UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission File Number: 000-54064

UNIVERSITY GENERAL HEALTH SYSTEM, INC.

(Exact name of registrant as specified in its charter)

Nevada		71-0822436
(State or other jurisdiction of		(IRS Employer Identification No.)
incorporation or organization)
7501 Fannin Street, Houston, Texas		77054
(Address of principal executive offices)		(Zip Code)

(713) 375-7100
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report

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

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

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ

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

As of November 14, 2011, there were 277,020,895 shares of the issuer’s common stock outstanding.

 

 

TABLE OF CONTENTS

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and December 31, 2010			3
Consolidated Statements of Operations For the three and nine months ended September 30, 2011 and 2010 (Unaudited)			4
Consolidated Statements of Cash Flows For the nine months ended September 30, 2011 and 2010 (Unaudited)			5
Consolidated Statements of Shareholders’ Equity (Deficit) For the nine months ended September 30, 2011 (Unaudited)			6
Notes to Consolidated Financial Statements (Unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
Item 3. Quantitative and Qualitative Disclosures about Market Risk			46
Item 4. Controls and Procedures			46
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			47
Item 1A. Risk Factors			48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			56
Item 3. Defaults Upon Senior Securities			56
Item 4. (Removed and Reserved)			56
Item 5. Other Information			56
Item 6. Exhibits			57
SIGNATURES			59
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

UNIVERSITY GENERAL HEALTH SYSTEM, INC.

		September 30,				December 31,
		2011				2010
		(Unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	622,959			$	2,291,754
Accounts receivables, net			16,373,762				11,812,184
Inventories			2,070,087				1,765,735
Receivables from related parties			476,379				633,678
Prepaid expenses and other assets			592,103				52,790
Total current assets			20,135,290				16,556,141
Investments in unconsolidated affiliates			115,000				—
Property and equipment, net			78,294,372				53,224,152
Intangible assets			1,200,000				—
Goodwill			16,457,447				—
Other assets			1,933,385				266,603
Total assets		$	118,135,494			$	70,046,896
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities
Accounts payable		$	12,735,052			$	14,823,508
Payables to related parties			2,237,165				4,714,951
Accrued expenses			7,774,265				7,984,109
Accrued acquisition cost			1,407,546				—
Taxes Payable			4,361,799				5,436,041
Deferred revenue			401,515				—
Lines of credit			8,451,025				—
Notes payable, current portion			18,314,509				8,321,298
Notes payable to related parties, current portion			3,461,831				4,027,650
Capital lease obligations, current portion			8,340,357				11,591,999
Capital lease obligation to related party, current portion			235,443				137,076
Total current liabilities			67,720,507				57,036,632
Lines of credit			—				8,450,000
Notes payable, less current portion			12,968,377				5,487,939
Notes payable to related parties, less current portion			2,029,297				2,087,241
Capital lease obligations, less current portion			50,815				532,805
Capital lease obligation payable to related party, less current portion			30,867,634				31,042,859
Total liabilities			113,636,630				104,637,476
Commitments and contingencies			—				—
Shareholders’ equity (deficit)
Preferred stock, $0.001 par value, 20,000,000 shares authorized, 3,000 shares issued and outstanding			3				3
Common stock, $0.001 par value, 480,000,000 shares authorized; 276,395,895 and 151,498,884 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively			276,396				151,499
Additional paid in capital			47,600,953				12,069,750
Shareholders’ receivables			(2,130,000	)			—
Accumulated deficit			(46,433,886	)			(46,811,832	)
Total shareholders’ deficit			(686,534	)			(34,590,580	)
Noncontrolling interest			5,185,398				—
Total equity (deficit)			4,498,864				(34,590,580	)
Total liabilities and shareholders’ equity (deficit)		$	118,135,494			$	70,046,896

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

UNIVERSITY GENERAL HEALTH SYSTEM, INC.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Revenues
Net patient service revenues, net of contractual adjustments		$	18,966,579			$	15,003,647			$	52,919,032			$	40,298,340
Resident revenues			1,723,571				—				1,723,571				—
Revenue cycle revenues			168,279				—				168,279				—
Other revenues			161,996				3,691				170,949				33,915
Total revenues			21,020,425				15,007,338				54,981,831				40,332,255
Operating expenses
Salaries, benefits, and other employee costs			8,263,837				5,202,667				21,211,247				14,222,012
Medical supplies			3,399,612				2,980,805				9,663,453				8,699,673
Management fees for third party			1,412,385				701,441				4,105,767				1,861,188
General and administrative expenses			4,886,019				2,566,839				12,542,252				8,375,657
Bad debt expense			369,469				707,445				994,619				2,276,856
Gain on extinguishment of liabilities			(1,947,134	)			(57,595	)			(3,411,479	)			(1,780,731	)
Depreciation and amortization			2,104,016				1,739,935				5,624,132				5,222,159
Total operating expenses			18,488,204				13,841,537				50,729,991				38,876,814
Operating income			2,532,221				1,165,801				4,251,840				1,455,441
Interest expense			1,349,023				1,186,778				3,574,146				3,822,084
Income (loss) before income tax			1,183,198				(20,977	)			677,694				(2,366,643	)
State income tax expense			99,000				60,000				261,000				235,000
Income (loss) before noncontrolling interest			1,084,198				(80,977	)			416,694				(2,601,643	)
Net income attributable to noncontrolling interests			(38,748	)			—				(38,748	)			—
Net income (loss) attributable to Company		$	1,045,450			$	(80,977	)		$	377,946			$	(2,601,643	)
Basic and diluted earnings (loss) per share data:
Basic and diluted earnings (loss) per share		$	0.00			$	(0.00	)		$	0.00			$	(0.03	)
Basic and diluted weighted average shares outstanding			276,379,591				91,132,160				235,075,067				91,132,160

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

UNIVERSITY GENERAL HEALTH SYSTEM, INC.

		Nine Months Ended
		September 30,
		2011				2010
Operating activities
Net income (loss)		$	416,694			$	(2,601,643	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Bad debt expense			994,619				2,276,856
Depreciation and amortization			5,624,132				5,222,159
Gain on extinguishment of liabilities			(3,411,479	)			(1,780,731	)
Net changes in other operating assets and liabilities:
Accounts receivable			(5,390,952	)			(2,142,743	)
Related party receivables and payables			222,513				(1,082,151	)
Inventories			(304,352	)			9,523
Prepaid expenses and other assets			(46,793	)			(86,839	)
Accounts payable, accrued expenses, and payable to Internal Revenue Service			(1,465,474	)			3,736,282
Deferred revenue			133,940				—
Net cash (used in) provided by operating activities			(3,227,152	)			3,550,713
Investing activities
Purchase of property and equipment			(598,960	)			(143,811	)
Business acquisitions, net of cash acquired			397,755				—
Investments in unconsolidated affiliates			(115,000	)			—
Net cash used in investing activities			(316,205	)			(143,811	)
Financing activities
Redemption of common stock			(50,000	)			—
Issuance of common stock			7,120,000				—
Dividends paid			(3,496	)			—
Borrowings under notes payable			3,500				100,000
Payments on notes payable			(3,481,189	)			(600,410	)
Borrowings under notes payable to related party			3,944,633				5,367,300
Payments on notes payable to related party			(1,848,396	)			(6,000,991	)
Proceeds from capital leases			—				547,924
Repayment of capital lease obligation			(3,733,632	)			(2,714,356	)
Payments on capital lease obligation to related party			(76,858	)			(46,447	)
Net cash provided by (used in) financing activities			1,874,562				(3,346,980	)
Net (decrease) increase in cash and cash equivalents			(1,668,795	)			59,922
Cash and cash equivalents at beginning of period			2,291,754				1,640
Cash and cash equivalents at end of period		$	622,959			$	61,562
Supplemental disclosure of cash flow information
Interest paid		$	1,360,017			$	2,783,764
Taxes paid		$	5,443,470			$	1,800,025
Supplemental noncash financing activities
Exchange of debt for common stock on February 2011		$	3,500,000			$	—
Issuance of common stock on February 2011		$	2,130,000			$	—
Issuance of common stock to affiliate for termination of service agreement		$	1,000,000			$	—
Noncash consideration paid for acquisitions		$	24,753,735			$	—

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

UNIVERSITY GENERAL HEALTH SYSTEM, INC.

																		Additional												Total
		Preferred Stock								Common Stock								Paid-In				Shareholders’				Accumulated				Shareholders’				Noncontrolling
		Shares				Par Value				Shares				Par Value				Capital				Receivable				Deficit				Equity (Deficit)				Interest
Balance, December 31, 2010,			3,000			$	3				151,498,884			$	151,499			$	12,069,750			$	—			$	(46,811,832	)		$	(34,590,580	)		$	—
Redemption of common stock on January 2011			—				—				(173,632	)			(174	)			(49,826	)			—				—				(50,000	)			—
Issuance of common stock on February 2011			—				—				56,388,831				56,389				7,193,611				(130,000	)			—				7,120,000				—
Issuance of common stock on February 2011			—				—				22,040,000				22,040				1,977,960				(2,000,000	)			—				—				—
Exchange of debt for common stock on February 2011			—				—				40,600,587				40,601				3,459,399				—				—				3,500,000				—
Issuance of common stock to affiliate for termination of service agreement			—				—				11,600,000				11,600				988,400				—				—				1,000,000				—
Exchange of profit interest for common stock on February 2011			—				—				2,204,000				2,204				(2,204	)			—				—				—				—
Effect of Reverse Merger			—				—				(31,158,670	)			(31,159	)			31,159				—				—				—				—
Issuance of common stock for acquisitions in June 2011			—				—				23,395,895				23,396				21,932,704												21,956,100				5,150,146
Dividends to noncontrolling interest			—				—				—				—				—				—				—				—				(3,496	)
Net income for the period			—				—				—				—				—				—				377,946				377,946				38,748
Balance, September 30, 2011			3,000			$	3				276,395,895			$	276,396			$	47,600,953			$	(2,130,000	)		$	(46,433,886	)		$	(686,534	)		$	5,185,398

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

University General Health System, Inc.

NOTE 1 — DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

On March 28, 2011, pursuant to an Agreement and Plan of Reorganization (“Reorganization Agreement”) executed on March 10, 2011, SeaBridge Freight, Corp. (“SeaBridge”), a publicly reporting Nevada corporation, acquired University General Hospital, LP (the “UGH LP”), a Texas limited partnership and University Hospital Systems, LLP (the “UGH GP”), a Delaware limited liability partnership (collectively the “UGH Partnerships”) in exchange for the issuance of 232,000,000 shares of common stock, a majority of the common stock, to the former partners of the UGH Partnerships.

For financial accounting purposes, this acquisition (referred to as the “Merger”) was a reverse acquisition of SeaBridge by the UGH Partnerships and was treated as a recapitalization with the UGH Partnerships as the accounting acquirer. Accordingly, the financial statements have been prepared to give retroactive effect of the reverse acquisition completed on March 28, 2011 and represent the operations of UGH Partnerships.

In connection with and immediately following the Merger, SeaBridge changed its name to University General Health System, Inc. (the “UGHS”, “we”, or the “Company”) and divested of its wholly-owned subsidiary, SeaBridge Freight, Inc. a Delaware corporation. The divested subsidiary is in the business of providing container-on-barge, break-bulk and out-of-gauge freight transport service between Port Manatee of Tampa Bay, FL and Port Brownsville, Texas. In consideration of the divestiture, the Company received and cancelled 135,000,000 outstanding shares of common stock of the Company from existing shareholders.

After the Merger, the Company is a diversified, integrated, multi-specialty health care provider that delivers concierge physician and patient oriented services providing timely and innovative health solutions that are competitive, efficient and adaptive in today’s health care delivery environment. At September 30, 2011, the Company owned and operated University General Hospital (“UGH”), a 72-bed acute care hospital in Houston, Texas. UGH commenced business operations as a general acute care hospital on September 27, 2006. The Company is headquartered in Houston, Texas.

In June 2011, through its wholly-owned subsidiaries, the Company completed the acquisitions of three senior living communities: Trinity Oaks of Pearland, Texas, Trinity Shores of Port Lavaca, Texas and Trinity Hills of Knoxville, Tennessee (the “TrinityCare Facilities”). UGHS also acquired 51% of the ownership interests of TrinityCare Senior Living, LLC (“TrinityCare Senior Living, LLC”), a developer and manager of senior living communities. As UGHS’ majority-owned subsidiary, TrinityCare Senior Living, LLC continues to manage the three existing senior living communities, and will continue to develop additional communities across the United States and internationally. The TrinityCare Facilities and TrinityCare Senior Living, LLC are sometimes collectively referred to as “TrinityCare.” Effective June 30, 2011, UGHS also acquired the business asset of specialized health care billing, coding and other revenue cycle management companies, Autimis, LLC, and Autimis Medical Billing, LLC, collectively “Autimis”.

As of September 30, 2011, the Company had the following wholly-owned subsidiaries for the primary purpose of ownership, operation and acquisition of general acute care hospitals, ambulatory surgery centers and other ancillary businesses, senior living communities and healthcare revenue cycle businesses: University General Hospital, LP (“UGH LP”), University Hospital Systems, LLP (“UGH GP”), UGHS Ancillary Services, Inc (“UGHS Services”), UGHS Hospitals, Inc. (“UGHS Hospital”), UGHS Management Services, Inc. (“UGHS Management”), UGHS Real Estate, Inc. (“UGHS Real Estate”), UGHS Senior Living of Pearland, LLC (“UGHS Pearland”), UGHS Senior Living of Port Lavaca, LLC (“UGHS Port Lavaca”), UGHS Senior Living of Knoxville, LLC (“UGHS Knoxville”), UGHS Autimis Billing, Inc. (“UGHS Billing”), and UGHS Coding, Inc. (“UGHS Coding”). As of September 30, 2011, UGHS conducted operations through three operating segments: Hospital, Senior Living, and Revenue Management. See Note 5.

University General Health System, Inc.
Notes to the Consolidated Financial Statements (unaudited) — (Continued)

Basis of Presentation

The accompanying unaudited consolidated financial statements of the Company have been prepared in conformity with United States of America generally accepted accounting principles (“U. S. GAAP”) and the instructions for Form 10-Q and Article 10 of Regulation S-X as they apply to interim financial information. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of the interim periods have been included. All such adjustments are of a normal and recurring nature. The results for interim periods are not necessarily indicative of results for the entire year. The consolidated balance sheet at December 31, 2010 has been derived from audited consolidated financial statements; however, the notes to the consolidated financial statements do not include all of the information and notes required by U.S. GAAP for complete consolidated financial statements. The accompanying unaudited interim consolidated financial statements should be read in conjunction with the combined financial statements and notes thereto included in our Form 8-K/A for the year ended December 31, 2010 as filed with the Securities and Exchange Commission (the “SEC”) on June 14, 2011.

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U. S. GAAP requires management to make a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid short-term investments purchased with an original maturity of three months or less to be cash equivalents. These investments are carried at cost, which approximates fair value. The Company and its subsidiaries maintain its cash in institutions insured by the Federal Deposit Insurance Corporation (FDIC). Beginning December 31, 2010 through December 31, 2012 all non-interest-bearing transaction accounts are fully insured, regardless of the balance of the account, at all FDIC-insured institutions. This unlimited insurance coverage is separate from, and in addition to, the insurance coverage provided to the depositor’s other accounts held by a FDIC-insured institution, which are insured for balances up to $250,000 per depositor until December 31, 2013. At September 30, 2011 and December 31, 2010, the amounts held in the banks exceeded the insured limit of $250,000. The Company has not incurred losses related to these deposits and believes no significant concentration of credit risk exists with respect to these cash investments.

Accounts Receivable

Accounts receivables are stated at estimated net realizable value. Significant concentrations of accounts receivables at September 30, 2011 and December 31, 2010 consist of the following:

		September 30,				December 31,
		2011				2010
Commercial and managed care providers			62	%			67	%
Government-related programs			34	%			31	%
Self-pay patients			4	%			2	%
Total			100	%			100	%

University General Health System, Inc.
Notes to the Consolidated Financial Statements (unaudited) — (Continued)

Accounts receivable are based on gross patient receivables of $46,426,974 and $44,800,018, net of contractual adjustments of $23,904,248 and $27,754,146 as of September 30, 2011 and December 31, 2010, respectively. Additionally, the Company’s accounts receivable consist of net resident receivables of $72,331 and revenue management receivables of $26,162 at September 30, 2011. Receivables from government-related programs (i.e. Medicare and Medicaid) represent the only concentrated groups of credit risk for the Company and management does not believe that there are significant credit risks associated with these receivables. Commercial and managed care receivables consist of receivables from various payors involved in diverse activities and subject to differing economic conditions, and do not represent any concentrated credit risk to the Company. The Company maintains allowances for uncollectible accounts for estimated losses resulting from the payors’ inability to make payments on accounts. The Company assesses the reasonableness of the allowance account based on historic write-offs, the aging of accounts and other current conditions. Furthermore, management continually monitors and adjusts the allowances associated with its receivables. Accounts are written off when collection efforts have been exhausted. Recoveries of trade receivables previously written off are recorded when received. The allowance for doubtful accounts was $6,247,457 and $5,233,688 as of September 30, 2011 and December 31, 2010, respectively.

Related Parties Receivables

Related parties receivables include employee receivables and expenses paid on behalf of affiliates, which management believes have minimal credit risk.

Inventories

Inventories consist primarily of pharmaceuticals and supplies inventories. Inventories are stated at cost, which approximates market, and are expensed as used. Cost is determined using the first-in, first-out method.

