Adeptus Health (ADPTQ) 10-Q 2016 Q2 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 June 30, 2016

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 16,350,866 as of July 25, 2016.  The number of shares of the registrant’s Class B common stock, par value $0.01 per share, outstanding was 4,724,430 as of July 25, 2016.

ADEPTUS HEALTH INC. and SUBSIDIARIES

FORM 10-Q

INDEX

PART I.	FINANCIAL INFORMATION	5
Item 1.	Financial Statements (Unaudited):	5
	Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015	5
	Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2016 and 2015	6
	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2016 and 2015	7
	Condensed Consolidated Statement of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2016	8
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015	9
	Notes to Condensed Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	47
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	48
Item 3.	Defaults Upon Senior Securities	48
Item 4.	Mine Safety Disclosure	48
Item 5.	Other Information	48
Item 6.	Exhibits	48

2

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.

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.

On June 8, 2016, we completed a public offering of 1,774,219 shares of our Class A common stock at a price to the public of $62.00 per share and received net proceeds of approximately $107.4 million, after deducting underwriting discounts and commissions and offering expenses. We used the net proceeds from the offering to purchase, for cash, 1,774,219 LLC Units. An additional 1,043,281 shares were also sold by an affiliate of a significant stockholder.

SPECIAL NOTE REGARDING 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 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, 2015, 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;

· 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;

3

· 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 may be 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;

· Our ability to maintain proper and effective internal controls necessary to provide accurate financial statements on a timely basis; and

· The factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 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)

	June 30,		December 31,
	2016		2015
	(unaudited)		(audited)
ASSETS
Current assets
Cash	$	3,718	$	16,037
Accounts receivable, less allowance for doubtful accounts of $28,901 and $28,818, respectively		74,327		65,954
Other receivables and current assets		57,352		31,532
Medical supplies inventory		2,900		5,167
Total current assets		138,297		118,690
Property and equipment, net		34,486		70,187
Investment in unconsolidated joint ventures		272,967		43,104
Deposits		939		1,163
Deferred tax assets		255,886		206,265
Intangibles, net		17,345		18,235
Goodwill		51,390		61,009
Other long-term assets		2,046		2,950
Total assets	$	773,356	$	521,603
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses	$	24,608	$	27,521
Accrued compensation		17,043		23,197
Current maturities of long-term debt		7,278		7,585
Current maturities of capital lease obligations		40		102
Deferred rent		691		858
Total current liabilities		49,660		59,263
Long-term debt, less current maturities		126,772		113,563
Payable to related parties pursuant to tax receivable agreement		237,914		191,302
Capital lease obligations, less current maturities		177		3,954
Deferred rent		2,453		3,837
Total liabilities		416,976		371,919
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 June 30, 2016		—		—
Class A common stock, par value $0.01 per share; 50,000,000 shares authorized, 16,350,866 and 14,257,187 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively		164		143
Class B common stock, par value $0.01 per share; 20,000,000 shares authorized, 4,724,430 and 6,510,738 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively		47		65
Additional paid-in capital		172,370		85,457
Retained earnings		95,083		6,323
Total shareholders' equity		267,664		91,988
Non-controlling interest		88,716		57,696
Total equity		356,380		149,684
Total liabilities and shareholders' equity	$	773,356	$	521,603

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

5

Adeptus Health Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except share data)

	Three months ended				Six months ended
	June 30,				June 30,
	2016		2015		2016		2015
Revenue:
Patient service revenue	$	101,595	$	104,363	$	234,883	$	200,265
Provision for bad debt		(16,673)		(17,514)		(43,726)		(32,459)
Net patient service revenue		84,922		86,849		191,157		167,806
Management and contract services revenue		15,245		2,738		21,779		3,234
Total net operating revenue		100,167		89,587		212,936		171,040
Equity in earnings of unconsolidated joint ventures		2,435		3,621		4,936		2,927
Operating expenses:
Salaries, wages and benefits		62,130		51,124		128,945		100,004
General and administrative		13,015		11,370		29,279		21,834
Other operating expenses		12,093		12,541		27,106		23,846
Depreciation and amortization		3,412		4,523		7,783		9,279
Total operating expenses		90,650		79,558		193,113		154,963
Income from operations		11,952		13,650		24,759		19,004
Other income (expense):
Gain on contribution to joint venture		185,336		24,250		185,336		24,250
Interest expense		(1,822)		(3,898)		(3,648)		(7,172)
Total other income		183,514		20,352		181,688		17,078
Income before provision for income taxes		195,466		34,002		206,447		36,082
Provision for income taxes		47,270		6,328		50,388		6,806
Net income		148,196		27,674		156,059		29,276
Less: Net income attributable to non-controlling interest		61,248		17,040		64,579		18,048
Net income attributable to Adeptus Health Inc.	$	86,948	$	10,634	$	91,480	$	11,228
Net income per share of Class A common stock:
Basic	$	5.80	$	0.97	$	6.23	$	1.08
Diluted	$	5.80	$	0.97	$	6.23	$	1.08
Weighted average shares of Class A common stock:
Basic		15,001,701		10,953,138		14,687,700		10,432,882
Diluted		15,001,701		10,953,138		14,687,700		10,432,882

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

(Unaudited)

(In thousands)

	Adeptus Health Inc.				Non-controlling Interest				Total
	Three months ended				Three months ended				Three months ended
	June 30,				June 30,				June 30,
	2016		2015		2016		2015		2016		2015
Net income	$	86,948	$	10,634	$	61,248	$	17,040	$	148,196	$	27,674
Other comprehensive loss, net of tax:
Unrealized loss on interest rate contract		—		(3)		—		—		—		(3)
Comprehensive income	$	86,948	$	10,631	$	61,248	$	17,040	$	148,196	$	27,671

	Adeptus Health Inc.				Non-controlling Interest				Total
	Six months ended				Six months ended				Six months ended
	June 30,				June 30,				June 30,
	2016		2015		2016		2015		2016		2015
Net income	$	91,480	$	11,228	$	64,579	$	18,048	$	156,059	$	29,276
Other comprehensive loss, net of tax:
Unrealized loss on interest rate contract		—		(17)		—		—		—		(17)
Comprehensive income	$	91,480	$	11,211	$	64,579	$	18,048	$	156,059	$	29,259

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

7

Adeptus Health Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(In thousands, except share data)

	Adeptus Health Inc.
							Additional				Total		Non-
	Class A shares			Class B shares			Paid-in		Retained		Shareholders'		Controlling		Total
	Shares	Amount		Shares	Amount		Capital		Earnings		Equity		Interest		Equity
Balance, December 31, 2015	14,257,187	$	143	6,510,738	$	65	$	85,457	$	6,323	$	91,988	$	57,696	$	149,684
Issuance of Class A restricted stock	324,238		3	—		—		(3)		—		—		—		—
Issuance of Class A common stock	1,774,219		18	—		—		(18)		—		—		—		—
Purchase of Class B common stock	—		—	(1,774,219)		(18)		18		—		—		—		—
Conversion of Class B common stock	12,089		—	(12,089)		—		—		—		—		—		—
Adjustment of non-controlling interest for public offerings	—		—	—		—		33,559		—		33,559		(33,559)		—
Class A restricted stock withheld on vesting	(16,867)		—	—		—		(847)		—		(847)		—		(847)
Stock-based compensation	—		—	—		—		2,309		—		2,309		—		2,309
Excess tax benefit from stock compensation	—		—	—		—		524		—		524		—		524
Effects of tax receivable agreement	—		—	—		—		51,371		—		51,371		—		51,371
Tax distribution to LLC unit holders	—		—	—		—		—		(2,720)		(2,720)		—		(2,720)
Net income	—		—	—		—		—		91,480		91,480		64,579		156,059
Balance, June 30, 2016	16,350,866	$	164	4,724,430	$	47	$	172,370	$	95,083	$	267,664	$	88,716	$	356,380

