ITEM 1. BUSINESS.
Overview
We are a leading publicly-traded provider of urgent and primary care
services. We currently own and operate 13 urgent and primary care centers in the east and southeastern United States. Our centers
deliver convenient, affordable urgent and primary care primarily on a walk-in basis to local community members. We also own an
ancillary services network business, which we intend to exit in the near future and refer to as our “legacy business.”
Upon our disposition of our legacy business, we believe we will be the only publicly-traded, pure-play urgent and primary care
provider in the United States.
Urgent and Primary Care Business
Our Business
Our community-based, walk-in medical centers offer an expansive array
of convenient and affordable medical services. Our primary clinical objective is to meet the everyday healthcare needs of the patients
and employers in our communities.
We treat colds, influenzas, ear infections, hypertension and other
routine medical conditions, which we consider to be among our “primary care” offerings, and we also treat higher acuity
conditions such as lacerations, dislocations, bruises, sprains and strains, which we consider our “urgent care” offerings.
We also offer occupational health services to local employers, which involve our performance of pre-employment drug screens, physicals
and the treatment of on-the-job injuries to employees or contractors of our employer clients.
All of our centers are equipped with digital x-ray machines, electrocardiograph
machines and basic laboratory equipment, and are generally staffed with a combination of licensed physicians, nurse practitioners,
physician assistants, medical support staff, and administrative support staff. Our medical support staff includes licensed nurses,
certified medical assistants, laboratory technicians, and registered radiographic technologists.
Although we treat patients of all ages, the majority of our patients
are between the ages of 27 and 55 years. When hospitalization, emergency or other specialty care is needed, we make referrals to
appropriate providers.
Purchasing urgent and primary care services on a walk-in basis represents
a growing, consumer-driven trend in healthcare delivery. We believe that focusing our primary attention on delivering such services
in a prompt and patient-centric manner, and in appealing environments, will allow us to operate more efficiently, productively
and at higher quality levels than our competitors.
In keeping with the retail nature of the services we offer, we have
initiated a rebranding campaign with our new tradename, GoNow Doctors. We believe our new name and logo will enable us to effectively
market our services in our existing and target communities:
We believe that by offering affordable urgent care and primary care
services to patients and their families at convenient times and locations, as well as easily accessible occupational health services
to local employers, we are uniquely positioned to serve as a meaningful part of the solution to the United States’ ongoing
healthcare problems.
Our Growth Plans
We intend to grow our urgent and primary care business in three
ways:
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by
opening new centers in locations that are complementary to our acquired sites;
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through the acquisition of quality centers in the eastern and southeastern United States; and
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by improving same-store performance of our new and existing centers.
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De Novo Clinic Growth
We intend to establish new centers in markets complementary to our
existing centers. We believe that doing so will enable us to better leverage our existing brand recognition, marketing resources,
and our physician and non-physician providers in the area. Our evaluation of such opportunities includes an analysis of local
competition, desirability of available sites, and surrounding market demographics (including income, population density, traffic
outside a particular location, percentage of insured population, and median age of the surrounding area).
Growth by Acquisition
Our experienced acquisition team utilizes its extensive healthcare
industry contacts, as well as referrals from current physician partners, brokers and bankers and other sources to identify, contact
and develop acquisition leads at attractive valuations. We intend to continue our pattern of acquiring what we view as quality
businesses at favorable purchase price multiples. We target one-center to four-center chains that we can acquire in the range of
four to five times EBITDA, which we believe presents an attractive arbitrage opportunity when compared with the up to 15 times
EBITDA multiples we believe are currently being paid for large, profitable operators.
We also analyze several factors in determining whether or not to
make an investment in a target, including, without limitation, the following:
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location and number of centers, historical financial performance, and existing local competition;
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opportunity to increase revenue through marketing, advertising, contract renegotiation, service line expansion and local
de
novo
growth;
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cost reduction opportunities through group purchasing and operational best practices;
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quality of physician and non-physician providers; and
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payor mix and local occupational medicine penetration.
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We believe there are numerous acquisition opportunities in our target
geographies at attractive valuations. Once identified, we carefully evaluate each opportunity through an extensive due diligence
process to determine which have the greatest potential for growth and profitability improvements under our operating structure.
Our comprehensive post-acquisition strategic plan also facilitates the integration of acquired centers by, among other things,
receiving the benefits of our best practices and group purchasing agreements designed to promote quality care, efficiency and
expense reduction.
Organic Revenue Growth at Existing Centers
We seek to increase revenue at our centers by broadening our range
of services to new and existing patients through marketing, advertising and rebranding efforts, and by increasing insurance reimbursement
rates. In addition, we seek to increase patient counts in our existing facilities, by focusing on increasing occupational medicine
services rendered at our facilities, as well as by expanding our days and hours of operation at select centers. For the year ended
December 31, 2015, our centers averaged a total of 25 patients per day per center. We believe our management team can increase
our patient volume significantly while contemporaneously leveraging group purchasing arrangements and other benefits derived from
economies of scale to reduce expenses.
Our Centers
Locations
We own and operate 13 urgent and primary care centers, two of which
are located in Georgia, two in Florida, three in Alabama, four in North Carolina and two in Virginia.
Staffing
We staff our centers with a combination of licensed physicians, nurse
practitioners, physician assistants, medical support staff, and administrative support staff. Our medical support staff includes
licensed nurses, certified medical assistants, laboratory technicians, and registered radiographic technologists.
Hours of Operation
Although our hours of operation vary based on local patient demand,
in general we operate from 8:00 a.m. to 8:00 p.m., Monday through Friday, and from 9:00 a.m. to 6:00 p.m. on Saturday and Sunday.
Services and Service Lines
Our centers offer a broad array of medical services that include
urgent care, primary care, family practice and occupational medicine. Specifically, we offer non-emergent, out-patient medical
care for the treatment of acute, episodic, and some chronic medical conditions. When hospitalization, emergency or other specialty
care is needed, we make referrals to appropriate providers.
Patients typically visit our centers on a walk-in basis if they do
not have an existing relationship with a primary care provider, when their condition is beyond the scope of their regular primary
care provider but not severe enough to warrant an emergency visit or when treatment by their primary care provider is inconvenient.
We strive to deliver quality care and an exceptional patient experience to every patient who seeks care at our centers. We also
attempt to capture follow-up, preventive and general primary care business after each walk-in visit. The services provided at our
centers include, but are not limited to, the following:
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routine treatment of general medical problems, including colds, influenza, ear infections, hypertension, asthma, pneumonia,
urinary tract infections, and other conditions typically treated by primary care providers;
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treatment of injuries, such as simple fractures, dislocations, sprains, bruises, and cuts;
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minor, non-emergent surgical procedures, including suturing of lacerations and removal of cysts and foreign bodies;
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diagnostic tests, such as x-rays, electrocardiograms, complete blood counts, and urinalyses; and
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occupational and industrial medical services, including drug testing, workers’ compensation cases, and physical examinations.
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Our occupational medicine service line involves the rendering of
treatment to employees or contractors of employer clients. Occupational medicine services are sold directly to employers and are
generally paid for in cash by the employer. The services typically rendered include, but are not limited to:
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general employee wellness services;
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drug and alcohol screening;
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pre-employment physicals; and
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employee vaccine administration.
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Our Acquisition Pipeline and De Novo Opportunities
We believe considerable opportunities exist to expand in underserved areas in our target markets. We are evaluating several
opportunities to develop new centers in proximity to our existing locations. To facilitate our de novo growth, we recently
entered into a development arrangement with Harbert Realty Services, LLC ("Harbert"), to build and develop up to 10 de novo
GoNow Doctors locations throughout Alabama, Georgia, North Carolina and Florida over the next 12 months. Although we have
not entered into lease arrangements with respect to any real property, we expect to do so in the near future. There is no
assurance, however, that we will open new centers in the locations currently being considered, or at all.
The growing urgent and primary care industry is highly-fragmented
making it, in our opinion, poised for consolidation by companies with experienced management teams and access to capital. The Urgent
Care Association of America reported that, in 2012, one and two center operators comprised approximately 71% of the industry. According
to the IBISWorld Report, the largest four urgent and primary care operators accounted for approximately just over 1% of industry
revenue in 2013.
In addition, we are at various stages of discussions with other prospective
sellers and sellers’ representatives, but we do not have letters of intent, binding purchase agreements, rights of first
offer or rights of first refusal with respect to any of the prospective acquisitions. Accordingly, none of these possible acquisitions
is deemed probable as of the date hereof. There is no assurance that we will consummate any other transactions or acquire any additional
centers.
We are also evaluating several opportunities to develop new centers
in proximity to our existing locations. Although we have not entered into lease or purchase arrangements with respect to any real
property, we believe the locations we have identified will support our growth plans. There is no assurance, however, that we will
open new centers in the locations currently being considered, or at all.
Fees and Revenue Cycle Management
We receive payment for services rendered at our centers
from patients, commercial payors, governmental payors (including Medicare) and from our occupational medicine clients. The
fees charged are generally determined by the nature and extent of medical services rendered. We believe the charges at our
centers are significantly lower than the charges for similar services or hospital emergency departments and are generally
competitive with those charged by local family medicine and primary care physicians and other similar providers in our
service areas.
In general, our centers attempt to collect amounts owed by patients
at the time of their service (including co-payments and deductibles). The amounts collected from patients often differ depending
on whether the patient visit is reimbursable under an urgent or primary care contract. We submit claims for services rendered to
commercial payors, occupational medicine payors and governmental payors electronically through third-party revenue cycle managers.
In most cases, commercial payors process our claims and pay us based on negotiated rates set forth in our applicable contract.
We rely on our outside revenue cycle managers to collect amounts
owed to us from commercial and governmental payors.
Marketing
Because the success of our centers is dependent on the acceptance
of our brands in the local communities in which we operate, we market at the center-level through various community outreach activities.
These activities are coordinated locally by the individual center and are supported by dedicated marketing personnel. Through the
local centers, we host and sponsor community activities and events and become involved in local business organizations such as
rotary clubs. We also implement a broad range of targeted marketing strategies via direct mail, radio, search engine optimization
and social media.
In connection with the acquisition of a new center, we expect to
commence marketing efforts to introduce ourselves to the local community. This may include inviting community members to attend
a tour of the center, conducting a direct mail campaign, or sponsoring an activity or event. Decisions regarding acquired center
branding or co-branding are made on a case-by-case basis. Although we are nearing completion on the rebranding of our existing
centers with our “GoNow Doctors” name and logo, we currently have no plans to change the names of the “Medac”
branded centers.
Information Systems and Controls
We use integrated clinical/practice management and accounting systems
to manage information flow and day-to-day operations at each of our centers. The overall system functionality allows for the following:
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Point-of-sale
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Charge capture and processing
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Registration
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Billing
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Scheduling
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Accounts receivable management
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Insurance rates, allowables, and adjustments processing
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Accounting
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Eligibility and verification checking
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Reporting and trending
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Clinical and coding documentation
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Related claims activities are processed electronically with each
of our payors through a national clearinghouse. Our systems are integrated with a commercially available reporting/dashboard solution,
which allows for the real-time tracking, trending, and reporting of key operating and financial statistics. Management uses these
tools and the resulting data to measure results against target thresholds and to identify needs for improvement in certain core
operational areas.
We attempt to integrate acquired centers into our systems promptly after we close a transaction. Because our acquisitions close on varying dates throughout the year, certain of our
newly acquired sites may be not be fully transitioned to our systems on any given date. Consequently, it may be difficult to capture
and analyze information from such newly acquired sites electronically, requiring us to capture and report manually for some period
after the acquisition is completed.
Competition
Urgent and primary care industry participants must compete with other
local operators, hospitals, traditional primary care physicians, family care practices, and other facilities that offer similar
services. Clinics operated by nurse practitioners and physician assistants, including “retail clinics,” are increasing
in number. Such clinics are expected to increase in number as states continue to relax the rules pertaining to the ability of such
mid-level providers to prescribe medications and to the supervision of such mid-level providers by physicians. Although our current
strategy does not involve the operation of pure, mid-level operated centers, we plan to closely analyze this option and monitor
the success of such competition in our markets.
Because we offer walk-in, urgent care, we are also in competition
with hospital-based and freestanding emergency departments. In 2012, Americans made approximately 136.1 million visits to an emergency
room, according to the CDC. Unlike our centers, emergency departments provide acute care, which may be life threatening or require
immediate attention, 24 hours a day, 7 days a week. Also different from our centers, hospital emergency departments that accept
payment from governmental sources are required by federal law to provide care to all patients regardless of their ability to pay.
Ancillary Network Business
On November 2, 2015 we commenced efforts to sell our legacy ancillary
network business to our largest client and manager of the business, HealthSmart Preferred Care II, L.P., or HealthSmart, in order
to continue our focus on our urgent and primary care business. Assuming we reach mutually agreeable terms with HealthSmart, we
anticipate closing the transaction in 2016. Accordingly, we have concluded that the ancillary network business qualifies as discontinued
operations and financial results for the ancillary network business are presented as discontinued operations in our consolidated
statements of operations, and the related asset and liability accounts are presented on our consolidated balance sheets as held
for sale as of December 31, 2015 and 2014.
Our ancillary network business offers cost
containment strategies to our payor clients, primarily through the utilization of a comprehensive national network of
ancillary healthcare service providers. This service is marketed to a number of healthcare companies including third party
administrators, or TPAs, insurance companies, large self-funded organizations, various employer groups and PPOs. We are able
to lower the payors’ ancillary care costs through our network of high quality, cost effective providers that we have
under contract at more favorable terms than the payors can generally obtain on their own.
Payors route healthcare claims to us after service is performed by participant
providers in our network. We process those claims and charge the payor according to an agreed upon, contractual rate. Upon processing
the claim, we are paid directly by the payor or the insurer for the service. We then pay the medical service provider according
to a separately negotiated contractual rate. We assume the risk of generating positive margin, which is calculated as the difference
between the payment we receive for the service from the payor and the amount we are obligated to pay the service provider.
As a result of continuing revenue declines in our ancillary network
business and our recent focus on the urgent and primary care business on October 1, 2014, we entered into a management services
agreement with HealthSmart. Under the management services agreement, HealthSmart manages the operation of our ancillary network
business, subject to the supervision of a five-person oversight committee comprised of three members selected by us and two members
selected by HealthSmart. As a result of this arrangement, we no longer employ the workforce of our ancillary network business.
Under the management services agreement, HealthSmart operates our ancillary network business for a management fee equal to the
sum of (a) 35% of the net profit derived from operation of our ancillary network business, plus (b) 120% of all direct and documented
operating expenses and liabilities actually paid during such calendar month by HealthSmart in connection with providing its management
services. For purposes of the fee calculation, the term “net profit” means gross ancillary network business revenue,
less the sum of (x) the provider payments and administrative fees and (y) 120% of all direct and documented operating expenses
and liabilities actually paid during such calendar month by HealthSmart in connection with providing its management services.
Any remaining net profit accrues to us on a monthly basis, which we recognize as service agreement revenue. During the term of
the agreement, HealthSmart is responsible for the payment of all expenses incurred in providing the management services with respect
to our ancillary network business, including personnel salaries and benefits, the cost of supplies and equipment, and rent. The
initial term of the management services agreement was three years, and it will terminate upon the consummation of the disposition
of the ancillary network business.
Our management services agreement with HealthSmart provides
that at any time between October 1, 2016 and the expiration date of the management services agreement, HealthSmart may
purchase, or we may require that HealthSmart purchase, our ancillary network business for a purchase price equal to $6.5
million less the aggregate sum of net profit received by us since the beginning of the management arrangement. The purchase
price would be payable by HealthSmart solely out of the net profit it derives from the operation of the ancillary network
business after consummation of the transaction. Each month, HealthSmart would be obligated to pay us 65% of the net profit
derived from the operation of the ancillary network business, with the net profit to be calculated for such purpose in the
same manner net profit is calculated for the purpose of the management fee as set forth above. Consummation of the
transaction would be subject to the satisfaction of certain material conditions, including approval by our stockholders if
our annual gross revenue from the urgent and primary care business does not then exceed $40.0 million. In the event
HealthSmart purchases our ancillary network business, the urgent and primary care business will be our only business line
following completion of that transaction.