Property and Equipment

Property and equipment are initially stated at cost and fair value at date of acquisition. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets. Upon retirement or disposal of assets, the asset and accumulated depreciation accounts are adjusted accordingly, and any gain or loss is reflected in earnings or loss of the respective period. Maintenance costs and repairs are expensed as incurred; significant renewals and betterments are capitalized. Assets held under capital leases are classified as property and equipment and amortized using the straight-line method over the shorter of the useful lives or lease terms, and the related obligations are recorded as debt. Amortization of assets under capital leases and of leasehold improvements is included in depreciation expense. The Company records operating lease expense on a straight-line basis unless another systematic and rational allocation is more representative of the time pattern in which the leased property is physically employed. The Company amortizes leasehold improvements, including amounts funded by landlord incentives or allowances, for which the related deferred rent is amortized as a reduction of lease expense, over the shorter of their economic lives or the lease term. The estimated useful life of each asset is as follows:

Buildings			40
Machinery and Equipment			3 to 15
Leasehold improvement			5 to 30
Computer equipment and software			5

Intangible Asset

The Company recorded as an intangible asset the previously developed software technology of Autimis, Inc. as an allocation of purchase price (see note 4) based on the fair value as determined by a weighted average of a cost and income based measure of fair value. The intangible asset is amortized on a straight-line basis over the 10 year life of the asset. The amortization charge is included in the Consolidated Statements of Operations. The Company evaluates for impairment when events and circumstances warrant in accordance with ASC Topic 350-30, Intangibles: Goodwill and Other, and an impairment loss will be recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value. After an impairment loss is recognized, the adjusted carrying amount of the intangible asset will be its new accounting basis.

Deferred Loan Costs

Costs associated with securing loans are capitalized and amortized over life of related debt. Capitalized loan cost net of accumulated amortization of $34,734 were $1,390,266 at September 30, 2011 and are included in other assets in the balance sheet. Loan cost amortization totals $34,734 for the three months ended September 30, 2011.

University General Health System, Inc.
Notes to the Consolidated Financial Statements (unaudited) — (Continued)

Impairment of Long-lived Assets

Long-lived assets, which include property, plant and equipment and identified intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset, or related groups of assets, may not be fully recoverable from estimated future cash flows. In the event of impairment, measurement of the amount of impairment may be based on appraisal, market values of similar assets or estimates of future discounted cash flows using market participant assumptions with respect to the use and ultimate disposition of the asset. No such impairment was identified at September 30, 2011 or December 31, 2010.

Goodwill

Effective September 2011, the Company accounts for its goodwill in accordance with the Accounting Standards Update (“ASU”) No. 2011-08, Intangibles-Goodwill and Other (Topic 350) Testing Goodwill for Impairment. Goodwill represents the excess of the fair value of consideration paid over the fair value of identified net assets recognized and represents the future economic benefits arising from assets acquired that could not be individually identified and separately recognized. The Company assesses the carrying amount of goodwill by testing the goodwill for impairment annually on December 31, and whenever events or changes in circumstances or a triggering event indicate that the carrying amount may not be recoverable.

In accordance with ASU 2011-08, the Company first assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The qualitative factors include macroeconomic conditions, industry and market considerations, the Company’s overall financial performance, cost factors, and entity-specific events such as changes in strategy, management, key personnel, or customers. If the Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then it performs the two-step impairment test.

Under ASU 2011-08, the Company has also an option to bypass the qualitative assessment described above for any reporting unit in any period and proceed directly to performing the first step of the goodwill impairment test. In the first step, the fair value of each reporting unit is compared to its carrying value. If the fair value of a reporting unit exceeds the carrying value of that unit, goodwill is not impaired and no further testing is required. If the carrying value of the reporting unit exceeds the fair value of that unit, then a second step must be performed to determine the implied fair value of the reporting entity’s goodwill. The second step of the goodwill impairment analysis requires the allocation of the fair value of the reporting unit to all of the assets and liabilities of that reporting unit as if the reporting unit had been acquired in a business combination. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then an impairment loss equal to the difference is recorded as a separate line item within income from operations. Significant estimates and judgments are involved in this assessment and include the use of valuation methods for determining the fair value of goodwill assigned to each of the reporting units and the applicable assumptions included in those valuation methods such as financial projections, discount rates, tax rates and other related assumptions. Additionally, these estimates and judgments include the assumptions utilized to arrive at the market values of the fixed assets assigned to these reporting units and the reliability of other assets assigned to the reporting units. There have been no triggering events in the nine months ended September 30, 2011 and 2010.

Fair Value Measurements

The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability. The Company uses fair value measurements based on quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2) or unobservable inputs for assets or liabilities (Level 3), depending on the nature of the item being valued. The Company discloses on a yearly basis the valuation techniques and discloses any change in method of such within the body of each applicable footnote. The estimated fair values may not be representative of actual values that will be realized or settled in the future. The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value because of the short maturity of these instruments.

The fair value of the Company’s long-term debt is determined by estimation of the discounted future cash flows of the debt at rates currently quoted or offered to a comparable company for similar debt instruments of comparable maturities by its lenders. The fair value of the Company’s intangible assets was originally determined as a part of an acquisition based measure of fair value and is currently carried at amortized cost.

University General Health System, Inc.
Notes to the Consolidated Financial Statements (unaudited) — (Continued)

Revenue Recognition

Hospital Segment

Revenues related to the Company’s Hospital segment consist primarily of net patient service revenues, which are based on the facilities’ established billing rates less allowances and discounts. Net patient service revenues for the three months ended September 30, 2011 and 2010 were $18,966,579 and $15,003,647, respectively, and are based on gross patient service revenues of $77,559,961 and $65,172,485, net of contractual adjustments of $58,593,382 and $50,168,838, respectively. Net patient service revenues for the nine months ended September 30, 2011 and 2010 were $52,919,032 and $40,298,340, respectively, and are based on gross patient service revenues of $210,384,636 and $174,169,382, net of contractual adjustments of $157,465,604 and $133,871,042, respectively.

UGH LP has agreements with third-party payors that provide for payments to UGH LP at amounts different from its established rates. Payment arrangements include prospectively-determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Net patient service revenue is reported at the estimated net realizable amount from patients, third-party payors, and others for services rendered, including estimated contractual adjustments under reimbursement agreements with third party payors. Allowances and discounts are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. These allowance and discounts are related to the Medicare and Medicaid programs and managed care contracts.

For the three months ended September 30, 2011 and 2010, net patient service revenue from the Medicare and Medicaid programs accounted for approximately 38% and 31% of total net patient service revenue, respectively, and net patient service revenue from managed care contracts accounted for approximately 57% and 62% of net patient service revenue, respectively. For the nine months ended September 30, 2011 and 2010, net patient service revenue from the Medicare and Medicaid programs accounted for approximately 36% and 31% of total net patient service revenue, respectively, and net patient service revenue from managed care contracts accounted for approximately 58% and 62% of net patient service revenue, respectively.

Senior Living Segment

Revenues related to the Company’s Senior Living segment consist primarily of resident fees, entrance fees, community fees, and management fees. Resident fee revenue is recorded when services are rendered and consists of fees for basic housing, support services and fees associated with additional services such as personalized assisted living care. Residency agreements are generally non-binding, for a term of one year, with resident fees billed monthly in advance.

The TrinityCare Facilities have residency agreements that require the resident to pay an upfront fee prior to occupying the senior living community. The non-refundable portion of the entrance fee is recorded as deferred revenue and amortized over the estimated stay of the resident based on an actuarial valuation. The refundable portion of a resident’s entrance fee is generally refundable within a certain number of months or days following contract termination. In such instances, the refundable portion of the fee is not amortized and included in refundable entrance fees and deferred revenue.

All refundable amounts due to residents at any time in the future, including those recorded as deferred revenue are classified as current liabilities. The non-refundable portion of entrance fees expected to be earned and recognized in revenue in one year is recorded as a current liability. The balance of the non-refundable portion is recorded as a long-term liability.

The majority of community fees received by the TrinityCare Facilities are non-refundable and are recorded initially as deferred revenue. The deferred amounts, including both the deferred revenue and the related direct resident lease origination costs, are amortized over the estimated stay of the resident, which is consistent with the contractual terms of the resident lease. The refundable portion of a resident’s community fee is generally refundable within a certain number of months or days following the resident’s move-in into the community. In such instances, the refundable portion of the fee is not amortized and included in refundable community fees and deferred revenue.

TrinityCare Senior Living, LLC provides management services to the TrinityCare Facilities, as well as an assisted living community and two memory care greenhouses in Georgia. Management fee revenue is determined by an agreed upon percentage of gross revenues and recorded as services are provided. Management fee revenue received from the TrinityCare Facilities has been eliminated in consolidation.

University General Health System, Inc.
Notes to the Consolidated Financial Statements (unaudited) — (Continued)

Revenue Management Segment

Billing and coding revenues are generated from revenue cycle management services provided by Autimis to UGH LP and other third-party clients. Fees charged for these services are defined in service agreements and based upon a stated percentage of cash collections. Revenue is recognized as services are performed. Billing and coding fee revenue received from UGH LP has been eliminated in consolidation.

Concentration of Credit Risk

Concentration of credit risk with respect to accounts receivable is limited due to the large number of customers comprising the Company’s customer base and in which the Company operates. The Company provides for bad debts principally based upon the aging of accounts receivable and uses specific identification to write off amounts against its allowance for doubtful accounts. The Company believes the allowance for doubtful accounts adequately provides for estimated losses as of September 30, 2011 and December 31, 2010. The Company has a risk of incurring losses if such allowances are not adequate.

Income Taxes

The Company accounts for income taxes under the Accounting Standards Codification (“ASC”) No. 740, Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets may not be realized.

The Company records and reviews quarterly its uncertain tax positions. The Company recognizes the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The Company measures a tax position that meets the more-likely-than-not recognition threshold as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. In its measurement of a tax position that meets the more-likely-than-not recognition threshold, the Company considers the amounts and probabilities of the outcomes that could be realized upon settlement using the facts and circumstances and information available at the reporting date.

Earnings (Loss) Per Share Information

Basic net earnings (loss) per common share are computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net earnings (loss) per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.

Cost Method Investments in Nonconsolidated Affiliates

We use the cost method to account for equity investments for which we do not have the ability to exercise significant influence or for which the equity securities do not have readily determinable fair values. Under the cost method of accounting, investments are carried at cost and are adjusted only for other-than-temporary declines in fair value, additional investments, or distributions deemed to be a return of capital.

Management periodically assesses the recoverability of our cost method investments. We consider all available information, including the recoverability of the investment, the earnings and near-term prospects of the affiliate, factors related to the industry, conditions of the affiliate, and our ability, if any, to influence the management of the affiliate. We assess fair value based on valuation methodologies, as appropriate, including discounted cash flows, estimates of sales proceeds, and external appraisals, as appropriate. If an investment is considered to be impaired and the decline in value is other than temporary, we record an appropriate write-down.

University General Health System, Inc.
Notes to the Consolidated Financial Statements (unaudited) — (Continued)

Non-controlling Interests in Consolidated Affiliates

The consolidated financial statements include all assets, liabilities, revenues, and expenses of less-than-100%-owned affiliates we control. Accordingly, we have recorded non-controlling interests in the earnings and equity of such entities. We record adjustments to non-controlling interests for the allocable portion of income or loss to which the non-controlling interest holders are entitled based upon their portion of the subsidiaries they own. Distributions to holders of non-controlling interest are adjusted to the respective non-controlling interest holders’ balance.

Business Combinations

The Company accounts for its business acquisitions under the acquisition method of accounting as indicated in ASC 805, Business Combinations, which requires the acquiring entity in a business combination to recognize the fair value of all assets acquired, liabilities assumed, and any non-controlling interest in the acquiree; and establishes the acquisition date as the fair value measurement point. Accordingly, the Company recognizes assets acquired and liabilities assumed in business combinations, including contingent assets and liabilities and non-controlling interest in the acquiree, based on fair value estimates as of the date of acquisition. In accordance with ASC 805, the Company recognizes and measures goodwill as of the acquisition date, as the excess of the fair value of the consideration paid over the fair value of the identified net assets acquired.

All acquisition-related transaction costs have been expensed as incurred rather than capitalized as a part of the cost of the acquisition.

Acquired Assets and Assumed Liabilities

Pursuant to ASC No. 805-10-25, if the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, but during the allowed measurement period not to exceed one year from the acquisition date, the Company retrospectively adjusts the provisional amounts recognized at the acquisition date, by means of adjusting the amount recognized for goodwill.

Contingent Consideration

In certain acquisitions, the Company agrees to pay additional amounts to sellers contingent upon achievement by the acquired businesses of certain negotiated future goals, such as targeted earnings levels. The Company records contingent consideration based on its estimated fair value as of the date of the acquisition. The Company evaluates and adjusts the value of contingent consideration, if necessary, at each reporting period based on the progress toward achievement of targets on which issuance of the contingent consideration is based. Any differences between the acquisition-date fair value and the changes in fair value of the contingent consideration subsequent to the acquisition date are recognized in current period earnings until the arrangement is settled.

Segment Information

As a result of the TrinityCare and Autimis acquisitions in June 2011, the Company identified the three reportable segments: Hospital (UGH LP, UGH GP, UGHS Services, UGHS Hospital, UGHS Management, and UGHS Real Estate), Senior Living (UGHS Pearland, UGHS Port Lavaca, UGHS Knoxville, and TrinityCare), and Revenue Management (UGHS Billing and UGHS Coding). The aggregation of operating segments into three reportable segments requires management to evaluate whether there are similar expected long-term economic characteristics for each operating segment, and is an area of significant judgment. If the expected long-term economic characteristics of our operating segments were to become dissimilar, then we could be required to re-evaluate the number of reportable segments.

Commitments and Contingencies

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein.

University General Health System, Inc.
Notes to the Consolidated Financial Statements (unaudited) — (Continued)

If the assessment of a loss contingency indicates that it is probable that a loss has been incurred and the amount of the liability can be reasonably estimated, then the estimated liability is accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed. The Company expenses legal costs associated with contingencies as incurred.

Subsequent Events

The Company evaluates subsequent events through the date when financial statements are issued. The Company, which files reports with the SEC, considers its consolidated financial statements issued when they are widely distributed to users, such as upon filing of the financial statements on Electronic Data Gathering, Analysis and Retrieval system (“EDGAR”), the SEC’s EDGAR.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”), which provides guidance about how fair value should be applied where it is already required or permitted under U.S. GAAP. The ASU does not extend the use of fair value or require additional fair value measurements, but rather provides explanations about how to measure fair value. ASU 2011-04 requires prospective application and will be effective for interim and annual reporting periods beginning after December 15, 2011. The Company is currently assessing the impact ASU 2011-04 will have on its financial statements, but does not expect a significant impact from adoption of the pronouncement.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which eliminates the current option to present components of other comprehensive income as part of the statements of changes in stockholder’s equity and requires entities to present comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments do not change the components of other comprehensive income. For public companies, the new disclosure requirements will be effective for fiscal years and interim periods beginning after December 15, 2011, with early adoption permitted and will have presentation changes only.

In July 2011, the FASB issued ASU No. 2011-07 “Health Care Entities (Topic 954) Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities” (“ASU 2011-07”), which requires the provision for bad debts associated with patient service revenue to be separately displayed on the face of the statement of operations as a component of net revenue. This standard also requires enhanced disclosure of significant changes in estimates related to patient bad debts. ASU 2011-07 requires retrospective application and will be effective for interim and annual reporting periods beginning after December 15, 2011, with early adoption permitted. The Company is currently assessing the impact ASU 2011-07 will have on its financial statements, but does not expect a significant impact from adoption of the pronouncement.

In September 2011, the FASB issued ASU No. 2011-08 “Intangibles-Goodwill and Other (Topic 350) Testing Goodwill for Impairment” (“ASU 2011-08”), which amended its guidance on goodwill impairment testing to simplify the process for entities. The amended guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The revised standard is effective for annual and interim goodwill tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted, provided the entity has not yet performed its 2011 annual impairment test or issued its annual financial statements.

University General Health System, Inc.
Notes to the Consolidated Financial Statements (unaudited) — (Continued)

NOTE 2 — GOING CONCERN

During the nine months ended September 30, 2011, the Company had a net income of $377,946 and used $3,227,152 of net cash in operating activities. As of September 30, 2011, the Company had a negative working capital of $47,585,217 and held cash and cash equivalents of $622,959. The cash used in operations and negative working capital amounts raise substantial doubt concerning the Company’s ability to continue as a going concern for a reasonable period of time.

Management believes that the Company’s current level of cash flows will be sufficient to sustain operations in the next twelve months. In January 2011, the Company completed a $7.1 million capital raise with the funds being used to repay payroll taxes and other liabilities. Additionally, the Company has converted certain shareholders’ debt to equity, has obtained extensions for certain bank debt maturities and is currently working with certain vendors to extend repayment terms. Finally, management believes that the March 28, 2011 merger transaction with SeaBridge (see Note 3) will create additional opportunities to raise capital in the public markets. However, there can be no assurance that the plans and actions proposed by management will be successful or that unforeseen circumstances will not require the Company to seek additional funding sources in the future or effectuate plans to conserve liquidity. In addition, there can be no assurance that in the event additional sources of funds are needed they will be available on acceptable terms, if at all. The accompanying financial statements have been prepared on a going concern basis which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

NOTE 3 — MERGER

On March 28, 2011, pursuant to an Agreement and Plan of Reorganization (“Reorganization Agreement”) executed on March 10, 2011, SeaBridge Freight, Corp. (“SeaBridge”), a publicly reporting Nevada corporation, acquired University General Hospital, LP (the “UGH LP”), a Texas limited partnership, and University Hospital Systems, LLP (the “UGH GP”), a Delaware limited liability partnership (collectively, the “UGH Partnerships”) in exchange for the issuance of 232,000,000 shares of SeaBridge common stock, a majority of the common stock, to the former partners of the UGH Partnerships.