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

8

Adeptus Health Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	Six months ended
	June 30,
	2016		2015
Cash flows from operating activities:
Net income	$	156,059	$	29,276
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Loss from the disposal or impairment of assets		2		68
Depreciation and amortization		7,783		9,279
Deferred tax expense		48,363		4,377
Amortization of deferred loan costs		387		468
Provision for bad debts		43,726		32,459
Gain on contribution to unconsolidated joint venture		(185,336)		(24,250)
Equity in earnings of unconsolidated joint ventures		(4,936)		(2,927)
Stock-based compensation		2,309		1,157
Changes in operating assets and liabilities:
Restricted cash		—		(3,009)
Accounts receivable		(52,099)		(41,375)
Other receivables and current assets		(25,996)		(951)
Medical supplies inventory		(526)		(160)
Other long-term assets		261		(110)
Accounts payable and accrued expenses		(1,834)		(4,140)
Accrued compensation		(5,085)		(464)
Deferred rent		929		1,377
Net cash (used in) provided by operating activities		(15,993)		1,075
Cash flows from investing activities:
Deposits		224		985
Investments in unconsolidated joint ventures		(927)		—
Proceeds from sale of property and equipment		—		1,527
Capital expenditures		(3,718)		(3,270)
Net cash used in by investing activities		(4,421)		(758)
Cash flows from financing activities:
Proceeds from public offerings, net of underwriters fees and expenses		107,389		94,470
Purchase of limited liability units from LLC Unit holders		(107,389)		(94,470)
Proceeds from long-term borrowings		35,000		54,000
Payment of deferred loan costs		—		(495)
Payments on borrowings		(23,303)		(6,691)
Payment of capital lease obligations		(35)		(39)
Tax distribution to LLC Unit holders		(2,720)		(2,965)
Restricted stock forfeited on vesting to satisfy withholding requirements		(847)		—
Net cash provided by financing activities		8,095		43,810
Net (decrease) increase in cash and cash equivalents		(12,319)		44,127
Cash, beginning of period		16,037		2,002
Cash, end of period	$	3,718	$	46,129

See Note 12 for Supplemental Cash Flow Information

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 (“Adeptus Health”). As the sole managing member of Adeptus Health LLC, the Company operates and controls all of the business and affairs of Adeptus Health LLC and, through Adeptus Health LLC 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 high quality emergency medical care through its network of freestanding emergency rooms and partnerships with premier healthcare providers.   Adeptus Health or its predecessors began operations in 2002 and owns and operates First Choice Emergency Room, the nation’s largest and oldest network of freestanding emergency rooms and owns and/or operates hospitals and freestanding facilities in partnership with Texas Health Resources in Texas, UCHealth in Colorado, Dignity Health in Arizona, and development activity together with Ochsner Health System in Louisiana and Mount Carmel Health System in Ohio.  Adeptus Health delivers 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 93 freestanding facilities and two fully licensed general hospitals as of June 30, 2016. In Texas, 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. 

The Company consolidates the financial results of Adeptus Health and its subsidiaries and records non-controlling interest for the economic interest in Adeptus Health held by the non-controlling unit holders. The non-controlling interest ownership percentage as of June 30, 2016 was 22.8%.

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, 2015 audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC on February 29, 2016.

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Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Reclassifications

As a result of our adoption of Accounting Standards Update (“ASU”) 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (Subtopic 835-30), which requires that debt issuance costs be presented in the balance sheets as a deduction from the carrying amount of the related debt, $3.7 million of debt issuance costs at December 31, 2015 have been reclassified in the condensed consolidated balance sheet from other long-term assets to long-term debt, less current portion.

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 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, 2015.

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 six months ended June 30, 2016 and 2015 was earned in the United States.

Cash and Cash Equivalents and Concentrations of Risk

The Company includes all securities with a maturity date of three 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.

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 management services agreements under which it provides management services to hospital

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Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

facilities 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.

Net patient service revenue by major payor source for the three and six months ended June 30, 2016 and 2015 were as follows (in thousands):  

	Three months ended				Six months ended
	June 30,				June 30,
	2016		2015		2016		2015
Commercial	$	92,068	$	100,545	$	215,114	$	193,812
Self-pay		5,407		2,360		10,879		3,990
Medicaid		1,972		343		4,406		398
Medicare		1,269		111		3,175		145
Other		879		1,004		1,309		1,920
Patient Service Revenue		101,595		104,363		234,883		200,265
Provision for bad debt		(16,673)		(17,514)		(43,726)		(32,459)
Net Revenue	$	84,922	$	86,849	$	191,157	$	167,806

The Company receives payments from third-party payors that have contracts with the Company or the Company uses MultiPlan arrangements whereby the Company accesses third-party payors at in-network rates. Four major third-party payors accounted for 79.5%, 85.1%, 80.8% and 85.6% of patient service revenue for the three and six months ended June 30, 2016 and 2015, respectively. These same payors also accounted for 76.2% and 65.9% of accounts receivable as of June 30, 2016 and December 31, 2015, respectively. The following table sets forth the percentage of patient service revenue earned by major payor source:

	Three months ended				Six months ended
	June 30,				June 30,
	2016		2015			2016		2015
Payor:
United HealthCare	30.3	%	30.9	%		29.4	%	28.9	%
Blue Cross Blue Shield	20.0		21.1			22.2		23.2
Aetna	15.8		19.5			15.9		19.7
Cigna	13.4		13.6			13.3		13.8
Other	17.3		14.5			16.0		14.1
Medicaid/Medicare	3.2		0.4			3.2		0.3
	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 months ended June 30, 2016 and 2015.

The Company treats anyone that is emergent. Total charity care was approximately 3.3%, 9.0%, 3.4% and 8.9% of patient service revenue for the three and six months ended June 30, 2016 and 2015, respectively.

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Advertising Costs

Advertising costs are expensed as incurred. Advertising expense for the three and six months ended June 30, 2016 and 2015, was approximately $0.6 million, $0.9 million, $1.9 million and $2.3 million, respectively, and is included as a component of general and administrative expenses within the unaudited condensed consolidated statements of income.

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 income. 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 June 30, 2016 and December 31, 2015, 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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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 June 30, 2016, the Company leased 93 facilities, which the Company classified as operating leases.

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 of approximately $47.3 million, $6.3 million, $50.4 million and $6.8 million are included in the provision for income taxes in the financial statements for the three and six months ended June 30, 2016 and 2015, 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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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 June 30, 2016, the Company determined that it has two joint venture interests which it considers a VIE for which it is not the primary beneficiary.  Accordingly, we account for these investments in joint ventures 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 June 30, 2016, the Company accounted for 16 freestanding facilities associated with our joint venture with UCHealth, one Arizona hospital and its seven freestanding departments associated with our joint venture with Dignity Health, one hospital in Dallas/Fort Worth and its 30 freestanding departments associated with our joint venture with THR and the development activity associated with our joint ventures with Ochsner Health System in Louisiana and Mount Carmel Health System in Ohio using the equity method. The Company has an ownership interest ranging from 49.0% to 50.1% in these joint ventures.

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 generated from its non-controlling equity investment in one full-service healthcare hospital facility and seven freestanding emergency rooms in Arizona, (ii) the Company’s preferred return and its share of the income generated from its non-controlling equity investment in 16 freestanding emergency rooms in Colorado and one hospital and 30 freestanding facilities in Dallas/Fort Worth, and (iii) its share of the income generated from its non-controlling equity investment in the development activity associated with our joint ventures with Ochsner Health System in Louisiana and Mount Carmel Health System in Ohio. 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 income. 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. Additionally, the Company receives a stipend for providing physicians to the facilities within each joint venture.

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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 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.  The Company adopted the amendments under ASU 2015-02 on January 1, 2016. The adoption of the standard did not have an impact on the Company’s condensed consolidated financial statements as there was no change to the entities currently consolidated by the Company.

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. We retrospectively adopted the provisions of ASI 2015-03 as of January 1, 2016. As of December 31, 2015, $3.7 million of debt issuance costs were reclassified in the consolidated balance sheet from other long-term assets to long-term debt, less current portion. The adoption of ASU 2015-03 impacted the presentation of our consolidated financial position and had no impact on our results of operations, or cash flows.

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”, which amended the balance sheet classification requirements for deferred income taxes to simplify their presentation in the statement of financial position. The ASU requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This ASU is effective for fiscal years beginning after December 31, 2016, with early adoption permitted. The Company early adopted the provisions of this ASU for the presentation and classification of its deferred tax assets at December 31, 2015 and has reflected the change on the consolidated balance sheet for all periods presented.

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842). This new standard establishes a comprehensive new lease accounting model. The new standard clarifies the definition of a lease, requires a dual approach to lease classification similar to current lease classifications, and causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease term of more than twelve months. The standard is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The new standard requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements, but it does not require transition accounting for leases that expire prior to the date of initial application. We are evaluating the impact of the new standard on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting” (Topic 718). This new standard simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This standard is effective for fiscal years, and interim periods within those

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Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

years, beginning after December 15, 2016. Early adoption is permitted. The Company is currently assessing the potential impact of the new standard on our consolidated financial statements. 

