plus 1%, or (b) LIBOR for the applicable interest period. The applicable margin for the New Facility ranges, based on our consolidated net leverage ratio, from 2.25% to 3.00% in the case of base rate loans and from 3.25% to 4.00% in the case of LIBOR loans. The New Facility includes an unused line fee ranging, based on our consolidated net leverage ratio, from 0.40% to 0.50% per annum on the revolving commitment.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the respective condensed consolidated financial statements and related footnotes of Adeptus Health Inc. included in Part I of this Quarterly  Report on Form 10-Q, as well as our consolidated audited financial statements and related notes included in our 2014 Annual Report on Form 10-K . This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those discussed in the section herein entitled “Forward Looking Statements” and in the section of the 2014 Annual Report on Form 10-K entitled Part I, "Item 1.A. Risk Factors.”

Overview

We are a patient-centered healthcare organization providing emergency medical care through the largest network of freestanding emergency rooms in the United States and partnerships with leading healthcare systems. We own and operate First Choice Emergency Rooms in Texas and UCHealth Emergency Rooms in partnership with University of Colorado Health in Colorado.  Together with Dignity Health, the company also operates Dignity Health Arizona General Hospital and freestanding emergency departments in Arizona.  Adeptus Health is the largest and oldest network of freestanding emergency rooms in the United States. We have experienced rapid growth in recent periods, growing from 14 freestanding facilities at the end of 2012 to 55 freestanding facilities at the end of 2014 and to 74 freestanding facilities as of September 30, 2015. We own and/or operate facilities currently located in the Houston, Dallas/Fort Worth, San Antonio and Austin, Texas markets, as well as in the Colorado Springs and Denver, Colorado and Phoenix, Arizona markets. By the end of 2015, we expect to be operating 79 freestanding facilities and two hospitals in our target markets.

Since our founding in 2002, our mission has been to address the need within our local communities for immediate and convenient access to quality emergency care in a patient-friendly, cost-effective setting. We believe we are transforming the emergency care experience with a differentiated and convenient care delivery model which improves access, reduces wait times and provides high-quality clinical and diagnostic services on-site. Our facilities are fully licensed and provide comprehensive, emergency care with an acuity mix that we believe is comparable to hospital-based emergency rooms.

Initial Public Offering

On June 30, 2014, we completed our initial public offering of 5,321,414 shares of our Class A common stock at a price to the public of $22.00 per share and received net proceeds of approximately $96.2 million, after deducting underwriting discounts and commissions and offering expenses. We used the net proceeds from the initial public offering to purchase limited liability company units of Adeptus Health LLC, or LLC Units, from Adeptus Health LLC. Adeptus Health LLC used the proceeds it received as a result of our purchase of LLC Units to cause First Choice ER, LLC to reduce outstanding borrowings under its senior secured credit facility, to make a $2.0 million one-time payment to an affiliate of a significant stockholder in connection with the termination of an advisory services agreement and for general corporate purposes. An additional 313,586 shares were also sold by an affiliate of a significant stockholder.

Secondary Offerings

On May 11, 2015, we completed a public offering of 1,572,296 shares of our Class A common stock at a price to the public of $63.75 per share and received net proceeds of approximately $94.5 million, after deducting underwriting discounts and commissions and offering expenses. We used the net proceeds from the offering to purchase, for cash, 1,572,296 LLC Units. An additional 842,704 shares were also sold by an affiliate of a significant stockholder.

On July 29, 2015, we completed a public offering of 2,645,277 shares of our Class A common stock at a price to the public of $105.00 per share and received net proceeds of approximately $265.9 million, after deducting underwriting discounts and commissions and offering expenses. We used the net proceeds from the offering to purchase, for cash, 2,645,277 LLC Units. An additional 1,264,723 shares were also sold by an affiliate of a significant stockholder.

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Industry Trends

The emergency room remains a critical access point for millions of Americans who experience sudden serious illness or injury in the United States each year. The availability of that care is under pressure and threatened by a wide range of factors, including shrinking capacity and an increasing demand for services. According to AHA, from 1992 to 2012, the number of emergency room visits increased by 46.7%, while the number of emergency departments decreased by 11.4%. The number of emergency room visits exceeded 130 million in 2012, or approximately 247 visits per minute, and care previously provided in inpatient settings is now increasingly being provided in emergency departments.

Factors affecting access to emergency care include availability of emergency departments, capacity of emergency departments, and availability of staffing in emergency departments. ACEP's National Report Card on U.S. emergency care rates the access to emergency care category with a near-failing grade of "D-" and a grade of "D+" for the overall emergency room system. As the largest operator of freestanding emergency rooms, we believe we are an essential part of the solution, providing access to high-quality emergency care and offering a significantly improved patient experience relative to traditional hospital emergency departments.

Key Revenue Drivers

Our revenue growth is primarily driven by facility expansion, increasing patient volumes and reimbursement rates.

Facility Expansion

We add new facilities based on capacity, location, demographics and competitive considerations. We expect the new facilities we open to be the primary driver of our revenue growth. Our results of operations have been and will continue to be materially affected by the timing and number of new facility openings and the amount of new facility opening costs incurred. A new facility builds its patient volumes over time and, as a result, generally has lower revenue than our more mature facilities. A new facility generally takes up to 12 months to achieve a level of operating performance comparable to our similar existing facilities.

Patient Volume

We generate revenue by providing emergency care to patients based upon the estimated amounts due from commercial insurance providers, patients and other third-party payors. Revenue per treatment is sensitive to the mix of services used in treating a patient. Our patient volumes are directly correlated to our new facility openings, our targeted marketing efforts and external factors such as severity of annually recurring viruses that lead to increases in patient visits. Revenue is recognized when services are rendered to patients.

Patient volume is supported through marketing programs focused on educating communities about the convenient and high-quality emergency care we provide. Through our targeted marketing campaigns, which include direct mail, radio, outdoor advertising, digital and social media, we aim to increase our patient volumes by reaching a broad base of potential patients in order to increase brand awareness. We also have a dedicated field marketing team that works to educate local communities in which we operate about the access and care available at our facilities. Our dedicated field marketing team targets specific audiences by attending local chamber of commerce meetings, meeting with primary care physicians and visiting with school nurses and athletic directors, in order to increase patient volumes within a facility's local community.

Our patient volume is also influenced by conditions that may be beyond our direct control, some of which are seasonal. These conditions include the timing, location and severity of influenza, allergens and other annually recurring viruses, which at times leads to severe upper respiratory concerns.

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Reimbursement Rates and Acuity Mix 

The majority of our net patient revenue is derived from patients with commercial health insurance coverage. The reimbursement rates set by third-party payors tend to be higher for higher acuity visits, reflecting their higher complexity. Consistent with billing practices at all emergency rooms and in light of the fact our facilities are open 24 hours a day, seven days a week and staffed with Board-certified physicians, we bill payors a facility fee, a professional services fee and other related fees. The reimbursement rates we have been able to negotiate have held relatively stable; however, the mix of both acuity and payors can vary period to period, changing the overall blended reimbursement rate. With select payors, we have the ability to make annual increases in our billed amounts.