Although HealthSmart’s option to purchase and our option to
sell the ancillary network business do not become exercisable until October 1, 2016, we currently are in negotiations with HealthSmart
to facilitate an earlier disposition. However, we cannot
assure you such negotiations will result in us disposing of our legacy business within such price range, earlier than October 1,
2016 or at all. See “Risk Factors — Risks Related to Our Legacy Business — We may not be
able to successfully complete the disposition of our ancillary network business to HealthSmart, or at all.”
In the event HealthSmart purchases our ancillary network
business, the urgent and primary care business will be our only business line, and we believe we will be the only
publicly-traded, pure-play urgent care consolidator in the United States. If for any reason the sale of our ancillary network
business to HealthSmart is not consummated during or at the end of the term of the management services agreement, we expect
to market the business for sale to parties other than HealthSmart or expeditiously wind down the business.
Pursuant to our management services agreement, HealthSmart is primarily
responsible for securing new clients and provider contracts and maintaining and growing existing relationships.
Our healthcare
payor clients engage us to manage a comprehensive array of ancillary healthcare services that they and their payors have agreed
to make available to their insureds or beneficiaries, or for which they have agreed to provide insurance coverage.
Our manager is our most significant client. Under our current client
contract with HealthSmart, which is separate from our management services agreement, we agreed to enhance our network of ancillary
service providers to address markets outside of the commercial group health space and utilize an administrative fee rate differential
to encourage HealthSmart to add payors that will access our network of ancillary providers. As part of the agreement, we pay HealthSmart
a monthly administrative services fee, subject to an annual maximum, to reimburse and to compensate it for the work it is required
to perform to support our program. The fee is based upon paid claims arising from our network of providers. The agreement, the
initial term of which expired on December 31, 2015, was subject to an automatic, two-year renewal term. After this initial renewal
term, the agreement will automatically renew for successive periods of one year. The agreement may be terminated by either party
for breach or by notice of non-renewal no less than 90 days prior to the expiration of the initial term or any renewal term. Although
this contract continues our client relationship with HealthSmart, the agreement does not provide that we are its exclusive ancillary
care network, and HealthSmart can engage other ancillary care providers directly into its network. Accordingly, we cannot be certain
of any level of continued claims volume from HealthSmart.
Government Regulation
The healthcare industry is subject to extensive regulation by federal,
state and local governments. Government regulation affects our businesses in a number of ways, including requiring licensure or
certification of facilities, regulating billing and payment for certain of our services, regulating how we maintain health-related
information and patient privacy, and regulating how we pay and contract with our physicians. Our ability to conduct our business
and to operate profitability depends in part upon obtaining and maintaining all necessary licenses and other approvals, and complying
with applicable healthcare laws and regulations. See “Risk Factors — Risks Related to Our Regulatory Environment.”
Our Urgent and Primary Care Business
State Laws Regarding Prohibition of Corporate Practice of Medicine
and Fee-Splitting Arrangements
The laws and regulations relating to our operations vary from state
to state, and approximately 30 states, including Georgia and North Carolina, prohibit certain entities from practicing medicine
or controlling physicians’ medical decisions. These laws are generally intended to prevent unlicensed persons or entities
from interfering with or inappropriately influencing the physicians’ professional judgment. They also may prevent or limit
the sharing or assignment of income generated by our physicians. We believe that we are in material compliance with these laws
in the states in which we operate. Regulatory authorities or other parties, however, including our physicians, may attempt to
assert that we are impermissibly engaged in the practice of medicine or that our contractual arrangements with our physicians
constitute unlawful fee-splitting. In that event, we could be subject to adverse judicial or administrative interpretations, to
civil or criminal penalties, our contracts could be found legally invalid and unenforceable, we could be made to refund amounts
received during our noncompliance, or we could be required to restructure our contractual arrangements with our physicians.
State Law Regulation of Construction, Acquisition or Expansion of
Healthcare Facilities
Thirty-six states have certificate of need programs that require
some level of prior approval for the construction of a new facility, acquisition or expansion of an existing facility, or the addition
of new services at various healthcare facilities. Although the states in which we currently operate do not require a certificate
of need to acquire or operate our centers, other states where we may seek to expand our operations may. See “Risk Factors — Risks
Related to Our Regulatory Environment.”
State Licensure
Only a few states, including Florida, currently require the
licensure of centers such as ours. This absence of a uniform national licensing process leads to inconsistencies in the
nature and scope of services offered at urgent care centers. To effectively control the nature of services rendered and the
environments in which they are offered, state legislators or regulators may attempt to regulate the urgent care industry in a
manner similar to hospitals and freestanding emergency rooms. Such regulations could have a material impact on our growth
strategy and expansion plans.
Laws and Rules Regarding Billing
Numerous state and federal laws apply to our claims for payment,
including but not limited to (i) “coordination of benefits” rules that dictate which payor must be billed first when
a patient has coverage from multiple payors, (ii) requirements that overpayments be refunded within a specified period of time,
(iii) “reassignment” rules governing the ability to bill and collect professional fees on behalf of other providers,
(iv) requirements that electronic claims for payment be submitted using certain standardized transaction codes and formats, and
(v) laws requiring all health and financial information of patients in a manner that complies with applicable security and privacy
standards.
Additionally, on January 16, 2009, the U.S. Department of Health
and Human Services, or HHS released the final rule mandating that providers covered by the Administrative Simplification Provisions
of the Health Insurance Portability and Accountability Act, or HIPAA, including our centers, must implement the ICD-10 for medical
coding on October 1, 2013. ICD-10 is the 10th revision of the International Statistical Classification of Diseases and Related
Health Problems, a medical classification list produced by the World Health Organization. The ICD-10 codes, the use of which became
mandatory on October 15, 2015, require significantly more information than the ICD-9 codes previously used for medical coding and
also require covered entities to code with much greater detail and specificity than with ICD-9 codes. We may incur additional
costs in our continued efforts to implement these changes. See “Risk Factors — Risks Related to our Urgent
and Primary Care Business — Our business may be adversely affected by CMS’ adoption of a new coding set
for diagnoses.”
Medicare and Medicaid
Our centers participate in the federal Medicare program and currently
one state Medicaid program on a limited basis. Since 1992, Medicare has paid for the “medically necessary” services
of physicians, non-physician practitioners, and certain other suppliers under a physician fee schedule, a system that pays for
covered physicians’ services furnished to a person with Medicare Part B coverage. Under the physician fee schedule, relative
values are assigned to each of more than 7,000 services to reflect the amount of work, the direct and indirect (overhead) practice
expenses, and the malpractice expenses typically involved in furnishing that service. Each of these three relative value components
is multiplied by a geographic adjustment factor to adjust the payment for variations in the costs of furnishing services in different
localities. Resulting relative value units, or RVUs, are summed for each service and then are multiplied by a fixed-dollar conversion
factor to establish the payment amount for each service. The higher the number of RVUs assigned to a service, the higher the payment.
Under the Medicare fee-for-service payment system, an individual can choose any licensed physician enrolled in Medicare and use
the services of any healthcare provider or facility certified by Medicare.
Historically, the Centers for Medicare & Medicaid Services, or
CMS, was required to limit the growth in spending under the physician fee schedule by a sustainable growth rate, or SGR. Congress
typically responded to these automatic physician payment cuts with a series of temporary fixes. President Obama signed into law
the Medicare Access and CHIP Reauthorization Act of 2015, or MACRA, which includes permanent repeal of the SGR formula. With MACRA,
the long sought after goal of permanently repealing the SGR was achieved and overrides a 21.2% across-the-board cut in Medicare
physician payments that briefly took effect on April 1, 2015. Under MACRA, physician payment updates are to be linked to quality
and value measurements and participation in alternative payment models. Enactment of MACRA, and repeal of the SGR, could be offset
by further reductions in Medicare payments, and any such reductions could have a material adverse effect on our business.
CMS’s Recovery Audit Contractor Program
The Medicare Modernization Act of 2003, or MMA, introduced on a trial
basis the use of recovery audit contractors, or RACs, for the purpose of identifying and recouping Medicare overpayments and underpayments.
Any overpayment received from Medicare is considered a debt owed to the federal government. In October 2008, CMS made the RAC program
permanent. RACs review Medicare claims to determine whether such claims were appropriately reimbursed by Medicare. RACs engage
in an automated review and in a complex review of claims. Automated reviews are conducted when a review of the medical record is
not required and there is certainty that the service is not covered or is coded incorrectly. Complex reviews involve the review
of all underlying medical records supporting the claim, and are generally conducted where there is a high likelihood, but not certainty,
that an overpayment has occurred. RACs are paid a contingency fee based on overpayments they identify and collect.
A MAC may suspend Medicare payments to a provider if it determines
that an overpayment has occurred. When a Medicare claim for payment is filed, the MAC will notify the patient and the provider
of its initial determination regarding reimbursement. The MAC may deny the claim for one of several reasons, including the lack
of necessary information or lack of medical necessity for the services rendered. Providers may appeal any denials of claims.
Anti-Kickback Statute
As participants in the Medicare program, we are subject to the Anti-Kickback
Statute. The Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation or receipt of remuneration, directly
or indirectly, in return for the referral of patients or arranging for the referral of patients, or in return for the recommendation,
arrangement, purchase, lease or order of items or services that are covered, in whole or in part, by a federal healthcare program
such as Medicare or Medicaid. The term “remuneration” has been broadly interpreted to include anything of value such
as gifts, discounts, rebates, waiver of payments or providing anything at less than its fair market value. The ACA amended the
intent requirement of the Anti-Kickback Statute such that a person or entity can be found guilty of violating the statute without
actual knowledge of the statute or specific intent to violation the statute. Further, the ACA now provides that claims submitted
in violation of the Anti-Kickback Statute constitute false or fraudulent claims for purposes of the civil False Claims Act, or
FCA, including the failure to timely return an overpayment. Many states have adopted similar prohibitions against kickbacks and
other practices that are intended to influence the purchase, lease or ordering of healthcare items and services reimbursed by a
governmental health program or state Medicaid program. Some of these state prohibitions apply to remuneration for referrals of
healthcare items or services reimbursed by any third-party payor, including commercial payors.
Because we currently accept funds from governmental health programs,
we are subject to the Anti-Kickback Statute. Violations of the Anti-Kickback Statute can result in exclusion from Medicare, Medicaid
or other governmental programs as well as civil and criminal penalties, such as $25,000 per violation and up to three times the
remuneration involved. If in violation, we may be required to enter into settlement agreements with the government to avoid such
sanctions. Typically, such settlement agreements require substantial payments to the government in exchange for the government
to release its claims, and may also require entry into a CIA. Any such sanctions or obligations contained in a CIA could have a
material adverse effect on our business, financial condition and results of operations.
Stark Law
Because we participate in the Medicare program, we are also subject
to the Stark Law. The Stark Law prohibits a physician from referring a patient to a healthcare provider for certain designated
health services reimbursable by Medicare if the physician (or close family members) has a financial relationship with that provider,
including an ownership or investment interest, a loan or debt relationship or a compensation relationship. The designated health
services covered by the law include, among others, laboratory and imaging services and the provision of durable medical equipment.
Some states have self-referral laws similar to the Stark Law for Medicaid claims and commercial claims.
We have entered into several types of financial relationships with
physicians who staff our urgent and primary care centers, including compensation arrangements. We believe that the compensation
arrangements under our employment agreements and independent contractor agreements satisfy one or more exceptions to the Stark
Law. Although we believe that the compensation provisions included in our written physician agreements, which are the result of
arm’s length negotiations, result in fair market value payments for medical services rendered or to be rendered, an enforcement
agency could nevertheless challenge the level of compensation that we pay our physicians.
The ownership of our stock by any of our physicians will constitute
a “financial relationship” for purposes of the Stark Law. As a result, in order to bill Medicare for the designated
health services referred by such physician stockholder, we must qualify for one or more exceptions to the Stark Law. Although an
exception exists for publicly traded securities, we will not qualify until our stockholders’ equity exceeds $75.0 million
at the end of our most recent fiscal year or on average during the previous three years. If we are unable to qualify for another
exception to the Stark Law, we will not be entitled to bill Medicare for services rendered by a physician stockholder. As a result,
we may suffer losses to our net revenue. Further, it may become necessary for us to perform regular compliance tests to determine
which, if any, of our physicians own our stock, and, if so, to determine whether or not we meet an applicable exception to the
Stark Law.
Such efforts could have a material adverse effect on our business and our ability
to compensate physicians, and could result in damage to our reputation.
Violation of the Stark Law may result in prohibition of payment for
services rendered, a refund of any Medicare payments for services that resulted from an unlawful referral, $15,000 civil monetary
penalties for specified infractions, criminal penalties, exclusion from Medicare and Medicaid programs, and potential false claims
liability. The repayment provisions in the Stark Law are not dependent on the parties having an improper intent; rather, the Stark
Law is a strict liability statute and any violation is subject to repayment of all amounts arising out of tainted referrals. If
physician self-referral laws are interpreted differently or if other legislative restrictions are issued, we could incur significant
sanctions and loss of revenues, or we could have to change our arrangements and operations in a way that could have a material
adverse effect on our business, prospects, damage to our reputation, results of operations and financial condition.
False Claims Act
The federal civil FCA prohibits providers from, among other things,
(1) knowingly presenting, or causing to be presented, claims for payments from the Medicare, Medicaid or other federal healthcare
programs that are false or fraudulent; (2) knowingly making, using or causing to be made or used, a false record or statement to
get a false or fraudulent claim paid or approved by the federal government; or (3) knowingly making, using or causing to be made
or used, a false record or statement to avoid, decrease or conceal an obligation to pay money to the federal government. The “qui
tam” or “whistleblower” provisions of the FCA allow private individuals to bring actions under the FCA on behalf
of the government. These private parties are entitled to share in any amounts recovered by the government, and, as a result, the
number of “whistleblower” lawsuits that have been filed against providers has increased significantly in recent years.
Defendants found to be liable under the FCA may be required to pay three times the actual damages sustained by the government,
plus mandatory civil penalties ranging between $5,500 and $11,000 for each separate false claim and possible expulsion from the
program.
There are many potential bases for liability under the FCA. The government
has used the FCA to prosecute Medicare and other government healthcare program fraud such as coding errors, billing for services
not provided, and providing care that is not medically necessary or that is substandard in quality. The ACA also provides that
claims submitted in connection with patient referrals that results from violations of the Anti-Kickback Statute constitute false
claims for the purpose of the FCA, and some courts have held that a violation of the Stark law can result in FCA liability as well.
In addition, a number of states have adopted their own false claims and whistleblower provisions whereby a private party may file
a civil lawsuit in state court. We are required to provide information to our employees and certain contractors about state and
federal false claims laws and whistleblower provisions and protections.
Civil Monetary Penalties Statute
The federal Civil Monetary Penalties statute prohibits, among other
things, the offering or giving of remuneration to a Medicare or Medicaid beneficiary that the person or entity knows or should
know is likely to influence the beneficiary’s selection of a particular provider or supplier of items or services reimbursable
by a federal or state healthcare program.
Electronic Health Records
As required by the American Recovery and Reinvestment Act of 2009,
the Secretary of HHS has developed and implemented an incentive payment program for eligible healthcare professionals that adopt
and meaningfully use electronic health record, or EHR, technology. HHS uses an Internet-based Provider Enrollment, Chain and Ownership
System, or PECOS, to verify Medicare enrollment prior to making EHR incentive program payments. If our employed professionals are
unable to meet the requirements for participation in the incentive payment program, including having an enrollment record in PECOS,
we will not be eligible to receive incentive payments that could offset some of the costs of implementing EHR systems. Further,
healthcare professionals that fail to demonstrate meaningful use of certified EHR technology are subject to reduced payments from
Medicare. System conversions to comply with EHR could be time consuming and disruptive for physicians and employees. Failure to
implement EHR systems effectively and in a timely manner could have a material adverse effect on our financial position and results
of operations.
We are in process of converting certain of our clinical and patient
accounting information system applications to newer versions of existing applications or altogether new applications. In connection
with our implementation and conversions, we have incurred capitalized costs and additional training and implementation expenses.