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):

	June 30,		December 31,
	2016		2015
Leasehold improvements	$	35,832	$	73,249
Computer equipment		5,198		5,627
Medical equipment		2,805		4,458
Office equipment		3,651		5,445
Automobiles		218		218
Land		6,758		6,758
Construction in progress		1,335		345
Buildings		466		4,667
		56,263		100,767
Less accumulated depreciation		(21,777)		(30,580)
Property and equipment, net	$	34,486	$	70,187

Assets under capital leases totaled approximately $0.2 million and $4.2 million as of June 30, 2016 and December 31, 2015, respectively, and were included within the medical equipment and buildings component of net property and equipment as of June 30, 2016 and December 31, 2015, respectively. Accumulated depreciation associated with these capital lease assets totaled approximately $0.0 million and $0.6 million as of June 30, 2016 and December 31, 2015, 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, 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 June 30, 2016, the joint venture with Dignity Health in Arizona has sevenfreestanding 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 recorded a gain of $24.3 million on the contribution of the previously fully owned facilities in June 2015. As of June 30, 2016, the joint venture had 16 freestanding facilities under the UCHealth partnership.

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Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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. Due to this preferred return provision within the joint venture agreement, this joint venture interest is considered a variable interest entity. Additional terms within the agreement allow for certain decisions to be made in which the Company has determined that it does not have control. As such, the Company concluded that it is not the primary beneficiary of the VIE. Accordingly, the Company accounts for this investment in joint venture under the equity method.

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 multiple freestanding emergency departments. This joint venture did not have operatingfacilities during the period ended June 30, 2016, but did incur expenses related to preopening activities which are included in our equity in earnings of joint ventures within the unaudited condensed consolidated statements of income.

Joint Venture with Mount Carmel Health System

In February 2016, the Company announced its expansion into Ohio and a new partnership with Mount Carmel Health System. The partnership will construct and operate freestanding emergency rooms in the Columbus area. This joint venture did not have operatingfacilities during the period ended June 30, 2016, but did incur expenses related to preopening activities which are included in our equity in earnings of joint ventures within the unaudited condensed consolidated statements of income.

Joint Venture with Texas Health Resources

On May 11, 2016, the Company announced the formation of a new partnership with Texas Health Resources to enhance access to emergency medical care in Dallas/Fort Worth. The Company contributed the 27 existing freestanding emergency rooms and one existing hospital it held in Dallas/Fort Worth 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 $185.4 million on the contribution of the previously fully owned facilities during the quarter ended June 30, 2016. This gain is net of a $9.6 million reduction of the goodwill related to the business associated with the facilities contributed to the joint venture.

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. Due to this preferred return provision within the joint venture agreement, this joint venture interest is considered a variable interest entity. Additional terms within the agreement allow for certain decisions to be made in which the Company has determined that it does not have control. As such, the Company concluded that it is not the primary beneficiary of the VIE. Accordingly, the Company accounts for this investment in joint venture under the equity method.

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.

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Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Summarized unaudited financial information for the Company’s equity method investees is as follows (in thousands):

	Three months ended				Six months ended
	June 30,				June 30,
	2016		2015		2016		2015
Total net operating revenue	$	57,474	$	17,666	$	91,611	$	20,673
Total operating expenses		55,961		14,632		85,177		19,026
Income from operations	$	1,513	$	3,034	$	6,434	$	1,647

	June 30,		December 31,
Balance sheet information:	2016		2015
Current assets	$	65,807	$	25,646
Noncurrent assets		53,416		36,154
Current liabilities		53,636		20,774
Noncurrent liabilities		8,567		1,637

Our investment in unconsolidated joint ventures consists of the following (in thousands):

	June 30,		December 31,
	2016		2015
Beginning balance	$	43,104	$	2,100
Share of income		4,936		8,927
Fair value of contributed businesses		224,927		36,277
Distributions		—		(4,200)
Investment in unconsolidated joint ventures	$	272,967	$	43,104

NOTE 5—GOODWILL AND OTHER INTANGIBLE ASSETS

The following table summarizes the change in goodwill during the three months ended June 30, 2016 (in thousands):  

Balance at December 31, 2015	$	61,009
Adjustments		(9,619)
Balance at June 30, 2016	$	51,390

See Note 4 (Investment in Unconsolidated Joint Ventures) for more information on adjustment to goodwill.

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Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes the change in intangible assets during the three months ended June 30, 2016 (in thousands):

	Noncompete		Trade		Domain
	Agreements		Names		Names		Total
Balance at December 31, 2015	$	1,335	$	9,300	$	7,600	$	18,235
Additions		—		—		—		—
Amortization		(890)		—		—		(890)
Balance at June 30, 2016	$	445	$	9,300	$	7,600	$	17,345

NOTE 6—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company used an interest rate cap agreement with notional amount totaling $37.5 million to manage its exposure related to changes in interest rates on the Senior Secured Credit Facility. See Note 8 (Debt) for more information. This agreement had 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 did not contain credit-risk contingent features. In October 2015, the Company extinguished the debt related to the senior Secured Credit Facility, and reclassified losses of $0.1 million from accumulated other comprehensive income into earnings. The interest rate cap agreement was terminated on January 4, 2016. The Company has not engaged in hedging activity related to the New Credit Facility.

NOTE 7—ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

	June 30,		December 31,
	2016		2015
Accounts payable	$	13,901	$	13,600
Accrued expenses		5,558		7,297
Accrued tax distribution to LLC Unit holders		4,246		4,246
Other		903		2,378
Total accounts payable and accrued expenses	$	24,608	$	27,521

NOTE 8—DEBT

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

	June 30,		December 31,
	2016		2015
Term loan	$	120,313	$	123,438
Revolving credit		16,000		—
Other financing agreements		1,028		1,388
Total debt principal outstanding		137,341		124,826
Deferred financing costs		(3,291)		(3,678)
		134,050		121,148
Less current maturities		(7,278)		(7,585)
	$	126,772	$	113,563

On October 31, 2013, the Company entered into a Senior Secured Credit Facility (the “Facility”) for a $75.0 million term loan which was set to mature on October 31, 2018. The Facility included an additional $165.0 million

20

Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

delayed draw term loan commitment, which expired in April 2015, and a $10.0 million revolving commitment that was set to mature on October 31, 2018. All of the Company's assets were pledged as collateral under the Facility. The borrowing under the Facility was used by the Company to provide financing for working capital, capital expenditures and for new facility expansion and replaced an existing credit facility.

On June 11, 2014, the Company amended 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, $60.0 million in principal amount of which was used to make specified distributions and up to $10.0 million in principal amount which was 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. In April 2015, the Company drew $30.0 million on the delayed draw term loan prior to its expiration.

Borrowings under the Facility bore 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 Facility was 6.50% in the case of base rate loans and 7.50% in the case of LIBOR loans. The Facility included 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.

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. The Company had $23.8 million available under the revolving commitment at June 30, 2016, subject to certain debt covenants. During the three months ended June 30, 2016, the Company made mandatory principal payments under the New Facility of $1.6 million.

The net carrying amount of deferred financing fees capitalized in connection with the New Facility were approximately $3.3 million and $3.7 million, respectively, as of June 30, 2016 and December 31, 2015, which are included as a deduction to long-term debt, less current maturities in the accompanying condensed consolidated balance sheets. Amortization expense related to the deferred financing fees was approximately $0.2 million, $0.2 million, $0.4 million, and $0.5 million for the three and six months ended June 30, 2016 and 2015. Amortization expense is included within interest expense in the accompanying condensed consolidated statements of income.

The Facility contains certain affirmative covenants, negative covenants, and financial covenants which are measured on a quarterly basis. As of June 30, 2016, the Company was in compliance with all covenant requirements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In 2016, the Company entered into a finance agreement totaling approximately $0.8 million to finance the renewal of certain insurance policies.  The finance agreement has a fixed interest rate of 4.0% with principal being repaid over 10 months. 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.

NOTE 9—TRANSACTIONS WITH RELATED PARTIES

The Company made payments for contractor services to various related-party vendors, which totaled approximately $54,000, $32,000, $81,000 and $61,000 for the three and six months ended June 30, 2016 and 2015, 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 six months ended June 30, 2016 and 2015, the Company contributed approximately $1.7 million and $0.9 million to the 401(k) Plan for 2015 and 2014 matching contributions, respectively.

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 June 30, 2016 and December 31, 2015, the Company has an accrual of approximately $1.2 million and $0.8 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 six months ended June 30, 2016 and 2015 was approximately $0.1 million, $0.1 million, $0.2 million and $0.1 million, respectively. 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.

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

22

Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

future new freestanding emergency rooms and hospitals. This agreement is separate from and in addition to the Initial MPT Agreement. All other material terms remain consistent with the Initial MPT Agreement.