For financial accounting purposes, this acquisition (referred to as the “Merger”) was a reverse acquisition of SeaBridge by the UGH Partnerships and was treated as a recapitalization with UGH Partnerships as the accounting acquirer. Accordingly, the financial statements have been prepared to give retroactive effect of the reverse acquisition completed on March 28, 2011 and represent the operations of UGH Partnerships, with one adjustment, which is to retroactively adjust the UGH Partnerships legal capital to reflect the legal capital of SeaBridge.

In connection with and immediately following the Merger, SeaBridge changed its name to University General Health System, Inc. (“UGHS”, “we”, or the “Company”) and divested of its wholly-owned subsidiary, SeaBridge Freight, Inc. a Delaware corporation. The divested subsidiary is in the business of providing container-on-barge, break-bulk and out-of-gauge freight transport service between Port Manatee of Tampa Bay, FL and Port Brownsville, Texas. In consideration of the divestiture, the Company received and cancelled 135,000,000 outstanding shares of common stock of the Company from existing shareholders.

After completion of the Merger, approximately 232,000,000 common shares were held by the former UGH partners and approximately 21,000,000 common shares were held by the former SeaBridge shareholders. The 232,000,000 shares issued to the former UGH partners are subject to “lock-up leak out” resale restrictions that limit the number of such shares that can be resold to 1/24 of the shares per month (on a non-cumulative basis) held by the former UGH Partners over the 24 month period beginning six months following the closing date of the Merger. Additional information concerning the merger can be found on the Company’s Form 8-K Current Report filed with the SEC on April 01, 2011.

NOTE 4 — ACQUISITIONS

On June 28, 2011, UGHS, through wholly-owned subsidiaries, agreed to acquire 100% of the assets and assume certain of the liabilities of the TrinityCare Facilities and separately agreed to acquire 51% of the ownership interests of TrinityCare LLC ( “TrinityCare LLC”). The acquisitions contemplated by these agreements were completed effective June 30, 2011 (the “Closing Date”). The TrinityCare Facilities consist of three senior living communities, located in Texas and Tennessee. TrinityCare Senior Living, LLC is a developer of senior living communities and provides management services to the TrinityCare Facilities as well as an assisted living community and two memory care greenhouses in Georgia. The TrinityCare Facilities and TrinityCare Senior Living, LLC are sometimes referred to collectively as “TrinityCare.” The Company acquired TrinityCare to further its integrated regional diversified healthcare network. The Company has included the financial results of TrinityCare in the consolidated financial statements from the date of acquisition. TrinityCare is included in the Senior Living operating segment.

University General Health System, Inc.
Notes to the Consolidated Financial Statements (unaudited) — (Continued)

The total purchase consideration for the TrinityCare Facilities as of acquisition date was approximately $16.5 million, consisting of: 1) $1.4 million cash payable on August 30, 2011; 2) approximately $2.8 million in seller subordinated promissory notes payable over two years; and 3) the issuance by UGHS of 12,895,895 shares (the “Stock Consideration”) of its Common Stock, par value $0.001 per share (the “UGHS Common Stock”), valued at approximately $12.3 million, provided, that (a) 9,978,090 of such shares were delivered to Seller on the Closing Date and (b) 2,917,805 of such shares (the “Escrow Shares”) were deposited into an escrow account. The total purchase consideration was based upon a fair market valuation of TrinityCare determined by the Company, with consideration of the valuation report obtained from a third party appraisal firm. On July 1, 2011, the Company amended the purchase agreement for TrinityCare Senior Living, LLC to increase the purchase price payable to sellers to induce them to satisfy certain stock pledge requirements under bank loans assumed by UGHS Senior Living in connection with its acquisition of Trinity Shores of Port Lavaca. The Company agreed to issue an additional 1,500,000 shares of its common stock, par value $0.001 per share, valued at approximately $1,425, increasing the total purchase consideration for TrinityCare Senior Living, LLC to 5,642,480 shares of Common Stock. The sellers of TrinityCare Senior Living, LLC agreed to pledge up to 1,000,000 shares in favor of TrustMark Bank, N.A. The bank required such pledge as part of its consent to the loan assumption by UGHS Senior Living in connection with its acquisition of Trinity Shores of Port Lavaca. On October 14, 2011, the sellers of the three TrinityCare Facilities agreed to extend the due date to December 2011, was originally August 30, 2011, for the payment of approximately $1.4 million cash payable for the acquisitions of the facilities. Pursuant to such agreements purchase agreements, UGHS, through its subsidiaries, will pay such sellers $477,000 in each of October, November and December of 2011. For this extension, the Company agreed to release the Escrow Shares (described below) to the sellers. The Company recorded the $1,425 as deferred loan costs.

At June 30, 2011, in connection with the acquisition of the TrinityCare Facilities, the Company deposited 2,917,805 of its shares into an escrow account (the “Escrow Shares”). At that time, the Company agreed to release the Escrow Shares to the sellers of the TrinityCare Facilities on June 30, 2012 based on the TrinityCare Facilities’ Earnings Before Interest, Depreciation, Amortization and Management Fees (“EBITDAM”) (determined in good faith by UGHS) generated by the assets acquired for the twelve months ending June 30, 2012. Under the agreement, fifty percent (50%) of the Escrow Shares would be released if EBITDAM exceeded the lower threshold specified in the acquisition agreements, and one hundred percent (100%) would be released if the EBITDAM exceeded the highest threshold specified in the acquisition agreements. As of the acquisition date, the Company believed that the issuance of 100% of the Escrow Shares was probable and therefore recorded the approximate $2.8 million fair value of the Escrow Shares as of the date of acquisition. The Company evaluated the Escrow Shares as of September 30, 2011 based on the TrinityCare Facilities’ achievement of meeting its earnings targets as it relates to the Escrow Shares. In making this determination, the Company considered EBITDAM generated to date along with the forecasted EBITDAM projected for the duration of the measurement period. Based on its evaluation of the fair value of the Escrow Shares, the Company concluded that no adjustment was necessary as of September 30, 2011. As stated above, on October 14, 2011, the Company agreed to release the Escrow Shares to the sellers as additional consideration for their agreements to extend to due dates for the cash portion of the purchase price payable for the acquisitions of the TrinityCare Facilities.

The total purchase price for the TrintyCare acquisitions, including the fair value of the Escrow Shares (which were released October 14, 2011) was allocated to the net tangible and intangible assets based upon their fair values as of June 28, 2011 as set forth below. The excess of the purchase price over the net assets was recorded as goodwill. The goodwill of $10,993,833 is deductible for income tax purposes.

The following table summarizes the fair values of the assets and liabilities assumed at the acquisition date (in thousands).

Current assets		$	856
Property and equipment			29,968
Other noncurrent assets			1,768
Accounts payable and accrued expenses			(667	)
Deferred revenue			(268	)
Notes payable, short term portion			(6,521	)
Notes payable, less short term			(11,656	)
Goodwill			9,569
Total fair value of net assets acquired			23,049
Less: fair value attributable to noncontrolling interest			(5,150	)
Total purchase consideration		$	17,899

University General Health System, Inc.
Notes to the Consolidated Financial Statements (unaudited) — (Continued)

During the three months ended September 30, 2011, the Company has retrospectively adjusted the purchase price allocation. The Company recorded a fair value step up adjustment of $16.3 million to its property and equipment and revised other provisional amounts. The revisions to the purchase price allocation for the acquisition resulted from the Company’s finalization of valuations of long-term and intangible assets and other provisional amounts, with consideration of the valuation report obtained from a third party appraisal firm. The aforementioned adjustments resulted in a retrospective adjustment to decrease goodwill by $14.5 million.

Current assets include cash of $384,290, accounts receivable and prepaids and other current assets with fair value of $45,863 and $426,280, respectively. Accounts receivable consist of $45,863 of gross receivables contractually due, net of estimated uncollectible amounts of $1,470. Goodwill of approximately $11.0 million includes goodwill attributable to both the Company’s and noncontrolling interest. The fair value of goodwill attributable to noncontrolling interest was estimated to be approximately $5.2 million and was based on the purchase price the Company paid for its 51% ownership interest of TrinityCare LLC. The goodwill balance is primarily attributable to TrinityCare’s assembled workforce and the expected synergies and revenue opportunities when combining the senior living communities with the Company’s integrated healthcare network.

On June 30, 2011, separate and apart from the TrinityCare acquisitions, the Company through wholly-owned subsidiaries entered into Profit Participation Agreements (“Profit Agreements”) with one of the minority members (“Member”) of each of the Sellers of the TrinityCare Facilities. Pursuant to the Profit Agreements, through which the Company granted a 10% interest in the net proceeds attributable to any fiscal year during the term of the Profit Agreements for each of the facilities in exchange for specified future and on-going duties and services to be provided by the Member for the benefit of the facility. The Company will estimate and accrue for anticipated profit interest payments for each fiscal year.

Autimis

On June 30, 2011, through wholly-owned subsidiaries, the Company executed asset acquisition agreements with Autimis Billing and Autimis Coding (collectively “Autimis”), pursuant to which the Company acquired the business assets and properties of Autimis. Autimis Billing is a revenue cycle management company that specializes in serving hospitals, ambulatory surgery centers, outpatient laboratories and free-standing outpatient emergency rooms. Autimis Coding is a specialized health care coding company also serving hospitals, ambulatory surgery centers, outpatient laboratories and free-standing outpatient emergency rooms. Autimis has provided billing, coding and other revenue cycle management services to University General Hospital, our 72 bed general acute care hospital in Houston, since September 2009 under separate service agreements. The Company acquired Autimis to further its integrated regional diversified healthcare network. The Company has included the financial results of Autimis in the consolidated financial statements from the date of acquisition. Autimis is included in the Revenue Management operating segment.

The total purchase consideration for Autimis was approximately $8.3 million, consisting of the issuance by UGHS of 9,000,000 shares (the “Autimis Stock Consideration”) of the Company’s Common Stock. Following completion of the Autimis acquisition, Sellers of Autimis owned approximately 3.3% of the Company’s outstanding common stock. The total purchase consideration was based upon a fair market valuation of Autimis determined by the Company, with consideration of the valuation report obtained from a third party appraisal firm.

The total purchase price for the Autimis acquisitions was allocated to the net tangible and intangible assets based upon their estimated fair values as of June 30, 2011 as set forth below. The excess of the purchase price over the net assets was recorded as goodwill. The following table summarizes the fair values of the assets and liabilities assumed at the acquisition date (in thousands).

Current assets		$	133
Property and equipment			92
Accounts payable and accrued expenses			(34	)
Software			1,200
Goodwill			6,889
Total purchase consideration		$	8,280

University General Health System, Inc.
Notes to the Consolidated Financial Statements (unaudited) — (Continued)

As of September 30, 2011, the Company has retrospectively adjusted the purchase price allocation. The Company identified intangible assets associated with software and assigned the fair value of $1.2 million. The useful life associated with software was 10 years. The revisions to the purchase price allocation for the acquisition resulted from the Company’s finalization of valuations of long-term and intangible assets and other provisional amounts, with consideration of the valuation report obtained from a third part appraisal firm. The aforementioned adjustments resulted in a retrospective adjustment to decrease goodwill by $1.0 million.

Current assets with aggregate fair value of $133,000 include accounts receivable with fair value of $119,382. The goodwill of $6.9 million is deductible for income tax purposes. The goodwill balance is primarily attributable to Autimis’ assembled workforce and the expected synergies and revenue opportunities when combining the revenue cycle management tools of Autimis within the Company’s integrated solutions.

The unaudited pro forma information below for the three and nine months ended September 30, 2011 and 2010 gives effect to the acquisitions of TrinityCare and Autimis as if the acquisitions had occurred on January 1, 2010.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Revenue			21,020,425				17,103,091				59,821,092				46,619,514
Income from operations			2,532,221				1,244,855				5,116,261				1,692,604
Net income (loss) attributable to the Company			1,045,450				(214,963	)			679,609				(3,003,602	)

NOTE 5 — SEGMENT INFORMATION

The Company operates in three lines of business — (i) as a hospital, (ii) as a senior living care community, and (iii) as a revenue cycling management company. These segments were determined based on the way that the Company’s chief operating decision makers organize the Company’s business activities for making operating decisions and assessing performance.

Before the second quarter of 2011, the Company reported one operating segment, the Hospital. As a result of the acquisitions of TrinityCare and Autimis in June 2011, discussed in Note 4, the Company changed its reportable segments as follows:

(i)

Hospital. The Company provides a full array of services including inpatient and outpatient medical treatments and surgeries, heart catheterization procedures, physical therapy, diagnostic imaging and respiratory therapy, as well as other ancillary services. The Company also provides 24-7 emergency services and comprehensive inpatient services including critical care and cardiovascular services.

(ii)

Senior Living. Senior living communities offer housing and 24-hour assistance with activities of daily life to mid-acuity frail and elderly residents. The Company also operates memory care services specially designed for residents with Alzheimer’s disease and progressive dementia.

(iii)

Revenue Management. The Company provides billing, coding and other revenue cycling management services to University General Hospital, our 72 bed acute care hospital in Houston, as well as other clients not affiliated with the Company.

University General Health System, Inc.
Notes to the Consolidated Financial Statements (unaudited) — (Continued)

The following table presents selected financial information for the Company’s operating segments:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Revenues
Hospital		$	18,974,967			$	15,007,338			$	52,936,373			$	40,332,255
Senior living			1,877,179				—				1,877,179				—
Revenue management			626,447				—				626,447				—
Intersegment revenues			(458,168	)			—				(458,168	)			—
Total revenues		$	21,020,425				15,007,338				54,981,831				40,332,255
Operating income
Hospital		$	2,315,812			$	1,165,801			$	4,035,431			$	1,455,441
Senior living			168,446				—				168,446				—
Revenue management			47,963				—				47,963				—
Intersegment income			—				—				—				—
Total operating income		$	2,532,221			$	1,165,801			$	4,251,840			$	1,455,441

		September 30,				December 31,
		2011				2010
Total assets
Hospital		$	67,742,059			$	70,046,896
Senior living			41,992,627				—
Revenue management			8,400,808				—
Total assets		$	118,135,494			$	70,046,896

NOTE 6 — PROPERTY AND EQUIPMENT, NET

Property and equipment at September 30, 2011 and December 31, 2010 consists of the following:

		September 30,				December 31,
		2011				2010
Land		$	1,105,000			$	—
Land improvements			875,347				—
Buildings			54,511,604				27,406,478
Machinery and equipment			30,710,564				29,439,203
Leasehold improvements			21,450,025				21,348,505
Computer equipment and software			3,701,249				3,493,265
			112,353,789				81,687,451
Less accumulated depreciation and amortization			(34,059,417	)			(28,463,299	)
Total property and equipment, net		$	78,294,372			$	53,224,152

University General Health System, Inc.
Notes to the Consolidated Financial Statements (unaudited) — (Continued)

NOTE 7 — NOTES PAYABLE

Lines of Credit

On July 9, 2008, UGH LP entered into an Amended and Restated Line of Credit Agreement with a financial institution providing UGH LP with a $7,000,000 secured revolving credit facility with interest rate of 6% that matures on January 15, 2012. This Amended and Restated Line of Credit Agreement amends and restates the Company’s former Line of Credit Agreement of $8,000,000 dated March 27, 2006, which was set to mature on April 30, 2011.

On September 1, 2006, UGH GP entered into a line of credit agreement with a financial institution providing UGH GP with a $1,500,000 secured revolving credit facility with interest rate of prime rate plus 0.5%, originally maturing April 30, 2011, secured by all assets of UGH GP. In June 2011, the Company and the financial institution agreed to extend the term of the line of credit to January 15, 2012.

As of September 30, 2011 and December 31, 2010, the Company had outstanding balances on the lines of credit of $8,451,025 and $8,450,000, respectively. The Company’s lines of credit contain restrictive financial covenants. Throughout 2010 and subsequent to December 31, 2010 through the issuance of the accompanying consolidated financial statements, the Company was not in compliance with certain of the financial covenants contained within line of credit agreements. However, as the Company obtained an extension of the lines of credit to January 15, 2012 and obtained a waiver for the financial covenant violations, the Company has classified the lines of credit as long-term liabilities at December 31, 2010 in the consolidated financial statements. The lines of credit were classified as short-term liabilities at September 30, 2011. For the three months ended September 30, 2011 and 2010, the Company recognized interest expense on the line of credit of $134,021 and $156,982, respectively. For the nine months ended September 30, 2011 and 2010, the Company recognized interest expense on the line of credit of $379,977 and $432,146, respectively.

Notes Payable

The Company’s third party notes payable consisted of the following:

		September 30,				December 31,
		2011				2010
Note payable to a financial institution due January 15, 2012, monthly principal payments of $150,000 for January 2011 to June 2011, and $200,000 for July 2011 to January 2012 with interest rate at 6%		$	5,750,000			$	7,200,000
Notes payable to a financial institution guaranteed by shareholders, due April 4, 2011, interest rate at 7%			1,683,361				2,561,623
Note payable to a financial institution due on demand, with interest at prime rate(3.25% at June 30, 2010 and December 31, 2010)			982,079				982,079
Notes payable to a financial institution due on September 30, 2009, with interest rate at 5.25% at September 30, 2011 and December 31, 2010			1,404,063				1,604,063
Note payable to individuals due on demand, interest rate at 15%			—				300,000
Notes payable to Medicare, interest rate at 11% due October 1, 2013			388,132				507,295
Notes payable due on demand guaranteed by shareholders, with 0% -6.25% interest rates			104,586				403,482
Non-interest bearing note payable due on demand to a shareholder.
Note was paid in full in January, 2011.			—				250,695
Non-interest bearing note payable to an individual due June 30, 2012			160,000				—
Total debt			10,472,221				13,809,237
Less: current portion			(10,254,550	)			(8,321,298	)
Total debt, less current portion		$	217,671			$	5,487,939

University General Health System, Inc.
Notes to the Consolidated Financial Statements (unaudited) — (Continued)

The Company has notes payable with financial institutions of $1,683,361 and $1,404,063, which are past due and in default thus classified in current notes payable at September 30, 2011 and December 31, 2010.

