Nobilis Health's (HLTH) CEO Harry Fleming on Q2 2016 Results - Earnings Call Transcript

| About: Nobilis Health (HLTH)

Nobilis Health Corp. (NYSEMKT:HLTH)

Q2 2016 Results Earnings Conference Call

August 3, 2016, 09:00 AM ET

Executives

Natalie Kurz - Associate General Counsel

Harry Fleming - Chief Executive Officer

Kenneth Efird - President

Kenny Klein - Chief Financial Officer

Analysts

Neil Maruoka - Canaccord Genuity

Sheila Broughton - PI Financial

Russell Stanley - Mackie Research

Charles Haff - Craig-Hallum

Jacob Johnson - Stephens

Operator

Welcome, callers. And good morning. Today’s call will begin with a prepared statement from the company's management followed by a Q&A session open to callers. [Operator Instructions]

With that, I'd like the hand call over to Natalie Kurz, Associate General Counsel with Nobilis Health.

Natalie Kurz

Thank you, operator. And good morning, ladies and gentlemen. Welcome to our 2016 second quarter financial results conference call. On the call today are Harry Fleming, our Chief Executive Officer; Kenneth Efird, our President; and Kenny Klein, our Chief Financial Officer.

Following the formal portion of the call, we will be pleased to take your questions. For your information, this call is being recorded and a replay will be made available shortly after the call. Instructions for obtaining the replay will be posted on our Web site at www.nobilishealth.com.

Some of the statements that we make today may be considered forward-looking, including statements regarding future acquisitions, the expected performance of our business and the long-term growth and innovation. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. For more information, please refer to the risk factors discussed in our Form 10-Q for the second quarter of 2016 filed with the SEC and on SEDAR.

Any forward-looking statements that we may make are based on assumptions as of today and we undertake no obligation to update them.

During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in the press release that we filed yesterday.

I’ll now turn the call over to Harry.

Harry Fleming

Thank you, Natalie. And thanks, everyone, for joining us on today's call to discuss our 2016 second quarter results. I’m happy to report on the continued growth of our business, the progress made during the quarter and our prospects moving forward.

First, let me focus on some of the key highlights in the quarter. For the three months ended June 30, 2016, revenue increased by 26.6% over the same period last year to $61.9 million. This growth was driven by higher acuity case mix and increased case volumes, primarily from the addition of three new Nobilis hospitals in 2015.

For the second quarter of 2016, adjusted EBITDA increased to $8.5 million, a 22.7% increase over the same period last year. We are excited about the addition of the Arizona Vein and Vascular Center and its five clinical locations and four Ambulatory Surgical Centers that we announced on Monday. With the addition of these centers, we now have a platform upon which Nobilis can build a national presence in the treatment of vascular diseases, including a new brand tour, offering our branded surgical procedures.

We've already launched Vein and Vascular services in Dallas and Houston and will continue to expand with our sales and marketing departments. We're accurately assessing the acquisition of additional hospitals and ASCs, some of which are in-network facilities.

As announced in early July, Kenneth Efird, formerly Chief Operating Officer and Chief Business Development Officer of Nobilis, was appointed President of the company. He will have responsibility for all of Nobilis’ operating units nationally and will continue to focus on executing the company’s strategic plan. Kenneth is a proven leader and has played a pivotal role in executing Nobilis’ growth strategies. And he brings to the position as President a strong reputation for growing and executing on our business plan.

Regarding guidance, for the full-year 2016, we're reiterating our original organic growth guidance of 20% for total revenue growth or $275 million and 21% for adjusted EBITDA or $51 million. While our pipeline remains robust, as evidenced by the recent acquisition of Arizona Vein and Vascular, the timing of acquisitions is always uncertain. Therefore, from this point forward, our guidance will no longer include acquisitions. As we close future acquisitions, including Arizona Vein and Vascular, we will provide additional guidance.

With that, I’ll now turn the call to Kenneth Efird to provide an update on operations.