Our Ancillary Network Business
During 2010, President Obama signed the ACA and the HCEARA legislating
broad-based changes to the United States healthcare system. Among other things, the healthcare reform legislation includes insurance
industry reforms including, but not limited to guaranteed coverage requirements, elimination of pre-existing condition exclusions
and annual and lifetime maximum limits, and restrictions on the extent to which policies can be rescinded; creation of new market
mechanisms through the creation of health benefit exchanges; and creation of new and significant taxes on health insurers and,
in some circumstances healthcare benefits.
Section 1001 of the ACA amended Title 27 of the Public Health Service
Act of 1994, or the Public Health Service Act, to add, among other things, a new Section 2718, entitled “Bringing Down the
Cost of Health Care Coverage.” This new provision requires health insurance issuers to publicly report “the ratio of
the incurred loss (or incurred claims) plus the loss adjustment expense (or change in contract reserves) to earned premiums”
and account for premium revenue related to reimbursement for clinical services, activities that improve health care quality, and
all other non-claims costs. The law also requires issuers to provide annual rebates to their enrollees if their MLR does not meet
specific targets. For issuers in the large group market, the MLR must be at least 85%, and for issuers in the small group and individual
markets, the MLR must be at least 80%. The law also gives the National Association of Insurance Commissioners, or NAIC, subject
to certification of the Secretary of the HHS, authority to develop definitions and standards by which to determine compliance with
the new requirements.
In December 2010, HHS published final MLR regulations and agency
guidance, based upon the recommendations of the NAIC, implementing the new sections of the Public Health Service Act as mandated
by the ACA. The new regulations apply to issuers offering group or individual health insurance coverage. Under the MLR regulations,
an issuer’s MLR is calculated as the ratio of (i) incurred claims plus expenditures for activities that improve health care
quality to (ii) premium revenue. The two key aspects to this calculation involve what comprises an “incurred claim”
and what qualifies as an “expenditure for health care quality improvement.”
Incurred claims are reimbursement for clinical services, subject
to specific deductions and exclusions. Specifically, incurred claims represent the total of direct paid claims, unpaid claim reserves,
change in contract reserves, reserves for contingent benefits, the claim portion of lawsuits and any experience rating refunds.
Prescription drug rebates received by the issuer and overpayment recoveries from providers must be deducted from incurred claims.
Also, the following amounts are explicitly excluded and therefore may not be included in the calculation of incurred claims: (i)
amounts paid to third party vendors for secondary network savings; (ii) amounts paid to third party vendors for network development,
administrative fees, claims processing, and utilization management; and (iii) amounts paid, including amounts paid to a provider,
for professional or administrative services that do not represent compensation or reimbursement for covered services provided to
an enrollee. The regulation permits that some amounts “may” be included in incurred claims — market
stabilization payments, state subsidies based on stop-loss methodologies, and incentive and bonus payments made to providers. The
regulations themselves provide examples of specifically excluded amounts. With regard to amounts paid for network development (as
noted in (ii) above), if an issuer contracts with a behavioral health, chiropractic network, or high technology radiology vendor,
or a pharmacy benefit manager, and the vendor reimburses the provider at one amount but bills the issuer a higher amount to cover
its network development, utilization management costs, and profits, then the amount that exceeds the reimbursement to the provider
must not be included in incurred claims. With regard to administrative services (as noted in (iii) above), medical record copying
costs, attorneys’ fees, subrogation vendor fees, compensation to paraprofessionals, janitors, quality assurance analysts,
administrative supervisors, secretaries to medical personnel and medical record clerks must not be included in incurred claims.
In order to properly classify what activities “improve health
care quality,” the activity must be designed to improve health quality, increase the likelihood of desired health outcomes,
be directed toward individual enrollees or incurred for the benefit of specific segments of enrollees, or be grounded in evidence
based medicine. In addition, the activity must be primarily designed to improve health outcomes, prevent hospital readmissions,
improve patient safety and reduce medical errors, implement, promote and increase wellness activities and/or enhance the use of
health care data to improve quality. The regulations also contain a list of 14 expenditures that are specifically excluded from
‘improvement of health care quality’ activities. Among these excluded expenditures are: (1) those that are designed
primarily to control or contain costs; (2) activities that can be billed or allocated by a provider for care delivery and which
are, therefore, reimbursed as clinical services; (3) expenditures related to establishing or maintaining a claims adjudication
system, including costs directly related to upgrades in health information technology that are designed primarily or solely to
improve claims payment capabilities or to meet regulatory requirements for processing claims (for example, costs of implementing
new administrative simplification standards and code sets adopted pursuant to HIPAA, including the new ICD-10 requirements); (4)
all retrospective and concurrent utilization review; (5) costs of developing and executing provider contracts and fees associated
with establishing or managing a provider network, including fees paid to a vendor for the same reason; (6) provider credentialing;
(7) marketing expenses; (8) costs associated with calculating and administering individual enrollee or employee incentives; (9)
portions of prospective utilization that does not meet the definition of activities that improve health quality; and (10) any function
or activity not expressly included, unless otherwise approved by and within the discretion of the Secretary.
It is possible that a portion of the fees payors are contractually
required to pay us and that do not qualify as “incurred claims” may not be included as expenditures for activities
that improve health care quality. Such a determination may make it more difficult for us to retain existing clients or to add new
clients, because our clients’ or prospective clients’ MLR may otherwise not meet the specified targets.
Privacy and Security Regulations
Numerous federal and state laws and regulations, including HIPAA
and HITECH, govern the collection, dissemination, security, use and confidentiality of patient-identifiable health information.
As required by HIPAA, HHS has adopted standards to protect the privacy and security of this health-related information. The HIPAA
privacy regulations contain detailed requirements concerning the use and disclosure of individually identifiable health information
and the grant of certain rights to patients with respect to such information by “covered entities.” We believe that
all or substantially all of our entities qualify as covered entities under HIPAA. We have taken actions to comply with the HIPAA
privacy regulations including the creation and implementation of policies and procedures, staff training, execution of HIPAA-compliant
contractual arrangements with certain service providers and various other measures. Although we believe we are in substantial compliance,
ongoing implementation and oversight of these measures involves significant time, effort and expense.
In addition to the privacy requirements, HIPAA covered entities must
implement certain administrative, physical, and technical security standards to protect the integrity, confidentiality and availability
of certain electronic health-related information received, maintained, or transmitted by covered entities or their business associates.
Although we have taken actions in an effort to be in compliance with these security regulations, a security incident that bypasses
our information security systems causing an information security breach, loss of PHI, or other data subject to privacy laws or
a material disruption of our operational systems could have a material adverse effect on our business, along with fines. Furthermore,
ongoing implementation and oversight of these security measures involves significant time, effort and expense.
Further, HITECH, as implemented in part by an omnibus final rule
published in the Federal Register on January 25, 2013, further requires that patients be notified of any unauthorized acquisition,
access, use, or disclosure of their unsecured protected health information, or PHI, that compromises the privacy or security of
such information. HHS has established the presumption that all unauthorized uses or disclosures of unsecured PHI constitute breaches
unless the covered entity or business associate establishes that there is a low probability the information has been compromised.
HITECH and implementing regulations specify that such notifications must be made without unreasonable delay and in no case later
than 60 calendar days after discovery of the breach. Breaches affecting 500 patients or more must be reported immediately to HHS,
which will post the name of the breaching entity on its public website. Furthermore, breaches affecting 500 patients or more in
the same state or jurisdiction must also be reported to the local media. If a breach involves fewer than 500 people, the covered
entity must record it in a log and notify HHS of such breaches at least annually. These breach notification requirements apply
not only to unauthorized disclosures of unsecured PHI to outside third parties but also to unauthorized internal access to or use
of such PHI.
The scope of the privacy and security requirements under HIPAA was
substantially expanded by HITECH, which also increased penalties for violations. Currently, violations of the HIPAA privacy, security
and breach notification standards may result in civil penalties ranging from $100 to $50,000 per violation, subject to a cap of
$1.5 million in the aggregate for violations of the same standard in a single calendar year. The amount of penalty that may be
assessed depends, in part, upon the culpability of the applicable covered entity or business associate in committing the violation.
Some penalties for certain violations that were not due to “willful neglect” may be waived by the Secretary of HHS
in whole or in part, to the extent that the payment of the penalty would be excessive relative to the violation. HITECH also authorized
state attorneys general to file suit on behalf of residents of their states. Applicable courts may be able to award damages, costs
and attorneys’ fees related to violations of HIPAA in such cases. HITECH also mandates that the Secretary of HHS conduct
periodic compliance audits of a cross-section of HIPAA covered entities and business associates. Every covered entity and business
associate is subject to being audited, regardless of the entity’s compliance record.
State laws may impose more protective privacy restrictions related
to health information and may afford individuals a private right of action with respect to the violation of such laws. Both state
and federal laws are subject to modification or enhancement of privacy protection at any time. We are subject to any federal or
state privacy-related laws that are more restrictive than the privacy regulations issued under HIPAA. These statutes vary and could
impose additional requirements on us and more severe penalties for disclosures of health information. If we fail to comply with
HIPAA, similar state laws or any new laws, including laws addressing data confidentiality, security or breach notification, we
could incur substantial monetary penalties and substantial damage to our reputation.
States may also impose restrictions related to the confidentiality
of personal information that is not considered PHI under HIPAA, including certain identifying information and financial information
of our patients. Theses state laws may impose additional notification requirements in the event of a breach of such personal information.
Failure to comply with such data confidentiality, security and breach notification laws may result in substantial monetary penalties.
HIPAA and HITECH also include standards for common healthcare electronic
transactions and code sets, such as claims information, plan eligibility and payment information. Covered entities such as the
Company and each of our centers are required to conform to such transaction set standards.
ITEM 1A. RISK FACTORS.
Risks Related to Our General Business
We may not be able to continue as a going concern
if we do not obtain additional financing.
Our
recurring losses from operations and our stockholders’ deficit raise substantial doubt about our ability to continue as a
going concern, and our independent accountants’ audit report for the year ended December 31, 2015 states that there is substantial
doubt about our ability to continue as a going concern. Our ability to continue as a going concern is highly dependent upon obtaining
additional financing for our operations as well as the disposition of our ancillary network business on favorable terms. There
can be no assurance that we will be able to raise any additional funds, or if we are able to raise additional funds, that such
funds will be in the amounts required or on terms favorable to us. In addition, the perception that we may not be able to continue
as a going concern may cause others to choose not to deal with us due to concerns about our ability to meet our contractual obligations
and may adversely affect our ability to raise additional capital.
We have incurred losses in most of our years of
operation, and we may never be profitable again, despite our new business strategy.
With the exception of the years 2008, 2009 and 2010, we have incurred
losses in each year since our inception. At December 31, 2015, we had an accumulated deficit of approximately $35.2 million. We
incurred a net loss of $13.3 million for the year ended December 31, 2015, and losses are continuing through the date hereof. All
losses prior to the second half of 2014 were attributable to our ancillary network business. Our prospects in the ancillary network
business must be considered in light of the numerous risks, expenses, delays and difficulties frequently encountered in a highly-competitive,
consolidating industry as well as the risks inherent in our management arrangement with HealthSmart. No assurances can be given
that our future revenue from the ancillary network business will not continue to decline, which will result in continued operating
losses.
We announced our entry into the urgent and primary care market in
April 2014. We incurred losses of approximately $5.2 million from this business segment for the year ended December 31, 2015. Although
we plan to grow and operate the urgent and primary care business profitably, no assurances can be given that our efforts will be
successful.
We will require additional capital to fund our
operating and expansion costs, and our inability to obtain such capital will likely harm our business.
We will require additional capital to fund our urgent and primary
care growth and expansion plans. We may also need additional capital if we are unable to exit the ancillary network business or
if we are unable to operate our urgent and primary care business profitably. Furthermore, if the profit we receive from our two
business lines is not sufficient to cover our central overhead costs, we will also need additional capital. We cannot assure you
that we will be able to obtain such financing in a timely manner, on favorable terms or at all.
If additional financing is not available on satisfactory terms or
at all, we may be unable to expand our business or acquire new centers at our projected rate, or at all, and our operating results
may suffer. Debt financing increases expenses and must be repaid regardless of operating results and may impose restrictions on
the manner in which we operate our business. Equity financing, or debt financing that is convertible into equity, could result
in additional dilution to our existing stockholders. Furthermore, if we are unable to obtain adequate capital, whether in the form
of equity or debt, to fund our business and growth strategies we may be required to delay, scale back or eliminate some or all
of our expansion plans, which may have a material adverse effect on our business, operating results, financial condition, or prospects.
There is no assurance that we will be successful in obtaining sufficient
capital financing on commercially reasonable terms or at all, or, if we did obtain capital financing, that it would not be dilutive
to current stockholders.
We may need to raise additional capital to satisfy
our indebtedness.
Our indebtedness to Wells Fargo Bank, National Association, or
Wells Fargo, under our credit agreements, which totaled $11.1 million at December 31, 2015, matures in part on June 1, 2016
($5.0 million) and on October 1, 2016 (remainder). If we are unable to extend or refinance the Wells Fargo debt, we will need
to raise additional capital to repay Wells Fargo on the applicable maturity dates. In addition, our indebtedness to sellers
of urgent and primary care centers that we acquired in 2014 and 2015 now totals approximately $0.7 million and is payable at
varying times and in varying amounts until June 2017. We can provide no assurances that any additional sources of financing
will be available to us on favorable terms, if at all, to repay our indebtedness or for any other purpose. Our failure to
raise a sufficient amount of additional capital may significantly impact our ability to operate and expand our business and
would create substantial doubt as to our ability to continue as a going concern.. For further discussion of our liquidity
requirements, see “Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Liquidity and Capital Resources,” included elsewhere in this report.
Our subleases, management services agreement and
other contractual arrangements may not result in our realizing the financial benefits of direct ownership of Medac and may not
be as effective as direct ownership in providing managerial control over Medac.
There is a risk that state authorities in some jurisdictions, including
North Carolina, may find that certain of our contractual relationships, including those entered into in connection with the Medac
Asset Acquisition, violate laws prohibiting the corporate practice of medicine and fee-splitting arrangements, which could have
a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our
common stock. These laws are generally intended to prevent unlicensed persons or entities from interfering with or inappropriately
influencing a physician’s professional judgment and may prevent or limit the sharing or assignment of income generated by
certain of our physicians. See “Business — Our Urgent Care and Primary Care Business — Government
Regulation — Our Urgent and Primary Care Business — State Laws Regarding Prohibition of Corporate Practice of
Medicine and Fee Splitting Arrangements.”
Under applicable state law, we are prohibited from directly owning
an interest in a medical practice in North Carolina, including Medac. Accordingly, we are realizing the benefit of the Medac Asset
Acquisition though our subleases, management services agreement and other contractual arrangements. These arrangements may not
be as effective as direct ownership in providing us with the financial benefits of or managerial control over Medac. For example,
with limited exceptions, the annual consideration due to us under the subleases, management services agreement and other contractual
arrangements must be set in advance, which could result in our receipt of less than all of Medac’s annual earnings. Additionally,
because we do not consolidate Medac for income tax purposes, we may be unable to receive the benefit of any tax losses accrued
by Medac. In the event we or our contractual arrangements are found to violate applicable North Carolina law, such contractual
arrangements could be deemed void and unenforceable as a matter of law, which may have a material adverse effect on our business,
operating results, cash flow and financial condition.
If we had direct ownership of Medac, we would be able to exercise
our rights as an equity holder directly to effect changes to the board of directors of Medac, which could effect changes at the
management and operational levels. With our contractual arrangements, we may not be able to directly change the members of the
board of directors of Medac and will have to rely on the rights provided in our subleases, management services agreement and other
contractual arrangements for such purposes. The parties to our subleases, management services agreement and other contractual arrangements
may have conflicts of interest with us or our stockholders, and they may not act in our best interests or may not perform their
obligations under these contracts. Such risks will exist throughout the period in which we manage Medac through such contractual
arrangements unless a change in the law is enacted. If any dispute relating to such contracts remained unresolved, we would have
to enforce our rights under these contracts under state law through arbitration, litigation and other legal proceedings and therefore
will be subject to uncertainties in the legal system. Any such dispute could result in the ultimate termination of such contracts,
which would require that we identify a new medical company to operate the clinical aspects of the business. Therefore, our subleases,
management services agreement and other contractual arrangements may not be as effective in ensuring our financial rights or control
over the relevant portion of Medac’s business operations as direct ownership would be.