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 MPT Agreements, as amended, 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 a fixed number of facilities with a maximum aggregate funding of $500.0 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 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 June 30, 2016, the Company had total receivables of $10.1 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 $0.2 million, $0.4 million, $0.6 million and $0.8 million for the three and six months ended June 30, 2016 and 2015, respectively. In November 2015, the Company extended the lease term through April 2021 for its corporate headquarters.

Future minimum lease payments required under noncancelable operating leases and future minimum, capital lease payments as of June 30, 2016 were as follows (in thousands):  

	Capital		Operating
Years ending December 31,	leases		leases
2016 (6 months)	$	24	$	34,433
2017		49		69,182
2018		49		65,726
2019		49		58,253
2020		49		52,566
Thereafter		23		552,218
Total future minimum lease payments	$	243	$	832,378
Less: Amounts representing interest		(26)
Present value of minimum lease payments		217
Current portion of capital lease obligations		40
Long-term portion of capital lease payments	$	177

Rent expense totaled approximately $7.9 million, $7.1 million, $17.9 million and $14.3 million for the three and six months ended June 30, 2016 and 2015, respectively and is included as a component of other operating expenses within the unaudited condensed consolidated statements of income.  The Company has sublease agreements with the joint ventures in Arizona, Colorado, Dallas/Fort Worth and Louisiana 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 $8.4 million, $2.5 million, $13.0 million and $3.2 million during the three and six months ended June 30, 2016 and 2015, respectively, as rental income which is accounted for as a reduction of rent expense.

23

Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Future rental income associated with the sublease agreements as of June 30, 2016 were as follows (in thousands):

	Rental
Years ending December 31,	Income
2016 (6 months)	$	21,872
2017		43,698
2018		41,534
2019		36,585
2020		33,251
Thereafter		366,169
Total future rental income	$	543,109

NOTE 12—SUPPLEMENTAL CASH FLOW INFORMATION

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

	June 30,		June 30,
	2016		2015
Supplemental cash flow information:
Interest paid	$	3,133	$	6,670
Taxes paid		2,850		1,650
Supplemental noncash activities:
Assets acquired through capital lease		217		—
Note payable for other financing agreements		818		818
Contribution of assets to joint venture		32,741		12,332
Effects of tax receivable agreement		51,371		695

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 “2014 Plan”). In May 2016, the Company’s stockholders approved the Amended and Restated Adeptus Health Inc. 2014 Omnibus Incentive Plan (the “Amended and Restated Omnibus Plan”). The Amended and Restated Omnibus 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 June 30, 2016, 546,358 stock-based awards had been issued under the Omnibus Incentive Plan and 487,142 stock-based awards remained available for equity grants.

During the three months ended June 30, 2016 and 2015, the Company issued 1,846 and 5,273 time-based restricted shares of Class A common stock, respectively. The fair value of the time-based restricted shares of Class A common stock issued during the three months ended June 30, 2016 was $54.16 per share, and these shares vest over a period of three years. The fair value of the time-based restricted shares of Class A common stock issued during the three months ended June 30, 2015 ranged from $92.44 to $93.72 per share, and these shares vested on January 1, 2016. In addition, the Company issued 3,692 performance-based restricted shares of Class A common stock during the three months ended June 30, 2016.  The fair value of these performance-based restricted shares was $54.16 per share. The vesting of these performance-based shares is contingent upon meeting specified performance targets over a three year period.

24

Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

During the six months ended June 30, 2016 and 2015, the Company issued 114,490 and 149,741 time-based restricted shares of Class A common stock, respectively. The fair value of the time-based restricted shares of Class A common stock issued during the six months ended June 30, 2016 ranged from $54.16 to $56.92 per share, and these shares vest over a period of one to three years.  The fair value of the time-based restricted shares of Class A common stock issued during the six months ended June 30, 2015 ranged from $35.03 to $93.72 per share, and these shares vest over a period of six months to four years. In addition, the Company issued 209,748 performance-based restricted shares of Class A common stock during the six months ended June 30, 2016. The fair value of the performance-based restricted shares of Class A common stock issued during the six months ended June 30, 2016 ranged from $54.16 to $56.92 per share. The vesting of these performance-based shares is contingent upon meeting specified performance targets over a three year period.

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 six months ended June 30, 2016 and 2015.

The Company recorded compensation expense of $1.2 million, $0.6 million, $2.3 million and $1.1 million, adjusted for forfeitures, during the three and six months ended June 30, 2016 and 2015, respectively, related to restricted units, restricted stock and stock options 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.  No compensation expense was recorded during the three and six months ended June 30, 2016 related to restricted units with performance-based vesting criteria as vesting was not considered probable as of June 30, 2016. For the three and six months ended June 30, 2015, the Company recognized $0.1 million of stock-based compensation expense related to the restricted units with performance-based vesting criteria outstanding at that time.

As of June 30, 2016, $8.1 million of total unrecognized compensation costs for unvested awards, net of estimated forfeitures, was expected to be recognized over a weighted average period of 2.0 years`.

In May 2016, the Company’s stockholders approved the Adeptus Health Inc. Stock Purchase Plan (“ESPP”). The purpose of the ESPP is to afford eligible employees an opportunity to obtain a proprietary interest in the continued growth and prosperity of the Company through purchase of its common stock. An aggregate of 285,336 shares of Class A common stock may be issued under the Stock Purchase Plan.

NOTE 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)

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.

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 June 30, 2016, the Company has recorded an estimated payable pursuant to the tax receivable agreement of $237.9 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.

NOTE 15—NET INCOME PER SHARE

Basic net income per share is computed by dividing the net income by the weighted average number of common shares outstanding during the period. Diluted net income 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 per common share (in thousands, except share and per share data):

	Three months ended				Six months ended
	June 30,				June 30,
	2016		2015		2016		2015
Numerator
Net income attributable to Adeptus Health Inc.	$	86,948	$	10,634	$	91,480	$	11,228
Denominator:
Denominator for basic net income per Class A common share-weighted average shares		15,001,701		10,953,138		14,687,700		10,432,882
Effect of dilutive securities:
Restricted shares		—		—		—		—
Denominator for diluted net income per Class A common share-weighted average shares		15,001,701		10,953,138		14,687,700		10,432,882
Net income attributable to Adeptus Health Inc. per Class A common share - Basic	$	5.80	$	0.97	$	6.23	$	1.08
Net income attributable to Adeptus Health Inc. per Class A common share - Diluted	$	5.80	$	0.97	$	6.23	$	1.08

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.

NOTE 16—SUBSEQUENT EVENTS

The Company has evaluated subsequent events from the balance sheet date through the date at which the consolidated financial statements were available to be issued, and determined that there were no other items to disclose.

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

The following discussion and analysis of our financial position 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 2015 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 2015 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 premier healthcare providers. We own and operate First Choice Emergency Room in Texas, and operate a hospital and freestanding facilities in partnership with Texas Health Resources in Texas and UCHealth Emergency Rooms in partnership with University of Colorado Health in Colorado.  Together with Dignity Health, we also operate 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 93 freestanding facilities and two fully licensed general hospitals at June 30, 2016. 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. In the Arizona and Dallas/Fort Worth markets, each of the freestanding facilities are outpatient departments of the hospitals in those 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. As such, the Company did not receive benefit from the net proceeds. 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

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underwriting discounts and commissions and offering expenses. We used the net proceeds from the offering to purchase, for cash, 2,645,277 LLC Units. As such, the Company did not receive benefit from the net proceeds. An additional 1,264,723 shares were also sold by an affiliate of a significant stockholder.

On June 8, 2016, we completed a public offering of 1,774,219 shares of our Class A common stock at a price to the public of $62.00 per share and received net proceeds of approximately $107.4 million, after deducting underwriting discounts and commissions and offering expenses. We used the net proceeds from the offering to purchase, for cash, 1,774,219 LLC Units. As such, the Company did not receive benefit from the net proceeds. An additional 1,043,281 shares were also sold by an affiliate of a significant stockholder.

Joint Venture with Dignity Health

On October 22, 2014, we announced our expansion into Arizona through a joint venture with Dignity Health, one of the nation’s largest health systems. As of June 30, 2016, the partnership includes Dignity Health Arizona General Hospital, a full-service healthcare hospital facility in Phoenix Arizona and seven freestanding emergency departments. The hospital received its CMS certification from the Joint Commission on January 30, 2015. Department of Health and Human Services’ Centers for Medicare and Medicaid Services, or CMS, certification allows us to receive reimbursement for services provided to Medicare and Medicaid patients of the hospital. Dignity Health Arizona Health Hospital is a full-service hospital facility, licensed by the state as a general hospital.  Spanning 39,000 square feet, the hospital has 16 inpatient rooms, two operating rooms for inpatient and outpatient surgical procedures, an emergency department, a high-complexity laboratory and a full radiology suite. Patients have full access to the Dignity Health area facilities and physicians, and the hospital provides Phoenix-area residents with 24/7 access to emergency medical care.