Kenneth Efird

Thank you, Harry. And I'd like to thank the company’s leadership team for their support in becoming President of Nobilis. Our second quarter results illustrate the continued success of our strategy. Our marketing and sales divisions performed at or above expectation system-wide and we’re excited about the potential of the new Vascular brand.

The acquisition of Arizona Vein and Vascular contributes to an increased footprint in the Arizona market and provides additional capacity for the growth of our existing sales and marketing efforts. We’re confident these new surgical facilities will result in an increased conversion of our current marketing efforts as well as provide additional marketing opportunities.

In regards to facility operations, we’re near completion of our quality and satisfaction standardization program. This program will allow us to more precisely identify, react to and forecast trends within our system.

During the second quarter, we received full accreditation for Hermann Drive Surgical Hospital as a comprehensive bariatric center of excellence by the Metabolic and Bariatric Surgery Accreditation and Quality Improvement Program. This is a testament to the dedication of our facilities, staff and physicians to provide the highest quality of care for our patients.

In addition to the quality and satisfaction initiatives, we expect to recognize operational efficiencies through new supply chain strategies. Our new group purchasing organization contract and membership conversion will result in improved purchasing power, new supply chain business solutions and favorably negotiated agreements. We expect significant annual savings from these programs within our existing system and we’ll continue to experience sustainable savings with future acquisitions.

In Arizona, our Scottsdale Liberty Hospital has seen an increase in case volume by 100% and an increase of revenue by 250% since we acquired it in November of 2015. Again, this is an example of our success of our turnaround capabilities and the strength of our marketing and sales departments.

I will now turn the call over to Kenny Klein, our Chief Financial Officer, to discuss the second quarter results in more detail.

Kenny Klein

Thanks, Kenneth. As Kenneth mentioned, I will now begin discussing our second quarter financial results. Note that all figures are in US dollars.

For the three months ended June 30, 2016, revenues increased to $61.9 million, an increase of $13 million or 26.6% compared to the same period the prior year. This increase in revenue was primarily generated by three hospitals we acquired in 2015, which drove case volume growth and favorably impacted both acuity mix and revenue per the case compared to the same period in the prior year.

In the second quarter, the number of cases increased to 4,863, an increase of 248 cases or 5.4% compared to the second quarter of 2015. Our sales and marketing departments contributed 67% of second quarter case volumes and 89% of second quarter revenue as compared to 45% and 71% respectively in the second quarter of 2015. This is a direct result of our ability to drive organic growth within desired specialties and procedure type within our system.

The specialties with the largest increase in case volumes were ENT or ear, nose and throat, orthopedics, plastic and reconstructive, and pain management.

Revenue per case in the second quarter increased to $11,524, an increase of $1,388 or 13.7% over the same period last year as a result of performing higher acuity cases.

For the second quarter of 2016, the company recorded net income of $4.8 million or $0.06 per basic and fully diluted share compared to a net loss of $0.4 million or $0.01 per share in the same period the prior year.

Adjusted EBITDA for the second quarter was $8.5 million, an increase of 22.7% over the same period the prior-year. The add-backs to adjusted EBITDA consisted of $1.7 million of non-cash compensation, $0.8 million of deal costs and $0.5 million of non-recurring expenses.

Non-corporate operating salaries and benefits for the second quarter of 2016 were $12.6 million as compared to $9 million for the prior-year period. Operating salaries and benefits as a percentage of total revenues were 20.4% as compared to 18.5% in the same quarter last year.

Drugs and medical supplies expense for the second quarter of 2016 were $12.2 million as compared to $8.9 million for the prior-year period. Drugs and medical supplies as a percentage of revenues were 19.7% compared to 18.1% in the prior-year period.

The growth in salaries and benefits and the growth in drugs and medical supplies as well as the increase for both as a percentage of revenues was primarily due to the addition of three hospitals in 2015. Hospitals require higher staff wells and higher drugs and supply costs than ASCs as a result of performing more complex and higher acuity cases.