We have experienced significant turnover in our
senior management and our business may be adversely affected by the transitions in our senior management team or by our inability
to effectively handle our transition and any future succession planning.
We are highly dependent on the executive leadership of our senior
management and key employees and their extensive experience in the urgent and primary care industry, as well as their extensive
knowledge of healthcare operations and center acquisitions. Our success depends, in large part, on the contributions and strategic
vision of our senior management team as well as those other key personnel who manage our operations. In October 2014, we received
resignation notices from our then-serving Chief Financial Officer and Principal Accounting Officer after we announced the relocation
of our corporate headquarters from Dallas, Texas to Atlanta, Georgia; in April 2015, our President, Chairman and Chief Executive
Officer, Richard W. Turner, Ph.D., died unexpectedly; in July 2015, our then-serving Chief Financial Officer announced his resignation;
and in January 2016, our President and Chief Operating Officer announced his resignation. On January 8, 2016, our Board of Directors
appointed Adam S. Winger to serve as our President and Chief Executive Officer and appointed James A. Honn to the additional
position of Chief Operating Officer. Mr. Winger has continuously served us in several capacities during the period from July
2014 until January 2016, including as our Vice President of Acquisitions, Secretary, Interim Chief Financial Officer and General
Counsel. Mr. Honn has served as our Chief Information Officer since April 2013. In March 2016, Robert Frye, our Controller
and Principal Accounting Officer, was appointed to serve as our Interim Chief Financial Officer.
These transitions in our executive team have been disruptive to our
business, and if we are unable to manage orderly transitions, our business may continue to be adversely affected. Additionally,
the loss of other members of our senior management team or key personnel could harm our ability to implement our business strategy
and respond to the rapidly changing market conditions in which we operate. There may be a limited number of persons with the requisite
skills to serve in these positions, and we cannot assure you that we would be able to identify or employ such qualified personnel
on acceptable terms, if at all. The search for permanent replacements could also result in significant recruiting and relocation
costs. If we fail to successfully attract and appoint a permanent Chief Financial Officer with the appropriate expertise, we could
experience increased employee turnover and harm to our business, results of operations, cash flow and financial condition.
Our business depends on numerous complex information
systems, and any failure to successfully maintain these systems or implement new systems could materially harm our operations.
We depend on complex, integrated information systems and standardized
procedures for operational and financial information. We may not have the necessary resources to enhance existing information systems
or implement new systems where necessary to handle our needs. Furthermore, we may experience unanticipated delays, complications
and expenses in implementing, integrating and operating our systems. Any interruptions in operations during periods of implementation
would adversely affect our ability to properly allocate resources and process information in a timely manner, which could result
in customer dissatisfaction and delayed cash flow. In addition, our technology systems, or a disruption in the operation of such
systems, could be subject to physical or electronic break-ins, and similar disruptions from unauthorized tampering. The failure
to successfully implement and maintain operational, financial and billing information systems could have an adverse effect on our
ability to obtain new business, retain existing business and maintain or increase our profit margins.
A failure in or a breach of our operational or
security systems or infrastructure, or those of the third party vendors and other service providers or other third parties with
which we transact business, including as a result of cyber-attacks, could disrupt our business, result in the disclosure or misuse
of confidential or proprietary information, damage our reputation, increase our costs or cause losses.
We rely on communications and information systems to conduct our
business. Information security risks have generally increased in recent years in part because of the proliferation of new technologies,
the use of the internet and telecommunications technologies to conduct transactions, and the increased sophistication and activities
of organized crime, hackers, and terrorists, activists, and other external parties. Our business, financial, accounting, and data
processing systems, or other operating systems and facilities may stop operating properly or become disabled or damaged as a result
of a number of factors, including events that are wholly or partially beyond our control.
Although we have information security procedures and controls in
place, our technologies, systems and networks and our payors’ systems may become the target of cyber-attacks or information
security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of our or
our payors’ or other third parties’ confidential information.
Although we have disaster recovery and other policies and procedures
designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be
no assurance that any such failures, interruptions or security breaches will not occur or, if, they do occur, that they will be
adequately addressed. We may be required to expend additional resources to continue to modify or enhance our protective measures
or to investigate and remediate information security vulnerabilities. Disruptions or failures in the physical infrastructure or
operating systems that support our business, or cyber-attacks or security breaches of our networks, systems or devices could have
a material adverse effect on our business, results of operations or financial condition.
We may not be able to adequately secure or protect
our intellectual property and other proprietary rights that are material to our business, or to defend successfully against intellectual
property infringement claims by third parties.
Our ability to compete effectively depends in part upon our intellectual
property rights, including but not limited to our trademarks. Our use of contractual provisions, confidentiality procedures and
agreements, and trademark, copyright, unfair competition, trade secret and other laws to protect our intellectual property rights
may not be adequate. Litigation may be necessary to enforce our intellectual property rights, or to defend against claims by third
parties that the conduct of our businesses or our use of intellectual property infringes upon such third party’s intellectual
property rights. For example, in 2015 a complaint was filed against us in the U.S. District Court for the Northern District of
Alabama by American Family Care, Inc. and Irwin Holdings, LLC. The complaint alleged, among other things, that our use of the trade
name “American CareSource” in the urgent and primary care business infringed upon their trademark, “American
Family Care.” The parties settled the dispute and the court dismissed the case. Any intellectual property
litigation or claims brought against us, whether or not meritorious, could result in substantial costs and diversion of our resources,
and there can be no assurances that favorable final outcomes will be obtained in all cases. The terms of any settlement or judgment
may require us to pay substantial amounts to the other party or cease exercising our rights in such intellectual property, including
ceasing the use of certain trademarks used by us to distinguish our services from those of others or ceasing the exercise of our
rights in copyrightable works. In addition, we may have to seek a license to continue practices found to be in violation of a third
party’s rights, which may not be available on reasonable terms, or at all. Our business, financial condition, and results
of operations could be adversely affected as a result.
The credit agreements governing our indebtedness
contain restrictive covenants that may limit our ability to respond to changes in market conditions or pursue business opportunities.
Our credit agreements contain restrictive covenants that limit our
ability to, among other things:
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incur additional secured indebtedness other than purchase money indebtedness not to exceed $1.5 million in the aggregate;
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merge or consolidate with another entity;
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pay dividends or make other distributions;
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make additional investments in fixed assets in any year in excess of $1.5 million, unless such additional investments are made
in connection with our acquisition of all or substantially all of another company’s fixed assets;
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guarantee obligations of any other person or entity;
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mortgage or pledge any of our assets except liens securing permitted purchase money indebtedness; or
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make any loans or advances, excluding any loan or advance made to Medac Health Services, P.A., up to $1 million.
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We also cannot assure you that any third party or unaffiliated guarantors
will permit us to respond to changes in market conditions or pursue business opportunities.
The limitation on additional investments in fixed assets could limit
our ability to execute our de novo clinic growth strategy if the lender does not waive compliance with this covenant. The requirement
that we comply with these provisions may materially adversely affect our ability to react to changes in market conditions, take
advantage of business opportunities we believe to be desirable, obtain future financing, fund desired capital expenditures or withstand
a continuing or future downturn in our business.
If we are unable to comply with the restrictions
and covenants in our credit agreements, there could be an event of default under the terms of such agreements, which could result
in an acceleration of repayment.
Our ability to comply with the restrictions and covenants in our
credit agreements may be affected by events beyond our control. For example, in April 2015, we received notice from Wells Fargo
that an event of default had occurred under our July 2014 credit agreement following the unexpected death of our then President,
Chairman and Chief Executive Officer, Dr. Richard W. Turner, who had guaranteed part of our indebtedness under the July 2014 credit
agreement. Although that event of default was cured to the satisfaction of Wells Fargo, and Wells Fargo notified us that it will
not enforce its rights and remedies related to Dr. Turner’s death, we cannot assure you that in the future we or our guarantors
will be willing or able to comply with the restrictions and covenants in our credit agreements, or that any future events of default
will be waived. In the event of a default under our credit agreements, the lender could terminate its commitment to lend or could
accelerate the loan and declare all amounts borrowed due and payable. If any of these events occur, we could be forced to liquidate
all or a portion of our assets, which might not be sufficient to repay in full all of our outstanding indebtedness and we may be
unable to find alternative financing. Even if we could obtain alternative financing, it might not be on terms that are favorable
or acceptable to us. Additionally, we may not be able to amend our credit agreements or obtain needed waivers on satisfactory terms.
Our borrowing under our credit agreements exposes
us to interest rate risk.
Our results of operations are exposed to interest rate risk associated
with borrowing under our credit agreements, which bear interest at daily one month London Interbank Offered Rate, or LIBOR, plus
1.75%. By its nature, a variable interest rate will move up or down based on changes in the economy and other factors, all of which
are beyond our control. If interest rates increase, so will our interest costs, which may have a material adverse effect on our
results of operations, cash flows available for working capital and capital expenditures, and our overall financial condition.
We may be adversely affected by prevailing economic
conditions and financial, business and other factors beyond our control.
Our ability to attract and retain patients, invest in and grow our
business and meet our financial objectives and obligations depends on our operating and financial performance, which, in turn,
is subject to numerous factors, including the prevailing economic conditions and financial, business and other factors beyond our
control, such as the rate of unemployment, the extent and severity of illness, the number of uninsured persons in the United States
and inflationary pressures. We cannot anticipate all the ways in which the current economic climate and financial market conditions
could adversely impact our business.
The financial instability of our patients, many of whom may be adversely
affected by volatile economic conditions, could present a variety of risks that are beyond our control. For example, unemployment
and underemployment, and the resultant loss of insurance, may decrease the demand for healthcare services and pharmaceuticals.
If fewer patients are seeking medical care because they do not have insurance coverage, our centers may experience reductions in
revenues, profitability or cash flow. This, in turn, could adversely affect our financial condition and liquidity. In addition,
widespread and prolonged unemployment, notwithstanding the enforceability of the ACA could result in a substantial number of people
becoming uninsured or underinsured. In turn, this may lead to fewer individuals pursuing or being able to afford our services.
To the extent prevailing economic conditions result in fewer patients being treated, our business, results of operations, financial
condition and cash flows could be adversely affected.
Our ability to use our net operating loss carryforwards
to offset future taxable income may be subject to limitations.
In general, under Sections 382 and 383 of the Internal Revenue Code
of 1986, as amended, or the Code, a corporation that undergoes an “ownership change,” generally defined as a greater
than 50% change by value in its equity ownership over a three-year period, is subject to limitations on its ability to utilize
its pre-change net operating losses, or NOLs. As of December 31, 2015, 2014 and 2013, our NOL carryforwards were approximately
$31.6 million, $19.6 million and $14.5 million, respectively, which expire from 2025 through 2034.
Our existing NOL carryforwards may be subject to limitations arising from previous ownership changes. Either alone, or when aggregated
with past transactions, future changes in our stock ownership, some of which might be beyond our control, could result in an ownership
change under Section 382 of the Code. In the event we are deemed to experience such a change in control, we may not be able to
utilize some or all of the NOL carryforwards for state or federal income tax purposes even if we attain profitability.
Risks Related to Our Urgent and Primary Care Business
We may not be able to implement successfully our
growth strategy for our urgent and primary care business on a timely basis or at all, which could harm our business, financial
condition and results of operations.
The growth of our urgent and primary care business depends on our
ability to execute our plan to open and acquire new centers. Our ability to acquire and open profitable centers depends on many
factors, including our ability to:
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access capital to fund future acquisitions and preopening expenses;
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successfully identify and secure leases for sites in desirable locations;
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achieve brand awareness in new and existing markets;
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manage costs, which could give rise to delays or cost overruns;
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recruit, train, and retain qualified physicians, nurse practitioners, physician assistants, nurses, medical technologists and
other staff in our local markets;
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obtain favorable reimbursement rates for services rendered at the centers;
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successfully staff and operate new centers;
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obtain all required governmental approvals, certificates, licenses and permits on a timely basis;
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manage delays in the acquisition or opening of centers;
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outperform local competitors; and
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maintain adequate information systems and other operational system capabilities.
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Further, applicable laws, rules and regulations (including licensure
requirements) could negatively impact our ability to operate both new and existing centers.
Accordingly, we may not be able to achieve our planned growth or,
even if we are able to grow our center base as planned, any new centers may not be profitable or otherwise perform as planned.
Failure to implement successfully our growth strategy would likely have an adverse impact on our business, financial condition
and results of operations.
We are operating a new business line, and management
has limited experience operating such a line for us.
Our urgent and primary care business is a new business line for us,
and members of our management team do not have substantial experience operating in this segment with our Company. As a result,
our historical financial results may not be comparable to future results. Also, we may be subject to risks that we are unable to
presently identify, such as regulatory risks. We cannot assure you that management will be able to profitably operate our urgent
and primary care business. Such failure may have an adverse impact on our business, financial condition and results of operations.
The long-term success of our urgent and primary
care business is highly dependent on our ability to successfully identify and acquire target centers and open new centers.
To achieve our growth strategy, we will need to acquire and open
new centers and operate them on a profitable basis. We take into account numerous factors in identifying target markets where we
can enter or expand.
The number and timing of new centers acquired and opened during any
given period may be negatively impacted by a number of factors including, without limitation:
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the identification and availability of attractive sites for new centers and the ability to negotiate suitable lease terms;
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our ability to successfully identify and address pertinent risks and benefits during acquisition due diligence;
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the preparation of target centers’ financial statements using methods of accounting other than generally accepted accounting
principles;
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the proximity of potential sites to one of our or our competitors’ existing centers;
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our ability to obtain required governmental licenses, permits and authorizations on a timely basis; and
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our ability to recruit qualified physicians, nurse practitioners, physician assistants, nurses, medical technologists and other
personnel to staff our centers.
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If we are unable to find and secure attractive target centers to
expand in existing markets or enter new markets, our revenues and profitability may be harmed, we may not be able to implement
our growth strategy and our financial results may be negatively affected.
Our acquisition, integration and opening of centers
in new markets exposes us to various risks and may require us to develop new business models.
Our growth and profitability depend on our ability to successfully
implement our growth strategy by expanding the number of centers we operate in both new and existing markets. We cannot assure
you that our efforts to expand into new markets, particularly where we do not currently operate, will succeed. To operate in new
markets, we may be required to modify our existing business model and cost structure to comply with local regulatory or other requirements,
which may expose us to new operational, regulatory or legal risks.
We may be unable to acquire target centers within our current price
ranges. This may reduce the pace of our growth and increase the need for additional debt and equity capital. The patient population
of centers we acquire may be loyal to existing ownership, making it difficult to maintain pre-closing revenue and profit levels.
The re-branding of acquired centers may have an adverse market effect in local communities, and our brand may not be received as
favorably in the local communities as we anticipate.
The process of integration of an acquired center may subject us to
a number of risks, including:
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failure to successfully manage relationships with physicians and other staff of the acquired center;
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demands on management related to the increase in size of our Company after the acquisition;
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diversion of management attention from the operation of our business;
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potential difficulties integrating and harmonizing financial reporting systems;
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regulatory and compliance risks;
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difficulties in the assimilation and retention of employees;
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inability to retain the physicians and other staff of the acquired center;
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inability to establish uniform standards, controls, systems, procedures and policies;
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inability to retain the patients of the acquired center;
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inability to improve our operational systems sufficiently to support the expansion of our operations to achieve economies of
scale in order to improve operating margins;
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exposure to legal claims for activities of the acquired center prior to acquisition; and
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incurrence of additional expenses in connection with the integration process.
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If we are unable to successfully integrate acquired centers or if
there are delays in integration, the anticipated benefits of the acquisition may not be realized fully or at all or may take longer
to realize than expected.
Additionally, centers we open in new markets may take longer to reach
expected revenue and profit levels on a consistent basis. The cost of opening and operating new centers may exceed our budget,
thereby affecting our overall profitability. New markets may have competitive conditions, consumer preferences, and healthcare
spending patterns that are more difficult to predict, identify or satisfy than our existing markets. We may need to make greater
investments than we originally planned in advertising and promotional activity in new markets and after closing acquisitions to
build brand awareness. We may find it more difficult in new markets to hire, and we may not be able to retain and motivate, qualified
physicians, nurse practitioners, physician assistants, medical technologists and other personnel. We may need to augment our labor
model to meet regulatory requirements and the overall cost of labor may increase or be higher than anticipated.