As of September 30, 2011 and December 31, 2010, certain of Company’s notes payable were secured by the Company’s total assets.

Throughout 2010 and subsequent to December 31, 2010 through the issuance of the accompanying consolidated financial statements, the Company was not in compliance with certain financial covenants related to its note payable due to a financial institution of $5,750,000 and $7,200,000 at September 30, 2011 and December 31, 2010, respectively. In June 2011, the Company and the financial institution agreed to extend the terms of the note payable to January 2012, modified the monthly payments of the note payable, and provided a waiver to the Company for violations of financial covenants at September 30, 2011 and December 31, 2010. As a result, the Company classified the amounts due in 2012 as long-term at December 31, 2010. The note payable was classified as short-term at September 30, 2011.

For the three months ended September 30, 2011 and 2010, the Company recognized interest expense on the notes payable of $172,047 and $204,128, respectively. For the nine months ended September 30, 2011 and 2010, the Company recognized interest expense on the notes payable of $591,537 and $685,466, respectively. The Company accrued interest payable of $554,064 and $206,205 as of September 30, 2011 and December 31, 2010, respectively.

Total principal payment obligations relating to the Company’s third party long-term debt, except debt assumed in current year acquisitions, are as follows, as of September 30, 2011:

Fiscal Year		Principal Payments
2012		$	10,254,550
2013			178,346
2014			39,325
Total		$	10,472,221

See further discussion regarding the related party notes payable in Note 13.

Notes payable assumed from TrinityCare

At September 30, 2011 notes payable assumed from TrinityCare consisted of:

Line of Credit with total line of $80,000			(1	)		$	76,367
Mortgage payable — UGHS Knoxville			(2	)			5,797,144
Mortgage payable — UGHS Pearland			(3	)			6,181,869
Mortgage payable — UGHS Port Lavaca			(4	)			5,350,377
Mortgage payable — TrinityCare Senior Living, LLC			(5	)			44,427
Other			(6	)			108,372
TrinityCare Senior Living, LLC, guaranteed by shareholder			(7	)			437,020
Subordinated promissory notes			(8	)			2,815,089
Total							20,810,665
Less current portion							(8,059,959	)
Total Long-Term Debt assumed from TrinityCare						$	12,750,706

University General Health System, Inc.
Notes to the Consolidated Financial Statements (unaudited) — (Continued)

Notes to debt instruments:

Future maturities of notes payable assumed from TrinityCare are as follows:

Long-term debt
maturities		September 30, 2011
2012		$	8,059,959
2013			1,702,122
2014			257,804
2015			271,747
2016 thereafter			10,519,033
Total		$	20,810,665

NOTE 8 —LEASE OBLIGATIONS

Capital Leases

The Company has 17 capital lease obligations with 7 financing companies, collateralized by underlying assets having an aggregate net book value of $27,534,782 at September 30, 2011. These obligations have stated interest rates ranging between 4.18% and 17.22%, are payable in 13 to 360 monthly installments, and mature between October 1, 2011 and July 30, 2036. As of December 31, 2010, the UGH LP had 20 capital lease obligations with 10 finance companies with an aggregate net book value of $32,382,310. As of September 30, 2011 and December 31, 2010, the Company had capital lease obligations of $39,494,249 and $43,304,739, respectively. Future minimum lease payments, together with the present value of the net minimum lease payments under capital leases at September 30, 2011, are summarized as follows:

		Related Party				Third Party
		Lease				Leases
2012		$	580,833			$	8,821,419
2013			2,323,333				221,937
2014			2,323,333				53,472
2015			2,323,333				—
2016			2,323,333				—
Thereafter			57,212,744				—
Total minimum lease payments		$	67,086,909			$	9,096,828
Less amounts representing interest			35,983,832				705,656
Present value of minimum lease payments			31,103,077				8,391,172
Less current portion			235,443				8,340,357
Long term portion		$	30,867,634			$	50,815

University General Health System, Inc.
Notes to the Consolidated Financial Statements (unaudited) — (Continued)

The Company violated a capital lease debt covenant with a third party and recorded all of the related capital lease obligation of $5,706,156 and $6,687,253 as a current liability as of September 30, 2011 and December 31, 2010, respectively. See further discussion regarding the related party capital lease obligation in Note 13.

Operating Leases

The Company leases certain space under operating leases expiring in 2015. Lease payments totaling $21,331 are payable monthly. Terms of the facility leases generally provide that the Company pay it’s pro rata share of all operating expenses, including insurance, property taxes and maintenance. Rent expense for the three months ended September 30, 2011 and 2010 was $54,796 and $33,974, respectively. Rent expense for the nine months ended September 30, 2011 and 2010 was $156,719 and $76,379, respectively. Minimum future lease payments under the operating leases as of September 30, 2011 are as follows:

Fiscal Year		Payments
2012		$	196,704
2013			169,908
2014			169,908
2015			169,908
Total		$	706,428

NOTE 9 — COMMITMENTS AND CONTINGENCIES

Litigation

From time to time, the Company may become involved in litigation relating to claims arising out of its operations in the normal course of business. The Company is not involved in any pending legal proceeding or litigation and, to the best of the Company’s knowledge, no governmental authority is contemplating any proceeding to which we are a party or to which any of our properties is subject, which would reasonably be likely to have a material adverse effect on the Company, except for the following:

Prexus

On December 4, 2009, Prexus Health Consultants, LLC and its affiliate, Prexus Health LLC (collectively, “Prexus”), sued UGH LP and Ascension Physician Solutions, LLC (“APS”) in the 270th District Court of Harris County, Texas, Cause No. 2009-77474, seeking (i) $224,863 for alleged breaches of a Professional Services Agreement (the “PSA”) under which Prexus provided billing, coding and transcription services and (ii) $608,005.07 for alleged breaches of a Consulting Services Agreement (the “CSA”) under which Prexus provided professional management and consulting services. UGH LP and APS terminated these contracts effective September 9, 2009. Prexus subsequently added additional claims seeking lost profits and other damages for alleged tortious interference of Prexus contracts. In October 2010, UGH LP and APS filed counterclaims against Prexus seeking $1,687,242 in damages caused by Prexus’ breach of the CSA.

On October 11, 2011, the trial court judge executed and entered judgment against UGH LP of approximately $2.9 million, which included approximately $2.2 million in lost profits. The judgment also included additional amounts for pre-judgment and post-judgment interest. We believe the judgment is not supported by the evidence presented at trial and UGH LP has taken appropriate actions to appeal the judgment and will post a bond securing payment of the judgment pending the results of the appeal. The Company accrued $861,000 as of September 30, 2011.

Siemens

On June 29, 2010, Siemens Medical Solutions USA, Inc. (“Siemens”) sued UGH LP in the 215th District Court of Harris County, Texas, Cause No. 2010-40305, seeking approximately $7,000,000 for alleged breaches of (i) a Master Equipment Lease Agreement dated August 1, 2006 and related agreements (the “Lease Agreements”), pursuant to which UGH LP leased certain radiology equipment and (ii) an Information Technology Agreement dated March 31, 2006 and related agreements (the “IT Agreements”) pursuant to which Siemens agreed to provide an information technology system, software and related services. On November 22, 2010 UGH LP filed counterclaims against Siemens seeking approximately $5,850,000 against Siemens for breach of contract, negligent representation and breach of warranty based on Siemens breach of the Lease Agreements and the IT Agreements. On February 28, 2011, the court signed an order granting partial summary judgment in favor of Siemens and against UGH LP as to UGH LP’s liability for breach of the Lease Agreements, but not as to damages sought by Siemens.

University General Health System, Inc.
Notes to the Consolidated Financial Statements (unaudited) — (Continued)

On September 15, 2011, the parties to the Siemens litigation reached a settlement of the pending litigation. As part of the settlement, UGH LP agreed to pay Siemens an aggregate of $4,850,000 over a period of 20 months beginning in October 2011 through May 2013. The Company will have an on-going relationship with Siemens. The Company accrued this unpaid claim as current liabilities.

Internal Revenue Service

UGH LP currently owes the Internal Revenue Service (the “IRS”) approximately $1,302,000 in past due payroll taxes for the fourth quarter of 2009 and $710,000 for the second quarter of 2010. Until paid in full, statutory penalties and interest will continue to accrue. The IRS has filed tax liens covering such amounts with various governmental authorities and has taken other actions to collect these balances. UGH LP is working with IRS representatives on payment arrangements to satisfy these balances on an amicable basis and have entered into an installment agreement with the IRS pursuant to which UGH LP pays $165,000 per month towards satisfaction of the outstanding balance. At September 30, 2011 and December 31, 2010, UGH LP accrued $4,361,799 and $5,436,041, respectively. The Company has paid $1,715,000 in October 2011 and the current amount payable at November 14, 2011 is $2,646,799.

Employee Benefit Plans

UGH LP offers a 401(k) retirement and savings plan that covers substantially all of its employees, through which UGH LP provides discretionary matches to employees. For the three and nine months ended September 30, 2011 and 2010, UGH LP did not make any contributions to the plan.

Management Service Agreements

Kingwood Neighborhood Emergency Center

On February 25, 2011, UGH LP entered into agreements to establish the emergency room operations of Kingwood Neighborhood Emergency Center (“Emergency Center”) as a hospital outpatient department (“HOPD”) of UGH, and the Emergency Center was opened on April 25, 2011. UGH conducts these operations pursuant to real estate and equipment subleases with Emergency Center.

Emergency Center and UGH LP also entered into a management services agreement whereby the Emergency Center provides ongoing administrative and management services to UGH LP for this department. All agreements have an initial term of two years beginning February 25, 2011, plus an automatic renewal options for an additional one year periods. In consideration for such services, UGH LP pays an agreed percentage of all revenue received for each Emergency Center patient less the lease expenses and other expenses for these operations as defined in the agreement.

UGH LP also retains an exclusive right of first refusal for the purchase of the Emergency Center business during the term of the management services agreement and 12 months following any termination of that agreement. For the three and nine months ended September 30, 2011, UGH LP did not incur any operating and rent expense.

NOTE 10 — GAIN ON EXTINGUISHMENT OF LIABILITIES

In the three and nine months ended September 30, 2011 and 2010, the Company settled certain accounts payable with vendors, and reduced the accounts payable owed to those vendors. For the three months ended September 30, 2011, the Company recognized a gain on extinguishment of liabilities of $1,947,134, of which $1,700,000 of the gain was related to the Siemens settlement referenced in Note 9 and $57,595 was recognized for the three months ended September 30, 2010. For the nine months ended September 30, 2011 and 2010, the Company recognized a gain on extinguishment of liabilities of $3,411,479 and $1,780,731, respectively.

University General Health System, Inc.
Notes to the Consolidated Financial Statements (unaudited) — (Continued)

NOTE 11 — EQUITY

Common Stock Offerings

On February 15, 2011, prior to the closing of the Merger, the Company entered into a Subscription Agreements with certain strategic accredited investors (the “Purchasers”), pursuant to which the Company sold to the Purchasers in the aggregate 56,388,831 shares of common stock at a purchase price of approximately $0.13 per share. The aggregate purchase price paid by the Purchasers for the common stock was $7,120,000. The Company used the proceeds to pay tax payments, certain outstanding loan balances, and certain capital lease settlements, and for working capital purposes. Pursuant to the terms of the Merger, these shares are subject to “lock-up leak-out” resale restrictions that limit the number of shares that may be resold to 1/24 of such shares per month (on a non-cumulative basis) over the 24 month period beginning six months following the closing date of the Merger.

On February 28, 2011, prior to the Merger, the Company entered into Executive Unit Agreements with certain key executives (the “Executives”), pursuant to which the Company sold to the Executives in the aggregate 22,040,000 shares of common stock (“Executive Securities”) at a purchase price of approximately $0.09 per share, and Executives entered into promissory notes with the Company for the same amount. The aggregate purchase price paid by the Executives for the common stock was $2,000,000 subject to the Executive Unit Agreements. The shares purchased by each of the Executives are subject to repurchase by the Company if, prior to February 28, 2013, the Executive’s employment with the Company is terminated for “cause” (as defined in the Executive Unit Agreement) or the Executive resigns from his or her employment without “good reason” (as defined in the Executive Unit Agreement).

Pursuant to the terms of the Merger, these shares are subject to “lock-up leak-out” resale restrictions that limit the number of shares that may be resold to 1/24 of such shares per month (on a non-cumulative basis) over the 24 month period beginning six months following the closing date of the Merger. The Company used the proceeds for working capital purposes. The promissory notes are due on March 1, 2021. The promissory notes bear interest rate at 4%, and the accrued interest shall be paid in full on the date on which the final principal payments on these notes are made. The executives shall prepay a portion of the promissory notes equal to the amount of all cash proceeds the Executives receive in connection with his ownership, disposition, transfer or sales of the Executive Securities. At September 30, 2011, the outstanding notes receivable balance was $2,130,000.

Debt Exchange Agreements

On February 28, 2011 prior to the Merger, the Company entered into Debt Exchange Agreements with certain key creditors (the “Creditors”), pursuant to which the Creditors cancelled and released the Company from its obligations totally $3,500,000 and received 40,600,587 shares of common stock at a purchase price of approximately $0.09 per share. Pursuant to the terms of the Merger, these shares are subject to “lock-up leak-out” resale restrictions that limit the number of shares that may be resold to 1/24 of such shares per month (on a non-cumulative basis) over the 24 month period beginning six months following the closing date of the Merger.

Issuance of Common Stock to Affiliate for Termination of Service Agreement

Certain shareholders of the Company organized APS as a hospital management company. In September 2006, UGH LP and APS have entered into a Management Services Agreement (the “Management Agreement”), pursuant to which APS provided management services to UGH LP. In consideration for such services, UGH LP was obligated to pay APS a management fee of 5.0% of the net revenues of the Hospital. Net revenues are defined in the Management Agreement as the Hospital’s gross revenues, less adjustments for special contractual rates, charity work and an allowance for uncollectible accounts, all determined in accordance with generally accepted accounting principles.

On February 28, 2011, prior to the Merger, UGH LP terminated the management services agreement with APS by issuing 11,600,000 shares of common stock to APS valued at a purchase price of $1.0 million. Pursuant to the terms of the Merger, these shares are subject to “lock-up leak-out” resale restrictions that limit the number of shares that may be resold to 1/24 of such shares per month (on a non-cumulative basis) over the 24 month period beginning six months following the closing date of the Merger. Additionally, the Company assumed APS’ loan obligations of approximately $740,000, and APS cancelled the receivable due from the Company approximately of $2,543,000. For the nine months ended September 30, 2011, the Company recorded gains from cancellation of liability of approximately of $803,000.

University General Health System, Inc.
Notes to the Consolidated Financial Statements (unaudited) — (Continued)

Issuance of Common Stock in connection with the TrinityCare acquisition

On June 30, 2011, the Company issued 12,895,895 shares of its common stock in connection with the acquisition of Trinity Care at a price of $0.95 per share. On the closing date, 9,978,090 shares were delivered to the sellers of Trinity Care and 2,917,805 shares were deposited into an escrow account to be released to the sellers one year after the closing date, subject to certain performance measurement criteria specified in the acquisition agreements. These Escrow Shares were released and delivered to the sellers of TrinityCare on October 14, 2011.

On July 1, 2011, the Company amended the purchase agreement for the Trinity Care LLC acquisition to increase the purchase price payable to the sellers. The Company issued an additional 1,500,000 shares of its common stock at a price of $0.95 per share. See further discussion on the Trinity Care acquisition in Note 4.

Issuance of Common Stock in connection with the Autimis acquisition

On June 30, 2011, the Company issued 9,000,000 shares of its common stock in connection with the acquisition of Autimis at a price of $0.92 per share. See further discussion on the Autimis acquisition in Note 4.

Exchange of Profit Interest for Common Stock

Effective August 10, 2009, the Company entered into an agreement with a debtor to terminate and replace an existing note payable with 2.5% equity interest of the Company, 1% of the Company’s Profit Interest, and a term note payable of $20,000 monthly payment for 99 months. At March 28, 2011, the 1% Profit Interests was exchanged for 2,204,000 shares of common stock of the Company along with the Merger. Pursuant to the terms of the Merger, these shares are subject to “lock-up leak-out” resale restrictions that limit the number of shares that may be resold to 1/24 of such shares per month (on a non-cumulative basis) over the 24 month period beginning six months following the closing date of the Merger. See note 4.

NOTE 12 — INCOME TAXES

No provision for federal income taxes has been recognized for the three months ended September 30, 2011 and 2010 as the Company incurred a net operating loss for income tax purposes in each period and has no carryback potential. The current period income tax expense is solely attributable to state taxes accrued during the period.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company assesses whether it is more likely than not that it will generate sufficient taxable income to realize its deferred income tax assets in a reasonable period of time. In making this determination, it considers all available positive and negative evidence and makes certain assumptions, including, among other things, the deferred tax liabilities; the overall business environment; the historical earnings and losses; and its outlook for future years. At September 30, 2011 and December 31, 2010, the Company provided a full valuation allowance for its deferred tax assets, as it is more likely than not that these assets will not be realized in a reasonable period of time.

The Company accrued $0 and $82,651 interest or penalties relating to income taxes recognized in the consolidated statement of operations for the nine months ended September 30, 2011 and 2010 or in the consolidated balance sheet as of September 30, 2011 and December 31, 2010.