Non-corporate general and administrative expense for the second quarter of 2016 was $27.5 million as compared to $20.4 million for the prior-year period. This growth was driven primarily by the acquisition of three hospitals acquired in 2015 and includes the allocation of additional marketing expenses toward the expansion of our bariatric, spine, podiatry, gyn brands.

During the second quarter of 2016, depreciation and amortization increased by $1 million due to additional depreciation expense related to our acquisitions and amortization of unfavorable leases. Both of these items are non-cash, but increase the operating expense line and are added back to the calculated adjusted EBITDA.

For the second quarter, total corporate costs were $7.6 million, a decrease of $0.7 million compared to $8.3 million in the second quarter of 2015 and a decrease of $1.2 million from the first quarter of 2016. The year-over-year decrease in total corporate costs was due primarily to a decline in non-cash compensation expense, partially offset by an increase in salaries and benefits, specifically due to the hiring of additional corporate staff related to accounting, finance and information technology. It was also offset due to the recoupment of indemnified expenses of $0.7 million of credit item for the three months ended June 30, 2015 as a result of the confidential agreement with Athas. The decrease from the first quarter of 2016 was primarily due to a decrease in legal expense, general and administrative expenses, partially offset by an increase in salaries and benefits.

Total cash was $18.8 million, accounts receivable was $77.6 million, and total debt was $22.1 million as of June 30, 2016 compared to $15.7 million, $92.6 million and $22.7 million respectively as of December 31, 2015.

Net cash provided by operating activities for the six months ended June 30, 2016 was $8.2 million compared to $5.2 million in the same period of 2015. As of August 2, 2016, the company had collected approximately 91% of its December 31, 2015 accounts receivable and is on track to collect the remaining balance.

Regarding the second quarter 2016 receivables and collections, we are confident of the collectability of these receivables, especially given the initial prolonged timeframe to submit claims at our new hospital facilities as a result of implementing new electronic medical record systems.

With that information, I'm now going to turn the call back to Harry.

Harry Fleming

Thank you, Kenny. Turning now to future M&A, I could tell you that our acquisition pipeline remains strong as we focus on portfolio companies. Once we close the Arizona Vein and Vascular acquisition, we expect to move quickly to announce and close the next acquisition in our pipeline.

With that, I thank you for listening and I will now turn the call over to the operator as we enter the Q&A portion of our call.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Neil Maruoka with Canaccord Genuity. Your line is open.

Neil Maruoka

Good morning, guys. And congratulations on the solid quarter. Thank you. My question relates more to the Arizona acquisition. Could you characterize the in versus out-of-network aspects of the new clinics and surgery centers?

And then maybe a question for Ken Efird. You had alluded to the brand that you acquired, but could you provide some color on that new vascular surgery brand and the potential to market this through Athas.

Kenneth Efird

Perfect. Thank you, Neal. When we look at the Arizona Vein and Vascular acquisition, it has five clinical locations and four Ambulatory Surgical Centers. The facilities are a mix of in and out and the practices are a 100% in network. Yeah, there are some small payers that they may not have contracts, but the big four and five are in-network. The brand equity of Arizona Vein and Vascular is quite strong. So we’re not going to do anything to disrupt that brand. What we anticipate happening is an increase of our marketing efficiencies by taking their marketing efforts and putting them on our chassis. We have larger buying power and more leverage with our digital presence. So we’ll continue to grow our surgical volume for Arizona Vein and Vascular while reducing our acquisition cost.

Now, as we look at taking this surgical specialty into our other markets, it will be under a different brand as we've done in the past with our other branded procedures that are agnostic of provider and/or facility.

Neil Maruoka

Okay, great. Maybe just one last question for Harry. You had alluded to your next M&A. Could you provide – give us an idea of what you're looking for. What kind of characteristics are you looking for within your next couple of acquisitions?

Harry Fleming

So you see throughout our pipeline, we really are focusing on portfolio companies that are primarily in-network players. And as we look at these different opportunities, we’re looking at the companies that we think can benefit the most from our marketing product. And in other words, how can we impact in a positive way the acquisition. So although we’re going to be buying revenue, we’re going to be buying EBITDA, we want to be able to impact that in a positive way.