As a result of any of the foregoing, any new or acquired centers
may be less successful than expected, may not achieve target profit margins or our growth objectives and our reputation, business,
financial condition and results of operations could be adversely affected.
If we open new centers in existing markets, revenue
at our existing centers may be affected negatively.
The number and type of patients using our centers varies by location
and depends on a number of factors, including population density, availability of other sources for convenient medical services,
area demographics and geography. The opening of a new center in or near our existing centers could adversely affect the revenues
of those existing centers. Existing centers could also make it more difficult to build our patient base for a new center in the
same market. We may selectively open new centers in and around areas of existing centers that are operating at or near capacity
to serve effectively our patients, but revenue cannibalization between our centers may become significant in the future as competition
increases and as we continue to expand our operations. This could adversely affect our revenue growth, which could, in turn, adversely
affect our business, financial condition, and results of operations.
We may be required to make capital expenditures
in connection with our acquisitions to implement our growth strategy.
In order to effectively integrate our acquired centers, we may need
to make significant capital expenditures to the interior and exterior of those centers. This may include making real property improvements
and upgrading our medical equipment to serve our patients and remain competitive. Changing competitive conditions or the emergence
of significant advances in medical technology could require us to invest significant capital in additional equipment or capacity
in order to remain competitive. Along these lines, if the systems and technology of our target centers differ from those we have
chosen to utilize, we may be required to invest significant capital to either convert, terminate, or integrate the varying technology
platforms. If we are unable to fund any such investment or otherwise fail to make necessary capital expenditures, our business,
financial condition, and results of operations could be materially and adversely affected.
Damage to our reputation or our brand could negatively
impact our business, financial condition and results of operations.
We must grow the value of our brand to be successful. We intend to
develop a reputation based on the high quality of our medical services and clinic personnel, as well as on our unique culture and
the experience of our patients in our centers. If we do not make investments in areas such as marketing and advertising, as well
as the day-to-day investments required for center operations, equipment upgrades, and personnel training, the value of our brand
may not increase or may be diminished. Any incident, real or perceived, regardless of merit or outcome, that adversely affects
our brand, such as, but not limited to, patient disability or death due to medical malpractice or allegations of medical malpractice,
failure to comply with federal, state, or local regulations, including allegations or perceptions of non-compliance or failure
to comply with ethical and operational standards, could significantly reduce the value of our brand, expose us to negative publicity
and damage our overall business and reputation.
Our marketing activities may not be successful.
We incur costs and expend other resources in our marketing efforts
to attract and retain patients. Our marketing activities are principally focused on increasing brand awareness in the communities
in which we provide services. As we open and acquire new centers, we expect to undertake aggressive marketing campaigns to increase
community awareness about our presence and our service capabilities. We conduct our targeted marketing efforts in neighborhoods
through channels such as direct mail, billboards, radio advertisements, physician open houses, community sponsorships and various
social media. If we are not successful in these efforts, we will have incurred expenses without materially increasing revenue.
The urgent and primary care market is highly competitive,
including competition for patients, strategic relationships, and commercial payor contracts.
The market for providing urgent care and primary care services is
highly competitive. Our centers face competition from existing walk-in clinics, hospital emergency rooms, private doctors’
offices, freestanding emergency centers, independent laboratories, occupational medicine clinics, in-store clinics, and hospital-
and payor-supported urgent care facilities, depending on the type of patient and geographic market. Our centers compete on the
basis of quality, price, accessibility, and overall experience. We compete with national, regional, and local enterprises, many
of which have greater financial and other resources available to them, greater access to physicians or greater access to potential
patients. We also compete on the basis of our multistate, regional footprint, which we believe will be of value to both employers
and third-party payors. As a result of the differing competitive factors within the markets in which we operate and will operate,
the individual results of our centers may be adversely affected. If we are unable to compete effectively with any of these entities
or groups, or we are unable to implement our business strategies, there could be a material adverse effect on our business, prospects,
results of operations and financial condition.
We may not be able to recruit and retain qualified
physicians and other healthcare professionals for our urgent and primary care centers.
Our success depends upon our ability to recruit and retain qualified
physicians, nurse practitioners, physician assistants, nurses, medical technologists and other staff. There is currently a national
shortage of certain of these healthcare professionals. To the extent a significant number of physicians within an individual community
or market decides to partner with our competitors and not with us, we may not be able to operate our centers in such community.
We face competition for such personnel from existing urgent and primary care operators, hospital systems, entrepreneurial start-ups,
and other organizations. This competition may require us to enhance wages and benefits to recruit and retain qualified personnel.
Our inability to recruit and retain these professionals could have a material adverse effect on our ability to grow or be profitable.
We may not be able to prohibit or limit our physicians
and other healthcare professionals from competing with us in our local markets.
In certain states in which we operate or intend to operate, non-compete,
non-solicitation, and other negative covenants applicable to employment or ownership are judicially or statutorily limited in their
effectiveness or are entirely unenforceable against physicians and other healthcare professionals. As a result, we may not be able
to retain our patient relationships or protect our market share, operational processes or procedures, or limit insiders from using
competitive information against us or competing with us, which could have a material adverse effect on our business, financial
condition and ability to remain competitive.
We may be unable to enter into or maintain contracts
for our urgent and primary care centers on favorable terms with commercial payors.
A significant portion of our net patient service revenue is derived
from nongovernmental, third-party payors, or commercial payors, such as managed care organizations, commercial insurance providers
and employer-sponsored healthcare plans. These commercial payors use a variety of methods for reimbursement depending on the arrangement
involved. These arrangements include fee-for-service, PPOs and health maintenance organizations, as well as prepaid and discounted
medical service packages and capitated, or fixed fee, contracts.
Frequently, commercial payors classify or may reclassify us as either
a primary care or urgent care provider. Such distinctions may result in different payment and reimbursement structures. Such differences
may result in increased costs to the patient through higher co-payments, deductibles and other cost-sharing mechanisms. If, due
to our classification with commercial payors or to the structure of our contracts with such payors, patients are required to pay
higher amounts out of pocket than they are at our competitors, we could experience a decrease in our patient volume which could
have a material adverse effect on our business and our financial condition.
There is often pressure to renegotiate reimbursement levels, including,
in particular, in connection with changes to Medicare. Frequently, commercial payors reimburse us based upon contracted discounts
to our established base rates. If managed care organizations and other commercial payors reduce their rates or we experience a
significant shift in our revenue mix toward Medicare or Medicaid reimbursements, then our revenue and profitability would be adversely
affected and our operating margins would be reduced. Commercial payors often demand discounted fee structures, and the trend toward
consolidation among commercial payors tends to increase their bargaining power over fee structures. Because some commercial payors
rely on all or portions of Medicare fee schedules to determine payment rates, changes to government healthcare programs that reduce
payments under these schedules may negatively impact payments from commercial payors. Other healthcare providers may impact our
ability to negotiate increases and other favorable terms in our reimbursement arrangements with commercial payors. For example,
some of our competitors may negotiate exclusivity provisions with commercial payors or otherwise restrict the ability of commercial
payors to contract with us. We may be excluded from participating in commercial payor networks, making it more expensive for certain
patients to receive treatment at our centers. Our results of operations will depend, in part, on our ability to retain and renew
managed care contracts as well as enter into new managed care contracts on terms favorable to us. Our inability to maintain suitable
financial arrangements with commercial payors could have a material adverse impact on our business.
As various provisions of the ACA are implemented, commercial payors
may increasingly demand fee reductions. In addition, there is a growing trend for commercial payors to take steps to shift the
primary cost of care to the plan participant by increasing co-payments, co-insurance and deductibles, and these actions could discourage
such patients from seeking treatment at our centers. Patient volumes could be negatively impacted if we are unable to enter into
or maintain acceptable contracts with such commercial payors, which could have a material adverse effect on our business, prospects,
results of operations and financial condition.
Government healthcare programs may reduce reimbursement
rates.
In recent years, new legislation has been proposed and adopted at
both the federal and state level that is effecting major changes in the healthcare system. Any change in the laws, regulations,
or policies governing the healthcare system could adversely affect reimbursement rates and our operations and financial condition.
Enacted in 2010, the ACA seeks to expand healthcare coverage, while increasing quality and limiting costs. The ACA substantially
changes the way healthcare is financed by both governmental and commercial payors. As a result of the ACA or the adoption of additional
federal and state healthcare reforms measures there could be limits to the amounts that federal and state governments will pay
for healthcare services, which could result in reduced demand for, or profitability of, our services.
Furthermore, if due to an allegation of fraud or any other reason
one or more of our physicians or other licensed healthcare providers are no longer entitled to bill and receive payment for services
rendered to patients whose treatment is paid in whole or in part by a governmental payor, our revenue may be negatively impacted,
which could have a material adverse effect on our business, prospects, results of operations and financial condition.
If payments from commercial or governmental payors
are significantly delayed, reduced or eliminated, our business, prospects, results of operations and financial condition could
be adversely affected.
We depend upon compensation from third-party payors for the services
provided to patients in our centers. The amount that our centers receive in payment for services may be adversely affected by factors
we do not control, including federal or state regulatory or legislative changes, cost-containment decisions and changes in reimbursement
schedules of third-party payors. Any reduction or elimination of these payments could have a material adverse effect on our business,
prospects, results of operations and financial condition.
Additionally, the reimbursement process is complex and can involve
lengthy delays. Although we recognize revenue when healthcare services are provided, there can be delays before we receive payment.
In addition, third-party payors may reject, in whole or in part, requests for reimbursement based on determinations that certain
amounts are not reimbursable under plan coverage, that services provided were not medically necessary, that additional supporting
documentation is necessary, or for other reasons. Retroactive adjustments by third-party payors may be difficult or cost prohibitive
to appeal, and such changes could materially reduce the actual amount we receive from those payors. Delays and uncertainties in
the reimbursement process may be out of our control and may adversely affect our business, prospects, results of operations and
financial condition.
Significant changes in our payor mix resulting
from fluctuations in the types of patients seen at our centers could have a material adverse effect on our business, prospects,
results of operations and financial condition.
Our results may change from period to period due to fluctuations
in our payor mix. Payor mix refers to the relative amounts we receive from the mix of persons or entities that pay or reimburse
us for healthcare services. Because we generally receive relatively higher payment rates from commercial payors than from governmental
payors or self-pay patients, a significant shift in our payor mix toward a higher percentage of self-pay or patients whose treatment
is paid in whole or part by a governmental payor, which could occur for reasons beyond our control, could have a material adverse
effect on our business, prospects, results of operations and financial condition.
Failure to bill timely or accurately for our services
could have a negative impact on our net revenues, bad debt expense and cash flow.
Billing for our services is often complex and time consuming. The
practice of providing medical services in advance of payment or prior to assessing a patient’s ability to pay for such services
may have a significant negative impact on our patient service revenue, bad debt expense and cash flow. We bill numerous and varied
payors, including self-pay patients and various forms of commercial insurance providers. Billing requirements that must be met
prior to receiving payment for services rendered often vary by payor. Self-pay patients and third-party payors may fail to pay
for services even if they have been properly billed. Reimbursement is typically dependent on our providing the proper procedure
and diagnosis codes.
Additional factors that could affect our collections for the services
we render include:
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disputes among payors as to which party is responsible for payment;
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variations in coverage among various payors for similar services;
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the difficulty of adherence to specific compliance requirements, coding and various other procedures mandated by responsible
parties;
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the institution of new coding standards; and
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failure to properly credential our providers to enable them to bill various payors.
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The complexity associated with billing for our services may lead
to delays in our cash collections, resulting in increased carrying costs associated with the aging of our accounts receivable as
well as the increased potential for bad debt expense.
We are dependent on our third-party revenue cycle
managers for billing and collection of our claims.
We submit our claims for services rendered to commercial payors and
governmental payors electronically through our third-party revenue cycle managers. We are dependent on our revenue cycle managers
for the timely billing and collections of our claims. Any delay by or failure of our revenue cycle managers to timely bill and
collect our claims could have a material adverse effect on our business, results of operations and financial condition.
We may incur costs resulting from security risks
in connection with the electronic data processing by our partner banks.
Because we accept electronic payment cards for payments at our facilities,
we may incur costs resulting from related security risks in connection with the electronic processing of confidential information
by our partner banks. Recently, several large national banks have experienced potential or actual breaches in which similar data
has been or may have been stolen. Such occurrences could cause patient dissatisfaction resulting in decreased visits or could also
distract our management team from the management of the day-to-day operations.
A successful challenge by tax authorities to our
treatment of certain healthcare providers as independent contractors or the elimination of an existing safe harbor could materially
increase our costs relating to these healthcare providers.
Certain of our physicians and other licensed healthcare providers
are engaged as independent contractors by our operating subsidiaries. Because these personnel are treated as independent contractors
rather than as employees, our operating subsidiaries do not (i) withhold federal or state income taxes or other employment related
taxes from their compensation, (ii) make federal or state unemployment tax or Federal Insurance Contributions Act payments with
respect to them, (iii) provide workers compensation insurance with respect to them (except in states where they are required to
do so for independent contractors), or (iv) allow them to participate in benefits and retirement programs available to employees.
Although we have contracts with these physicians and other licensed healthcare providers obligating them to pay these taxes and
other costs, if a challenge to our treatment of these physicians and other licensed healthcare providers as independent contractors
by federal or state authorities were successful and they were treated as employees instead of independent contractors, we could
be liable for taxes, penalties and interest. In addition, there are currently, and have been in the past, proposals made to eliminate
an existing safe harbor that would potentially protect us from the imposition of taxes in these circumstances, and similar proposals
could be made in the future. If such a challenge were successful or if the safe harbor were eliminated, this could cause a material
increase in our costs relating to these physicians and other personnel and have a material adverse effect on our business, financial
condition and results of operations.
Currently, our centers are located in Georgia,
Florida, Alabama, North Carolina and Virginia, making us particularly sensitive to regulatory, economic, and other conditions in
those states.
Our current centers are located in Georgia, Florida, Alabama, North
Carolina and Virginia. If there were an adverse regulatory, economic or other development in any of those states, our patient volume
could decline, our ability to operate our centers under our existing business model could be impacted, or there could be other
unanticipated adverse impacts on our business that could have a material adverse effect on our business, prospects, results of
operations and financial condition.
Our business may be adversely affected by
CMS’ adoption of a new coding set for diagnoses.
CMS required all healthcare providers covered by HIPAA,
including our centers, to transition to the new ICD-10 coding system beginning October 1, 2015. The ICD-10 coding system
greatly expands the number and detail of billing codes used for claims compared to the existing International Classification
of Diseases, Ninth Revision, or ICD-9, coding system. Transition to the ICD-10 system may require significant and continued
investment to train staff and physicians on the updated coding practices. In addition, it is possible that our centers could
experience disruption or delays in reimbursement due to technical or coding errors or other implementation issues involving
our systems, the systems or processes of our revenue cycle vendors, or those of our payors. Further, the ICD-10 coding system
could result in decreased reimbursement if the use of ICD-10 codes results in our patients being assigned lower levels of
reimbursement than were assigned under the ICD-9 coding system. Any of the foregoing could have a material adverse effect on
our business, prospects, results of operations and financial condition.
Our business is seasonal, which impacts our results
of operations.
Our centers’ patient volumes are sensitive to seasonal fluctuations
in urgent care and primary care activity. Typically, winter months see a higher occurrence of influenza, bronchitis, pneumonia
and similar illnesses; however, the timing and severity of these outbreaks vary dramatically. Additionally, as consumers shift
toward 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 lower than expected patient volume or 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.
We could be subject to lawsuits for which we are
not fully insured.
Healthcare providers have become subject to an increasing number
of lawsuits alleging medical malpractice and related legal theories such as negligent hiring, supervision and credentialing. Some
of these lawsuits involve large claim amounts and substantial defense costs. We generally procure professional liability insurance
coverage for our affiliated medical professionals and professional and corporate entities. We are currently insured under policies
in amounts management deems appropriate, based upon the nature and risk of our business. Nevertheless, there are exclusions and
exceptions to coverage under each insurance policy that may make coverage for any claim unavailable, future claims could exceed
the limits of available insurance coverage, existing insurers could become insolvent and fail to meet their obligations to provide
coverage for such claims, and such coverage may not always be available with sufficient limits and at reasonable cost to insure
us adequately and economically in the future. One or more successful claims against us not covered by, or exceeding the coverage
of, our insurance could have a material adverse effect on our business, prospects, results of operations and financial condition.