Seasonality

Our patient volumes are sensitive to seasonal fluctuations in emergency activity. Typically, winter months see a higher occurrence of influenza, bronchitis, pneumonia and similar illnesses; however, the timing and severity of these outbreaks can vary dramatically. Additionally, as consumers shift towards high deductible insurance plans, they are responsible for a greater percentage of their bill, particularly in the early months of the year before other healthcare spending has occurred, which may lead to an increase in bad debt expense during that period. Our quarterly operating results may fluctuate significantly in the future depending on these and other factors.

Sources of Revenue by Payor

We receive payments for services rendered to patients from third-party payors or from our patients directly, as described in more detail below. Generally, our revenue is determined by a number of factors, including the payor mix, the number and nature of procedures performed and the rate of payment for the procedures.

Patient service revenue before the provision for bad debt by major payor source for the periods indicated is as follows (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2015		2014		2015		2014
Medicare	$	—	$	—	$	—	$	—
Medicaid		—		—		—		—
Commercial		98,617		65,019		292,972		159,755
Self-pay		1,442		1,059		5,433		2,798
Other		1,195		455		3,114		455
Patient Service Revenue		101,254		66,533		301,519		163,008
Provision for bad debt		(17,907)		(8,934)		(50,365)		(22,390)
Net Patient Service Revenue	$	83,347	$	57,599	$	251,154	$	140,618

Four major third-party payors accounted for 85.4%,  84.8%, 85.5% and 84.7%, of our patient service revenue for the three and nine months ended September 30, 2015 and 2014, respectively. These same payors also accounted for 77.9% and 80.0% of our accounts receivable as of September 30, 2015 and December 31, 2014, respectively.

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The following table presents a breakdown by major payor source of the percentage of net patient revenues for the periods indicated:

	Three months ended				Nine months ended
	September 30,				September 30,
	2015		2014		2015		2014
Payor:
United HealthCare	31.2	%	23.4	%	29.7	%	23.8	%
Blue Cross Blue Shield	21.8		27.1		22.7		27.7
Aetna	18.8		19.6		19.4		19.1
Cigna	13.6		14.7		13.7		14.1
Other	14.6		15.2		14.5		15.3
	100.0	%	100.0	%	100.0	%	100.0	%

Third-Party Payors

Third-party payors include health insurance companies as well as related payments from patients for deductibles and co-payments and have historically comprised the vast majority of our patient service revenue. We enter into contracts with health insurance companies and other health benefit groups by granting discounts to such organizations in return for the patient volume they provide.

Most of our commercial revenue is attributable to contracts where a fee is negotiated relative to the service provided at our facilities. Our contracts are structured as either case-rate contracts or as discounts to billed charges. In a case rate contract, a set fee is assigned to visits based on acuity level. We also enter into contracts with payors based on a discount of our billed charges. There are contracted rates for both the professional component and the technical component. Each portion of the claim is billed separately and paid based on the patient's emergency room benefits received.

Freestanding emergency room facilities, like hospital emergency rooms, are full-service emergency rooms licensed by the states of Texas,  Colorado and Arizona. As such, we collect the emergency room benefits based on a patient's specific insurance plan. Additionally, Texas insurance law provides that all fully funded insurance plans should pay all emergency claims at the in-network benefit rate, regardless of the provider's contract status.

Self-Pay

Self-pay consists of out-of-pocket payments for treatments by patients not otherwise covered by third-party payors. For the three and nine months ended September 30, 2015 and 2014, self-pay payments accounted for 1.4%, 1.6%, 1.8% and 1.7% of our patient service revenue, respectively.

Charity Care

Charity care consists of the write-off of all charges associated with patients who are treated but do not have commercial insurance or the ability to self-pay. This includes all charges associated with care provided to patients covered by Medicare and/or Medicaid, as we do not currently receive reimbursements under those programs in Texas and Colorado. For the three and nine months ended September 30, 2015 and 2014, charity care write-offs represented 12.2%,  10.1%,  10.0% and 8.8%, of our patient service revenue, respectively. 

Key Performance Measures

The key performance measures we use to evaluate our business focus on the number of patient visits, or patient volume, same-store revenue and Adjusted EBITDA. As a result of our strategy of partnering with Dignity Health in

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Arizona and University of Colorado Health in Colorado, we review unconsolidated facility revenues and also manage our facilities utilizing certain supplemental systemwide growth metrics, including systemwide same-store revenue, systemwide net patient services revenue and systemwide patient volume.

Patient Volume

We utilize patient volume to forecast our expected net revenue and as a basis by which to measure certain costs of the business. We track patient volume at the facility level. The number of patients we treat is influenced by factors we control and also by conditions that may be beyond our direct control. See "—Key Revenue Drivers."

Systemwide Same-Store Revenue

We begin comparing systemwide same-store revenue for a new facility on the first day of the 16th full fiscal month following the facility's opening, which is when we believe systemwide same-store comparison becomes meaningful. When a facility is relocated, we continue to include revenue from that facility in systemwide same-store revenue. Systemwide same-store revenue allows us to evaluate how our facility base is performing by measuring the change in period-over-period net revenue in facilities that have been open for 15 months or more. Various factors affect systemwide same-store revenue, including outbreaks of illnesses, changes in marketing and competition. Opening new facilities is an important part of our growth strategy. For the three months ended September 30, 2015, our systemwide same-store revenue grew by 19.7% to $51.6 million from $43.1 million for the three months ended September 30, 2014.  For the nine months ended September 30, 2015, our systemwide same-store revenue grew by 18.6% to $130.7 million from $110.2 million for the nine months ended September 30, 2014. These new facilities, within 15 months after opening, generally have historically generated approximately $5.0 million to $6.0 million in annual net revenue and on average have historically incurred approximately $3.6 million to $4.0 million in annual operating expenses. On that basis, our average annual estimated operating income, excluding depreciation and amortization, for such facilities has historically been between $1.0 million and $2.0 million, which would represent a facility operating margin, excluding depreciation and amortization, of between approximately 28% and 33%. As we continue to pursue our growth strategy, we anticipate that a significant percentage of our revenue will come from stores not yet included in our systemwide same-store revenue calculation.

Systemwide Net Patient Services Revenue

The revenues and expenses of equity method facilities are not directly included in our consolidated GAAP results. Only the (i) Company’s share of the income (loss) generated from its non-controlling equity investment in one full-service healthcare hospital facility and three freestanding emergency rooms in Arizona, and (ii) the Company’s preferred return and its share of the income (loss) generated from its non-controlling equity investment in 14 freestanding emergency rooms in Colorado is reported on a net basis in the line item Equity in earnings of unconsolidated joint ventures. Because of this, management supplementally focuses on non-GAAP systemwide results, which measure results from all our facilities, including revenues from our consolidated facilities and our equity method facilities (without adjustment based on our percentage of ownership). Systemwide net patient services revenues is a non-GAAP measure of our financial performance, as it includes revenue from our unconsolidated facilities as if they were consolidated, and should not be considered as an alternative to net patient service revenue as a measure of financial performance, or any other performance measure derived in accordance with GAAP. We believe the presentation of systemwide net patient service revenue provides supplemental information regarding our financial performance as it includes revenue earned by all of our affiliated facilities, regardless of consolidation.