Neil Maruoka

Okay, great. Thank you. I'll step back in the queue.

Operator

Your next question comes from the line of Sheila Broughton with PI Financial. Sheila Your line is open.

Sheila Broughton

Morning. And congratulations on the quarter. Continuing on with the Arizona acquisitions, you mentioned on the call I think that you are already starting to ramp this branding up in Houston and Dallas. Can you give us a kind of timeline to – will this all be rolled out for Q4? We’re thinking it might take you a little while to close this acquisition. So is the Q4 timeframe when we’re going to see the bulk of the EBITDA and revenue from this?

Harry Fleming

Well, a couple of questions in there, Sheila. The first is, yes, we're going to continue in parallel, develop and launch this effort in our other markets. When this transaction will close is an unknown. So it’s hard to answer. But we anticipate the same seasonality within this specialty as we have seen in the others. We have already begun the development of our marketing efforts in a new brand, which we will launch in the near future. And it is something that we have shown in the past to be able to complete in a short period of time, as low as 30 to 60 days.

Sheila Broughton

Okay. So that makes sense on the timeline. But I recognize you’re not providing guidance related to acquisitions anymore. But could this – the reason why I looked at it, it appeared like a fairly small acquisition, but then looking more at it, we’re wondering, could this actually be a meaningful step towards that $14 million of EBITDA that we had previously been expecting from guidance in 2016?

Kenny Klein

Yes, ma’am. That’s correct.

Harry Fleming

Let me add this, Sheila. So as our business goes, most of the EBITDA and revenue comes in Q4. We’re also going to ramp the vascular business in Houston and Dallas. Ken has already started. The marketing team has already built a market program for that. So we’re going to move with lightning speed on this. We expect to capture some significant revenue and EBITDA in Q4 from the vascular business.

Kenneth Efird

And that’s just the one – if you will, half of the potential pickup by adding these four surgical locations in Phoenix, we’re going to see an increase of our conversion of our existing brands, as well as we can expand those existing brands to the Phoenix market and it creates additional marketing opportunities. So if we allow our sales and marketing team to take advantage of the capacity we just purchased…

Harry Fleming

And let me add one more comment there. The business that Dr. Wall currently has in place is all done in either clinic or ASCs. As you know, we have a hospital in Phoenix. So that allows him to send the much complex cases to our hospital. And again, he’d capture more revenue than he can currently capture.

Sheila Broughton

Okay. So that my next question. So if you can do that – and I don't want to harp on this because I know you're removing the acquisition component of the guidance, but you are really coming off your guidance. You are just not discussing the acquisition-related guidance anymore.

Harry Fleming

Let me address that. I think there’s a lot of confusion out there with this bifurcated guidance. We wanted to get away from that and talk about organic growth as we acquired companies and close them. If we’re going to be acquiring EBITDA, revenue, we will update guidance every time we close a deal. And so, we would anticipate updating our guidance once we close the Arizona Vein and Vascular business.

Sheila Broughton

Okay. One comment that you made on the conference call – a bit surprised – was the increase in the ENT cases. I had maybe downplayed the importance of ENT, especially thinking they had a lower revenue per case. Is that a strategy to continue to grow ENT?

Harry Fleming

It’s an effort of our sales and marketing team to continue to go out there and grow our specialties in non-emergency electives modality that have high allowables and high margins. We’re looking at that phase in greater detail. We've been performing ENT cases for a decade now with the sinuplasty. It may be a potential area of growth, but not – but it’s nothing more than that at this time.

Kenneth Efird

And, Sheila, this is a capacity killer [ph]. So we have capacity, we’ll bring those kind of cases in.

Harry Fleming

I’m sorry, Sheila. I was just going to add. And then, specifically, at one of our ASCs in Houston, we did add a partner to that mix. And so, that also helped to contribute.