University General Health System, Inc.
Notes to the Consolidated Financial Statements (unaudited) — (Continued)

NOTE 13 — RELATED PARTY TRANSACTIONS

Related Party Capital Lease Obligation

Cambridge Properties (“Cambridge”) owns the land and building on which University General Hospital is located, and Cambridge is owned by one of the shareholders of the Company. UGH LP has leased the hospital space from Cambridge pursuant to a Lease Agreement. The Lease Agreement has an initial term of 10 years beginning October 1, 2006, plus tenant’s option to renew the term for two additional 10 year periods. In addition to base rent, the Lease Agreement provides that UGH LP pays its pro rata share of the operating expenses. The obligations of UGH LP under the Lease Agreement are secured by the personal guarantees of certain shareholders of the Company. UGH LP has previously been in litigation with Cambridge concerning monetary default of certain rent obligations under the Lease Agreement. UGH LP has cured such defaults and makes periodic payment of rent as permitted by current cash flow requirements. Should UGH LP’s relationship with Cambridge deteriorate further, UGH LP will be required to devote additional resources to protect its rights under the Lease Agreement.

As of September 30, 2011 and December 31, 2010, UGH LP recorded a related party capital lease obligation of $31,103,077 and $31,179,935, respectively. Additionally, during the three months ended September 30, 2011 and 2010, the Company incurred amortization expense of $171,920 and $171,920 and interest expense of $527,187 and $528,397, respectively, related to the capital lease obligation with Cambridge. During the nine months ended September 30, 2011 and 2010, the Company incurred amortization expense of $513,870 and $513,870 and interest expense of $1,571,088 and $1,574,482, respectively.

At September 30, 2011 and December 31, 2010 UGH LP had a related party receivable of $4,418 and $170,340 from Cambridge principally related to an overpayment of overhead allocation expenses during 2010. During the three months ended September 30, 2011 and 2010, UGH LP incurred overhead allocation expenses and parking expenses from Cambridge of $256,399 and $316,851, respectively. During the nine months ended September 30, 2011 and 2010, UGH LP incurred overhead allocation expenses and parking expenses from Cambridge of $859,752 and $964,130, respectively. These expenses were recorded as general and administrative expenses in the consolidated statements of operations.

Management Services Agreements

Certain shareholders of the Company have organized APS, a Texas limited liability company, as a service company. UGH LP and APS has entered into a management services agreement, pursuant to which APS provides management services to UGH LP for an initial term of five (5) years. Compensation under this agreement was based on 5% of net revenue recorded in the financial statements. This agreement with APS was terminated on February 28, 2011.

The Company incurred the management services fee of $0 and $701,440 for the three months ended September 30, 2011 and 2010, respectively, and $461,814 and $1,861,188 for the nine months ended September 30, 2011 and 2010, respectively. As of September 30, 2011 and December 31, 2010, the Company accrued $0 and $2,649,711 management services fees payable to APS, respectively.

In addition, UGH GP had a related party payable to APS of $0 and $173,500 as of September 30, 2011 and December 31, 2010, respectively, as a result of an advance from APS.

Food Services, Plant Operations & Management, Environmental, and Other Services Agreement

Certain shareholders of the Company have organized SYBARIS Group, LLC (“SYBARIS”), a Texas limited liability company, as a service company. UGH LP and SYBARIS have entered into a management services agreement, pursuant to which SYBARIS provides food services, plant operations & management, environmental, and other services to UGH LP for an initial term of five (5) years. Compensation under this agreement is based on (i) expense reimbursement for direct costs incurred by SYBARIS, (ii) a general expense allowance of six percent (6%) of the direct costs incurred by SYBARIS and (iii) a service fee of four percent (4%) of the direct costs incurred by SYBARIS. Amounts payable to SYBARIS under this agreement are adjusted annually based on cost of living and other customary adjustments.

The Company believes the terms of the transaction between SYBARIS and UGH LP are fair, reasonable and reflects fair market value. UGH LP recorded $1,178,263 and $952,565 services fee to SYBARIS for the three months ended September 30, 2011 and 2010, respectively, and $3,270,037 and $2,451,958 for the nine months ended September 30, 2011 and 2010, respectively, which were recorded as general and administrative expenses in the combined statements of operations. As of September 30, 2011 and December 31, 2010, UGH LP accrued $717,652 and $364,725 services fees to SYBARIS, respectively.

University General Health System, Inc.
Notes to the Consolidated Financial Statements (unaudited) — (Continued)

Other Related Party Transactions

Ascension Surgical Assistants (“ASA”) and Universal Surgical Staffing (“USS”) previously provided billing/collection services on behalf of the Company, but have since ceased operations in 2010 and 2009, respectively. As of September 30, 2011 and December 31, 2010, the Company recorded a related party payable owed to ASA of $110,098 and $332,074, respectively, as a result of advances provided to UGH LP. As of September 30, 2011 and December 31, 2010, UGH LP recorded a related party payable owed to USS of $17,073 and $16,843, respectively, as a result of advances provided to the Company.

The Company also makes advances to and receives advances from certain other entities owned by UGH LP and UGH GP. At September 30, 2011, the Company had a receivable of $33,141 and a payable of $75,680 at December 30, 2010.

As of September 30, 2011 and December 31, 2010, a shareholder of UGH GP owes UGH GP $438,820 for advances.

During 2010 and the nine months ended September 30, 2011, the Company received and issued non-interest bearing advances from its Chief Executive Officer for working capital purposes. At December 31, 2010, the Company recorded a $24,518 related party receivable from the Chief Executive Officer. At September 30, 2011, there were no advances receivable or payable with the Company’s Chief Executive Officer.

Receivables from Related Parties

Receivables from related parties include employee advances and advances to affiliates and consisted of the following:

		September 30,				December 31,
		2011				2010
Receivable from shareholder of UGH GP		$	438,820			$	438,820
Receivable from Chief Executive Officer			—				24,518
Receivable from other related party entities			33,141				—
Receivable from Cambridge			4,418				170,340
		$	476,379			$	633,678

Payables to Related Parties

Payables to related parties include advances from employees and amounts due to affiliates for services rendered and consisted of the following:

		September 30,				December 31,
		2011				2010
Payable to APS		$	—			$	2,649,711
Payable to ASA			110,098				332,074
Payable to USS			17,073				16,843
Payable to Autimis			—				27,800
Interest on notes payable to shareholders			1,392,342				1,248,118
Payable to SYBARIS			717,652				364,725
Payable to other related party entities			—				75,680
		$	2,237,165			$	4,714,951

University General Health System, Inc.
Notes to the Consolidated Financial Statements (unaudited) — (Continued)

Notes Payable to Related Parties

Notes payable — related parties consist of the following:

		September 30,				December 31,
		2011				2010
UGH GP note payable to a shareholder, payable on demand, bearing interest rate at 10%		$	1,923,000			$	1,923,000
UGH LP subordinated promissory notes payable to shareholders, payable in 2028, bearing interest rate at 15%			700,000				800,000
UGH LP non-interest bearing notes payable to shareholders, payable on demand			233,500				482,461
UGH LP note payable to a shareholder, payable in $20,000 monthly installments through 2017, bearing interest rate at 2.43%, maturing in 2017			395,000				—
UGH LP note payable to a shareholder, payable in $20,000 monthly installments through 2017, interest imputed at rate 2.88%, with a discount of $112,791 and $152,984 at September 30, 2011 and December 31, 2010, respectively, and principal balance of $1,520,000 and $1,640,000 at September 30, 2011 and December 31, 2010, respectively			1,327,208				1,487,016
UGH LP note payable to shareholder, payable on demand, bearing interest rate at 15%, classified as third party note payable at December 31, 2010			160,000				—
Trinity note payable to a shareholder, payable on demand, non-interest bearing			109,548				—
UGH LP various notes payable to shareholders, payable on demand, bearing interest rate at 4.25% and 10%			642,872				1,422,414
Total notes payable to related parties			5,491,128				6,114,891
Less: current portion			(3,461,831	)			(4,027,650	)
Notes payable to related parties, less current portion		$	2,029,297			$	2,087,241

Total accrued but unpaid interest on notes payable to related parties was $1,392,342 and $1,248,118 at September 30, 2011 and December 31, 2010, respectively, and included in payables to related parties in the consolidated balance sheets.

Future principal payment obligations related to the Company’s related party notes payable are as follows, as of September 30, 2011:

Year ending September 30,
2012		$	3,461,831
2013			385,607
2014			366,612
2015			217,191
2016			224,150
Thereafter			835,737
Total		$	5,491,128

Related Party Costs and Expenses

The following table summarizes related party costs and expenses that are reflected in the accompanying combined statements of operations:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Interest expense		$	641,293			$	625,222			$	1,815,568			$	1,828,004
Management fees			—				701,440				461,814				1,861,187
General and administrative			1,434,662				1,269,416				4,129,789				3,416,088
Amortization expense			171,290				171,290				513,870				513,870
Total		$	2,247,245			$	2,767,368			$	6,921,041			$	7,619,149

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this quarterly report including, without limitation, statements in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this quarterly report on Form 10-Q, regarding our financial condition, estimated working capital, business strategy, the plans and objectives of our management for future operations and those statements preceded by, followed by or that otherwise include the words “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”, “estimates”, “approximately”, “believes”, “continue”, “forecast”, “ongoing”, “pending”, “potential”, “seeks”, “views”, or “intends”, or stating that certain actions, events or results “may”, “must”, “could”, “would”, “might”, “should” or “will” be taken, occur or be achieved are not statements of historical fact and may be forward-looking statements. Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors which could cause actual events or results to differ from those expressed or implied by the forward-looking statements, including, without limitation:

	•		risks related to environmental laws and regulations and environmental risks;
	•		risks related to changes in and the competitive nature of the healthcare industry;
	•		risks related to stock price and volume volatility;
	•		risks related to our ability to access capital markets;
	•		risks related to our ability to successfully implement our business and acquisition strategies;
	•		risks related to our issuance of additional shares of common stock.

This list is not exhaustive of the factors that may affect our forward-looking statements. Some of the important risks and uncertainties that could affect forward-looking statements are described further under the sections titled “Risk Factors” in Item 1A of this quarterly report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated or expected. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except as required by applicable law.

Nature of Business

University General Health System, Inc. (“we,” “UGHS” or the “Company”), is a diversified, integrated, multi-specialty health care provider that delivers concierge physician and patient oriented services, providing timely and innovative health solutions that are competitive, efficient and adaptive in today’s health care delivery environment.

Our current business was founded in 2005 to establish University General Hospital in Houston, Texas (“UGH”), a 72-bed physician-owned general acute care hospital. We formed University General Hospital, LP (“UGH LP”) as a Texas limited partnership to own and operate UGH and formed University Hospital Systems, LLP as a Delaware limited liability partnership (“UGH GP”) to act as the general partner of UGH LP. UGH commenced business operations as a general acute care hospital on September 27, 2006.

On March 31, 2011, we formed UGHS Hospitals, Inc., UGHS Ancillary Services, Inc., UGHS Management Services, Inc., and UGHS Real Estate, Inc. Effective June 30, 2011, we completed the acquisitions of the three senior living communities: Trinity Oaks of Pearland, Texas, Trinity Shores of Port Lavaca, Texas, and Trinity Hills of Knoxville, Tennessee. UGHS also acquired 51% of the ownership interests of TrinityCare Senior Living, LLC (“TrinityCare”), a developer and manager of senior living communities. As UGHS’ majority-owned subsidiary, TrinityCare continues to manage the three existing senior living communities, and will continue to develop additional communities across the United States and internationally. Additionally, effective June 30, 2011, UGHS acquired specialized health care billing, coding and other revenue cycle management companies, Autimis, LLC, and Autimis Medical Billing, LLC.

As of September 30, 2011, UGHS conducted operations through its wholly-owned subsidiaries, UGHS Hospitals, Inc., UGHS Ancillary Services, Inc., UGHS Management Services, Inc., UGHS Real Estate, Inc., UGHS Senior Living of Pearland, LLC, UGHS Senior Living of Port Lavaca, LLC, UGHS Senior Living of Knoxville, LLC, UGHS Autimis Billing, Inc. and UGHS Coding, Inc.

Our common stock trades under the symbol “UGHS.PK”.

Merger Transaction

On March 28, 2011, pursuant to an Agreement and Plan of Reorganization (“Reorganization Agreement”) executed on March 10, 2011, UGH GP and UGH LP (collectively “UGH Partnerships”) were acquired by SeaBridge Freight Corp. (“SeaBridge”), a publicly reporting Nevada corporation, in a “reverse” merger (“Merger”) in exchange for the issuance of 232,000,000 shares of common stock, a majority of the common stock, to the former partners of the UGH Partnerships. Approximately 90 physicians are former owners of UGH and are now our shareholders. At the same time, SeaBridge changed its name to University General Health System, Inc.

Pursuant to the terms of the Merger, the 232,000,000 shares of common stock issued to the former partners of the UGH Partnerships are subject to “lock-up leak-out” resale restrictions that limit the number of shares that may be resold to 1/24 of such shares per month (on a non-cumulative basis) over the 24 month period beginning six months following the closing date of the Merger.

In connection with and immediately following the Merger, we divested of our wholly-owned subsidiary, SeaBridge Freight, Inc. a Delaware corporation. The divested subsidiary was in the business of providing container-on-barge, break-bulk and out-of-gauge freight transport service between Port Manatee of Tampa Bay, FL and Port Brownsville, Texas. In consideration of the divestiture, we received and cancelled 135,000,000 outstanding shares of our common stock of the Company from existing shareholders. We are no longer in the freight transport business.

UGH Partnerships are deemed to be the accounting acquirer in the reverse merger. Accordingly, the consolidated financial statements included herein are those of the UGH Partnerships.

Plan of Operation

Our business model anticipates the acquisition of acute care “host” hospitals and the development and operation of regional health networks within a defined radius of each host hospital that can provide services under separate departments under the hospitals’ acute care licenses. Such regional health networks and ancillary services will reflect a vertically integrated, diversified system, which will include provider-based “Hospital Outpatient Departments” (HOPDs) of the host hospitals and may consist of Free-Standing Ambulatory Surgical Centers, Free-Standing Emergency Rooms, Free-Standing Procedure Facilities, Diagnostic Imaging Treatment Facilities, HBOT/Wound Care Centers, and/or other ancillary service providers. Effective June 30, 2011, we also completed acquisitions of complementary businesses such as senior living care and revenue cycle management that expand our service offerings within the healthcare industry.

Following the Merger, we consummated acquisitions of complementary businesses, further discussed below, and as of November 14, 2011, we currently own or operate the following centers:

•

University General Hospital, which is a 72-bed general acute care hospital near Texas Medical Center in Houston, Texas.

•

A hyberbaric wound care center as an HOPD of University General Hospital doing business under the name University General Hospital -Hyperbaric Wound Care Center.

•

A free-standing emergency room as an HOPD of University General Hospital doing business under the name EliteCare Emergency Center

•

A free-standing emergency room as an HOPD of University General Hospital doing business under the name Neighborhood Emergency Center

•

Mainland Surgery Center, which is an ambulatory surgery center in Dickinson, Texas, located approximately 25 miles from University General Hospital.

•

Trinity Oaks senior living community in Pearland, Texas, which is an 80 unit senior living community providing independent living and assisted living services since 2001.

•

Trinity Shores senior living community in Port Lavaca, Texas, which is a 63 unit senior living community providing independent living, assisted living and memory care services since 2007.

•

Trinity Hills senior living community in Knoxville, Tennessee, which is an 87 unit senior living community providing independent living, assisted living and memory care services since 2007.

•

Autimis Billing, which is a revenue cycle management company that specializes in serving hospitals, ambulatory surgery centers, outpatient laboratories and free-standing outpatient emergency rooms.

•

Autimis Coding, which is a specialized health care coding company that serves hospitals, ambulatory surgery centers, outpatient laboratories and free-standing outpatient emergency rooms.

We plan to capitalize on opportunities created by the current regulatory and reimbursement environment through acquisitions and expansions or services to create an integrated health care delivery system.

As of September 30, 2011, we operated under the three segments of business: Hospital, Senior Living, and Revenue Management. As we implement our business plan, we expect to operate in complementary business segments, including: hospitals, ancillary services, management services and real estate holdings. We intend to aggressively pursue our acquisitions strategy for the remainder of 2011 and beyond.

Business Combinations

The Company accounts for its business acquisitions under the acquisition method of accounting as indicated in Accounting Standards Codification (“ASC”) 805, “Business Combinations”, which requires the acquiring entity in a business combination to recognize the fair value of all assets acquired, liabilities assumed, and any non-controlling interest in the acquiree; and establishes the acquisition date as the fair value measurement point. Accordingly, the Company recognizes assets acquired and liabilities assumed in business combinations, including contingent assets and liabilities and non-controlling interest in the acquiree, based on fair value estimates as of the date of acquisition. In accordance with ASC 805, the Company recognizes and measures goodwill as of the acquisition date, as the excess of the fair value of the consideration paid over the fair value of the identified net assets acquired. All acquisition-related transaction costs have been expensed as incurred rather than capitalized as a part of the cost of the acquisition.

Acquired Assets and Assumed Liabilities

Pursuant to ASC 805-10-25, if the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, but during the allowed measurement period not to exceed one year from the acquisition date, the Company retrospectively adjusts the provisional amounts recognized at the acquisition date, by means of adjusting the amount recognized for goodwill.

Contingent Consideration

In certain acquisitions, the Company agrees to pay additional amounts to sellers contingent upon achievement by the acquired businesses of certain negotiated goals, such as targeted earnings levels. The Company considers the key inputs of the arrangement and participant assumptions when developing the best estimate that is used to determine the fair value of the arrangement. The Company estimates the likelihood and timing of achieving the relevant milestones of the contingent consideration. The Company also exercises judgment when applying a probability assessment for each of the potential outcomes.