For the three months ended September 30, 2015, systemwide net patient services revenue grew by 89.2% to $109.0 million for the three months ended September 30, 2015, from $57.6 million for the three months ended September 30, 2014.  The growth in systemwide net patient services revenue was primarily attributable to the impact of increased patient volumes from the expansion of the number of freestanding facilities from 51 to 74 and annual gross charge increases, coupled with opening Dignity Health Arizona General Hospital, a full service general hospital located in Laveen, Arizona. For the three months ended September 30, 2015, systemwide patient volume grew by 54.2% to 60,926 compared to 39,522 for the three months ended September 30, 2014.

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For the nine months ended September 30, 2015, systemwide net patient services revenue grew by 111.6% to $297.5 million for the nine months ended September 30, 2015, from $140.6 million for the nine months ended September 30, 2014. The growth in systemwide net patient services revenue was primarily attributable to the impact of increased patient volumes from the expansion of the number of freestanding facilities from 51 to 74 and annual gross charge increases, coupled with opening Dignity Health Arizona General Hospital, a full service general hospital located in Laveen, Arizona. For the nine months ended September 30, 2015, systemwide patient volume grew by 71.2% to 168,446 compared to 98,415 for the nine months ended September 30, 2014.

The following table sets forth a reconciliation of our systemwide net patient services revenue for the periods indicated (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2015		2014		2015		2014
Net Patient Services Revenue:
Consolidated facilities	$	83,347	$	57,599	$	251,154	$	140,618
Unconsolidated joint ventures		25,691		—		46,354		—
Systemwide net patient services revenue	$	109,038	$	57,599	$	297,508	$	140,618

⁽¹⁾ Net patient services revenue from our Colorado facilities is included as consolidated facilities revenue until consummation of the UCHealth joint venture on April 20, 2015. 

Adjusted EBITDA

We define Adjusted EBITDA as net income before interest, taxes, depreciation, and amortization, further adjusted to eliminate the impact of certain additional items, including advisory services paid to a significant shareholder, facility pre-opening expenses, management recruiting expenses, stock compensation expense, costs associated with our  public offerings, gain recognized on the contribution and change of control of previously owned freestanding facilities to the joint venture with UCHealth and other non-recurring costs and gains that we do not consider in our evaluation of ongoing operating performance from period to period. Adjusted EBITDA is included in this Quarterly Report on Form 10-Q because it is a key metric used by management to assess our financial performance. We use Adjusted EBITDA to supplement GAAP measures of performance in order to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. Adjusted EBITDA is also frequently used by analysts, investors and other interested parties to evaluate companies in our industry.

Adjusted EBITDA is a non-GAAP measure of our financial performance and should not be considered as an alternative to net income (loss) as a measure of financial performance, or any other performance measure derived in accordance with GAAP, nor should it be construed as an inference that our future results will be unaffected by unusual or other items. In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation, such as preopening expenses, stock compensation expense, and other adjustments. Additionally, Adjusted EBITDA is not intended to be a measure of free cash flow for management's discretionary use, as it does not reflect certain cash requirements such as tax payments, debt service requirements, capital expenditures, facility openings and certain other cash costs that may recur in the future. Adjusted EBITDA contains certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized. Management compensates for these limitations by supplementally relying on our GAAP results in addition to using Adjusted EBITDA. Our presentation of Adjusted EBITDA is not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.

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The following table sets forth a reconciliation of our Adjusted EBITDA to net income (loss) using data derived from our condensed consolidated financial statements for the periods indicated (in thousands):  

	Three months ended		Nine months ended
	September 30,		September 30,
	2015	2014	2015	2014
Net income (loss)	$ 1,494	($3,598)	$ 30,769	($15,795)
Depreciation and amortization(a)	4,902	3,924	14,587	10,374
Interest expense(b)	3,753	2,635	10,925	9,160
Provision for income taxes	811	(116)	7,617	142
Gain on contribution to joint venture(c)	-	-	(24,250)	-
Advisory services agreement fees and expenses(d)	-	-	-	293
Preopening expenses(e)	5,102	3,098	9,191	6,107
Management recruiting expenses(f)	-	-	185	156
Stock compensation expense(g)	789	357	1,946	696
Public offering costs (h)	1,079	159	2,072	5,157
Other(i)	711	541	1,801	1,747
Total adjustments	17,147	10,598	24,074	33,832
Adjusted EBITDA	$ 18,641	$ 7,000	$ 54,843	$ 18,037

(a) Consists of the Company’s consolidated depreciation and amortization as well as our proportionate share of joint venture depreciation and amortization included in equity in earnings of unconsolidated joint ventures in the Condensed Consolidated Statement of Operations. 

(b) Consists of interest expense and fees of $3.8 million, $2.6 million, $10.9 million and $9.2 million for the three and nine months ended September 30, 2015 and 2014, respectively. 

(c) Consists of a gain recognized on the contribution and change of control of previously owned freestanding facilities to the joint venture with UCHealth.

(d) Consists of management fees and expenses paid to a significant shareholder under our Advisory Services Agreement. The Advisory Services Agreement was terminated in connection with the consummation of our initial public offering in June 2014.

(e) Includes labor, marketing costs and occupancy costs prior to opening a facility.

(f) Third-party costs and fees involved in recruiting our management team.

(g) Stock compensation expense associated with grants of management incentive units and restricted common stock.

(h) For the three and nine months ended September 30, 2015, we incurred cost of $1.1 million and $2.1 million, respectively, in conjunction with secondary public offerings.

For the three and nine months ended September 30, 2014, we incurred costs of $0.2 million and $5.2 million, respectively, in conjunction with our initial public offering, including $2.4 million in bonuses for certain members of management, $2.3 million in costs related to the termination of our Advisory Services Agreement and $0.5 million of other offering costs.

(i) For the three months ended September 30, 2015, we incurred costs to develop long-term strategic goals and objectives totaling $0.7 million. For the three months ended September, 2014, we incurred terminated real-estate development costs totaling approximately $0.1 million and costs to develop long-term strategic goals and objectives totaling approximately $0.4 million.

For the nine months ended September 30, 2015, we incurred costs to develop long-term strategic goals and objectives totaling $1.8 million. For the nine months ended September 30, 2014, we incurred costs to develop long-term strategic goals and objectives totaling approximately $1.1 million, terminated real-estate development costs totaling approximately $0.5 million and board fees and travel expenses paid to members of the board of directors totaling approximately $0.1 million.