Moreover, in the normal course of our business, we may be involved in other types of lawsuits, claims, audits and investigations,
including those arising out of our billing and marketing practices, employment disputes, contractual claims and other business
disputes for which we may have no insurance coverage. Furthermore, for our losses that are insured or reinsured through commercial
insurance providers, we are subject to the financial viability of those insurance companies. Although we believe our commercial
insurance providers are currently creditworthy, they may not remain so in the future. The outcome of these matters could have a
material adverse effect on our financial position, results of operations, and cash flows.
Risks Related to Our Legacy Business
We may not be able to successfully complete the
disposition of our ancillary network business to HealthSmart, or at all.
To focus our attention and resources on our urgent and primary care
business, on October 1, 2014, we entered into a management services agreement with our largest ancillary network client, HealthSmart.
Under the management services agreement, HealthSmart manages and operates our ancillary network business. The agreement also provides
that at any time between October 1, 2016 and the expiration date of the management services agreement, HealthSmart may purchase,
or we may require that HealthSmart purchase, our ancillary network business. Although HealthSmart’s option to purchase and
our option to sell the ancillary network business do not become exercisable until October 1, 2016, we are currently in negotiations
with HealthSmart to facilitate a disposition of our ancillary network business. See “Business—Ancillary Network—Management
Services Agreement.”
Consummation of a disposition to HealthSmart, whether
pursuant to the management services agreement or the current negotiations, would be subject to a number of conditions,
including entering into a binding agreement with HealthSmart to acquire our ancillary network business. There can be no
assurance that we will be successful in negotiating such an agreement on terms that will be favorable to us and our
stockholders, if at all, or that the other conditions to closing will be satisfied. Accordingly, there is no assurance that
HealthSmart will purchase our ancillary network business. If we do not consummate the disposition, we expect to market the
business for sale to parties other than HealthSmart or expeditiously wind down the business.
If a disposition of our ancillary network business to HealthSmart
is not completed, our ongoing business may be adversely affected and we will be subject to several risks, including the following:
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having to pay costs relating to the operation and eventual disposition or wind down of the ancillary network business, including
approximately $2.8 million to providers as well as legal, accounting, financial advisor and other expenses attributable to such
operations;
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focusing our management on the operation of the ancillary network business and eventual disposition or wind down, which could
lead to the disruption of our ongoing business or inconsistencies in its services, standards, controls, procedures and policies,
any of which could adversely affect the ability of the Company to maintain relationships with patients, regulators, vendors and
employees, or could otherwise adversely affect our operations and financial results, without realizing any of the benefits of having
the disposition of the ancillary network business completed; and
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the possible incurrence of penalties, charges or other expenses to us in connection with our management services agreement
or client contract with HealthSmart that would otherwise be settled by a disposition to HealthSmart.
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Any of the foregoing could materially and adversely affect our business,
results of operations and financial condition, as well as the price of our stock.
One client accounts for a substantial portion
of our ancillary network business.
HealthSmart is our largest client and the manager of our
ancillary network business. The loss of this client or significant declines in the level of use of our services by this
client, would have a material adverse effect on our business and results of operations. Although we have entered into a
management services agreement with HealthSmart to manage our ancillary network business, there is no assurance that it will
continue to use our ancillary network services as a customer at the same or greater level as it did in 2014. The initial term
of our current payor contract with HealthSmart, which is unrelated to our management services agreement, terminates on
October 1, 2017, and there is no assurance that it will be extended beyond that date.
Large competitors in the healthcare industry may
choose to compete with us, reducing our margins. Some of these potential competitors may be our current clients.
Traditional health insurance companies, specialty provider networks,
and specialty healthcare services companies are potential competitors of our ancillary network business. These entities include
well-established companies that may have greater financial, marketing and technological resources than we have. Pricing pressure
caused by competition has caused many of these companies to reduce the prices charged to clients for core services and to pass
on to clients a larger portion of the formulary fees and related revenues received from service providers. Increased price competition
from such companies’ entry into the market could reduce our margins and have a material adverse effect on our financial condition
and results of operations. In fact, our clients could choose to establish their own network of ancillary care providers. As a result,
we would not only lose the benefit of revenue from such clients, but we could face additional competition in our market.
Fluctuations in the number and types of claims
we process in our ancillary network business could make it more difficult to predict our net revenues in our ancillary network
business from quarter to quarter.
Monthly fluctuations in the number and types of claims we process
will impact our quarterly and annual results. Our margins vary depending on the type of ancillary healthcare service provided,
the rates associated with those services and the overall mix of these claims, each of which will impact our profitability. Consequently,
it may be difficult to predict the net revenue from our ancillary network business from one quarter to another quarter.
Limited barriers to entry into the ancillary healthcare
services market could result in greater competition.
There are limited barriers to entering the market for ancillary service
providers, meaning that it is relatively easy for other companies to replicate our ancillary network business model and provide
the same or similar services that we currently provide. Major benefit management companies and healthcare companies not presently
offering ancillary healthcare services may decide to enter the market. These companies may have greater financial, marketing and
other resources than are available to us. Competition from other companies may have a material adverse effect on our financial
condition and results of operations.
Our ancillary network business is dependent upon
payments from third-party payors which may reduce rates of reimbursement.
Our ability to achieve profitability in our ancillary network business
depends, in part, on payments made by third-party payors. Competition for patients, efforts by traditional third-party payors to
contain or reduce healthcare costs and the increasing influence of managed care payors, such as health maintenance organizations,
have resulted in reduced rates of reimbursement in recent years. If continuing, these trends could adversely affect our results
of operations and decrease profitability unless we can implement measures to offset the loss of revenues. In addition, changes
in reimbursement policies of private and governmental third-party payors, including policies relating to the Medicare and Medicaid
programs, could reduce the amounts reimbursed to our clients for the services provided through us, and consequently, the amount
these clients would be willing to pay for our services. Also, under the medical loss ratio, or MLR, regulations included in the
ACA, it is possible that a portion of the fees our existing and prospective payors are contractually required to pay us and that
do not qualify as “incurred claims” may not be included as expenditures for activities that improve health care quality.
Such a determination may make it more difficult for us to retain existing clients or add new clients, because our clients’
or prospective clients’ MLR may otherwise not meet the specified targets. This may reduce our net revenues and profit margins.
We are dependent upon our network of qualified
providers, and our provider agreements may be terminated at any time.
A network of qualified providers is an essential component of our
ancillary network business. The typical form of agreement from ancillary healthcare providers provides that these agreements may
be terminated at any time by either party with or without cause. If these agreements are terminated, particularly with our significant
providers, such ancillary healthcare providers could enter into new agreements with our competitors which would have an adverse
effect on our ability to continue our ancillary network business as it is currently conducted.
For any given claim, we are subject to the risk
of paying more to the provider than we receive from the payor.
Our agreements with our payors, on the one hand, and our ancillary
network service providers, on the other, are negotiated separately. We have complete discretion in negotiating both the prices
we charge our payors and the financial terms of our agreements with the providers. As a result, our profit is primarily a function
of the spread between the prices we have agreed to pay our ancillary network service providers and the prices our payors have agreed
to pay us. We bear the pricing risk because we are responsible for providing the agreed-upon services to our payors, whether or
not we are able to negotiate fees and other agreement terms with our ancillary network service providers that result in a positive
margin for us. There can be no assurances that these pricing arrangements will not result in losses to us.
The length of the current sales cycle may impede
efforts to add new client accounts.
Over the past several years, we have experienced a lengthening of
the period between identification of a prospective payor client and that prospect becoming a new client. Despite efforts to strategically
improve our implementation process and our new management arrangement with HealthSmart, we can give no assurances that the process
of converting a sales prospect into a new client account will not be lengthy and that our revenues will not continue to decline
due to the lack of new client accounts.
We are dependent on our manager to operate our
ancillary network business.
We are dependent on HealthSmart to operate our ancillary network
business. We have no employees in our ancillary network business and the individuals who perform services for us are employees
of our manager. Our manager may terminate our management agreement at any time after October 1, 2017, or before that date with
90 days’ advanced written notice, and we may not be able to find a suitable replacement in a timely manner, at a reasonable
cost, or at all. We are also subject to the risk that our manager will not manage our ancillary network business in a manner that
is in our best interests, particularly because HealthSmart operates its own preferred provider network that competes for clients
with our ancillary network.
Additionally, we pay our manager cash fees for the services it provides
in managing our ancillary network business. The payment of these fees may impact the amount of cash available for investment in
our urgent and primary care business. We cannot assure you that, after payment of these fees, our ancillary network business will
be profitable.
If our ancillary network business is sold to HealthSmart
under the terms provided for in our management services agreement, the business may not generate net profits sufficient for us
to be paid the full purchase price.
Under the terms of the asset purchase agreement that was negotiated
with HealthSmart in conjunction with our entry into the management services agreement, if HealthSmart buys the ancillary network
business it will be obligated to pay the purchase price to us only from the net profits generated by the ancillary network business
after closing. Accordingly, we will be dependent on the ancillary network business, and HealthSmart’s operation thereof,
to generate net profits sufficient to pay the full purchase price to us. Consequently, there is no assurance that we will receive
the full purchase price for the ancillary network business if it is sold to HealthSmart. See “Business — Ancillary
Network Business — Management Services Agreement.”
Our manager may be subject to conflicts of interest.
Our manager has potential conflicts of interest in its management
of our ancillary network business. Circumstances under which a conflict could arise between us and our manager include:
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the receipt of compensation by our manager for services for us and costs incurred, which may cause our manager to engage in
transactions or incur costs that generate higher fees, rather than transactions that are more appropriate or beneficial to our
business;
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taking actions that are beneficial to our manager’s preferred provider network that are detrimental to our ancillary
network business;
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taking actions that benefit our manager in its capacity as our client which are not beneficial to our ancillary network business;
and
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some of our clients are competitors of our manager, and our manager may take actions that are not in the best interests of
those clients.
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We are also subject to the risk that our manager will not manage
our ancillary network business in a manner that is in our best interests, particularly because HealthSmart operates its own preferred
provider network that competes for clients with our ancillary network.
Risks Related to Our Regulatory Environment
The healthcare industry is heavily regulated,
and if we fail to comply with these laws and government regulations we could incur penalties or be required to make significant
changes to our operations.
The healthcare industry is heavily regulated and closely scrutinized
by federal, state and local governments. Comprehensive statutes and regulations govern the manner in which we provide and bill
for services, our contractual relationships with our physicians, vendors, patients and clients, our marketing activities and other
aspects of our operations. If we fail to comply with these laws and regulations, we could be exposed to civil and criminal penalties
such as fines, damages, overpayment recoupment, loss of enrollment status and exclusion from government healthcare programs. Any
action against us for violation of these laws or regulations, even if successfully defended, could cause us to incur significant
legal expenses and divert our management’s attention from the operation of our business. Our physicians and other licensed
healthcare providers are also subject to ethical guidelines and operating standards of professional and private accreditation agencies.
The laws, regulations and standards governing the provision of healthcare
services may change significantly in the future, and these changes may materially and adversely affect our business. Furthermore,
a review of our business by regulatory or accreditation authorities could result in determinations that could adversely affect
our operations.
Our urgent and primary care centers are and will
be subject to numerous statutes and regulations in the states in which we operate now or in the future and the failure to comply
with these laws and regulations could result in civil or criminal sanctions.
The operation of urgent and primary care centers subjects us, and
will subject us, to many state laws and regulations. In general, states, whether directly or through boards, agencies or other
delegated authorities, regulate the ownership and dispensing of controlled substances, the retention and storage of medical records,
the ownership and management of entities engaged in healthcare services, patient privacy and protection of health information,
the licensure of healthcare providers, and the clinical supervision by physicians of nurse practitioners and physicians assistants,
training, client monitoring and supervision of staff, among other aspects of our operations. All such laws and regulations, and
the applicable interpretations of such laws and regulations, are subject to change.
Additional regulation of centers such as ours has been proposed in
several states. The adoption of any such regulations in the states in which we operate now or in the future could force us to change
our operational or transactional approach or lead to a finding by regulators that we do not meet legal requirements. We may be
subject to criminal prosecution, regulatory fines, penalties or other sanctions if our operations or centers are found to not comply
with applicable laws and regulations. In addition, we may be required to refund all funds received from patients and third-party
payors during the period of noncompliance.
Although we monitor compliance concerns on a corporate level and
at each center, and seek to institute best practices on compliance matters, we do not have a dedicated chief compliance officer
whose sole job is to monitor and manage compliance matters. Consequently, we may not immediately identify practices that need to
be changed or remediated. Further, as we integrate acquired centers, we seek to ensure they comply with the relevant regulations,
but we cannot assure you that compliance or regulatory issues will not arise.
Failure to comply with laws and regulations governing us and the
centers we manage could result in civil or criminal sanctions, which could have a material adverse effect on our business, results
of operations, financial condition and prospects.
State regulation of the expansion of urgent and
primary care centers could prevent us from reaching our expansion objectives.
Many states have certificate of need programs that require some level
of prior approval for the development, acquisition or expansion of certain healthcare facilities. Although the states where our
current centers operate do not require that we obtain a certificate of need to acquire or operate our centers, in the event we
choose to acquire or open centers in a state that does require such approval, we may be required to obtain a certificate of need
before the acquisition or opening occurs. If we are unable to obtain such approvals, we may not be able to move forward with the
planned activity.
Only a few states, including Florida, currently require the licensure
of centers such as ours. The lack of a specific licensure process for our centers in the vast majority of states may lead state
legislators or regulators to regulate aggressively the growth of our industry, potentially seeking to treat our industry in a manner
similar to hospitals or freestanding emergency departments. Further, the growing number of urgent care centers and freestanding
emergency departments may lead to legislation or regulations requiring us to change substantially our operations or cease our operations
in that state entirely. Any such requirements could have a material adverse effect on our prospects and growth strategy.
Our urgent and primary care centers are subject
to comprehensive laws and regulations that govern the manner in which we bill and are paid for our services by third-party payors,
and the failure to comply with these requirements can result in civil or criminal sanctions, including exclusion from federal and
state healthcare programs.
A substantial portion of our urgent and primary care services are
paid for by commercial payors and governmental payors. These third-party payors typically have differing and complex billing and
documentation requirements. If we fail to meet these requirements, we may not be paid for our services or payment may be substantially
delayed or reduced.
Numerous state and federal laws also apply to our claims for payment,
including but not limited to (i) “coordination of benefits” rules that dictate which payor must be billed first when
a patient has coverage from multiple payors, (ii) requirements that overpayments be refunded within a specified period of time,
(iii) “reassignment” rules governing the ability to bill and collect professional fees on behalf of other providers,
(iv) requirements that electronic claims for payment be submitted using certain standardized transaction codes and formats, and
(v) laws requiring all health and financial information of patients be handled in a manner that complies with applicable security
and privacy standards.
Third-party payors carefully monitor compliance with these and other
applicable rules. Our failure to comply with these rules could result in our obligation to refund amounts previously paid for such
services or non-payment for our services.
If we are found to have violated any of these or any of the other
laws or regulations which govern our activities, the resulting penalties, damages, fines or other sanctions could adversely affect
our ability to operate our business and our financial results.
Changes in coverage and the rates or methods of
third-party reimbursements may adversely affect our urgent and primary care revenue and operations.
A substantial portion of our urgent and primary care revenue is derived
from direct billings to patients and third-party payors. As a result, any changes in the rates or methods of reimbursement for
the services we provide could have a material adverse effect on our revenue and financial results. Reimbursement rates can vary
depending on whether our center is an in-network or out-of-network provider. Our centers may be out-of-network for some patients.
When acting as an out-of-network provider, reimbursement rates may be lower, co-payments and deductibles may be higher and we may
have difficulties complying with the billing requirements of certain third-party payors. Additionally, the continued implementation
of the ACA could result in substantial changes in coverage and reimbursement, including changes in coverage and amounts paid by
private payors, which could have an adverse impact on our revenue from those sources.
Past and future healthcare reform legislation
and other changes in the healthcare industry could adversely affect our business, financial condition and results of operations.