Sheila Broughton

Okay, that makes sense. I think I'm pushing my luck, but can we ask if there is an update on the Concertis program?

Natalie Kurz

Sure thing, Sheila. Good morning. We currently have three contracts with TPAs and brokers. We’ve been aggressively traveling around the country to both add additional contracts and to ensure that those contracts convert to cases.

Sheila Broughton

Great. And any outlook commentary?

Natalie Kurz

Well, again, there was no projection for revenue this year. We’re still very hopeful that will happen. And we’re looking forward to continuing to develop the product, ensure that we beat our expectations for this year and that this is both a significant revenue tool and patient acquisition tool, 2017.

Sheila Broughton

Great. Thank you very much. And thank you for taking my questions.

Harry Fleming

Thank you.

Operator

Your next question comes from the line of Russell Stanley with Mackie Research. Your line is open.

Russell Stanley

Good morning, everybody. Just following up a question on the Arizona acquisition. Can you elaborate on your plans to finance the cash component of the purchase, assuming you're expecting that to come, at least, in some part from debt?

Kenny Klein

Sure. We’re in negotiations and discussions with several opportunities. We expect to close that in, I would say, 30 to 45 days.

Russell Stanley

Okay. And is that kind of the barrier to actually the Arizona acquisition or is there anything else – any other notable items you need to check off before doing that?

Kenny Klein

No, no other notable items. That’s the final piece.

Russell Stanley

Okay, great. And you talked a little bit about the acquisition priorities. I just wanted to clarify something that Harry said earlier. The focus is on portfolio companies. Are there any kind of distressed asset type acquisitions in the mix at this point or is it more exclusive to portfolio?

Harry Fleming

We always have those deals. They’re coming to us all the time. And we’re being somewhat selective. But we would be surprised over the next few months to pick up an ASC or a small hospital in a market that we’re looking to enter. So there we’re going to continue to come our way.

Russell Stanley

Looking at portfolio companies at this point, what kind of multiples are you comfortable paying? And has the competitive environment for targets there changed at all?

Harry Fleming

So it depends on a couple of factors. One, how many are in the portfolio of the larger companies demand a better multiple, the management teams, the market, kind of their margins. Bur, generally, to get a very strong in-network portfolio, you’ve got to pay a 10 multiple. With that, you’d be getting strong management, good market penetration. And as I said earlier, that’s just the beginning of our analysis. Their EBITDA, it really goes down to what kind of cases do they do, what opportunities are they missing that we can now add, and then how does our marketing impact that particular business.

Russell Stanley

That’s helpful color. Just one more and I’ll get back into queue. A question on the receivables front. You did provide some color with respect to your progress on the receivables relative to year-end. Just wondering when you think you might return the days sales outstanding level to numbers that were more characteristic of 2015.

Kenny Klein

Yeah. I think they’ll be pretty consistent towards the end of the third quarter and back to normal in the fourth quarter. And just as you know, we did provide some color on this. We have implemented three new EMR systems at our three big hospitals. And those should all be completed by the third and fourth quarter. That will really in our productivity and collecting that AR.

Harry Fleming

Russ, also note, that’s with our existing system. Any big changes, the landscape of our network, we may see that days in AR go up because as we come in with our new operations and new EMR, you have initial lag. We have shown this quarter, once we hit our stride, we catch back up.

Russell Stanley

That’s great. Thank you for the color, guys.

Harry Fleming

Thank you, Russ.

Operator

Your next question comes from the line of Charles Haff with Craig-Hallum. Your line is open.

Charles Haff

Hi. Thanks for taking my questions. And congratulations on a good quarter. Can you hear me okay?

Harry Fleming

Yes, sir.

Charles Haff

Okay. I had one question for you. I’m trying to reconcile the growth that you saw this quarter. I think Ken Kline mentioned three of the hospitals, the recent acquisitions were kind of the primary growth drivers in the quarter. Correct me if I heard that wrong. But then when you are reciting the business lines, you cited ENT, ortho, plastics, and pain. I thought those three hospitals that you acquired were doing a lot of bariatric and spine. So I’m just trying to reconcile those two different comments. Can you help me with that?