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Results of Operations

Three Months Ended September 30, 2015 Compared to Three Months Ended September 30,  2014 

The following table summarizes our results of operations for the three months ended September 30, 2015 and 2014 (in thousands):

	Three months ended  September 30,
									Percentage of
					Change from prior				net patient
					period				service revenue
	2015		2014		$		%		2015		2014
Statement of Operations Data:
Revenue
Patient service revenue	$	101,254	$	66,533	$	34,721	52.2	%
Provision for bad debt		(17,907)		(8,934)		(8,973)	100.4
Net patient service revenue		83,347		57,599		25,748	44.7		100	%	100	%
Management and contract services revenue		4,865		—		4,865	—		5.8		—
Total net operating revenue		88,212		57,599		30,613	53.1		105.8		100.0
Equity in earnings of unconsolidated joint ventures		4,543		—		4,543	—		5.5		—
Operating expenses:
Salaries, wages and benefits		55,420		38,119		17,301	45.4		66.5		66.2
General and administrative		13,866		9,221		4,645	50.4		16.6		16.0
Other operating expenses		13,152		7,414		5,738	77.4		15.8		12.9
Depreciation and amortization		4,259		3,924		335	8.5		5.1		6.8
Total operating expenses		86,697		58,678		28,019	47.8		104.0		101.9
Income (loss) from operations		6,058		(1,079)		7,137	(661.4)		7.3		(1.9)
Other income (expense):
Interest expense		(3,753)		(2,635)		(1,118)	42.4		(4.5)		(4.6)
Total other income (expense)		(3,753)		(2,635)		(1,118)	42.4		(4.5)		(4.6)
Income (loss) before provision for income taxes		2,305		(3,714)		6,019	(162.1)		2.8		(6.4)
Provision for income taxes		811		(116)		927	(799.1)		1.0		(0.2)
Net income (loss)	$	1,494	$	(3,598)	$	5,092	(141.5)	%	1.8	%	(6.2)	%

Overall

Our results for the three months ended September 30, 2015 reflect a 53.1% increase in net operating revenue to  $88.2 million and net income of $1.5 million compared to a  net loss of $3.6 million for the three months ended September 30,  2014. The net income is primarily attributable to a $30.6 million increase in net operating revenue coupled with $4.5 million in earnings of unconsolidated joint ventures, partially offset by a $28.0 million increase in salaries, wages, benefits and other costs related to our growth initiatives, an increase in the provision for income tax of $0.9 million and an increase in interest expense of $1.1 million.

Revenue

Patient Service Revenue

Patient service revenue increased by $34.7 million, or 52.2%, to $101.3 million for the three months ended September 30, 2015, from $66.5 million for the three months ended September 30, 2014. This increase was primarily attributable to an increase in patient volumes generated from new facilities and gross charge increases in late February

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2015. This increase was partially offset by deconsolidation of revenues associated with freestanding facilities contributed to the UCHealth joint venture in April 2015.

Provision for Bad Debt

Our provision for bad debt increased by $9.0 million to $17.9 million for the three months ended September 30, 2015, from $8.9 million for the three months ended September 30, 2014. Of this increase, $3.0 million was attributable to revenue generated from new facilities, an increase in patient volume and a continued shift in insurance plans to high deductible plans.

Net Patient Service Revenue

As a result of the factors described above, our net patient service revenue increased by $25.7 million, or 44.7%, to $83.3 million for the three months ended September 30, 2015, from $57.6 million for the three months ended September 30, 2014.

Management and Contract Services Revenue

The Company recorded $4.9 million in management and contract services revenue for the three months ended September 30, 2015 as a result of entering into joint ventures with Dignity Health in October 2014 and UCHealth in April 2015.

Equity in Earnings of Unconsolidated Joint Ventures

The Company recorded $4.5 million in equity in earnings of unconsolidated joint ventures for the three months ended September, 2015 as a result of entering into joint ventures with Dignity Health in October 2014 and UCHealth in April 2015.

Operating Expenses

Salaries, Wages and Benefits

Salaries, wages and benefits increased by $17.3 million to $55.4 million for the three months ended September, 2015, from $38.1 million for the three months ended September, 2014. This increase was primarily attributable to an increase in new facilities along with standard salary increases, which contributed $14.8 million in facility compensation, coupled with an increase of $2.5 million related to our continued efforts to add staff to support new facility growth offset by the deconsolidation of salaries attributable to joint ventures. 

General and Administrative

General and administrative expenses increased by $4.6 million to $13.9 million for the three months ended September 30, 2015, from $9.2 million for the three months ended September 30, 2014. This increase was primarily attributable to $0.3 million in additional marketing costs associated with opening new facilities and our consumer awareness program, $0.6 million in additional facility utilities and insurance expenses, $2.1 million in legal and accounting expenses, $0.9 million in costs associated with the secondary offering and $0.7 million in other corporate expenses, offset by the deconsolidation of costs attributable to joint ventures. 

Other Operating Expenses

Other operating expenses increased by $5.7 million to $13.2 million for the three months ended September 30, 2015, from $7.4 million for the three months ended September 30, 2014. This increase was primarily attributable to $3.3 million in additional lease costs for buildings and medical equipment at new and existing facilities, $0.9 million in building and medical equipment maintenance for new and existing facilities, patient care and supply costs at new

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facilities contributed $0.9 million in additional expenses, coupled with an increase of $0.6 million at existing facilities. These costs were offset by the deconsolidation of costs attributable to joint ventures.

Depreciation and Amortization

Depreciation and amortization expenses increased by $0.3 million to $4.3 million for the three months ended September 30, 2015, from $3.9 million for the three months ended September 30, 2014. This increase was primarily attributable to the construction of new facilities that opened during 2014 and 2015, as well as new equipment at those facilities, offset by the deconsolidation of costs attributable to joint ventures.  

Other (Expense)

Interest Expense

Interest expense primarily consists of interest on our Senior Secured Credit Facility and on one facility treated as a capital lease. Our interest expense increased by $1.1 million to $3.8 million for the three months ended September 30, 2015, compared to $2.6 million for the three months ended September 30, 2014. This increase was primarily attributable to an increase in borrowings to fund working capital needs of new facilities and a delayed draw funding prior to the expiration of that provision of the Credit Facility.

Income (Loss) Before Provision (Benefit) for Income Taxes

As a result of the factors described above, we recorded income before provision (benefit) for income taxes of $2.3 million for the three months ended September 30, 2015, compared to a net loss of $3.7 million for the three months ended September 30, 2014.  

Provision (Benefit) for Income Taxes

For the three months ended September 30, 2015, we recorded income tax expense of $0.8 million, which consists of $0.4 million of federal income tax expense and state tax expense of $0.4 million. For the three months ended September 30, 2014, we were in a loss position and recorded a tax benefit of $0.1 million. The Company’s effective tax rate differs from the statutory rate due primarily to state taxes that are not based on pre-tax income (loss) but on gross margin resulting in state tax expense.