For the TrinityCare acquisition completed in June 2011, the Company recognized the contingent consideration based on the estimated fair value at the date of acquisition. In making this determination, the Company considered TrinityCare’s Earnings Before Interest, Depreciation, Amortization and Management Fees (“EBITDAM”) generated to date along with the forecasted EBITDAM projected for the duration of the measurement period. The Company evaluates the recorded value of the contingent consideration each subsequent reporting period based on TrinityCare’s achievement of meeting its earnings targets. Management makes estimates regarding the potential outcomes for TrinityCare’s future financial results and progress against the generated EBITDAM to date and the forecasted EBITDAM, which could result in an adjustment to the recorded value of the contingent consideration subsequent to the acquisition date. Any subsequent adjustment to the contingent consideration would be recognized in current period earnings until the arrangement is settled.

Factors that may affect future TrinityCare’s EBITDAM include complex federal, state and local regulations governing the health care industry, high competition in the senior living care market, downturns in the economy, housing market, and unemployment among senior resident family members, a shortage of qualified nurses and other factors as mentioned in “Risk Factors.” These factors can significantly impact the accuracy of the Company’s estimates and materially impact the TrinityCare’s future reported earnings.

University General Hospital

University General Hospital (“UGH” or the “Hospital”) is located at 7501 Fannin Street, Houston, Texas, near Texas Medical Center. UGH provides high-quality, cost-effective healthcare services for the communities served by Texas Medical Center. The Hospital offers a variety of medical and surgical services with 72 beds, including six intensive care unit beds and 11 intermediate care unit beds. The Hospital provides inpatient, outpatient and ancillary services including inpatient surgery, outpatient surgery, heart catheterization procedures, physical therapy, diagnostic imaging and respiratory therapy. UGH provides 24-7 emergency services and comprehensive inpatient services including critical care and cardiovascular services.

Regulatory Matters

The healthcare industry in general is subject to significant federal, state, and local regulation that affects our business activities by controlling the reimbursement we receive for services provided, requiring licensure or certification of our hospitals, regulating our relationships with physicians and other referral sources, regulating the use of our properties, and controlling our growth. Our facilities provide the medical, nursing, therapy, and ancillary services required to comply with local, state, and federal regulations, as well as, for most facilities, accreditation standards of the Joint Commission (formerly known as the Joint Commission on Accreditation of Healthcare Organizations)

We maintain a comprehensive compliance program that is designed to meet or exceed applicable federal guidelines and industry standards. The program is intended to monitor and raise awareness of various regulatory issues among employees and to emphasize the importance of complying with governmental laws and regulations. As part of the compliance program, we provide annual compliance training to our employees and encourage all employees to report any violations to their supervisor, or a toll-free telephone hotline.

Licensure and Certification

Healthcare facility operations are subject to numerous federal, state, and local regulations relating to, among other things, the adequacy of medical care, equipment, personnel, operating policies and procedures, acquisition and dispensing of pharmaceuticals and controlled substances, infection control, maintenance of adequate records and patient privacy, fire prevention, and compliance with building codes and environmental protection laws. Our hospital is subject to periodic inspection and other reviews by governmental and non-governmental certification authorities to ensure continued compliance with the various standards necessary for facility licensure, and our hospital is currently required to be licensed.

In addition, hospitals must be certified by CMS to participate in the Medicare program and generally must be certified by Medicaid state agencies to participate in Medicaid programs. Once certified by Medicare, hospital undergoes periodic on-site surveys in order to maintain their certification. Our hospital participates in the Medicare program.

Failure to comply with applicable certification requirements may make our hospital ineligible for Medicare or Medicaid reimbursement. In addition, Medicare or Medicaid may seek retroactive reimbursement from noncompliant facilities or otherwise impose sanctions on noncompliant facilities. Non-governmental payors often have the right to terminate provider contracts if a facility loses its Medicare or Medicaid certification

The 2010 Healthcare Reform Laws added new screening requirements and associated fees for all Medicare providers. The screening must include a licensure check and may include other procedures such as fingerprinting, criminal background checks, unscheduled and unannounced site visits, database checks, and other screening procedures prescribed by CMS.

We have developed operational systems to oversee compliance with the various standards and requirements of the Medicare program and have established ongoing quality assurance activities; however, given the complex nature of governmental healthcare regulations, there can be no assurance that Medicare, Medicaid, or other regulatory authorities will not allege instances of noncompliance. A determination by a regulatory authority that a facility is not in compliance with applicable requirements could also lead to the assessment of fines or other penalties, loss of licensure, and the imposition of requirements that an offending facility takes corrective action.

False Claims

The federal False Claims Act prohibits the knowing presentation of a false claim to the United States government and provides for penalties equal to three times the actual amount of any overpayments plus up to $11,000 per claim. In addition, the False Claims Act allows private persons, known as “relators,” to file complaints under seal and provides a period of time for the government to investigate such complaints and determine whether to intervene in them and take over the handling of all or part of such complaints. Because we perform thousands of similar procedures a year for which we are reimbursed by Medicare and other federal payors and there is a relatively long statute of limitations, a billing error or cost reporting error could result in significant civil or criminal penalties under the False Claims Act. The 2010 Healthcare Reform Laws amended the federal False Claims Act to expand the definition of false claim, to make it easier for the government to initiate and conduct investigations, to enhance the monetary reward to relators where prosecutions are ultimately successful, and to extend the statute of limitation on claims by the government.

Relationships with Physicians and Other Providers

Anti-Kickback Law. Various federal laws regulate relationships between providers of healthcare services, including management or service contracts and investment relationships. Among the most important of these restrictions is a federal law prohibiting the offer, payment, solicitation, or receipt of remuneration by individuals or entities to induce referrals of patients for services reimbursed under the Medicare or Medicaid programs (the “Anti-Kickback Law”). The 2010 Healthcare Reform Laws amended the federal Anti-Kickback Law to provide that proving violations of this law does not require proving actual knowledge or specific intent to commit a violation. Another amendment made it clear that Anti-Kickback Law violations can be the basis for claims under the False Claims Act.

These changes and those described above related to the False Claims Act, when combined with other recent federal initiatives, are likely to increase investigation and enforcement efforts in the healthcare industry generally.

In addition to standard federal criminal and civil sanctions, including penalties of up to $50,000 for each violation plus tripled damages for improper claims, violators of the Anti-Kickback Law may be subject to exclusion from the Medicare and/or Medicaid programs. In 1991, the Office of Inspector General of the United States Department of Health and Human Services (the “HHS-OIG”) issued regulations describing compensation arrangements that are not viewed as illegal remuneration under the Anti-Kickback Law.

Those regulations provide for certain safe harbors for identified types of compensation arrangements that, if fully complied with, assure participants in the particular arrangement that the HHS-OIG will not treat that participation as a criminal offense under the Anti-Kickback Law or as the basis for an exclusion from the Medicare and Medicaid programs or the imposition of civil sanctions. Failure to fall within a safe harbor does not constitute a violation of the Anti-Kickback Law, but the HHS-OIG has indicated failure to fall within a safe harbor may subject an arrangement to increased scrutiny.

A violation or even the assertion of, a violation of the Anti-Kickback Law by us or one or more of our partnerships could have a material adverse effect upon our business, financial position, results of operations, or cash flows

We have a number of relationships with physicians and other healthcare providers, including management or service contracts. Even though some of these contractual relationships may not meet all of the regulatory requirements to fall within the protection offered by a relevant safe harbor, we do not believe we engage in activities that violate the Anti-Kickback Law. However, there can be no assurance such violations may not be asserted in the future, nor can there be any assurance that our defense against any such assertion would be successful.

For example, we have entered into agreements to manage our hospital that are owned by shareholders. Most of these agreements incorporate a percentage-based management fee. Although there is a safe harbor for personal services and management contracts, this safe harbor requires, among other things, the aggregate compensation paid to the manager over the term of the agreement be set in advance. Because our management fee may be based on a percentage of revenues, the fee arrangement may not meet this requirement. However, we believe our management arrangements satisfy the other requirements of the safe harbor for personal services and management contracts and comply with the Anti-Kickback Law.

Physician Self-Referral Law. The federal law commonly known as the “Stark law” and CMS regulations promulgated under the Stark law prohibit physicians from making referrals for “designated health services” including inpatient and outpatient hospital services, physical therapy, occupational therapy, or radiology services, to an entity in which the physician (or an immediate family member) has an investment interest or other financial relationship, subject to certain exceptions.

The Stark law also prohibits those entities from filing claims or billing for those referred services. Violators of the Stark statute and regulations may be subject to recoupments, civil monetary sanctions (up to $15,000 for each violation and assessments up to three times the amount claimed for each prohibited service) and exclusion from any federal, state, or other governmental healthcare programs. The statute also provides a penalty of up to $100,000 for a circumvention scheme. There are statutory exceptions to the Stark law for many of the customary financial arrangements between physicians and providers, including personal services contracts and leases.

However, in order to be afforded protection by a Stark law exception, the financial arrangement must comply with every requirement of the applicable exception.

Historically, the Stark law provided certain exceptions for ownership and investments in specific providers, such as hospitals (the “Whole Hospital Exception”), which allowed a physician to refer patients to a hospital where the referring physician is a member of the hospital’s medical staff and has an ownership interest in the hospital as a whole, as opposed to a distinct part or department of the hospital.

The Healthcare Reform Laws eliminated the application of the Whole Hospital Exception to physician-owned hospitals that did not have their Medicare provider agreements in place by December 31, 2010. However, hospitals that already had physician ownership and their Medicare provider number as of December 31st were grandfathered and allowed to keep their physician ownership. These grandfathered hospitals may not expand the number of operating rooms, procedure rooms or beds for which the hospital was licensed as of March 23, 2010 (the date of enactment of the Healthcare Reform Laws), unless an exception is met. In addition, the percentage of physician investment interest may not increase in the Hospital. The legislation also subjects grandfathered hospitals to reporting requirements and extensive disclosure requirements on the hospital’s website and in any public advertisements.

Another exception relevant to our business under the Stark law protects personal service arrangements with physicians where certain specified requirements are met, including the requirement that (i) each arrangement be set out in writing; (ii) the arrangement covers all of the services furnished by the physician; (iii) the aggregate services contracted for do not exceed those that are reasonable and necessary for the legitimate business purpose of the arrangement; (iv) the term of each arrangement is at least one year; (v) the compensation to be paid over the term does not exceed fair market value and is not determined in a manner that takes into account the volume or value of referrals or other business generated between the parties; and (vi) the services furnished under each arrangement do not involve the counseling or promotion of a business arrangement that violates any federal or state law (the “Personal Service Arrangements Exception”). We have structured these arrangements between UGH LP and the applicable physicians to meet the requirements of the Personal Service Arrangements Exception under the Stark Law.

CMS has issued several phases of final regulations implementing the Stark law. While these regulations help clarify the requirements of the exceptions to the Stark law, it is unclear how the government will interpret many of these exceptions for enforcement purposes. Recent changes to the regulations implementing the Stark law further restrict the types of arrangements that facilities and physicians may enter, including additional restrictions on certain leases, percentage compensation arrangements, and agreements under which a hospital purchases services “under arrangements.” Because many of these laws and their implementing regulations are relatively new, we do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations. We attempt to structure our relationships to meet an exception to the Stark law, but the regulations implementing the exceptions are detailed and complex. Accordingly, we cannot assure that every relationship complies fully with the Stark law.

Additionally, no assurances can be given that any agency charged with enforcement of the Stark law and regulations might not assert a violation under the Stark law, nor can there be any assurance that our defense against any such assertion would be successful or that new federal or state laws governing physician relationships, or new interpretations of existing laws governing such relationships, might not adversely affect relationships we have established with physicians or result in the imposition of penalties on us. Even the assertion of a violation could have a material adverse effect upon our business, financial position, results of operations or cash flows.

Health Insurance Portability and Accountability Act

The Health Insurance Portability and Accountability Act of 1996, commonly known as “HIPAA,” broadened the scope of certain fraud and abuse laws by adding several criminal provisions for healthcare fraud offenses that apply to all health benefit programs. HIPAA also added a prohibition against incentives intended to influence decisions by Medicare beneficiaries as to the provider from which they will receive services. In addition, HIPAA created new enforcement mechanisms to combat fraud and abuse, including the Medicare Integrity Program, and an incentive program under which individuals can receive up to $1,000 for providing information on Medicare fraud and abuse that leads to the recovery of at least $100 of Medicare funds. Penalties for violations of HIPAA include civil and criminal monetary penalties.

HIPAA and related HHS regulations contain certain administrative simplification provisions that require the use of uniform electronic data transmission standards for certain healthcare claims and payment transactions submitted or received electronically. HIPAA regulations also regulate the use and disclosure of individually identifiable health-related information, whether communicated electronically, on paper, or orally. The regulations provide patients with significant rights related to understanding and controlling how their health information is used or disclosed and require healthcare providers to implement administrative, physical, and technical practices to protect the security of individually identifiable health information that is maintained or transmitted electronically.

With the enactment of the Health Information Technology for Economic and Clinical Health (“HITECH”) Act as part of the ARRA, the privacy and security requirements of HIPAA have been modified and expanded. The HITECH Act applies certain of the HIPAA privacy and security requirements directly to business associates of covered entities.

The modifications to existing HIPAA requirements include: expanded accounting requirements for electronic health records, tighter restrictions on marketing and fundraising, and heightened penalties and enforcement associated with noncompliance. Significantly, the HITECH Act also establishes new mandatory federal requirements for notification of breaches of security involving protected health information. HHS is responsible for enforcing the requirement that covered entities notify individuals whose protected health information has been improperly disclosed. In certain cases, notice of a breach is required to be made to HHS and media outlets.

The heightened penalties for noncompliance range from $100 to $50,000 for single incidents to $25,000 to $1,500,000 for multiple identical violations. In the event of violations due to willful neglect that are not corrected within 30 days, penalties are not subject to a statutory maximum.

In addition, there are numerous legislative and regulatory initiatives at the federal and state levels addressing patient privacy concerns. Facilities will continue to remain subject to any federal or state privacy-related laws that are more restrictive than the privacy regulations issued under HIPAA. These laws vary and could impose additional penalties. Any actual or perceived violation of these privacy-related laws, including HIPAA could have a material adverse effect on our business, financial position, results of operations, and cash flows.

Health Reform Legislation

On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act (the “PPACA”) into law. On March 30, 2010, President Obama signed into law the Health Care and Education Reconciliation Act of 2010, which amended the PPACA (together, the “2010 Healthcare Reform Laws”). Various bills have been introduced in both the United States Senate and House of Representatives to amend or repeal all or portions of these laws. Additionally, several lawsuits challenging aspects of these laws have been filed and remain pending at various stages of the litigation process. We cannot predict the outcome of legislation or litigation, but we have been, and will continue to be, actively engaged in the legislative process to attempt to ensure that any healthcare laws adopted or amended promote our goals of high-quality, cost-effective care. Many provisions within the 2010 Healthcare Reform Laws could have an impact on our business, including: (1) reducing annual “market basket updates” to providers, (2) the possible combining, or “bundling,” of reimbursement for a Medicare beneficiary’s episode of care at some point in the future, (3) implementing a voluntary program for accountable care organizations (“ACOs”), (4) creating an Independent Payment Advisory Board, and (5) modifying employer-sponsored healthcare insurance plans.

Most notably for us, these laws include a reduction in annual market basket updates to hospitals. Starting on April 1, 2010, the market basket update of 2.6% we received on October 1, 2009 was reduced to 2.35%. Similar reductions to our annual market basket update will occur each year through 2019, although the amount of each year’s decrease will vary over time. In addition, beginning on October 1, 2011, the 2010 Healthcare Reform Laws require an additional to-be-determined productivity adjustment (reduction) to the market basket update on an annual basis. The new productivity adjustments will be equal to the trailing 10-year average of changes in annual economy-wide private nonfarm business multi-factor productivity. We estimate that the first annual adjustment effective October 1, 2011 will be a decrease to the market basket update of approximately 1%.

The 2010 Healthcare Reform Laws also direct the United States Department of Health and Human Services (“HHS”) to examine the feasibility of bundling, including conducting a voluntary bundling pilot program to test and evaluate alternative payment methodologies. The possibility of implementing bundling on a nation-wide basis is difficult to predict at this time and will be affected by the outcomes of the various pilot projects conducted. In addition, if bundling were to be implemented, it would require numerous modifications to, or repeal of, various federal and state laws, regulations, and policies. These pilot projects are scheduled to begin no later than January 2013 and, initially, are limited in scope to ten medical conditions. We intend to participate in these pilot projects.

Similarly, the 2010 Healthcare Reform Laws require the United States Centers for Medicare and Medicaid Services (“CMS”) to start a voluntary program by January 1, 2012 for ACOs, in which hospitals, physicians and other care providers develop partnerships to pursue the delivery of high-quality, coordinated healthcare on a more efficient, patient-centered basis. Conceptually, ACOs will receive a portion of any savings generated from care coordination as long as benchmarks for the quality of care are maintained. Most of the key aspects of the ACO program, however, have yet to be proposed by CMS. We will continue to monitor developments in the ACO program and evaluate its potential impact on our business.

Another provision of these laws establishes an Independent Payment Advisory Board that is charged with presenting proposals, beginning in 2014, to Congress to reduce Medicare expenditures upon the occurrence of Medicare expenditures exceeding a certain level While we may not be subject to payment reduction proposals by this board for a period of time, based on the scope of this board’s directive to reduce Medicare expenditures and the significance of Medicare as a payor to us, other decisions made by this board may impact our results of operations either positively or negatively.

Given the complexity and the number of changes in these laws, as well as the implementation timetable for many of them, we cannot predict the ultimate impact of these laws. However, we believe the above points are the issues with the greatest potential impact on us. We will continue to evaluate and review these laws, and, based on our track record, we believe we can adapt to these regulatory changes.