Joint Venture with University of Colorado Health

On April 21, 2015, we announced a new partnership with University of Colorado Health, or UCHealth, to improve access to high-quality and convenient emergency medical care in Colorado. Under the partnership, UCHealth holds a majority stake in the freestanding emergency rooms throughout Colorado Springs, northern Colorado and the Denver metro area.  The Company contributed the 12 existing freestanding emergency rooms it held in Colorado, which have since been rebranded as UCHealth emergency rooms, and the related business associated with these facilities to the joint venture. The partnership will also include hospital locations planned for Colorado Springs and Denver.

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 freestanding emergency departments in locations still to be determined.

Joint Venture with Mount Carmel Health System

In February 2016, the Company announced expansion into Ohio and a new partnership with Mount Carmel Health System.  The partnership will include freestanding emergency rooms in the Columbus, Ohio market.

Joint Venture with Texas Health Resources

On November 4, 2015, the Company opened a full-service hospital facility in Carrollton, Texas, a suburb of the Dallas/Fort Worth Metroplex. This facility received its CMS certification from the Joint Commission on November 4, 2015. CMS certification allows us to receive reimbursement for services provided to Medicare and Medicaid patients of the hospital and its freestanding emergency departments in the Dallas/Fort Worth market. First Texas Hospital is a full-service healthcare hospital facility, licensed by the state as a general hospital. Spanning 77,000 square feet, the hospital has 50 inpatient rooms, three operating rooms for inpatient and outpatient surgical procedures, an emergency department, a high-complexity laboratory and a full radiology suite.

On May 11, 2016, the Company announced the formation of a new partnership with Texas Health Resources (“THR”) to enhance access to emergency medical care in Dallas/Fort Worth. The Company contributed First Texas

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Hospital and the 27 existing freestanding emergency rooms it held in Dallas/Fort Worth and the related business associated with these facilities to the joint venture. Under the joint venture, THR will hold a majority interest in these   facilities.  The contribution of these facilities and their operations was deemed a change of control for accounting purposes, and as such, the Company has recorded a gain of $185.4 million on the contribution of the previously fully owned facilities during the quarter ended June 30, 2016. This gain is net of a $9.6 million reduction of the goodwill related to the business associated with the facilities contributed to the joint venture.

We may not consolidate the financial results of the operations of any particular joint venture. While revenues from unconsolidated joint ventures are not recorded as revenues by us for GAAP reporting purposes, equity in earnings of joint ventures could be a significant portion of our overall earnings.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 for which the Company receives a management fee. Additionally, the Company receives a stipend for providing physicians to the facilities within each joint venture.

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.

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.

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

30

direct mail, radio, television, 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 local market conditions, such as weather, economy, etc., that may be beyond our direct control, as well as, seasonal conditions. These seasonal conditions include the timing, location and severity of influenza, allergens and other annually recurring viruses, which at times leads to severe upper respiratory concerns.

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				Six months ended
	June 30,				June 30,
	2016		2015		2016		2015
Commercial	$	92,068	$	100,545	$	215,114	$	193,812
Self-pay		5,407		2,360		10,879		3,990
Medicaid		1,972		343		4,406		398
Medicare		1,269		111		3,175		145
Other		879		1,004		1,309		1,920
Patient Service Revenue		101,595		104,363		234,883		200,265
Provision for bad debt		(16,673)		(17,514)		(43,726)		(32,459)
Net Revenue	$	84,922	$	86,849	$	191,157	$	167,806

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Four major third-party payors accounted for 79.5%, 85.1%, 80.8% and 85.6%, of our patient service revenue for the three and six months ended June 30, 2016 and 2015, respectively. These same payors also accounted for 76.2% and 65.9% of our accounts receivable as of June 30, 2016 and December 31, 2015, respectively. The following table presents a breakdown by major payor source of the percentage of patient service revenues for the periods indicated:

	Three months ended				Six months ended
	June 30,				June 30,
	2016		2015		2016		2015
Payor:
United HealthCare	30.3	%	30.9	%	29.4	%	28.9	%
Blue Cross Blue Shield	20.0		21.1		22.2		23.2
Aetna	15.8		19.5		15.9		19.7
Cigna	13.4		13.6		13.3		13.8
Other	17.3		14.5		16.0		14.1
Medicaid/Medicare	3.2		0.4		3.2		0.3
	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 six months ended June 30, 2016 and 2015, self-pay payments accounted for 5.3%, 2.3%, 4.6%  and 1.9% 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. For the three and six months ended June 30, 2016 and 2015, charity care write-offs represented 3.3%, 9.0%, 3.4% and 8.9%, 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, University of Colorado Health in Colorado and THR in Dallas/Fort Worth, 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. For the three months ended June 30, 2016, our systemwide same-store revenue decreased by 2.8% to $91.6 million from $94.3 million for the three months ended June 30, 2015.  For the six months ended June 30, 2016, our systemwide same-store revenue grew by 3.5% to $171.4 million from $165.6 million for the six months ended June 30, 2015. Opening new facilities is an important part of our growth strategy. 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 generated from its non-controlling equity investment in one full-service healthcare hospital facility and seven freestanding emergency rooms in Arizona, (ii) the Company’s preferred return and its share of the income generated from its non-controlling equity investments in 16 freestanding emergency rooms in Colorado and one hospital and 30 freestanding facilities in Dallas/Fort Worth, and (iii)  its share of the income generated from its non-controlling equity investment in the development activity associated with our joint ventures with Ochsner Health System in Louisiana and Mount Carmel Health System in Ohio 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 revenue 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 June 30, 2016, systemwide net patient services revenue grew by 36.2% to $142.4 million for the three months ended June 30, 2016, from $104.5 million for the three months ended June 30, 2015. 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 68 to 93, annual gross charge increases and continued growth of our hospitals and their hospital outpatient departments in Arizona and Texas. For the three months ended June

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30, 2016, systemwide patient volume grew by 58.6% to 89,001 compared to 56,119 for the three months ended June 30, 2015.

For the six months ended June 30, 2016, systemwide net patient services revenue grew by 50.0% to $282.7 million for the six months ended June 30, 2016, from $188.5 million for the six months ended June 30, 2015. 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 68 to 93, annual gross charge increases and continued growth of our hospitals and their hospital outpatient departments in Arizona and Texas. For the six months ended June 30, 2016, systemwide patient volume grew by 67.3% to 180,076 compared to 107,667 for the six months ended June 30, 2015.

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

	Three months ended				Six months ended
	June 30,				June 30,
	2016		2015		2016		2015
Net Patient Services Revenue:
Consolidated facilities(1)	$	84,922	$	86,849	$	191,157	$	167,806
Unconsolidated joint ventures		57,455		17,659		91,580		20,662
Systemwide net patient services revenue	$	142,377	$	104,508	$	282,737	$	188,468

⁽¹⁾ Net patient services revenue from our Colorado and Dallas/Fort Worth facilities is included as consolidated facilities revenue until consummation of the UCHealth joint venture on April 20, 2015 and the THR joint venture on May 11, 2016, respectively. 

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 facility pre-opening expenses, stock compensation expense, costs associated with our  public offerings, and other non-recurring costs, losses or 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 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 using data derived from our condensed consolidated financial statements for the periods indicated (in thousands):

	Three months ended		Six months ended
	June 30,		June 30,
	2016	2015	2016	2015
Net income	$ 148,196	$ 27,674	$ 156,059	$ 29,276
Depreciation and amortization(a)	5,206	4,929	10,015	9,685
Interest expense	1,822	3,898	3,648	7,172
Provision for income taxes	47,270	6,328	50,388	6,806
Gain on contribution to joint venture(b)	(185,336)	(24,250)	(185,336)	(24,250)
Preopening expenses(c)	3,294	1,991	5,234	4,089
Stock compensation expense(d)	1,221	608	2,309	1,157
Public offering costs€	530	993	530	993
Duplicative billing effort (f)	—	—	208	—
Other(g)	292	769	1,179	1,275
Total adjustments	(125,701)	(4,734)	(111,825)	6,927
Adjusted EBITDA	$ 22,495	$ 22,940	$ 44,234	$ 36,203

(a) Includes the Company’s proportionate share of depreciation and amortization related to its joint ventures. 

(b) Consists of a gain recognized on the contribution and change of control of previously owned freestanding facilities to the joint venture with THR in May 2016 and UCHealth in April 2015.

(c) Includes labor, marketing costs and occupancy costs prior to opening facilities and hospital losses prior to obtaining Medicare certification.