Kenneth Efird

I think you are kind of co-mingling a little bit there, Charles. That line that Harry talked

about – sorry, that Kenny was talking about, growth within the new specialties, when we talk about the three hospitals and the blend of those procedures, around 60% of that is going to be spine and pain and bariatrics. So we continue to focus on those higher acuity cases with our sales and marketing efforts.

Charles Haff

Okay, thanks for that. And then, turning to Arizona Vein and Vascular, I cover a couple of the medical device companies that do business in this area. And the business seems to be pretty seasonal, especially in the summer months when ladies want to wear shorts and so forth. I’m wondering if you expect a similar level of seasonality for Arizona Vein and Vascular clinics. Or do you think it will follow along your typical seasonality where you have most of the procedures done in the fourth quarter?

Kenneth Efird

Charles, I can tell you we have looked at the financials in detail for several years of this business. Its seasonality tracks what we do. The majority or almost half the business is done in the fourth quarter. We don’t see any run-up in the summer. So that isn’t happening with this business.

Jacob Johnson

Charles Haff

Okay, thank you. And then, also, on the Arizona Vein and Vascular, looking at their website, it looks like they do not do atherectomy procedures. I wonder if you could confirm that or not. And do you currently do atherectomy procedures or is that something you may be adding to your Scottsdale hospital in the future, so that as those cases progress that you could still do atherectomy?

Harry Fleming

We do not perform them at this time. It is on the short list of where we can grow. Appreciate you asking that, Charles. When we look at the current vein procedures that are being performed within the acquisition, in our desire to have growth in the near future, it is vein and vascular procedures that we can currently perform. Operationally, we have no concern in going forward and launching them immediately. We see that there is a great entryway into more advanced cardiovascular procedures, including placement of stents, filters, and maybe even some more advanced cath procedures. So we will grow our cardiovascular and vein modalities in all of our markets [indiscernible].

Charles Haff

Okay, thanks for that. And congratulations on getting the 10-Q out last night. I think that was a big step for the company and for your stock today. What do you see that you did differently this quarter in order to get the 10-Q out in a timely basis?

Kenny Klein

Good morning. This is Kenny Klein. So several things. So we have increased our staffing, our process and our structure, and so that all came together. I think our lead piece of this was our Chief Accounting Officer that really drove this quarter. And with the process, the people, and also focus on internal controls, which we have also implemented this quarter, you’re going to see these – we’ll hit our deadlines going forward without an issue.

Charles Haff

Okay. Well, that sounds great. And then, I reviewed the 10-Q last night, and one item that jumped out to me was on page 27 where you broke out the same-store metrics. And the same-store revenue in the ASC component was down significantly versus 2015. Can you kind of help me understand what the reasons were for that?

Kenny Klein

Sure. The biggest component change there is our ASC that was in Dallas. As you know, that entity ceased conducting cases as of September 2015 at its previous state. Now we participate in a JV there in Dallas. So that line item, which used to be consolidated with the ASCs, is now picked up as other income, as an equity investment. So it was just a change.

Harry Fleming

And that’s something that - before we had to function as only ASCs. With the addition of the surgical hospitals into our portfolio, we’re able to shift those higher acuity cases into an in-patient setting and then alleviate some of the large space in our ASCs.

Kenny Klein

Just one other thing to add. That was partially the driver for the change in the MD&A. As you see now, we break it down by market segment which is consistent with our peers. In this way, if center changes, it’s not as granular there.

Charles Haff

Okay. Yeah, that makes sense. And then, lastly, following up on the previous question on AR, I was very impressed that your AR only grew only 5% quarter-over-quarter, while your revenue growth grew 21% quarter-over-quarter. And you mentioned the three EMR systems. I’m wondering what the collections rates are. Ken Efird mentioned that there would be a little bit of a pause as you can convert over to the EMRs. But I’m wondering what is kind of went on year in terms of that improvement in AR quarter-over-quarter given the strong revenue growth? And what kind of different collection days would you expect when you have an EMR system at a facility versus when you don’t?