The Company’s provision for income taxes in interim periods is based on our estimated annual effective tax rate. The estimated annual effective tax rate calculation does not include the effect of discrete events that may occur during the year. The effect of these events, if any, is recorded in the quarter in which the event occurs.

Net Income (Loss) 

As a result of the factors described above, we recorded net income of $1.5 million for the three months ended September 30, 2015, compared to a  net loss of $3.6 million for the three months ended September 30, 2014.

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Nine months ended September 30, 2015 Compared to Nine months ended September 30, 2014 

The following table summarizes our results of operations for the nine months ended September 30, 2015 and 2014 (in thousands):

	Nine months ended September 30,
									Percentage of
					Change from prior				net patient
					period				service revenue
	2015		2014		$		%		2015		2014
Statement of Operations Data:
Revenue
Patient service revenue	$	301,519	$	163,008	$	138,511	85.0	%
Provision for bad debt		(50,365)		(22,390)		(27,975)	124.9
Net patient service revenue		251,154		140,618		110,536	78.6		100.0	%	100.0	%
Management and contract services revenue		8,098		—		8,098	—		3.2		—
Total net operating revenue		259,252		140,618		118,634	84.4		103.2		100.0
Equity in earnings of unconsolidated joint ventures		7,470		—		7,470	—		3.0		—
Operating expenses:
Salaries, wages and benefits		155,424		92,577		62,847	67.9		61.9		65.8
General and administrative		35,701		26,744		8,957	33.5		14.2		19.0
Other operating expenses		36,998		17,416		19,582	112.4		14.7		12.4
Depreciation and amortization		13,538		10,374		3,164	30.5		5.4		7.4
Total operating expenses		241,661		147,111		94,550	64.3		96.2		104.6
Income (loss) from operations		25,061		(6,493)		31,554	(486.0)		10.0		(4.6)
Other income (expense):
Gain on contribution to joint venture		24,250		—		24,250	—		9.7		—
Interest expense		(10,925)		(9,160)		(1,765)	19.3		(4.3)		(6.5)
Total other income (expense)		13,325		(9,160)		22,485	(245.5)		5.3		(6.5)
Income (loss) before provision for income taxes		38,386		(15,653)		54,039	(345.2)		15.3		(11.1)
Provision for income taxes		7,617		142		7,475	5,264.1		3.0		0.1
Net income (loss)	$	30,769	$	(15,795)	$	46,564	(294.8)	%	12.3	%	(11.2)	%

Overall

Our results for the nine months ended September 30, 2015 reflect a 84.4% increase in net operating revenue to  $259.3 million and net income of $30.8 million compared to a  net loss of $15.8 million for the nine months ended September 30, 2014. The net income is primarily attributable to a $118.6 million increase in net operating revenue coupled with $7.5 million in earnings of unconsolidated joint ventures and the recognition of a gain of $24.3 million on our contribution and change of control of previously owned freestanding facilities to a joint venture with UCHealth, partially offset by a $62.8 million increase in salaries, wages, benefits, $28.5 million increase in other costs related to our growth initiatives,  an increase in the provision for income tax of $7.5 million, $1.8 million in interest expense associated with our long-term debt and additional depreciation and amortization expense of $3.2 million.

Revenue

Patient Service Revenue

Patient service revenue increased by $138.5 million, or 85.0%, to $301.5 million for the nine months ended September 30, 2015, from $163.0 million for the nine months ended September 30, 2014. This increase was primarily attributable to an increase in patient volumes generated from new facilities and gross charge increases in late February 2015. This increase was partially offset by deconsolidation of revenues associated with freestanding facilities contributed to the UCHealth joint venture in April 2015.

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Provision for Bad Debt

Our provision for bad debt increased by $28.0 million to $50.4 million for the nine months ended September 30, 2015, from $22.4 million for the nine months ended September 30, 2014. Of this increase, $7.3 million was attributable to revenue generated from new facilities, an increase in patient volume and a continued shift in insurance plans to high deductible plans.

Net Patient Service Revenue

As a result of the factors described above, our net patient service revenue increased by $110.5 million, or 78.6%, to $251.2 million for the nine months ended September 30, 2015, from $140.6 million for the nine months ended September 30, 2014.  

Management and Contract Services Revenue

The Company recorded $8.1 million in management and contract services revenue for the nine months ended September 30, 2015 as a result of entering into joint ventures with Dignity Health in October 2014 and UCHealth in April 2015

Equity in Earnings of Unconsolidated Joint Ventures

The Company recorded $7.5 million in equity in earnings of unconsolidated joint ventures for the nine months ended September 30, 2015 as a result of entering into joint ventures with Dignity Health in October 2014 and UCHealth in April 2015.

Operating Expenses

Salaries, Wages and Benefits

Salaries, wages and benefits increased by $62.8 million to $155.4 million for the nine months ended September 30, 2015, from $92.6 million for the nine months ended September 30, 2014. This increase was primarily attributable to an increase in new facilities along with standard salary increases, which contributed $54.9 million in facility compensation, coupled with an increase of $7.9 million related to our continued efforts to add staff to support new facility growth offset by the deconsolidation of salaries attributable to joint ventures.

General and Administrative

General and administrative expenses increased by $9.0 million to $35.7 million for the nine months ended September 30, 2015, from $26.7 million for the nine months ended September 30, 2014. This increase was primarily attributable to $1.7 million in additional marketing costs associated with opening new facilities and our consumer awareness program, $2.4 million in additional facility utilities and insurance expenses, $4.1 million in legal and accounting expenses, $0.5 million in travel expenses associated with increased headcount and the opening of new facilities outside of the Dallas/Fort Worth market and $3.4 million in other corporate expenses, offset by a reduction of $3.1 million in costs associated with the secondary offerings in the current period compared to the costs of the initial public offering in the prior year and the deconsolidation of costs attributable to joint ventures.

Other Operating Expenses

Other operating expenses increased by $19.6 million to $37.0 million for the nine months ended September 30, 2015, from $17.4 million for the nine months ended September 30, 2014. This increase was primarily attributable to $11.9 million in additional lease costs for buildings and medical equipment at new and existing facilities, $0.5 million increase in lease costs for corporate office space, including a charge of $0.4 million for lease termination expense, and $2.3 million in building and equipment maintenance for new and existing facilities, patient care and supply costs at new

39

facilities contributed $2.0  million in additional expenses, coupled with an increase of $2.5 million at existing facilities. These costs were offset by the deconsolidation of costs attributable to joint ventures.

Depreciation and Amortization

Depreciation and amortization expenses increased by $3.2 million to $13.5 million for the nine months ended September 30, 2015, from $10.4 million for the nine months ended September 30, 2014. This increase was primarily attributable to the construction of new facilities that opened during 2014 and 2015, as well as new equipment at those facilities, offset by the deconsolidation of costs attributable to joint ventures.