Medicare and Medicaid Participation

Medicare is a federally funded and administered health insurance program, primarily for individuals entitled to social security benefits who are 65 or older or who are disabled. Medicaid is a health insurance program jointly funded by state and federal governments that provides medical assistance to qualifying low income persons. Each state Medicaid program has the option to determine coverage for ambulatory surgery center services and to determine payment rates for those services.

Medicare prospectively determines fixed payment amounts for procedures performed at short stay surgical facilities. These amounts are adjusted for regional wage variations. The various state Medicaid programs also pay us a fixed payment for our services, which amount varies from state to state. A portion of our revenues are attributable to payments received from the Medicare and Medicaid programs. For the three months ended September 30, 2011 and 2010, 38% and 31% of our patient service revenues were contributed by Medicare and Medicaid, and 36% and 31% for the nine months ended September 30, 2011 and 2010, respectively.

In order to participate in the Medicare program, our hospital must satisfy regulations known as conditions of participation (COPs) for hospital and conditions for coverage (CFCs) for ambulatory surgery center. Each facility can meet this requirement through accreditation with the Joint Commission on Accreditation of Healthcare Organizations or other CMS-approved accreditation organizations, or through direct surveys at the direction of CMS. Our hospital and facility are certified to participate in the Medicare program. We have established ongoing quality assurance activities to monitor and ensure our facilities’ compliance with these COPs or CFCs. Any failure by a facility to maintain compliance with these COPs or CFCs as determined by a survey could result in the loss of the facility’s provider agreement with CMS, which would prohibit reimbursement for services rendered to Medicare or Medicaid beneficiaries until such time as the facility is found to be back in compliance with the COPs or CFCs. This could have a material adverse affect on the individual facility’s billing and collections.

As with most government programs, the Medicare and Medicaid programs are subject to statutory and regulatory changes, possible retroactive and prospective rate adjustments, administrative rulings, freezes and funding reductions, all of which may adversely affect the level of payments to our short stay surgical facilities. Beginning in 2008, CMS began transitioning Medicare payments to ambulatory surgery centers to a system based upon the hospital outpatient prospective payment system. In 2011, that transition is now complete and payments to ambulatory surgery centers will be solely based on the outpatient prospective payment system (OPPS) relative weights. CMS has cautioned that the final OPPS relative weights may result in payment rates for the year being less than the payment rates for the preceding year. On November 2, 2010, CMS issued a final rule to update the Medicare program’s payment policies and rates for ambulatory surgery centers for 2011. The final rule applies a 0.2% increase to the ASC payment rate. The final rule will also add six procedures to the list of procedures for which Medicare will reimburse when performed in an ASC. The Acts require the Department of Health and Human Services to issue a plan in early 2011 for developing a value-based purchasing program for ambulatory surgery centers. Such a program may further impact Medicare reimbursement of ambulatory surgery centers or increase our operating costs in order to satisfy the value-based standards. For federal fiscal year 2011 and each subsequent federal fiscal year, the Acts provide for the annual market basket update to be reduced by a productivity adjustment. The amount of that reduction will be the projected nationwide productivity gains over the preceding 10 years. To determine the projection, the Department of Health and Human Services will use the Bureau of Labor Statistics 10-year moving average of changes in specified economy-wide productivity. The ultimate impact of the changes in Medicare reimbursement will depend on a number of factors, including the procedure mix at the centers and our ability to realize an increased procedure volume.

Texas Statutory and Regulatory Risks

Illegal Remuneration Law. The Texas Illegal Remuneration Statute (Chapter 102 of the Texas Occupations Code) (the “Texas Remuneration Statute”) mirrors the federal Anti-Kickback Law, except that it applies to all healthcare services, regardless of the source of payment. The Texas Remuneration Statute, makes it illegal to solicit or receive any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for referring an individual to or from a person licensed, certified or registered by a state health care regulatory agency. The penalty for violating this prohibition ranges from a Class A misdemeanor to a third degree felony. The Texas Remuneration Statute does, however, permit any payment, business arrangement, or payment practice permitted under the Anti-Kickback Law or any regulation adopted thereunder, provided the relationship is appropriately disclosed. The Company intends for all business activities and operations of the Company and the UGH LPto conform in all respects with the Texas Remuneration Statute, but no assurances can be given that the Company and UGH LP’s activities will not be reviewed and challenged under this statute.

Medicaid Fraud. There are both federal and state laws that impose penalties for improper billing practices. Texas has several laws, including the Medicaid Fraud Prevention Act, which provides civil and criminal penalties for improper billing. UGH LP attempts to comply with all reimbursement and billing requirements. However, no assurances can be given that UGH LP’s activities will not be reviewed and challenged under these Texas laws.

Other Texas Statutes. Texas has laws which prohibit various business practices including the corporate practice of medicine, fee splitting, and commercial bribery. In essence, the corporate practice of medicine prohibition, as established by case law and interpretive opinions of the Texas Attorney General, provides that an individual or entity that is not licensed to practice medicine may not employ a physician and receive the fees for the physician’s professional services. Further, Texas case law has established that other arrangements, besides employment of the physician by the non-licensed individual or entity, may result in the application of the corporate practice of medicine prohibition. Arrangements that are viewed as “fee splitting” or “fee sharing” arrangements between the non-licensed person or entity and the licensed physician could also be problematic from a state law perspective. There have been numerous bills filed in the Texas legislature to remove or modify the Texas corporate practice of medicine doctrine, but no such legislation has passed to date in connection with private hospitals.

There has been very little interpretation of some of these laws and a government agency charged with enforcement of these laws might assert that the Company’s, or any of its affiliates’, arrangements with physicians do not comply with some of these prohibitions. If this occurs or if new applicable laws are enacted, this may have a material adverse effect on the UGH LP, its operations and prospects, and/or the Company.

Results of Operations

Set forth below are:

(A) A discussion of the results of operations for University General Hospital (“UGH”) for the three and nine months ended September 30, 2011, as compared to the three and nine months ended September 30, 2010;

(B) A discussion of the results of operations for our senior living care communities for the three and nine months ended September 30, 2011, as compared to the three and nine months ended September 30, 2010; and

(C) A discussion of the results of operations for our revenue cycling management business for the three and nine months ended September 30, 2011, as compared to the three and nine months ended September 30, 2010.

(A) Results of Operation — Hospital

For the three months ended September 30, 2011 as compared to the three months ended September 30, 2010

Our net operating revenues consist primarily of revenues derived from patient care services and other non-patient care services. Total revenues increased approximately 26.7% to $19.0 million for the three months ended September 30, 2011 as compared to $15.0 million for the three months ended September 30, 2010. The increase in net revenue was primarily as a result of increased inpatient volumes and the new emergency centers which included University General Hospital-Hyperbaric Wound Care Center and Freestanding Emergency Centers opening. The Company experienced a record average daily census of 40 for the three months ended September 30, 2011. As a result, the Company has experienced an increase in collection rate of approximately 2%, which is due to higher payment rates on inpatient accounts.

Our day’s sales outstanding were 79 days at September 30, 2011, which compares to 77 days at December 31, 2010. To calculate our day’s sales outstanding, we divide our accounts receivable net of allowance for doubtful accounts, by our revenue per day. Our revenue per day is calculated by dividing our quarterly revenues by the number of calendar days in the quarter.

Salaries, benefits, and other employee costs represent the most significant cost to us and represent an investment in our most important asset. Salaries, benefits, and other employee costs include all amounts paid to full-time and part-time employees who directly participate in or support the operations of our hospital, including all related costs of benefits provided to employees. It also includes amounts paid for contract labor. Total salaries, benefits, and other employee costs increased approximately 34.6% to $7.0 million for the three months ended September 30, 2011, as compared to $5.2 million for the three months ended September 30, 2010. This increase was primarily due to an increase in the number of full-time equivalents as a result of our new emergency centers were opened during 2010 and merit increase provided to employees on January 1, 2011. In addition, the number of nursing staff increased to cover the increased inpatient volumes.

Medical supplies expense includes all costs associated with supplies used while providing patient care. These costs include pharmaceuticals, food, needles, bandages, and other similar items. Medical supplies expense increased approximately 13.3% to $3.4 million for the three months ended September 30, 2011 as compared to $3.0 million for the three months ended September 30, 2010. Medical supplies expense increase was primarily due to the result of our increased in patient volumes in the third quarter of 2011.

General and administrative (“G&A”) expenses primarily include information technology services, corporate accounting, human resources, internal audit and controls and legal services. G&A expenses increased approximately 57.7% to $4.1 million for the three months ended September 30, 2011 as compared to $2.6 million for the three months ended September 30, 2010. The increase in G&A rate in current year third quarter over last year third quarter was primarily comprised of marketing expenses which increased by $0.5 million and billing and collection expenses which increased by $0.3 million.

Management fees increased $0.7 million to $1.4 million for the three months ended September 30, 2011 as compared to $0.7 million for the three months ended September 30, 2010. The increase in management fees was mainly due to additional expenses for the new emergency centers opened late 2010 and early 2011.

As claims are denied and the related receivables age during the appeal process, our provision for doubtful accounts increases as a percent of net revenues. When Medicare contractors cease denials and our recoveries of previously denied claims exceed the dollar value of new claims added to our outstanding receivables balance, our provision for doubtful accounts decreases as a percent of net revenues. Provision for doubtful accounts decreased $0.3 million, or 42.9%, to $0.4 million for the three months ended September 30, 2011 as compared to $0.7 million for the three months ended September 30, 2010.

Interest expense decreased $0.2 million, or 16.7% to $1.0 million for the three months ended September 30, 2011 as compared to $1.2 million for the three months ended September 30, 2010. The decrease in interest expense was primarily due to a decrease in our average interest rate and lower average amount outstanding on notes in the current year. The average interest rate decreased as a result of current market fluctuations.

As a result of the foregoing, our net income was $1.2 million for the three months ended September 30, 2011, compared to a net loss of $0.1 million for the three months ended September 30, 2010. The net income of $1.2 million was primarily derived from a one- time $1.9 million gain from extinguishment of liabilities during the quarter ended September 30, 2011.

For the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010

Total revenues increased 31.3% to $52.9 million for nine months ended September 30, 2011 as compared to $40.3 million for the nine months ended September 30, 2010. The increase in net revenue was a result of increased inpatient volumes and the new emergency centers, which included University General Hospital-Hyperbaric Wound Care Center and Freestanding Emergency Centers opening. The Company experienced a 40% increase in average daily census for the nine months ended September 30, 2011. As a result, the Company has experienced an increase in collection rate of approximately 2% due to higher payment rates on inpatient accounts.

Total salaries, benefits, and other employee costs increased $5.8 million, or 40.8%, to $20.0 million for the nine months ended September 30, 2011 as compared to $14.2 million for the nine months ended September 30, 2010. Salaries, benefits, and other employee costs increased was primarily due to an increase in the number of full-time equivalents as a result of our new emergency centers were opened during 2010, an merit increase provided to employees on January 1, 2011 and increased nursing staff needed to cover the increased inpatient volumes.

Medical supplies expense increased $1.0 million, or 11.6%, to $9.6 million for the nine months ended September 30, 2011 as compared to $8.6 million for the nine months ended September 30, 2010. Medical supplies expense increased was primarily due to the direct result of our increased inpatient volumes in the first nine months of 2011.

G&A expenses increased $3.8 million, or 45.2%, to $12.2 million for the nine months ended September 30, 2011 as compared to $8.4 million for the nine months ended September 30, 2010. The increase in G&A rate in current year third quarter over last year third quarter was primarily comprised of marketing expenses which increased by $1 million and billing and collection expenses which increased by $.9 million, and legal fees which increased by $.4 million.

Management fees increased $2.3 million to $4.1 million for the nine months ended September 30, 2011 as compared to $1.8 million for the nine months ended September 30, 2010. Management fees increased due to additional expenses for the new emergency centers opened late 2010 and early 2011.

Provision for doubtful accounts decreased $1.2 million, or 54.5%, to $1.0 million for the nine months ended September 30, 2011 as compared to $2.2 million for the nine months ended September 30, 2010. The decrease in the provision for doubtful accounts was primarily due to continued collection efforts partially offset by the timing and aging of these denials. In addition, we continue to benefit from the enhancements that we made to our processes around the capture and recovery of medicare-related bad debts.

Interest expense decreased $0.2 million, or 5.3%, to $3.6 million for the nine months ended September 30, 2011 as compared to $3.8 million for the nine months ended September 30, 2010. The decreased in interest expense was primarily due to a decrease in our average interest rate and lower average amount outstanding on notes in the current year. The average interest rate decreased as a result of current market fluctuations.

As a result of the foregoing, our net income was $0.5 million for the nine months ended September 30, 2011, compared to a net loss of $2.6 million for the nine months ended September 30, 2010.

(B) Results of Operation — Senior Living

For the three months ended September 30, 2011

For the three months ended September 30, 2011, Senior Living revenues were $1.9 million. Salaries and benefit expense was $0.7 million, general and administrative expense was $0.7 million, depreciation expense was $0.3 million, and interest expense was $0.3 million. Net loss was $0.2 million for the three months ended September 30, 2011.

Senior Living did not have operations for the prior year or the first nine months of 2011.

(C) Results of Operation — Revenue Management

For the three months ended September 30, 2011

For the three months ended September 30, 2011, revenues of $0.62 million were recognized, salaries were $0.48 million, general and administrative expenses were $0.08 million, and depreciation expense was $0.001 million. Net income was $0.05 million.

Revenue management did not have operations for the prior year or for the first nine months of 2011.

Liquidity and Capital Resources

The cash used in operating activities was $3.2 million for the nine months ended September 30, 2011, compared to cash provided by operations of $3.6 million for the nine months ended September 30, 2010. The decrease in operating cash flows was primarily caused by continuing to pay down payables and increased accounts receivable.

The cash used in investing activities was $0.3 million for the nine months ended September 30, 2011, compared to $0.1 million for the nine months ended September 2010. The increase in cash used in investing activities was primarily attributable to the $0.1 million in investments in unconsolidated affiliate and higher purchases of property and equipment as compared to the prior year, partially offset by $0.4 million attributable to business acquisitions.

The cash provided by financing activities was $1.9 million for the nine months ended September 30, 2011, compared to cash used of $3.3 million for the nine months ended September 30, 2010. The increase over the prior year was primarily caused by $7.1 million of an internal capital raise prior to going public. This increase was partially offset by higher payments on short-term notes payable and capital lease obligations in 2011.

The Company generated a negative working capital of $47.6 million as of September 30, 2011, compared to a negative of $40.5 million as of December 31, 2010. This decrease in liquidity is primarily due to the reclassification of debt from long-term to current portion in 2011. Additionally, the Company assumed $7.7 million in current liabilities from the acquisitions made in the second quarter of 2011.

The Company intends to complete a series of transactions comprising a refinancing and restructuring plan (the “Restructuring Plan”) of certain current debt obligations that is expected to involve (i) the refinancing of approximately $14.8 million in loans with Amegy Bank, (ii) the completion of a new revolving line of credit secured by the Hospital’s accounts receivables, (iii) work-outs of the Company’s accounts payable with its trade creditors and equipment providers, as many of these accounts are in default, and (iv) work-outs of taxes payable with the IRS and other taxing authorities. Management believes that this can be achieved by the end of 2011, while there can be no assurances that the restructuring plan will be completed on terms acceptable to the Company or at all.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires management to select appropriate accounting policies and to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. See Note 1 — DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, in the accompanying Notes to our consolidated financial statements, for further descriptions of our major accounting policies and for information related to the impact of the implementation of new accounting pronouncements on our results of operations and financial position.

In preparing our consolidated financial statements, we make estimates and assumptions that affect the accounting for and recognition and disclosure of assets, liabilities, equity, revenues and expenses. We must make these estimates and assumptions because certain information that we use is dependent on future events, cannot be calculated with a high degree of precision from data available or simply cannot be readily calculated based on generally accepted methods. In some cases, these estimates are particularly difficult to determine and we must exercise significant judgment. We periodically evaluate our estimates and judgments that are most critical in nature. We believe that the following discussion of critical accounting policies address all important accounting areas where the nature of accounting estimates or assumptions is material due to the levels of subjectivity and judgment. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements.

Business Combinations

The Company accounts for its business acquisitions under the acquisition method of accounting as indicated in ASC 805, “Business Combinations”, which requires the acquiring entity in a business combination to recognize the fair value of all assets acquired, liabilities assumed, and any non-controlling interest in the acquiree; and establishes the acquisition date as the fair value measurement point. Accordingly, the Company recognizes assets acquired and liabilities assumed in business combinations, including contingent assets and liabilities and non-controlling interest in the acquiree, based on fair value estimates as of the date of acquisition. In accordance with ASC 805, the Company recognizes and measures goodwill as of the acquisition date, as the excess of the fair value of the consideration paid over the fair value of the identified net assets acquired.

All acquisition-related transaction costs have been expensed as incurred rather than capitalized as a part of the cost of the acquisition.

Acquired Assets and Assumed Liabilities

Pursuant to ASC 805-10-25, if the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, but during the allowed measurement period not to exceed one year from the acquisition date, the Company retrospectively adjusts the provisional amounts recognized at the acquisition date, by means of adjusting the amount recognized for goodwill.

Contingent Consideration

In certain acquisitions, the Company agrees to pay additional amounts to sellers contingent upon achievement by the acquired businesses of certain negotiated goals, such as targeted earnings levels. The Company considers the key inputs of the arrangement and participant assumptions when developing the best estimate that is used to determine the fair value of the arrangement. The Company estimates the likelihood and timing of achieving the relevant milestones of the contingent consideration. The Company also exercises judgment when applying a probability assessment for each of the potential outcomes.