Kenny Klein

Sure. So, first of all, several questions there. First of all, we have seen, since our 12/31 reporting, we’ve seen an increase each quarter on our DSO and will continue to see that. We have one EMR system in place at one of our large hospitals in Houston. And the other two are being implemented and those should be done in, again, the third and early in the fourth quarter. And there’ll be a slight few days as we implement that. But then we should see some pretty significant efficiencies and our average days in AR should be under the 90-day range on a go-forward basis after we get those systems in place.

Charles Haff

Okay. But just to understand, for this quarter, when you had a 5% increase quarter-over-quarter in AR versus a 21% increase in revenue growth quarter-over-quarter, what happened this quarter that led to the improvement?

Harry Fleming

You also have to look at the ideology of that AR and then layer on top of that the seasonality of our company. When we had Plano come online and a very large portion of that AR not hit the ground until January, it went through its normal maturation process and we’re seeing that AR become collected, as we’ve seen, at 91%, that has allowed us to significantly increase our collectability of that past AR and we will continue to see that going forward.

Charles Haff

Okay, alright. Sounds great. Thanks.

Operator

And our last question comes from the line of Dana Hambly with Stephens. Your line is open.

Jacob Johnson

Morning. This is Jacob Johnson on for Dana. First question, on the vascular procedures at Arizona Vein, how do these compare to your current portfolio procedures in terms of volume, revenue per case, and margins?

Kenneth Efird

Obviously, it’s dependent by location, how many units, the type of procedure that’s performed. Big investors, it’s somewhat broad. But it’s been a mix of our averages from a revenue and gross margin standpoint. Where we get really excited about this modality is it is a morality in which patients are looking for solutions every day. It’s a great marketing opportunity where we can take this existing brand and continue to grow and develop and get out there and educate these patients and introduce them into our system and network of providers and ultimately receive treatment within our system.

Jacob Johnson

And then, on the M&A front, are you looking to do more deals, like this Arizona deal where you can bring on a new procedure type and then you use your marketing arm to push it out to traditional locations?

Harry Fleming

Yeah. We keep our eyes open for those kind of deals, but I can tell you we’re looking for the kind of multispecialty, multiunit portfolio companies, much broader than this. We came across this deal really through an introduction with Dr. Wall and we were so impressed with what he has done over the last few years, that got us inadvertently into a discussion of why don’t you join our team and that’s how we got here with that deal.

Jacob Johnson

Great. And then corporate costs, you guys talked a bit about it. They were down sequentially and year-over-year, which was really impressive. Should we think about them going forward at these levels, maybe in particular the legal expenses?

Kenny Klein

Yeah. They should continue to go down. Same thing with our cost per case at the SMB line and the drugs and supply and also the G&A line. You’ll see efficiencies going forward in the year.

Jacob Johnson

And just one last question on expenses. The increased marketing spend in the first and second quarter of this year, is that going to continue into the third and the fourth quarter or should it taper off at some point?

Kenny Klein

It’s largely dependent on the number of brands in markets that we have active. But we do have an internal strategy of how we utilize our spend. In the holidays of November and December, we tend to pull back on that spend a little bit. But we’re going to continue pushing forward hard to grow our volume. If you look at Q2 2016, a metric we often talk about, 67% of our Q2 cases came from our sales and marketing efforts. It was subsequently 89% of our revenue. That’s, again, a testament of our ability to drive revenue within our system in desired modalities and specialties.

Jacob Johnson

Great. Great quarter, guys. Thanks.

Kenny Klein

Thank you.

Operator

And we have no further questions at this time. May I turn the call back over to the presenters?

Harry Fleming

Thank you all for attending this call today. And we hope to deliver great results in the future. Thank you.

Operator

And this concludes today’s conference call. You may now disconnect.

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