The healthcare industry is subject to changing political, regulatory
and other influences. In March 2010, the President signed the ACA into law, which made major changes in how healthcare is delivered
and reimbursed and increased access to health insurance benefits for the uninsured and underinsured population of the United States.
Because of the continued uncertainty about the implementation of
various provisions of the ACA, we cannot predict with any certainty the impact of the ACA on our business models, prospects, financial
condition and results of operations. Also, Congress and state legislatures may continue reviewing and assessing alternative healthcare
delivery and payment systems and may in the future adopt legislation making additional fundamental changes in the healthcare system.
There is no assurance that such changes will not have a material adverse effect on our business, financial condition and results
of operations. Continued efforts to shift healthcare costs to the patient (through co-payments, deductibles, and other mechanisms)
could adversely affect our business, financial condition and results of operations.
If we are required to restructure our arrangements
with physicians because of current or future laws, we may incur additional costs, lose contracts or suffer a reduction in net revenue.
Various laws bear on our relationships with the physicians staffing
our urgent and primary care centers. Authorities in some states could find that our contractual relationships with our physicians
violate laws prohibiting the corporate practice of medicine and fee-splitting. These laws are generally intended to prevent unlicensed
persons or entities from interfering with or inappropriately influencing the physician’s professional judgment, but they
may also prevent the sharing of professional services income with non-professional or business interests. Approximately 30 states
have some form of corporate practice of medicine restrictions, and, as we continue to expand into new markets, our current business
model may implicate these restrictions. Two of the states in which we currently operate, Georgia, and North Carolina, have adopted
certain corporate practice of medicine restrictions against non-professional entities. Although we believe we are currently in
material compliance with applicable law, including with respect to the corporate practice of medicine and fee-splitting, regulatory
authorities or other parties, including our employed and contracted physicians, or our physicians, may assert that, among other
things, our state-level operating subsidiaries are impermissibly engaged in the practice of medicine. In that event, we could be
subject to adverse judicial or administrative interpretations, to civil or criminal penalties, our contracts could be found legally
invalid and unenforceable or we could be required to modify our organizational structure, any of which could have a material adverse
effect on our business and our ability to execute our growth strategy. Moreover, if we are required to modify our structure and
organization to comply with these laws and rules, our financing agreements may prohibit such modifications and require us to obtain
the consent of the holders of our debt or require the refinancing of such debt.
We are subject to the data privacy, security and
breach notification requirements of HIPAA, HITECH and other data privacy and security laws, and the failure to comply with these
rules, or allegations that we have failed to do so, could result in civil or criminal sanctions.
Numerous federal and state laws and regulations, including HIPAA
and HITECH, govern the collection, dissemination, security, use and confidentiality of patient-identifiable health information.
As required by HIPAA, HHS has adopted standards to protect the privacy and security of this health-related information. The HIPAA
privacy regulations contain detailed requirements concerning the use and disclosure of individually identifiable health information
and the grant of certain rights to patients with respect to the use and disclosure of such information by “covered entities.”
The Company and each of our centers are considered covered entities under HIPAA. We have taken actions to comply with the HIPAA
privacy regulations including the creation and implementation of policies and procedures, staff training, execution of HIPAA-compliant
contractual arrangements with certain service providers and various other measures. Although we believe we are in substantial compliance,
ongoing implementation and oversight of these measures involves significant time, effort and expense.
In addition to the privacy requirements, HIPAA-covered entities must
implement certain administrative, physical, and technical security standards to protect the integrity, confidentiality and availability
of certain electronic health-related information received, maintained, or transmitted by covered entities or their business associates.
Although we have taken actions in an effort to be in compliance with these security regulations, a security incident that bypasses
our information security systems causing an information security breach, loss of protected health information, or PHI, or other
data subject to privacy laws or a material disruption of our operational systems could have a material adverse effect on our business,
along with fines. Furthermore, ongoing implementation and oversight of these security measures involves significant time, effort
and expense.
Further, HITECH, as implemented in part by an omnibus final rule
published in the Federal Register on January 25, 2013, further requires that patients be notified of any unauthorized acquisition,
access, use, or disclosure of their unsecured PHI that compromises the privacy or security of such information. HHS has established
the presumption that all unauthorized uses or disclosures of unsecured PHI constitute breaches unless the covered entity or business
associate establishes that there is a low probability the information has been compromised. HITECH and implementing regulations
specify that such notifications must be made without unreasonable delay and in no case later than 60 calendar days after discovery
of the breach. Breaches affecting 500 patients or more must be reported immediately to HHS, which will post the name of the breaching
entity on its public website. Furthermore, breaches affecting 500 patients or more in the same state or jurisdiction must also
be reported to the local media. If a breach involves fewer than 500 people, the covered entity must record it in a log and notify
HHS of such breaches at least annually. These breach notification requirements apply not only to unauthorized disclosures of unsecured
PHI to outside third parties but also to unauthorized internal access to or use of such PHI.
The scope of the privacy and security requirements under HIPAA was
substantially expanded by HITECH, which also increased penalties for violations. Currently, violations of the HIPAA privacy, security
and breach notification standards may result in civil penalties ranging from $100 to $50,000 per violation, subject to a cap of
$1.5 million in the aggregate for violations of the same standard in a single calendar year. The amount of penalty that may be
assessed depends, in part, upon the culpability of the applicable covered entity or business associate in committing the violation.
Some penalties for certain violations that were not due to “willful neglect” may be waived by the Secretary of HHS,
in whole or in part, to the extent that the payment of the penalty would be excessive relative to the violation. HITECH also authorized
state attorneys general to file suit on behalf of residents of their states. Applicable courts may be able to award damages, costs
and attorneys’ fees related to violations of HIPAA in such cases. HITECH also mandates that the Secretary of HHS conduct
periodic compliance audits of a cross-section of HIPAA-covered entities and business associates. Every covered entity and business
associate is subject to being audited, regardless of the entity’s compliance record.
State laws may impose more protective privacy restrictions related
to health information and may afford individuals a private right of action with respect to the violation of such laws. Both state
and federal laws are subject to modification or enhancement of privacy protection at any time. We are subject to any federal or
state privacy-related laws that are more restrictive than the privacy regulations issued under HIPAA. These statutes vary and could
impose additional requirements on us and more severe penalties for disclosures of health information. If we fail to comply with
HIPAA, similar state laws or any new laws, including laws addressing data confidentiality, security or breach notification, we
could incur substantial monetary penalties and substantial damage to our reputation.
States may also impose restrictions related to the confidentiality
of personal information that is not considered PHI under HIPAA, including certain identifying information and financial information
of our patients. Theses state laws may impose additional notification requirements in the event of a breach of such personal information.
Failure to comply with such data confidentiality, security and breach notification laws may result in substantial monetary penalties.
HIPAA and HITECH also include standards for common healthcare electronic
transactions and code sets, such as claims information, plan eligibility and payment information. Covered entities such as the
Company and each of our centers are required to conform to such transaction set standards.
Our centers participate in the federal Medicare
program and, as a result, we must comply with a number of additional federal regulatory requirements.
Our centers participate as providers the federal Medicare program.
As participants in the Medicare program, we are directly subject to certain federal regulatory requirements, including the Stark
Law and the Anti-Kickback Statute. Furthermore, the Medicare program is particularly susceptible to statutory and regulatory changes,
retroactive and prospective rate adjustments, spending freezes, federal and state funding reductions and administrative rulings
and interpretations concerning, without limitation, patient eligibility requirements, funding levels and the method of calculating
payments or reimbursements.
Since 1992, Medicare has paid for the “medically necessary”
services of physicians, non-physician practitioners, and certain other suppliers under a physician fee schedule, a system that
pays for covered physicians’ services furnished to a person with Medicare Part B coverage. Under the physician fee schedule,
relative values are assigned to each of more than 7,000 services to reflect the amount of work, the direct and indirect (overhead)
practice expenses, and the malpractice expenses typically involved in furnishing that service. Each of these three relative value
components is multiplied by a geographic adjustment factor to adjust the payment for variations in the costs of furnishing services
in different localities. The RVUs are summed for each service and then are multiplied by a fixed-dollar conversion factor to establish
the payment amount for each service. The higher the number of RVUs assigned
to a service,
the higher the payment. Under the Medicare fee-for-service payment system, an individual can choose any licensed physician enrolled
in Medicare and use the services of any healthcare provider or facility certified by Medicare.
Historically, CMS was required to limit the growth in spending under
the physician fee schedule by a predetermined sustained growth rate, or SGR. Congress typically responded to these automatic physician
payment cuts with a series of temporary fixes. On April 16, 2015, however, the Medicare Access and CHIP Reauthorization Act of
2015, or MACRA, was enacted which includes permanent repeal of the SGR formula. With MACRA, the long sought after goal of permanently
repealing the SGR was achieved and overrides a 21.2% across-the-board cut in Medicare physician payments that briefly took effect
on April 1, 2015. Under MACRA, physician payment updates are to be linked to quality and value measurement and participation in
alternative payment models. Enactment of MACRA and repeal of the SGR could be offset by further reductions in Medicare payments,
and any such reductions could have a material adverse effect on our business.
Furthermore, the ACA reduces annual payment updates for certain providers
and reduces Medicare payments for certain procedures, and the Budget Control Act of 2011, or BCA, requires automatic spending reductions
for each fiscal year through 2021. As a result of the BCA and subsequent activity in Congress, a $1.2 trillion sequester (across-the-board
spending cuts) in discretionary programs took effect in 2013. In particular, a 2% reduction in Medicare payments took effect on
April 1, 2013 and has recently been extended for an additional two years beyond the original expiration date of 2021.
We are subject to CMS’ RAC program.
The Medicare Prescription Drug, Improvement and Modernization Act
of 2003, or MMA, introduced on a trial basis the use of RACs for the purpose of identifying and recouping Medicare overpayments
and underpayments. Any overpayment received from Medicare is considered a debt owed to the federal government. In October 2008,
CMS made the RAC program permanent. RACs review Medicare claims to determine whether such claims were appropriately reimbursed
by Medicare. RACs engage in an automated review and in a complex review of claims. Automated reviews are conducted when a review
of the medical record is not required and there is certainty that the service is not covered or is coded incorrectly. Complex reviews
involve the review of all underlying medical records supporting the claim, and are generally conducted where there is a high likelihood,
but not certainty, that an overpayment has occurred. RACs are paid a contingency fee based on overpayments identified and collected.
A Medicare administrative contractor, or MAC, may suspend Medicare
payments to a provider if it determines that an overpayment has occurred. When a Medicare claim for payment is filed, the MAC will
notify the patient and the provider of its initial determination regarding reimbursement. The MAC may deny the claim for one of
several reasons, including the lack of necessary information or lack of medical necessity for the services rendered. Providers
may appeal any denials for claim payments.
Any such reviews under the RAC program or denials by the MAC could
have a material adverse effect on our results of operations.
We are subject to the Anti-Kickback Statute, Stark
Law, FCA, Civil Monetary Penalties statute and analogous provisions of applicable state laws and could face substantial penalties
if we fail to comply with such laws.
Anti-Kickback Statute
The Anti-Kickback Statute prohibits the knowing and willful offer,
payment, solicitation or receipt of remuneration, directly or indirectly, in return for the referral of patients or arranging for
the referral of patients, or in return for the recommendation, arrangement, purchase, lease or order of items or services that
are covered, in whole or in part, by a federal healthcare program such as Medicare or Medicaid. The term “remuneration”
has been broadly interpreted to include anything of value such as gifts, discounts, rebates, waiver of payments or providing anything
at less than its fair market value. The ACA amended the intent requirement of the Anti-Kickback Statute such that a person or entity
can be found guilty of violating the statute without actual knowledge of the statute or specific intent to violation the statute.
Further, the ACA now provides that claims submitted in violation of the Anti-Kickback Statute constitute false or fraudulent claims
for purposes of the FCA, including the failure to timely return an overpayment. Many states have adopted similar prohibitions
against kickbacks and other practices that are intended to influence the purchase, lease or ordering of healthcare items and services
reimbursed by a governmental health program or state Medicaid program. Some of these state prohibitions apply to remuneration for
referrals of healthcare items or services reimbursed by any third-party payor, including commercial payors.
Because we currently accept funds from governmental healthcare programs,
we are subject to the Anti-Kickback Statute. Violations of the Anti-Kickback Statute can result in exclusion from Medicare, Medicaid
or other governmental programs as well as civil and criminal penalties, such as $25,000 per violation and up to three times the
remuneration involved. If in violation, we may be required to enter into settlement agreements with the government to avoid such
sanctions. Typically, such settlement agreements require substantial payments to the government in exchange for the government
to release its claims and may also require entry into a corporate integrity agreement, or CIA. Any such sanctions or obligations
contained in a CIA could have a material adverse effect on our business, financial condition and results of operations.
Stark Law
The Stark Law prohibits a physician from referring a patient to a
healthcare provider for certain “designated health services” reimbursable by Medicare if the physician (or close family
members) has a financial relationship with that provider, including an ownership or investment interest, a loan or debt relationship
or a compensation relationship. The designated health services covered by the law include, among others, laboratory and imaging
services and the provision of durable medical equipment. Some states have self-referral laws similar to the Stark Law for Medicaid
claims and commercial claims.
We have entered into several types of financial relationships with
physicians who staff our urgent and primary care centers, including compensation arrangements. We believe that the compensation
arrangements under our employment agreements and independent contractor agreements satisfy one or more exceptions to the Stark
Law. Although we believe that the compensation provisions included in our written physician agreements, which are the result of
arm’s length negotiations, result in fair market value payments for medical services rendered or to be rendered, an enforcement
agency could nevertheless challenge the level of compensation that we pay our physicians.
The ownership of our stock by any of our physicians will constitute
a “financial relationship” for purposes of the Stark Law. As a result, in order to bill Medicare for the designated
health services referred by such physician stockholder, we must qualify for one or more exceptions to the Stark Law. Although an
exception exists for publicly traded securities, we will not qualify until our stockholders’ equity exceeds $75.0 million
at the end of our most recent fiscal year or on average during the previous three years. If we are unable to qualify for another
exception to the Stark Law, we will not be entitled to bill Medicare for services rendered by a physician stockholder. As a result,
we may suffer losses to our net revenue. Further, it may become necessary for us to perform regular compliance tests to determine
which, if any, of our physicians own our stock, and, if so, to determine whether or not we meet an applicable exception to the
Stark Law. Such efforts could have a material adverse effect on our business and our ability to compensate physicians, and could
result in damage to our reputation.
Violation of the Stark Law may result in prohibition of payment for
services rendered, a refund of any Medicare payments for services that resulted from an unlawful referral, $15,000 civil monetary
penalties for specified infractions, criminal penalties, and potential exclusion from participation in government healthcare programs,
and potential false claims liability. The repayment provisions in the Stark Law are not dependent on the parties having an improper
intent; rather, the Stark Law is a strict liability statute and any violation is subject to repayment of all amounts arising out
of tainted referrals. If physician self-referral laws are interpreted differently or if other legislative restrictions are issued,
we could incur significant sanctions and loss of revenues, or we could have to change our arrangements and operations in a way
that could have a material adverse effect on our business, prospects, damage to our reputation, results of operations and financial
condition.
False Claims Act
The federal civil FCA prohibits providers from, among other things,
(i) knowingly presenting or causing to be presented, claims for payments from the Medicare, Medicaid or other federal healthcare
programs that
are false or fraudulent; (ii) knowingly making, using or causing to be made
or used, a false record or statement to get a false or fraudulent claim paid or approved by the federal government; or (iii) knowingly
making, using or causing to be made or used, a false record or statement to avoid, decrease or conceal an obligation to pay money
to the federal government. The “qui tam” or “whistleblower” provisions of the FCA allow private individuals
to bring actions under the FCA on behalf of the government. These private parties are entitled to share in any amounts recovered
by the government, and, as a result, the number of “whistleblower” lawsuits that have been filed against providers
has increased significantly in recent years. Defendants found to be liable under the FCA may be required to pay three times the
actual damages sustained by the government, plus mandatory civil penalties ranging between $5,500 and $11,000 for each separate
false claim as well as possible expulsion from participation in the Medicare and Medicaid programs.