Other Income (Expense)

Gain on Contribution to Joint Venture

The Company recorded a gain of $24.3 million for the nine months ended September, 2015 as a result of the contribution and change of control of previously owned freestanding facilities to the joint venture with UCHealth.

Interest Expense

Interest expense primarily consists of interest on our Senior Secured Credit Facility and on one facility treated as a capital lease. Our interest expense increased by $1.7 million to $10.9 million for the nine months ended September 30, 2015, compared to $9.2 million for the nine months ended September 30, 2014. This increase was primarily attributable to an increase in borrowings to fund working capital needs of new facilities and a delayed draw funding prior to the expiration of that provision of the Credit Facility.

Income (Loss) Before Provision for Income Taxes

As a result of the factors described above, we recorded income before provision for income taxes of $38.4 million for the nine months ended September 30, 2015, compared to a net loss of $15.7 million for the nine months ended September 30, 2014.  

Provision for Income Taxes

For the nine months ended September 30, 2015, we recorded income tax expense of $7.6 million, which consists of $6.5 million of federal income tax expense and state tax expense of $1.1 million. Prior to the Reorganization, we were not a federal taxpayer. Due to the timing of the Company’s initial public offering, federal income taxes were not calculated on activity prior to June 25, 2014. The Company’s effective tax rate for the period subsequent to the Reorganization differs from the statutory rate due primarily to state taxes that are not based on pre-tax income (loss) but on gross margin resulting in state tax expense even in periods of pretax losses and taxes applicable to pass-through entities.

The Company’s provision for income taxes in interim periods is based on our estimated annual effective tax rate. The estimated annual effective tax rate calculation does not include the effect of discrete events that may occur during the year. The effect of these events, if any, is recorded in the quarter in which the event occurs.

Net Income (Loss) 

As a result of the factors described above, we recorded net income of $30.8 million for the nine months ended September 30, 2015, compared to a  net loss of $15.8 million for the nine months ended September 30, 2014.

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Liquidity and Capital Resources

We rely on cash flows from operations, the Senior Secured Credit Facility and the MPT Agreements (each as described below) as our primary sources of liquidity. In June 2014, we sold 4,900,000 shares of Class A common stock in an initial public offering, resulting in proceeds, net of transaction expenses, of $96.2 million. We used part of the net proceeds from the initial public offering to reduce outstanding borrowings under our senior secured credit facility. An additional 735,000 shares of Class A common stock were sold to the public, of which 313,586 shares were sold by a significant stockholder and 421,414 shares were sold by the Company with the proceeds received by the Company used to purchase an equivalent number of LLC Units from such significant stockholder.

Upon the consummation of our initial public offering, we entered into a tax receivable agreement with the Unit holders of Adeptus Health LLC, which provides for the payment from time to time by us to the Unit holders of Adeptus Health LLC of 85% of the amount of the benefits, if any, that we deemed to realize as a result of increases in tax basis and certain other tax benefits related to exchanges of LLC Units pursuant to the exchange agreement, including tax benefits attributable to payments under the tax receivable agreement. These payment obligations are obligations of Adeptus Health Inc.; however, payments to LLC Unit holders will only be paid as tax benefits for the Company are realized. For purposes of the tax receivable agreement, the benefit deemed realized by Adeptus Health Inc. will be computed by comparing its actual income tax liability (calculated with certain assumptions) to the amount of such taxes that we would have been required to pay had there been no increase to the tax basis of the assets of Adeptus Health LLC as a result of the exchanges and had Adeptus Health Inc. not entered into the tax receivable agreement.

Our primary cash needs are capital expenditures on new facilities, compensation of our personnel, purchases of medical supplies, facility leases, equipment rentals, marketing initiatives, service of long-term debt and any payments made under the tax receivable agreement.    We believe that cash we expect to generate from operations, the availability of borrowings under the Senior Secured Credit Facility and funds available under the MPT Agreements will be sufficient to meet liquidity requirements, including any payments made under the tax receivable agreement, anticipated capital expenditures and payments due under our Senior Secured Credit Facility and MPT Agreements for at least 12 months.

As of September 30, 2015, our principal sources of liquidity included cash of $46.3 million and funds available under our Senior Secured Credit Facility line of credit of $10.0 million, net of $0.5 million of outstanding letters of credit.  In April 2015, prior to the expiration of the delayed draw component of our credit facility, we borrowed $30.0 million on the delayed draw term loan.  On April 20, 2015, we entered into an amendment to the Additional MPT Agreement (as described below) which added an additional aggregate funding of $250.0 million.  As of September 30, 2015, we had $211.2 million available under the MPT Agreements. 

On October 6, 2015, the Company entered into a senior secured credit facility (the “New Facility”) for a $125.0 million term loan and a $50.0 million revolving facility. The New Facility matures on October 6, 2020. The revolving credit facility includes a sub-limit of $15.0 million for letters of credit and a sub-limit of $50.0 million for swing line loans. In addition, the New Facility contains an option to borrow up to an additional $50.0 million under certain conditions. All of the assets of the Company’s subsidiaries are pledged as collateral under the New Facility, and such subsidiaries guarantee the New Facility. Borrowings under the New Facility replace the Company’s existing credit facility and will be used by the Company to provide financing for working capital and capital expenditures.

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Cash Flows

The following table summarizes our cash flows for the periods indicated (in thousands):  

		Nine months ended
		September 30,
		2015		2014
Net cash provided by (used in) operating activities	$	5,120	$	(20,843)
Net cash used in investing activities		(2,468)		(35,297)
Net cash provided by financing activities		41,656		59,956
Net increase in cash	$	44,308	$	3,816

Net Cash from Operating Activities

Net cash provided by operating activities increased by $25.9 million to $5.1 million for the nine months ended September 30, 2015, from $20.8 million used in operating activities for the same period in 2014. This increase was primarily attributable to net income and increases in accrued expenses, offset by non-cash charges, increases in accounts receivable and decreases in accounts payable. 

Net Cash from Investing Activities

Net cash used in investing activities decreased by $32.8 million to $2.5 million for the nine months ended September 30, 2015, from $35.3 million used by investing activities for the same period in 2014. This decrease was primarily attributable to a decrease in capital expenditures on new facility construction, which are now substantially funded by MPT or other third party developers.  

Net Cash from Financing Activities

Net cash provided by financing activities decreased by $18.3 million to $41.7 million for the nine months ended September 30, 2015, from $60.0 million for the same period in 2014. This decrease results primarily from the net proceeds from the initial public offering of $96.2 million, offset by a dividend paid of $60.0 million, which did not recur in the current period, offset by increases in borrowings under our Senior Secured Credit Facility to finance construction and ongoing operations of new facilities as well as the payment of tax distributions to LLC Unit holders.

Off Balance Sheet Arrangements

During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purpose arrangements. We lease certain medical facilities and equipment under various non-cancelable operating leases. See "—Obligations and Commitments—Operating Lease Obligations."