(d) Stock compensation expense associated with grants of management incentive units.

(e) For the three and six months ended June 30, 2016 and 2015, we incurred cost of $0.5 million and $1.0 million, respectively, in conjunction with secondary public offerings.

(f) Consists of duplicative costs, including salaries, stay bonuses, and contract labor, incurred during the transition to outsource billing services for the ICD-10 conversion.

(g) For the three months ended June 30, 2016, we incurred costs to develop long-term strategic goals and objectives totaling $0.3 million. For the three months ended June 30, 2015, we incurred costs to develop long-term strategic goals and objectives totaling approximately $0.6 million and third-party costs and fees involved in recruiting our management team of $0.2 million.

For the six months ended June 30, 2016, we incurred costs to develop long-term strategic goals and objectives totaling $1.2 million. For the six months ended June 30, 2015, we incurred costs to develop long-term strategic goals and objectives totaling approximately $1.1 million, third-party costs and fees involved in recruiting our management team of $0.2 million and terminated real-estate development costs totaling $32,000.

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Results of Operations

Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

The following table summarizes our results of operations for the three months ended June 30, 2016 and 2015 (in thousands):

	Three months ended  June 30,
									Percentage of
					Change from prior				net patient
					period				service revenue
	2016		2015		$		%		2016		2015
Statement of Operations Data:
Revenue
Patient service revenue	$	101,595	$	104,363	$	(2,768)	(2.7)	%
Provision for bad debt		(16,673)		(17,514)		841	(4.8)
Net patient service revenue		84,922		86,849		(1,927)	(2.2)		100.0	%	100.0	%
Management and contract services revenue		15,245		2,738		12,507	456.8		18.0		3.2
Total net operating revenue		100,167		89,587		10,580	11.8		118.0		103.2
Equity in earnings of unconsolidated joint ventures		2,435		3,621		(1,186)	(32.8)		2.9		4.2
Operating expenses:
Salaries, wages and benefits		62,130		51,124		11,006	21.5		73.2		58.9
General and administrative		13,015		11,370		1,645	14.5		15.3		13.1
Other operating expenses		12,093		12,541		(448)	(3.6)		14.2		14.4
Depreciation and amortization		3,412		4,523		(1,111)	(24.6)		4.0		5.2
Total operating expenses		90,650		79,558		11,092	13.9		106.7		91.6
Income from operations		11,952		13,650		(1,698)	(12.4)		14.1		15.7
Other income (expense):
Gain on contribution to joint venture		185,336		24,250		161,086	664.3		218.2		27.9
Interest expense		(1,822)		(3,898)		2,076	(53.3)		(2.1)		(4.5)
Total other income		183,514		20,352		163,162	801.7		216.1		23.4
Income before provision for income taxes		195,466		34,002		161,464	474.9		230.2		39.2
Provision for income taxes		47,270		6,328		40,942	647.0		55.7		7.3
Net income	$	148,196	$	27,674	$	120,522	435.5	%	174.5	%	31.9	%

Overall

Our results for the three months ended June 30, 2016 reflect a 11.8% increase in net operating revenue to $100.2 million and net income of $148.2 million compared to net income of $27.7 million for the three months ended June 30, 2015. The increase in net income is primarily attributable to a $10.6 million increase in net operating revenue, a $2.1 million decrease in interest expense, and a $185.3 million gain recognized on the contribution and change of control of previously owned facilities to the joint venture with THR. This increase was partially offset by a $1.2 million decrease in equity in earnings of unconsolidated joint ventures, an increase of salaries, wages, and benefits and other costs related to our growth initiatives and the impact of deferred taxes associated with the gain recognized on the contribution and change of control of previously owned facilities to the joint venture with THR.

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Revenue

Patient Service Revenue

Patient service revenue decreased by $2.8 million, or 2.7%, to $101.6 million for the three months ended June 30, 2016 from $104.4 million for the three months ended June 30, 2015. The decrease was primarily attributable to the deconsolidation of our DFW locations due to the THR joint venture offset by the impact of volumes generated from the expansion of the number of consolidated freestanding facilities and annual gross charge increases. 

Provision for Bad Debt

Our provision for bad debt decreased by $0.8 million to $16.7 million for the three months ended June 30, 2016, from $17.5 million for the three months ended June 30, 2015. This decrease was primarily attributable to the deconsolidation of our Dallas/Fort Worth locations due to the THR joint venture offset by bad debts associated with revenue generated from the expansion of the number of consolidated freestanding facilities.

Net Patient Service Revenue

As a result of the factors described above, our net patient service revenue decreased by $1.9 million, or 2.2%, to $84.9 million for the three months ended June 30, 2016, from $86.8 million for the three months ended June 30, 2015.

Management and Contract Services Revenue

Management and contract services revenue was $15.2 million for the three months ended June 30, 2016 compared to $2.7 million for the three months ended June 30, 2015. The increase is a result of our management and contract services agreement associated with our joint venture agreements, which increased due to the addition of the joint venture with THR in May 2016.

Equity in Earnings of Unconsolidated Joint Ventures

Equity in earnings of joint ventures consists of our ownership interest, which ranges from 49.0% to 50.1%, of earnings generated from our non-controlling equity investments. Our equity in earnings of unconsolidated joint ventures decreased by $1.2 million to $2.4 million for the three months ended June 30, 2016 from earnings of approximately $3.6 million for the three months ended June 30, 2015. The decrease is primarily attributable to a decrease in volumes in our UCHealth joint venture and increased contract services expense partially offset by earnings from the Arizona and Dallas/Fort Worth joint ventures.

Operating Expenses

Salaries, Wages and Benefits

Salaries, wages and benefits increased by $11.0 million to $62.1 million for the three months ended June 30, 2016, from $51.1 million for the three months ended June 30, 2015. This increase was primarily attributable to our continued efforts to support new facility growth, including $3.7 million in facility compensation, coupled with an increase of $12.9 million for physician labor, as we provide physician services to each facility, whether owned or managed, offset by billing and collection salaries, wages and benefits outsourced to a third party revenue cycle company and the deconsolidation of salaries attributable to joint ventures.

General and Administrative

General and administrative expenses increased by $1.6 million to $13.0 million for the three months ended June 30, 2016, from $11.4 million for the three months ended June 30, 2015. This increase was primarily attributable to $1.7 million in costs related to outsourcing billing and collections to a third party revenue cycle company, $0.5 million in legal and accounting expenses, and $0.4 million in other corporate expenses, offset by reductions of $0.4 million in

37

marketing costs associated with opening new facilities and our consumer awareness program, $0.5 million in costs associated with the secondary offerings in the current period compared to the prior year and the deconsolidation of costs attributable to joint ventures.

Other Operating Expenses

Other operating expenses decreased by $0.4 million to $12.1 million for the three months ended June 30, 2016, from $12.5 million for the three months ended June 30, 2015. This decrease was primarily attributable to the deconsolidation of costs attributable to joint ventures, offset by increases in costs due to the expansion of the number of consolidated freestanding facilities, including $1.6 million in lease costs for buildings and medical equipment, $0.1 million in building and medical equipment maintenance and $0.6 million in patient care and supply costs.

Depreciation and Amortization

Depreciation and amortization expenses decreased by $1.1 million to $3.4 million for the three months ended June 30, 2016, from $4.5 million for the three months ended June 30, 2015. This decrease was primarily attributable to the deconsolidation of assets attributable to joint ventures.

Other Income (Expense)

Gain on Contribution to Joint Venture

The Company recorded a gain of $185.4 million for the three months ended June 30, 2016 as a result of the contribution and change of control of previously owned freestanding facilities to the joint venture with THR. This gain is net of a $9.6 million reduction of the goodwill related to the business associated with the facilities contributed to the joint venture.

Interest Expense

Interest expense primarily consists of interest on our Senior Secured Credit Facility. Our interest expense decreased by $2.1 million to $1.8 million for the three months ended June 30, 2016, compared to $3.9 million for the three months ended June 30, 2015. This decrease was primarily attributable to lower borrowing rates as a result of refinancing our Senior Secured Credit Facility in October 2015.

Income Before Provision for Income Taxes

As a result of the factors described above, we recorded income before provision for income taxes of $195.5 million for the three months ended June 30, 2016, compared to net income of $34.0 million for the three months ended June 30, 2015.

Provision for Income Taxes

For the three months ended June 30, 2016, we recorded income tax expense of $47.3 million, which consists of $46.9 million of federal income tax expense and Texas margin tax of $0.4 million.

Net Income

As a result of the factors described above, we recorded net income of $148.2 million for the three months ended June 30, 2016, compared to net income of $27.7 million for the three months ended June 30, 2015.