There are many potential bases for liability under the FCA. The government
has used the FCA to prosecute Medicare and other government healthcare program fraud such as coding errors, billing for services
not provided, and providing care that is not medically necessary or that is substandard in quality. The ACA also provides that
claims submitted in connection with patient referrals that results from violations of the Anti-Kickback Statute constitute false
claims for the purpose of the FCA, and some courts have held that a violation of the Stark law can result in FCA liability as well.
In addition, a number of states have adopted their own false claims and whistleblower provisions whereby a private party may file
a civil lawsuit in state court. We are required to provide information to our employees and certain contractors about state and
federal false claims laws and whistleblower provisions and protections.
Civil Monetary Penalties Statute
The federal Civil Monetary Penalties statute prohibits, among other
things, the offering or giving of remuneration to a Medicare or Medicaid beneficiary that the person or entity knows or should
know is likely to influence the beneficiary’s selection of a particular provider or supplier of items or services reimbursable
by a federal or state healthcare program.
The scope and enforcement of each of these laws is uncertain and
subject to constant change. Federal and state enforcement entities have significantly increased their scrutiny of healthcare companies
and providers which has led to investigations, prosecutions, convictions and large settlements. Although we intend to conduct our
business in compliance with all applicable federal and state fraud and abuse laws, many of these laws are broadly worded and may
be interpreted or applied in ways that cannot be predicted with any certainty. Therefore, we cannot assure you that our arrangements
or business practices will not be subject to government scrutiny or will be found to be in compliance with applicable fraud and
abuse laws. Further, responding to investigations can be time consuming and result in significant legal fees and can potentially
divert management’s attention from the operation of our business.
The Office of Inspector General, or OIG, is authorized to seek different
amounts of civil monetary penalties and assessments based on the type of violation at issue. For example, in a case of false or
fraudulent claims, the OIG may seek a penalty of up to $10,000 for each item or service improperly claimed, and an assessment of
up to three times the amount improperly claimed. In a kickback case, the OIG may seek a penalty of up to $50,000 for each improper
act and damages of up to three times the amount of remuneration at issue (regardless of whether some of the remuneration was for
a lawful purpose).
If we fail to effectively and timely implement
electronic health record systems, our operations could be adversely affected.
As required by the American Recovery and Reinvestment Act of 2009,
the Secretary of HHS has developed and implemented an incentive payment program for eligible healthcare professionals that adopt
and meaningfully use EHR technology. HHS uses PECOS to verify Medicare enrollment prior to making EHR incentive program payments.
If our professionals are unable to meet the requirements for participation in the incentive payment program, including having an
enrollment record in PECOS, we will not be eligible to receive incentive payments that could offset some of the costs of implementing
EHR systems. Further, healthcare professionals that fail to demonstrate meaningful use of certified EHR technology are subject
to reduced payments from Medicare. System conversions to comply with EHR could be time consuming and disruptive for physicians
and employees. Failure to implement EHR systems effectively and in a timely manner could have a material adverse effect
on our financial position and results of operations.
We are in process of converting certain of our clinical and patient
accounting information system applications to newer versions of existing applications or altogether new applications. In connection
with our implementation and conversions, we have incurred capitalized costs and additional training and implementation expenses.
If we fail to comply with laws and regulations
related to the protection of the environment and human health and safety, we could incur substantial penalties and fines.
We are subject to various federal, state and local and regulations
relating to the protection of the environment and human health and safety, including those governing the management and disposal
of hazardous substances and wastes, the cleanup of contaminated sites and the maintenance of a safe workplace. Some of our operations
include the use, generations and disposal of hazardous materials. We also plan to acquire ownership in new facilities and properties,
some of which may have had a history of commercial or other operations. We may, in the future, incur liability under environmental
statutes and regulations with respect to contamination of sites we own or operate, including contamination caused by prior owners
or operators of such sites, abutters or other persons, and the off-site disposal of hazardous substances. Violations of these laws
and regulations may result in substantial civil penalties or fines.
Risks Related to Ownership of Our Securities
Investors may experience dilution of their ownership
interests because of the future issuance of additional shares of our common stock.
From time to time, we may issue shares of our common stock or other
securities that are convertible into or exercisable for common stock in the future in connection with hiring or retaining employees,
future acquisitions, future sales of our securities for capital raising purposes, or for other business purposes, resulting in
the dilution of the ownership interests of our stockholders at that time. At December 31, 2015, we had outstanding options to purchase
an aggregate of 962,400 shares of our common stock at a weighted average exercise price of $2.92 per share, warrants to purchase
an aggregate of 13,167,397 shares of our common stock at a weighted average exercise price of $0.85 per share (assumes adjustment
of exercise price for warrants to purchase 249,990 shares is approved by stockholders) and 1,575,320 shares of our common stock
reserved for issuance under our 2005 Stock Option Plan and our Amended and Restated 2009 Plan.
On August 12, 2015, we issued warrants to purchase 300,000 shares
of our common stock in connection with the guarantee of our indebtedness at an initial exercise price of $1.70 per share. The exercise
prices of the warrants to purchase 800,000 shares of our common stock that were issued on July 30, 2014 at an initial exercise
price of $3.15 per share and to purchase 960,000 shares of our common stock that were issued on December 4, 2014 at an initial
exercise price of $2.71 per share and the warrant to purchase 50,010 shares issued on August 12, 2015 to an individual who is not
an officer or director of the Company have been adjusted downward to $1.46 per share to reflect the closing price of our common
stock on August 28, 2015, the date restricted stock was awarded to our directors pursuant to our director compensation plan. The
adjustment resulted from our issuing such restricted stock at a price per share less than the exercise price of such warrants.
Holders of warrants representing substantially all of the shares issuable under the July 2014 warrants have waived any adjustment
in the number of shares that could be purchased pursuant to their warrants as a result of the change in the exercise price. The
adjusted exercise price of the December 4, 2014 warrants and the warrant for 50,010 shares issued on August 12, 2015 have
been further adjusted to $0.70, the public offering price of the Class A Units in our December 2015 offering. If our stockholders
approve certain anti-dilution provisions of the August 12, 2015 warrants to purchase 249,990 shares issued to Mr. Pappajohn and
Mr. Oman, the exercise price of those warrants will also be adjusted to $0.70 per share, the public offering price of the Class
A Units in our December 2015 offering. We intend to seek such stockholder approval at our 2016 annual meeting of stockholders.
The exercise of such outstanding awards and warrants, the issuance of future awards under our 2005 Stock Option Plan and Amended
and Restated 2009 Plan, the exercise of Warrants or conversion of Series A Preferred sold in our December 2015 offering, or the
future issuance of any such additional shares of common stock, will result in further dilution of your investment and may create
downward pressure on the trading price of the common stock. There can also be no assurance that we will not be required to issue
additional shares, warrants or other convertible securities in the future in conjunction with any capital raising efforts, including
at a price (or exercise prices) below the price at which shares of our common stock are currently traded on The NASDAQ Capital
Market, and new investors could gain rights superior to those of our stockholders at that time.
Our executive officers, directors and principal
stockholders have significant voting power.
As of December 31, 2015, our executive officers, directors
and holders of more than 5% of our outstanding common stock together beneficially owned approximately 87% of our common stock
(including shares underlying currently exercisable warrants and options). As a result, if these stockholders were to choose to
act together, they would be able to control all matters submitted to our stockholders for approval, as well as our management
and affairs. For example, these persons, if they choose to act together, would be able to control the election of directors
and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of
ownership control may:
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delay, defer or prevent a change in control;
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entrench our management and Board of Directors; or
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impede a merger, consolidation, takeover or other business combination involving us that other stockholders may desire.
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The market price of our common stock may be volatile
and this may adversely affect our stockholders.
The price at which our common stock trades may be volatile. The stock
market can experience significant price and volume fluctuations that have affect the market prices of securities, including securities
of healthcare companies. The market price of our common stock may be influenced by many factors, including:
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our operating and financial performance;
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variances in our quarterly financial results compared to expectations;
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the depth and liquidity of the market for our common stock;
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future sales of common stock or the perception that sales could occur;
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investor perception of our business and our prospects;
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factors affecting our industry and competitors;
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developments relating to litigation or governmental investigations;
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changes or proposed changes in healthcare laws or regulations or enforcement of these laws and regulations, or announcements
relating to these matters;
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general economic and stock market conditions; and
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other risk factors described in this “Risk Factors” section.
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In addition, the stock market in general has experienced price and
volume fluctuations that have often been unrelated or disproportionate to the operating performance of healthcare companies. These
broad market and industry factors may materially reduce the market price of our common stock, regardless of our financial condition,
results from operations, business or prospects. In the past, securities class-action litigation has often been brought against
companies following periods of volatility in the market price of their respective securities. We may become involved in this type
of litigation in the future. Litigation of this type is often expensive to defend and may divert our management team’s attention
as well as resources from the operation of our business. There is no assurance that the market price of our common stock will not
fall in the future.
We do not anticipate paying dividends on our common
stock in the foreseeable future and, consequently, your ability to achieve a return on your investment will depend solely on any
appreciation in the price of our common stock.
We do not pay dividends on our shares of common stock and currently
intend to retain all future earnings to finance the continued growth and development of our business. In addition, we do not anticipate
paying cash dividends on our common stock in the foreseeable future and our credit agreements limit our ability to pay dividends.
Any future payment of cash dividends will depend upon our financial condition, capital requirements, earnings and other factors
deemed relevant by our Board of Directors. As a result, capital appreciation in the price of our common stock, if any, will be
your only source of gain on an investment in our common stock. See “Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities — Dividend Policy.”
Our common stock may be delisted from The NASDAQ
Capital Market, which may make it more difficult for you to sell your shares.
Our common stock is listed on The NASDAQ Capital Market, and we are
therefore subject to its continued listing requirements, including requirements with respect to the market value of publicly-held
shares, minimum bid price per share, and minimum stockholder's equity, among others, and requirements relating to board and committee
independence. If we fail to satisfy one or more of the requirements, we may be delisted from The NASDAQ Capital Market.
On May 21, 2015, we received a letter from NASDAQ indicating that
as of March 31, 2015, our reported stockholders’ equity of $407,000 did not meet the $2.5 million minimum required to maintain
continued listing, as set forth in NASDAQ Listing Rule 5550(b)(1). The letter further stated that as of May 20, 2015 we did not
meet either of the alternatives of market value of listed securities or net income from continuing operations.
Under NASDAQ rules, we submitted a plan to NASDAQ to regain compliance,
which NASDAQ accepted, granting us until November 17, 2015 to evidence compliance. However, because we were unable to raise equity
capital as we anticipated, we did not evidence compliance with NASDAQ Listing Rule 5550(b)(1) by November 17, 2015. On November
18, 2015, we received a letter from NASDAQ stating that we had not regained compliance with the continued listing requirements
of The NASDAQ Capital Market. As a result, NASDAQ determined that our common stock would be delisted from The NASDAQ Capital Market
effective November 30, 2015. We appealed that determination which stayed the delisting of our common stock until the appeal was
heard on January 14, 2016 by the NASDAQ Hearings Panel. Following the hearing, the NASDAQ Hearings Panel continued our listing
through May 16, 2016 in order to allow us to meet the $2.5 million minimum stockholders’ equity requirement for continued
listing on The NASDAQ Capital Market.
On January 8, 2016, we received a deficiency letter from NASDAQ indicating
that as of January 8, 2016, our common stock failed to maintain a minimum bid price of $1.00 per share for 30 consecutive days
in violation of NASDAQ Listing Rule 5550(a)(2). The notification had no immediate effect on the listing of our common stock on
The NASDAQ Capital Market and our common stock is continuing to trade on The NASDAQ Capital Market. Under NASDAQ rules, we were
granted a 180-day period within which to regain compliance. If at any time during this compliance period, the closing bid price
of our listed securities is at least $1.00 per share for at least ten consecutive business days, NASDAQ will provide us with written
confirmation of compliance and the matter will be closed. If we have not regained compliance within the 180-day period, we may
be eligible for an additional 180 days to regain compliance if certain additional requirements are met, including our providing
written notice to NASDAQ of our intention to cure the deficiency by effecting a reverse stock split.
We cannot assure you that NASDAQ will deem us to be in compliance
with either of these listing standards and continue the listing of our common stock on The NASDAQ Capital Market. Moreover, our
losses are continuing and, even if NASDAQ permits listing of our common stock to continue, we may not be able to continue
to satisfy this listing standard in the future. Accordingly, we will likely need to raise additional equity financing to satisfy
the NASDAQ minimum stockholders’ equity requirement for continued listing on The NASDAQ Capital Market in the future.
Delisting from The NASDAQ Capital Market may adversely affect our
ability to raise additional financing through the public or private sale of equity securities, may significantly affect the ability
of investors to trade our securities and may negatively affect the value and liquidity of our common stock. Delisting also could
have other negative results, including the potential loss of employee confidence, the loss of institutional investor interest business
development opportunities.
If we are delisted from The NASDAQ Capital Market and we are not
able to list our common stock on another exchange, our common stock could be quoted on the OTC Bulletin Board or in the “pink
sheets.” As a result, we could face significant adverse consequences including, among others:
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a limited availability of market quotations for our securities;
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a determination that our common stock is a “penny stock” which will require brokers trading in our common stock
to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for
our securities;
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a limited amount of news and little or no analyst coverage for us; and
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a decreased ability to issue additional securities (including pursuant to short-form registration statements on Form S-3) or
obtain additional financing in the future.
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If our common stock becomes subject to the penny
stock rules, it would become more difficult to trade our shares.
The SEC has adopted rules that regulate broker-dealer practices in
connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00, other
than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation
systems, provided that current price and volume information with respect to transactions in such securities is provided by the
exchange or system. If we do not retain a listing on The NASDAQ Capital Market and if the price of our common stock is less than
$5.00, our common stock will be deemed a penny stock. The penny stock rules require a broker-dealer, before a transaction in a
penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information.
In addition, the penny stock rules require that before effecting any transaction in a penny stock not otherwise exempt from those
rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser
and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement
to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure
requirements may have the effect of reducing the trading activity in the secondary market for our common stock, and therefore stockholders
may have difficulty selling their shares.
The market price of our common stock in the future
may be affected by different factors than in the past.
With our entry into the urgent and primary care line of business
and our plans to exit the ancillary network business, the market price of our common stock in the future may be impacted by different
factors than those that have affected the market price of our common stock in the past.
Anti-takeover provisions of our certificate of
incorporation, our bylaws and Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult
and may prevent attempts by our stockholders to replace or remove the current members of our board and management.
Certain provisions of our certificate of incorporation and bylaws
could discourage, delay or prevent a merger, acquisition or other change of control that stockholders may consider favorable, including
transactions in which you might otherwise receive a premium for your shares. Furthermore, these provisions could prevent or frustrate
attempts by our stockholders to replace or remove members of our Board of Directors. These provisions also could limit the price
that investors might be willing to pay in the future for our common stock, thereby depressing the market price of our common stock.
Stockholders who wish to participate in these transactions may not have the opportunity to do so. These provisions, among other
things:
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authorize our Board of Directors to issue, without stockholder approval, preferred stock, the rights of which will be determined
at the discretion of the Board of Directors and that, if issued, could operate as a “poison pill” to dilute the stock
ownership of a potential hostile acquirer to prevent an acquisition that our Board of Directors does not approve; and
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limit who may call a stockholders meeting.
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In addition, we are governed by the provisions of Section 203 of
the Delaware General Corporation Law, or the DGCL, which may, unless certain criteria are met, prohibit large stockholders, in
particular those owning 15% or more of the voting rights on our common stock, from merging or combining with us for a prescribed
period of time.
We may not have an active market for our common
stock and, as a result, it may be difficult for you to sell your shares of our common stock.
Despite our current listing on The NASDAQ Capital Market, there
may not be a meaningful, consistent, trading market for our common stock. Generally, trading in our common stock has been
limited. An inactive market may impair our ability to raise capital by selling shares of our common stock and may impair our
ability to enter into strategic partnerships or acquire companies or products by using our shares of common stock as
consideration. We cannot predict with any certainty the prices at which our common stock will trade. It is possible that in
one or more future periods our results of operations may be below the expectations of public market analysts and investors
and, as a result of these and other factors, the price of our common stock may fall. If we do not have an active market for
our common stock, it may be difficult for investors to sell their shares without depressing the market prices for the shares
or at all.