As a result of our strategy of partnering with leading healthcare providers, we do not own a controlling interest in our facilities in Colorado and Arizona.  At September 30, 2015, we accounted for these joint ventures under the equity method. Our ownership percentage is 49.9% in each joint venture at September 30, 2015.

As described above, our unconsolidated joint venturesare structured as limited liability corporations. These joint ventures do not provide financing, liquidity, or market or credit risk support for us.

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Obligations and Commitments

The following is a summary of our contractual obligations as of September 30, 2015 (in thousands):  

	Total	Less than 1 year	1-3           years	3-5     years	More than 5 years
Long-term debt obligations	$ 154,652	$ 1,167	$ 12,491	$ 140,994	$ -
Capital lease obligations(1)	7,838	131	1,076	1,119	5,512
Operating lease obligations	422,082	10,255	78,719	62,089	271,019
Total	$ 584,572	$ 11,553	$ 92,286	$ 204,202	$ 276,531

(1) Includes amounts representing interest.

Senior Secured Credit Facility

On October 31, 2013, we entered into a Senior Secured Credit Facility (the “Facility”) for a $75.0 million term loan, which matures on October 31, 2018. The Facility includes an additional $165.0 million delayed draw term loan commitment, which expired in April 2015 and a $10.0 million revolving commitment that matures on October 31, 2018. All of our assets are pledged as collateral under the Senior Secured Credit Facility.  Borrowings under the Facility are used by us to provide financing for working capital and capital expenditures for new facility expansion and replaced our original credit facility.

On March 31, 2014, we amended the Facility to, among other things, increase the maximum aggregate amount permitted to be funded by Medical Properties Trust (“MPT”) under the MPT Agreements (as defined below) to $250.0 million.

On June 11, 2014, we entered into a second amendment to the Facility to, among other things, provide for a delayed draw term loan in an aggregate principal amount of up to $75.0 million, up to $60.0 million of which will be used to make specified distributions and up to $10.0 million to repay certain revolving loans.  On June 11, 2014, we drew $75.0 million and made the $60.0 million dividend distribution on June 24, 2014. In April 2015, prior to the expiration of the delayed draw component of the credit facility, we borrowed an additional $30.0 million.

Borrowings under the Facility bear interest, at our option, at a rate equal to an applicable margin over (a) a base rate determined by reference to the highest of (1) the prime rate, (2) the federal funds effective rate plus 0.50% and (3) LIBOR for an interest period of one month plus 1%, or (b) LIBOR for the applicable interest period. The margin for the Senior Secured Credit Facility is 6.50% in the case of base rate loans and 7.50% in the case of LIBOR loans. The Facility includes an unused line fee of 0.50% per annum on the revolving commitment and delayed draw term loan commitment, a draw fee of 1.0% of the principal amount of each borrowing on the delayed draw term loan and an annual Agency fee of $0.1 million. As of September 30, 2015, we had approximately $9.5 million available under the revolving commitment.

The original principal amount of the term loan will be repaid in consecutive quarterly installments of $0.5 million on the last day of each fiscal quarter commencing with the fiscal quarter ending December 31, 2015 and escalating to $0.9 million for each fiscal quarter ending after December 31, 2016. If drawn, the delayed draw term loan will be repaid in consecutive quarterly installments in an amount based on the repayment calculation contained in the Facility on the last day of each fiscal quarter commencing with the fiscal quarter ending December 31, 2015.

The Senior Secured Credit Facility contains certain affirmative covenants, negative covenants, and financial covenants, which are measured on a quarterly basis. As of September 30, 2015, we were in compliance with all covenant requirements.

On October 6, 2015, the Company entered into a senior secured credit facility (the “New Facility”) for a $125.0 million term loan and a $50.0 million revolving facility. The New Facility matures on October 6, 2020. The revolving

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credit facility includes a sub-limit of $15.0 million for letters of credit and a sub-limit of $5.0 million for swing line loans. In addition, the New Facility contains an option to borrow up to an additional $50.0 million under certain conditions. All of the assets of the Company’s subsidiaries are pledged as collateral under the New Facility, and such subsidiaries guarantee the New Facility. Borrowings under the New Facility replace the Company’s existing credit facility and will be used by the Company to provide financing for working capital and capital expenditures.

Borrowings under the New Facility bear interest, at our option, at a rate equal to an applicable margin over (a) a base rate determined by reference to the highest of (1) the prime rate, (2) the federal funds effective rate plus 0.50% and (3) LIBOR for an interest period of one month plus 1%, or (b) LIBOR for the applicable interest period. The applicable margin for the New Facility ranges, based on our consolidated net leverage ratio, from 2.25% to 3.00% in the case of base rate loans and from 3.25% to 4.00% in the case of LIBOR loans. The New Facility includes an unused line fee ranging, based on our consolidated net leverage ratio, from 0.40% to 0.50% per annum on the revolving commitment

Capital Lease Obligations

Assets under capital leases totaled approximately $4.2 million as of September 30, 2015, and were included within the buildings component of net property and equipment. Accumulated amortization associated with these capital lease assets totaled approximately $0.5 million for the nine months ended September 30, 2015. 

Operating Lease Obligations

We lease certain medical facilities and equipment under various non-cancelable operating leases. In June 2013, we entered into a Master Funding and Development Agreement (the “Initial MPT Agreement”) with an affiliate of Medical Properties Trust (“MPT) to fund future facilities. Pursuant to the Initial MPT Agreement, MPT will acquire parcels of land, fund the ground-up construction of new freestanding emergency room facilities and lease the facilities to us upon completion of construction. Under the terms of the agreement, MPT is required to fund all hard and soft costs, including the project purchase price, closing costs and pursuit costs for the assets relating to the construction of up to 25 facilities with a maximum aggregate funding of $100.0 million.  The maximum aggregate funding has been met. Each completed project will be leased for an initial term of 15 years, with three five-year renewal options. We follow the guidance in Accounting Standards Codification, or ASC, 840, Leases, and ASC 810, Consolidation, in evaluating the lease as a build-to-suit lease transaction to determine whether we would be considered the accounting owner of the facilities during the construction period. In applying the accounting guidance, we concluded that one facility completed in 2013 under this arrangement qualified for capitalization.

In July 2014, we entered into an additional Master Funding and Development Agreement (the “Additional MPT Agreement” and, together with the Initial MPT Agreement, the “MPT Agreements”) with MPT to fund future new freestanding emergency rooms and hospitals. This agreement is separate from and in addition to our Initial MPT Agreement. The new agreement allows a maximum aggregate funding of $150.0 million.

On April 20, 2015, the Company entered into an amendment to the Additional MPT Agreement which adds an additional aggregate funding of $250.0 million, increasing the maximum aggregate funding under all of the MPT Agreements to $500.0 million, of which $211.2 million remained available as of September 30, 2015. All other material terms remain consistent with the Initial MPT Agreement.  All newly constructed facilities under the MPT Agreements will have initial terms of 15 years, with three five-year renewal options.