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Six months ended June 30, 2016 Compared to Six months ended June 30, 2015

The following table summarizes our results of operations for the six months ended June 30, 2016 and 2015 (in thousands):

	Six months ended June 30,
									Percentage of
					Change from prior				net patient
					period				service revenue
	2016		2015		$		%		2016		2015
Statement of Operations Data:
Revenue
Patient service revenue	$	234,883	$	200,265	$	34,618	17.3	%
Provision for bad debt		(43,726)		(32,459)		(11,267)	34.7
Net patient service revenue		191,157		167,806		23,351	13.9		100.0	%	100.0	%
Management and contract services revenue		21,779		3,234		18,545	573.4		11.4		1.9
Total net operating revenue		212,936		171,040		41,896	24.5		111.4		101.9
Equity in earnings of unconsolidated joint ventures		4,936		2,927		2,009	68.6		2.6		1.7
Operating expenses:
Salaries, wages and benefits		128,945		100,004		28,941	28.9		67.5		59.6
General and administrative		29,279		21,834		7,445	34.1		15.3		13.0
Other operating expenses		27,106		23,846		3,260	13.7		14.2		14.2
Depreciation and amortization		7,783		9,279		(1,496)	(16.1)		4.1		5.5
Total operating expenses		193,113		154,963		38,150	24.6		101.0		92.3
Income from operations		24,759		19,004		5,755	30.3		13.0		11.3
Other income (expense):
Gain on contribution to joint venture		185,336		24,250		161,086	664.3		97.0		14.5
Interest expense		(3,648)		(7,172)		3,524	(49.1)		(1.9)		(4.3)
Total other income		181,688		17,078		164,610	963.9		95.0		10.2
Income before provision for income taxes		206,447		36,082		170,365	472.2		108.0		21.5
Provision for income taxes		50,388		6,806		43,582	640.3		26.4		4.1
Net income	$	156,059	$	29,276	$	126,783	433.1	%	81.6	%	17.4	%

Overall

Our results for the six months ended June 30, 2016 reflect a 24.5% increase in net operating revenue to $212.9 million and net income of $156.1 million compared to net income of $29.3 million for the six months ended June 30, 2015. The net income is primarily attributable to a $41.9 million increase in net operating revenue coupled with increases of $2.0 million and $161.1 million in earnings of unconsolidated joint ventures and a gain on our contribution and change of control of previously owned freestanding facilities to a joint venture with THR, respectively. These increases are partially offset by a $28.9 million increase in salaries, wages and benefits, $10.7 million increase in other costs related to our growth initiatives, an increase in the provision for income tax of $43.6 million, and decreases of $1.5 million in depreciation expense and $3.5 million in interest expense associated with our long-term debt.

Revenue

Patient Service Revenue

Patient service revenue increased by $34.6 million, or 17.30%, to $234.9 million for the six months ended June 30, 2016 from $200.3 million for the six months ended June 30, 2015. This increase was primarily attributable to the impact of patient volumes from new consolidated freestanding facilities and gross charge increases, offset by the deconsolidation of our Dallas/Fort Worth locations due to the THR joint venture.

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Provision for Bad Debt

Our provision for bad debt increased by $11.3 million to $43.7 million for the six months ended June 30, 2016, from $32.5 million for the six months ended June 30, 2015. This increase was primarily attributable to bad debts associated with revenue generated from the expansion of the number of consolidated freestanding facilities, offset by the deconsolidation of our Dallas/Fort Worth locations due to the THR joint venture.

Net Patient Service Revenue

As a result of the factors described above, our net patient service revenue increased by $23.4 million, or 13.9%, to $191.2 million for the six months ended June 30, 2016, from $167.8 million for the six months ended June 30, 2015.

Management and Contract Services Revenue

Management and contract services revenue was $21.8 million for the six months ended June 30, 2016 compared to $3.2 million for the six months ended June 30, 2015. The increase is a result of our management and contract services agreement associated with our joint venture agreements, which increased due to the addition of the joint venture with THR in May 2016.

Equity in Earnings of Unconsolidated Joint Ventures

Equity in earnings of joint ventures consists of our ownership interest, which ranges from 49.0% to 50.1%, of earnings generated from our non-controlling equity investments. Our equity in earnings of unconsolidated joint ventures increased by $2.0 million to $4.9 million for the six months ended June 30, 2016 from earnings of approximately $2.9 million for the six months ended June 30, 2015. The increase is attributable to entering a joint venture with THR in May 2016.

Operating Expenses

Salaries, Wages and Benefits

Salaries, wages and benefits increased by $28.9 million to $128.9 million for the six months ended June 30, 2016, from $100.0 million for the six months ended June 30, 2015. This increase was primarily attributable to our continued efforts to support new facility growth, including $11.2 million in facility and corporate compensation, coupled with an increase of $24.8 million for physician labor, which includes both owned and managed facilities as we provide physician services to each facility, offset by billing and collection salaries, wages and benefits outsourced to a third party revenue cycle company and the deconsolidation of salaries attributable to joint ventures.

General and Administrative

General and administrative expenses increased by $7.4 million to $29.3 million for the six months ended June 30, 2016, from $21.8 million for the six months ended June 30, 2015. This increase was primarily attributable to $3.3 million in costs related to outsourcing billing and collections to a third party revenue cycle company, $1.1 million in additional facility utilities and insurance expenses, $2.1 million in legal and accounting expenses, $0.2 million in travel expenses associated with increased headcount and the opening of new facilities outside of the Dallas/Fort Worth market and $1.7 million in other corporate expenses, offset by reductions of $0.5 million in marketing costs associated with opening new facilities and our consumer awareness program, $0.5 million in costs associated with the secondary offerings in the current period compared to the prior year and the deconsolidation of costs attributable to joint ventures.

Other Operating Expenses

Other operating expenses increased by $3.3 million to $27.1 million for the six months ended June 30, 2016, from $23.8 million for the six months ended June 30, 2015. This increase was primarily attributable to $4.0 million in additional lease costs for buildings and medical equipment at new and existing facilities and $0.6 million in building and

40

equipment maintenance for new and existing facilities. These costs were offset by decreases of $0.7 million in patient care and supply costs for new and existing facilities, $0.7 million in lease costs for corporate office space, as a charge of $0.4 million for lease termination expense in prior year did not recur, and the deconsolidation of costs attributable to joint ventures.

Depreciation and Amortization

Depreciation and amortization expenses decreased by $1.5 million to $7.8 million for the six months ended June 30, 2016, from $9.3 million for the six months ended June 30, 2015. This decrease was primarily attributable to the deconsolidation of costs attributable to joint ventures and a decrease in capital expenditures on new facility construction as we shifted toward third-party developers to fund all new construction.

Other Income (Expense)

Gain on Contribution to Joint Venture

The Company recorded a gain of $185.4 million for the six months ended June 30, 2016 as a result of the contribution and change of control of previously owned freestanding facilities to the joint venture with THR. This gain is net of a $9.6 million reduction of the goodwill related to the business associated with the facilities contributed to the joint venture.

Interest Expense

Interest expense primarily consists primarily of interest on our Senior Secured Credit Facility. Our interest expense decreased by $3.5 million to $3.6 million for the six months ended June 30, 2016, compared to $7.2 million for the six months ended June 30, 2015. This decrease was primarily attributable to lower borrowing rates as a result of refinancing our Senior Secured Credit Facility in October 2015.

Income Before Provision for Income Taxes

As a result of the factors described above, we recorded income before provision for income taxes of $206.4 million for the six months ended June 30, 2016, compared to $36.1 million for the six months ended June 30, 2015.

Provision for Income Taxes

For the six months ended June 30, 2016, we recorded income tax expense of $50.4 million, which consists of $49.4 million of federal income tax expense and state tax expense of $1.0 million.

Net Income

As a result of the factors described above, we recorded net income of $156.1 million for the six months ended June 30, 2016, compared to net income of $29.3 million for the six months ended June 30, 2015.

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.

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

41

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.

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 June 30, 2016, our principal sources of liquidity included cash of $3.7 million, funds available under our Senior Secured Credit Facility line of credit of $34.0 million, net of $10.2 million for outstanding letters of credit, subject to meeting certain debt covenants.   As of June 30, 2016, we also had $72.9 million available under the MPT Agreements. 

Cash Flows

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

	Six months ended
	June 30,
	2016		2015
Net cash (used in) provided by operating activities	$	(15,993)	$	1,075
Net cash used in investing activities		(4,421)		(758)
Net cash provided by financing activities		8,095		43,810
Net (decrease) increase in cash	$	(12,319)	$	44,127

Net Cash from Operating Activities

Net cash used by operating activities increased by $17.1 million to $16.0 million for the six months ended June 30, 2016, from $1.1 million provided by operating activities for the same period in 2015. This increase was primarily attributable to the gain and impact of deferred taxes associated with the contribution and change of control of previously owned facilities to the joint venture with THR, coupled with increases in receivables from joint ventures.

Net Cash from Investing Activities

Net cash used in investing activities increased by $3.6 million to $4.4 million for the six months ended June 30, 2016, from $0.8 million used by investing activities for the same period in 2015. This increase was primarily attributable to our investment in joint ventures with Ochsner Health System and Mount Carmel Health System, offset by proceeds from the sale of property and equipment in 2015 which did not recur in the current period.

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Net Cash from Financing Activities

Net cash provided by financing activities decreased by $35.7 million to $8.1 million for the six months ended June 30, 2016, from $43.8 million for the same period in 2015. This decrease results primarily from a decrease in borrowings under our Senior Secured Credit Facility in the current period compared to prior period, coupled with the reduction in outstanding debt due to payments of principal which began in December 2015.

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, Arizona and Dallas/Fort Worth.  At June 30, 2016, we accounted for these joint ventures under the equity method. Our ownership percentage ranges from 49.0% to 50.1% in each joint venture at June 30, 2016.

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.

Obligations and Commitments

The following is a summary of our contractual obligations as of June 30, 2016 (in thousands):

	Total	Less than 1 year	1-3           years	3-5 years	More than 5 years
Long-term debt obligations	$ 137,341	$ 3,760	$ 16,800	$ 116,781	$ -
Capital lease obligations(1)	243	24	98	98	23
Operating lease obligations	832,378	34,433	134,908	110,819	552,218
Total	$ 969,962	$ 38,217	$ 151,806	$ 227,698	$ 552,241

(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 matured on October 31, 2018. The Facility included an additional $165.0 million delayed draw term loan commitment, which expired in April 2015 and a $10.0 million revolving commitment that matured on October 31, 2018. All of our assets were pledged as collateral under the Facility.  The borrowings under the Facility was used by us to provide financing for working capital, capital expenditures and for new facility expansion and replaced an existing credit facility.

On June 11, 2014, we amended 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, $60.0 million in principal amount of which was used to make specified distributions and up to $10.0 million in principal amount which was used 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.

On April 20, 2015, we 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. In April 2015, we drew $30.0 million on the delayed draw term loan prior to its expiration.

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Borrowings under the Facility bore 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 Facility was 6.50% in the case of base rate loans and 7.50% in the case of LIBOR loans. The Facility included 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. The Company repaid the total outstanding balance in October 2015.

On October 6, 2015, we entered into a new 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 our existing credit facility and will be used by us 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. We had $23.8 million available under the revolving commitment at June 30, 2016, subject to certain debt covenants. During the six months ended June 30, 2016, we made mandatory principal payments under the New Facility of $3.1 million.

The New Facility contains a number of significant negative covenants. Such negative covenants, among other things and subject to certain exceptions, restrict Adeptus Health, Inc. and its subsidiaries’ ability to incur additional indebtedness, make guarantees and enter into hedging agreements; create liens on assets; engage in mergers or consolidations; transfer assets; pay dividends and distributions; change the nature of our business; make investments, loans and advances, including acquisitions; engage in certain transactions with affiliates; amend certain material agreements, including the MPT Agreements and organizational documents; enter into certain joint ventures; enter into certain restrictive agreements and make certain changes to our accounting practices. In addition, the New Facility contains financial covenants that, among other things, require us to maintain a consolidated net leverage ratio of at most 5.00 to 1.00 as of June 30, 2016 (decreasing to 2.00 to 1.00 as of September 30, 2019); a consolidated fixed charge coverage ratio of at least 1.25 to 1.00; and a minimum Non-MPT Facility EBITDA as of the end of any fiscal quarter of not less than $40.0 million. The financial covenant calculations are based on Adeptus Health Inc. and its subsidiaries as a consolidated group. In addition, the New Facility includes certain limitations on intercompany indebtedness. The affirmative covenants, negative covenants, and financial covenants, are measured on a quarterly basis and, as of June 30, 2016, we were in compliance with all covenant requirements.

Capital Lease Obligations

Assets under capital leases totaled approximately $0.2 million as of June 30, 2016, and were included within the medical equipment component of net property and equipment. We began recording amortization expense associated with these capital lease assets on July 1, 2016.

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.

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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 our Initial MPT Agreement. All material terms remain consistent with the Initial MPT Agreement.

Pursuant to the MPT Agreements, as amended, 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 MPT 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 a fixed number of facilities with a maximum aggregate funding of $500.0 million, of which, $72.9 million remained uncommitted as of June 30, 2016. 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 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 June 30, 2016, the Company had total receivables of $10.1 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 $0.6 million for the six months ended June 30, 2016.

We have sublease agreements with the joint ventures in Arizona, Colorado and Dallas/Fort Worth 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 $8.4 million, $2.5 million, $13.0 million and $3.2 million during the three and six months ended June 30, 2016 and 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):

	Six months ended
	June 30,
	2016		2015
Leasehold improvements	$	201	$	1,303
Computer equipment		1,503		927
Medical equipment		1,135		21
Office equipment		879		1,019
	$	3,718	$	3,270

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

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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.  The Company adopted amendments under ASU 2015-02 retrospectively on January 1, 2016. The adoption of the standard did not have an impact on the Company’s condensed consolidated financial statements as there was no change to the entities currently consolidated by the Company.

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. We retrospectively adopted the provisions of ASU 2015-03 as of January 1, 2016. As if December 31, 2015, $3.7 million of debt issuance costs were reclassified in the consolidated balance sheet from other long-term assets to long-term debt, less current portion. The adoption of ASU 2015-03 impacted the presentation of our consolidated financial position and had no impact on our results of operations, or cash flows.

In November 2015, the FASB issued ASU No. 2015-17, which amended the balance sheet classification requirements for deferred income taxes to simplify their presentation in the statement of financial position. The ASU requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This ASU is effective for fiscal years beginning after December 31, 2016, with early adoption permitted. The Company early adopted the provisions of this ASU for the presentation and classification of its deferred tax assets at December 31, 2015 and has reflected the change on the consolidated balance sheet for all periods presented.

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842). This new standard establishes a comprehensive new lease accounting model. The new standard clarifies the definition of a lease, requires a dual approach to lease classification similar to current lease classifications, and causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease term of more than twelve months. The standard is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The new standard requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements, but it does not require transition accounting for leases that expire prior to the date of initial application. We are evaluating the impact of the new standard on our consolidated financial statements.

In March 2016, FASB issued ASU 2016-09 “Improvements to Employee Share-Based Payment Accounting” (Topic 718). This new standard simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted. The Company is currently assessing the potential impact of the new standard on our consolidated financial statements.

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

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different estimates, or where accounting changes may reasonably occur from period to period, and in each case could 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, 2015. There have been no material changes in our critical accounting policies since December 31, 2015.

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 June 30, 2016, we had $137.3 million of indebtedness (excluding capital leases) which is at variable interest rates. We have not engaged in hedging activity related to the New Credit Facility 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 not effective due to the material weakness described in Managements’ Annual Report on Internal Control Over Financial Reporting as reported in our Annual Report on Form 10-K at December 31, 2015.

Changes in Internal Control Over Financial Reporting

During the period ended June 30, 2016, our management was engaged in the implementation of remediation efforts to address the material weakness that was identified in our Annual Report on Form 10-K for the year ended December 31, 2015. These remediation efforts were designed both to address the identified weakness and to enhance our overall financial reporting control environment. The Company is implementing controls over the completeness and accuracy of revenue transaction data exchanged with the third-party provider. In addition, the Company plans to obtain an appropriate annual internal control report from the third-party service organization utilized in coding and billing payors for the year ended December 31, 2016. This report will not be available until the fourth quarter of 2016, and as such, the material weakness cannot be fully remediated until that time.

Other than the controls related to the material weakness described above, there were no changes in our internal control over financial reporting during the quarter ended June 30, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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, 2015.  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. 

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: July 29, 2016	/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†	Amended and Restated Adeptus Health Inc. 2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (File No. 001-36520) filed with the Commission on May 17, 2016).
10.2	Operating Agreement of FTH DFW Partners LLC, dated as of May 10, 2016, by and between Texas Health Resources and ADPT DFW Holdings LLC, each as members of the FTH DFW Partners LLC, together with the integrated agreements (Portions of this exhibit have been omitted pursuant to a request for confidential treatment).
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

† Management compensatory plan or arrangement.

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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