In addition to the MPT Agreements, the Company has entered into similar agreements with certain developers to fund and lead the development efforts on the construction of future facilities. As of September 30, 2015, the Company had total receivables of $11.3 million from the lessor to the MPT Agreements and certain developers for soft costs incurred for facilities currently under development.

We lease approximately 80,000 square feet for our corporate headquarters. Lease expense associated with this lease was $1.2 million for the nine months ended September 30, 2015.  

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We have sublease agreements with the joint ventures in Arizona and Colorado, under which the Company subleases certain freestanding emergency room facilities, ground leases and equipment leases to the joint ventures. Under these agreements, the Company received $3.6 million and $6.8 million during the three and nine months ended September 30, 2015, respectively, as rental income which is accounted for as a reduction of rent expense.

Capital Expenditures

Our current plans for our business contemplate capital expenditures to expand our operations. The MPT Agreements will be used to fund a significant portion of our new facilities. We typically incur approximately $0.2 million in capital expenditures related to each MPT-funded facility. Facilities funded under the MPT Agreements will be operating leases and thus not considered a capital expenditure.

The table below provides our total capital expenditures for the period  (in thousands):

	Nine months ended
	September 30,
	2015		2014
Leasehold improvements	$	1,681	$	26,263
Computer equipment		1,614		1,816
Medical equipment		172		693
Office equipment		1,449		2,904
Land		-		5,038
Buildings		-		116
	$	4,916	$	36,830

New Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2018. Early application is permitted to the original effective date of January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation: Amendments to the Consolidation Analysis” (Topic 810). This standard modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2015 and requires either a retrospective or a modified retrospective approach to adoption. Early adoption is permitted.  We are currently evaluating the potential impact of this standard on our consolidated financial position, results of operations and cash flows.

In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs,"(Subtopic 835-30) which changes the presentation of debt issuance costs in financial statements. ASU No. 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. ASU No. 2015-03 is effective for annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The new guidance will be applied retrospectively to each prior period presented. The Company will implement the provisions of ASU 2015-03 as of January 1, 2016.

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Critical Accounting Policies

Our application of critical accounting policies require our management to make certain assumptions about matters that are uncertain at the time the accounting estimate is made, where our management could reasonably use different estimates, or where accounting changes may reasonably occur from period to period, and in each case would have a material effect on our financial statements.

For a discussion of our critical accounting estimates, see the Part II., Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014. There have been no material changes in our critical accounting policies since December 31, 2014.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We are exposed to market risks related to changes in variable interest rates. As of September 30, 2015, we had $154.7 million of indebtedness (excluding capital leases) which is at variable interest rates. In seeking to reduce the risks and costs associated with such activities, we manage exposure to changes in interest rates primarily through the use of derivatives. As of September 30, 2015, we have hedged the variable interest rate risk with an interest rate cap covering approximately 20.0% of our indebtedness. We do not use financial instruments for trading or other speculative purposes, nor do we use leveraged financial instruments.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and our Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d - 15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended September 30, 2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

As of December 31, 2015, we will cease to be an "emerging growth company." Accordingly, we must comply with the requirements of Section 404 of the Sarbanes-Oxley Act starting with our next annual report for the year ended December 31, 2015. While we expect to be ready to comply with Section 404 of the Sarbanes-Oxley Act by the applicable deadline, we cannot assure you that this will be the case. Furthermore, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended  from time to time, we may not be able to conclude that we have effective internal controls over financial reporting in accordance with Section 404 of the

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Sarbanes-Oxley Act. If we are not able to implement the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or with adequate compliance, our independent registered public accounting firm may issue an adverse opinion due to ineffective internal controls over financial reporting and we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel.  Any such action could have a material adverse effect on our business, prospects, results of operations and financial condition.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings  

From time to time, we are party to various legal proceedings that have arisen in the normal course of conducting business. While, we do not believe the results of these proceedings, individually or in the aggregate, will have a material adverse effect on our business, financial condition, results of operations or liquidity, litigation is subject to inherent uncertainties. 

Item 1A. Risk Factors

In addition to the other information contained in this Quarterly Report on Form 10-Q, the risks and uncertainties that we believe could materially affect our business, financial condition or future results and are most important for you to consider are discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.  Additional risks and uncertainties which are not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also materially and adversely affect any of our business, financial position or future results.  Updates from our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 are as follows:

Pursuant to the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the filing of our next annual report.

Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we file with the SEC as a public company, and generally requires in the same report a report by our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. Under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until we are no longer an "emerging growth company."

As a result of the significant increase in our market capitalization as of June 30, 2015, we will cease to be an "emerging growth company” as of December 31, 2015. Accordingly, we must comply with the requirements of Section 404 of the Sarbanes-Oxley Act starting with our next annual report for the year ended December 31, 2015. This change in our reporting status allows us a relatively short timeline in order for our independent registered public accounting firm to attest to the effectiveness of our internal controls. While we expect to be ready to comply with Section 404 of the Sarbanes-Oxley Act by the applicable deadline, we cannot assure you that this will be the case. Furthermore, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404 of the Sarbanes- Oxley Act. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended  from time to time, we may not be able to conclude that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. If we are not able to implement the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or with adequate compliance, our independent registered public accounting firm may issue an adverse opinion due to ineffective internal controls over financial reporting and we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel.  Any such action could have a material adverse effect on our business, prospects, results of operations and financial condition.

Transformation into a public company has increased our costs and may disrupt the regular operations of our business.

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Our initial public offering had a significant transformative effect on us. Prior to our initial public offering, our business operated as a privately owned company and we now incur significant additional legal, accounting, reporting and other expenses as a result of having publicly-traded Class A common stock. We also incur costs that we have not incurred previously, and will incur additional costs after we are no longer an "emerging growth company." Such costs include, but are not limited to, costs and expenses for directors' fees, increased directors and officers insurance, investor relations, compliance with the Sarbanes-Oxley Act and rules and regulations of the SEC, and various other costs of a public company. The additional demands associated with being a public company may disrupt regular operations of our business by diverting the attention of some of our senior management team away from revenue producing activities to management and administrative oversight, adversely affecting our ability to attract and complete business opportunities and increasing the difficulty in both retaining professionals and managing and growing our businesses. Any of these effects could harm our business, financial condition and results of operations

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities  

None. 

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information  

None.

Item 6. Exhibits

See the Exhibit Index immediately following the signature page of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ADEPTUS HEALTH INC.
Date: October 30, 2015	/s/ Timothy L. Fielding
	Timothy L. Fielding
	(Chief Financial Officer and Authorized Officer)

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EXHIBIT INDEX

Exhibit Number	Exhibit Description
10.1	Senior Secured Credit Facility, dated as of October 6, 2015, among First Choice ER, LLC, Adeptus Health Inc., the subsidiaries identified therein, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the other lenders party thereto (incorporated by reference to Form 8-K filed on October 9, 2015).
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time. 

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