For the TrinityCare acquisition completed in June 2011, the Company recognized the contingent consideration based on the estimated fair value at the date of acquisition. In making this determination, the Company considered TrinityCare’s EBITDAM generated to date along with the forecasted EBITDAM projected for the duration of the measurement period. The Company evaluates the recorded value of the contingent consideration each subsequent reporting period based on TrinityCare’s achievement of meeting its earnings targets. Management makes estimates regarding the potential outcomes for TrinityCare’s future financial results and progress against the generated EBITDAM to date and the forecasted EBITDAM, which could result in an adjustment to the recorded value of the contingent consideration subsequent to the acquisition date. Any subsequent adjustment to the contingent consideration would be recognized in current period earnings until the arrangement is settled. Factors that may affect future TrinityCare’s EBITDAM include complex federal, state and local regulations governing the health care industry, high competition in the senior living care market, downturns in the economy, housing market, and unemployment among senior resident family members, a shortage of qualified nurses and other factors as mentioned in “Risk Factors.” These factors can significantly impact the accuracy of the Company’s estimates and materially impact the TrinityCare’s future reported earnings.

Revenue Recognition

We recognize net patient service revenues in the reporting period in which we perform the service based on our current billing rates (i.e., gross charges), less actual adjustments and estimated discounts for contractual allowances (principally for patients covered by Medicare, Medicaid, and managed care and other health plans). We record gross service charges in our accounting records on an accrual basis using our established rates for the type of service provided to the patient. We recognize an estimated contractual allowance to reduce gross patient charges to the amount we estimate we will actually realize for the service rendered based upon previously agreed to rates with a payor. Our patient accounting system calculates contractual allowances on a patient-by-patient basis based on the rates in effect for each primary third-party payor. Other factors that are considered and could further influence the level of our reserves include the patient’s total length of stay for in-house patients, each patient’s discharge destination, the proportion of patients with secondary insurance coverage and the level of reimbursement under that secondary coverage, and the amount of charges that will be disallowed by payors. Such additional factors are assumed to remain consistent with the experience for patients discharged in similar time periods for the same payor classes, and additional reserves are provided to account for these factors, accordingly. Payors include federal and state agencies, including Medicare and Medicaid, managed care health plans, commercial insurance companies, employers, and patients.

The process of estimating contractual allowances requires us to estimate the amount we expect to receive based on our payor contracts as well as our governmental payors, such a Medicare and Medicaid. The key assumption in this process is the estimated reimbursement percentage, which is based on payor classification, historical paid claims data and, in the case of Medicare, actual DRG data. Due to the complexities involved in these estimates, actual payments we receive could be different from the amounts we estimate and record. If the actual contractual reimbursement percentage under government programs and managed care contracts differed by 1% at September 30, 2011 from our estimated reimbursement percentage, net income for the nine months ended September 30, 2011 would have changed by approximately $1.9 million, and net accounts receivable at September 30, 2011 would have changed by $1.9 million. Final settlements under some of these programs are subject to adjustment based on administrative review and audit by third parties. We account for adjustments to previous program reimbursement estimates as contractual allowance adjustments and report them in the periods that such adjustments become known. Contractual allowance adjustments relative to final settlements and previous program reimbursement estimates impacted net revenue and net income by insignificant amounts in each of the three- months and nine -months ended September 30, 2011 and 2011.

The following table shows gross revenues and contractual allowances for the three and nine months ended September 30, 2011 and 2010:

		Three months ended								Nine months ended
		September 30								September 30
		2011				2010				2011				2010
Gross billed charges		$	77,559,961			$	65,172,485			$	210,384,636			$	174,169,382
Contractual allowance			(58,593,382	)			(50,168,838	)			(157,465,604	)		$	(133,871,042	)
Net revenue		$	18,966,579			$	15,003,647			$	52,919,032			$	40,298,340
Contractual allowance percentage			24	%			23	%			25	%			23	%

Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms that result from contract renegotiations and renewals. In addition, laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. If actual results are not consistent with our assumptions and judgments, we may be exposed to gains or losses that could be material.

Due to complexities involved in determining amounts ultimately due under reimbursement arrangements with third-party payors, which are often subject to interpretation, we may receive reimbursement for healthcare services authorized and provided that is different from our estimates, and such differences could be material. However, we continually review the amounts actually collected in subsequent periods in order to determine the amounts by which our estimates differed. Historically, such differences have not been material from either a quantitative or qualitative perspective.

Allowance for Doubtful Accounts

Substantially all of our accounts receivable are related to providing healthcare services to patients. Collection of these accounts receivable is our primary source of cash and is critical to our operating performance. Our primary collection risks relate to non-governmental payors who insure these patients, and deductibles, co-payments and self-insured amounts owed by the patient. Deductibles, co-payments and self-insured amounts are an immaterial portion of our net accounts receivable balance. At September 30, 2011 and December 31, 2010, deductibles, co-payments and self-insured amounts owed by the patient accounted for approximately 3% and 2% of our net accounts receivable balance before doubtful accounts. Our general policy is to verify insurance coverage prior to the date of admission for a patient admitted to our hospitals, we verify insurance coverage prior to their first outpatient visit. Our estimate for the allowance for doubtful accounts is calculated by providing a reserve allowance based upon the age of an account balance. Generally we reserve as uncollectible all governmental accounts over 365 days and non-governmental accounts over 180 days from discharge. This method is monitored based on our historical cash collections experience. Collections are impacted by the effectiveness of our collection efforts with non-governmental payors and regulatory or administrative disruptions with the fiscal intermediaries that pay our governmental receivables.

Aging by Payor Mix:

		% of Accounts Receivable as of September 30, 2011
		Under 91 Days				91-180 Days				Over 180 Days
Medicare & Medicaid			26	%			4	%			4	%
Managed Care & other			46	%			5	%			11	%
Self-Pay			2	%			0	%			2	%
Total			74	%			9	%			17	%

We do not have any significant amounts subject to pre-approval from third party payors because our business office obtains approvals prior to admission based on information provided by our patients.

We estimate bad debts for total accounts receivable, and we believe our policies have resulted in reasonable estimates determined on a consistent basis. We believe that we collect substantially all of our third-party insured receivables (net of contractual allowances) which include receivables from governmental agencies. To date, we believe there has not been a material difference between our bad debt allowances and the ultimate historical collection rates on accounts receivable. We review our overall reserve adequacy by monitoring historical cash collections as a percentage of net revenue less the provision for bad debts. Uncollected accounts are written off the balance sheet when they are turned over to an outside collection agency, or when management determines that the balance is uncollectible, whichever occurs first.

We attempt to collect deductibles, co-payments and self-pay accounts prior to or at the time of service for non-emergency care. If we do not collect these patient responsibility accounts prior to the delivery of care, the accounts are handled through our billing and collections processes.

The approximate percentage of total net accounts receivable (after allowance for contractual adjustments but before doubtful accounts) summarized by insured status is as follows:

		September 30,				December 31,
		2011				2010
Government payors and insured receivables			96	%			98	%
Self-pay receivables (including deductible and co-payments)			4	%			2	%
Total			100	%			100	%

We verify each patient’s insurance coverage as early as possible before a scheduled admission or procedure with respect to eligibility, benefits, and authorization/pre-certification requirements in order to notify patients of the amounts for which they will be responsible. We attempt to verify insurance coverage within a reasonable amount of time for all emergency room visits and urgent admissions in compliance with EMTALA. We do not pursue collection of amounts related to patients who meet our guidelines to qualify as charity care.

In general, we perform the following steps in collecting our accounts receivable: We collect deductibles, co-payments and self-pay accounts prior to or at time of service if possible; we bill and follow-up with third party-payors as soon as possible following discharge; we make collection calls on a regular basis; we utilize the services of outside collection agencies; we write-off of accounts manually if collection efforts are unsuccessful.

The amount of the allowance for doubtful accounts is based upon management’s assessment of historical write-offs and expected net collections, business and economic conditions, trends in federal, state, and private employer health care coverage and other collection indicators. Management relies on the results of detailed reviews of historical write-offs and recoveries as a primary source of information in estimating the collectability of our accounts receivable. These estimates have not resulted in material adjustments to our allowance for doubtful accounts or period-to-period comparisons of our results of operations.

Long-lived Assets

Long-lived assets, such as property and equipment, are reviewed for impairment when events or changes in circumstances indicate the carrying value of the assets contained in our financial statements may not be recoverable. When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the asset’s estimated undiscounted future cash flows. If the estimated future cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value, which may be based on estimated discounted future cash flows, unless there is an offer to purchase such assets, which would be the basis for determining fair value. We recognize an impairment loss if the amount of the asset’s carrying value exceeds the asset’s estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset will be its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated over the remaining useful life of the asset. Restoration of a previously recognized impairment loss is prohibited. No such impairment was identified at September 30, 2011 and 2010 or December 31, 2010. If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to additional impairment losses that could be material to our results of operations.

Income Taxes

We provide for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, deferred tax assets are also recorded with respect to net operating losses and other tax attribute carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is established when realization of the benefit of deferred tax assets is not deemed to be more likely than not. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in our consolidated financial statements.

A high degree of judgment is required to determine the extent a valuation allowance should be provided against deferred tax assets. On a quarterly basis, we assess the likelihood of realization of our deferred tax assets considering all available evidence, both positive and negative. Our operating performance in recent years, the scheduled reversal of temporary differences, our forecast of taxable income in future periods, our ability to sustain a core level of earnings, and the availability of prudent tax planning strategies are important considerations in our assessment. Based on the weight of available evidence, we determine it is not more likely than not our deferred tax assets will be realized in the near term future. Based on this determination, we have provided a full valuation allowance on net deferred tax assets as of September 30, 2011 and December 31, 2010. If circumstances change and we determine in the future that it is more likely than not that our deferred tax assets will be realized in the near term future, a reversal of a portion or all of the valuation allowance will be required, which could result in a significant reduction in future income tax expense.

Uncertain Tax Positions

We record and review quarterly our uncertain tax positions. Reserves for uncertain tax positions are established for exposure items related to various federal and state tax matters. Income tax reserves are recorded when an exposure is identified and when, in the opinion of management, it is more likely than not that a tax position will not be sustained and the amount of the liability can be estimated. While we believe that our reserves for uncertain tax positions are adequate, the settlement of any such exposures at amounts that differ from current reserves may require us to materially increase or decrease our reserves for uncertain tax positions.

Assessment of Loss Contingencies

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein.

If the assessment of a loss contingency indicates that it is probable that a loss has been incurred and the amount of the liability can be reasonably estimated, then the estimated liability is accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed. The Company expenses legal costs associated with contingencies as incurred.

Goodwill

Effective September 2011, the Company accounts for its goodwill in accordance with the ASU 2011-08, Intangibles-Goodwill and Other (Topic 350) Testing Goodwill for Impairment. Goodwill represents the excess of the fair value of consideration paid over the fair value of identified net assets recognized and represents the future economic benefits arising from assets acquired that could not be individually identified and separately recognized. The Company assesses the carrying amount of goodwill by testing the goodwill for impairment annually, on December 31, and whenever events or changes in circumstances or a triggering event indicate that the carrying amount may not be recoverable.

In accordance with ASU 2011-08, the Company first assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The qualitative factors include macroeconomic conditions, industry and market considerations, the Company’s overall financial performance, cost factors, and entity-specific events such as changes in strategy, management, key personnel, or customers. If the Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then it performs the two-step impairment test. Under ASU 2011-08, the Company has also an option to bypass the qualitative assessment described above for any reporting unit in any period and proceed directly to performing the first step of the goodwill impairment test.

In the first step, the fair value of each reporting unit is compared to its carrying value. If the fair value of a reporting unit exceeds the carrying value of that unit, goodwill is not impaired and no further testing is required. If the carrying value of the reporting unit exceeds the fair value of that unit, then a second step must be performed to determine the implied fair value of the reporting entity’s goodwill. The second step of the goodwill impairment analysis requires the allocation of the fair value of the reporting unit to all of the assets and liabilities of that reporting unit as if the reporting unit had been acquired in a business combination. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then an impairment loss equal to the difference is recorded as a separate line item within income from operations. Significant estimates and judgments are involved in this assessment and include the use of valuation methods for determining the fair value of goodwill assigned to each of the reporting units and the applicable assumptions included in those valuation methods such as financial projections, discount rates, tax rates and other related assumptions. Additionally, these estimates and judgments include the assumptions utilized to arrive at the market values of the fixed assets assigned to these reporting units and the reliability of other assets assigned to the reporting units.

There have been no triggering events in the nine months ended September 30, 2011 and 2010.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, see Note 1 — DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, in the Notes to our accompanying consolidated financial statements.

ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, we are not required to provide disclosure under this Item 3.

ITEM 4.		CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Disclosure and control procedures are also designed to ensure that such information is accumulated and communicated to management, including the interim chief executive officer and interim chief financial officer, to allow timely decisions regarding required disclosures.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that there are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their desired control objectives. Additionally, in evaluating and implementing possible controls and procedures, management is required to apply its reasonable judgment.

Based on the evaluation described above, our chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this report, the Company’s internal control over financial reporting was ineffective. We identified several material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses relate to inadequate staffing within our accounting department, lack of consistent policies and procedures within our newly formed operating segments, and inadequate monitoring of controls, including the Company’s lack of an audit committee. To mitigate these weaknesses, we have engaged an outside accounting firm to assist us with accounting and financial reporting, including internal controls over financial reporting.

Changes in internal controls over financial reporting

There was no change in our internal controls over financial reporting that occurred during the period covered by this report, which has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Officers’ Certifications

Appearing as exhibits to this quarterly report on Form 10-Q are “Certifications” of our Chief Executive and Financial Officer. The Certifications are required pursuant to Sections 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302 Certifications”). This section of the quarterly report on Form 10-Q contains information concerning the Controls Evaluation referred to in the Section 302 Certification. This information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

PART II — OTHER INFORMATION

ITEM 1.		LEGAL PROCEEDINGS

Information with respect to the Company’s legal proceedings can be found under the heading “Commitments and Contingencies,” in Note 9 to the Notes to consolidated financial statements contained in Part 1, Item 1, of this report.

Siemens

On June 29, 2010, Siemens Medical Solutions USA, Inc. (“Siemens”) sued UGH LP in the 215th District Court of Harris County, Texas, Cause No. 2010-40305, seeking approximately $7,000,000 for alleged breaches of (i) a Master Equipment Lease Agreement dated August 1, 2006 and related agreements (the “Lease Agreements”), pursuant to which UGH LP leased certain radiology equipment and (ii) an Information Technology Agreement dated March 31, 2006 and related agreements (the “IT Agreements”) pursuant to which Siemens agreed to provide an information technology system, software and related services. On November 22, 2010 UGH LP filed counterclaims against Siemens seeking approximately $5,850,000 against Siemens for breach of contract, negligent representation and breach of warranty based on Siemens breach of the Lease Agreements and the IT Agreements. On February 28, 2011, the court signed an order granting partial summary judgment in favor of Siemens and against UGH LP as to UGH LP’s liability for breach of the Lease Agreements, but not as to damages sought by Siemens.

On September 15, 2011 the parties to the Siemens litigation reached a settlement of the pending litigation. As part of the settlement, UGH LP agreed to pay Siemens an aggregate of $4,850,000 over a period of 20 months beginning in October 2011 through May 2013. The Company accrued this unpaid claim as current liabilities.

Prexus

On December 4, 2009, Prexus Health Consultants, LLC and its affiliate, Prexus Health LLC (collectively, “Prexus”), sued UGH LP and APS in the 270th District Court of Harris County, Texas, Cause No. 2009-77474, seeking (i) $224,863 for alleged breaches of a Professional Services Agreement (the “PSA”) under which Prexus provided billing, coding and transcription services and (ii) $608,005.07 for alleged breaches of a Consulting Services Agreement (the “CSA”) under which Prexus provided professional management and consulting services. UGH LP and APS terminated these contracts effective September 9, 2009. Prexus subsequently added additional claims seeking lost profits and other damages for alleged tortious interference of Prexus contracts. In October 2010, UGH LP and APS filed counterclaims against Prexus seeking $1,687,242 in damages caused by Prexus’ breach of the CSA.

On October 11, 2011 the trial court judge executed and entered judgment against UGH LP of approximately $2.9 million, which included approximately $2.2 million in lost profits. The judgment also includes additional amounts for pre-judgment and post-judgment interest. We believe the judgment is not supported by the evidence presented at trial and UGH LP has taken appropriate actions to appeal the judgment and will post a bond securing payment of the judgment pending the results of the appeal. The Company accrued $861,000 as of September 30, 2011.

ITEM 1A.		RISK FACTORS

OUR FUTURE PERFORMANCE IS SUBJECT TO A VARIETY OF RISKS, INCLUDING THOSE DESCRIBED BELOW. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS COULD BE HARMED AND THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE. YOU SHOULD ALSO REFER TO THE OTHER INFORMATION CONTAINED IN THIS REPORT.

Risks related to our business and industry

Our significant leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk and prevent us from meeting our obligations.

We have a high ratio of debt to assets and require substantial cash flow to meet our debt service requirements. The degree of our leverage has several important effects on our operations, including

	•		a substantial amount of our cash flow from operations must be dedicated to the payment of lease payments and interest on our indebtedness and will not be available for other purposes;
	•		covenants contained in our debt obligations requires us to meet certain financial tests and retain minimum cash balances, in addition to certain other restrictions that will limit our ability to borrow additional funds or dispose of our assets and may affect our flexibility in planning for, and reacting to, changes in our business;
	•		our ability to obtain permanent and additional financing for working capital, capital expenditures, or general corporate purposes may be impaired;
	•		our vulnerability to downturns or adverse changes in general economic, industry or competitive conditions and adverse changes in government regulations is increased;
	•		our risk of exposure to interest rate fluctuations is increased;
	•		our ability to make strategic acquisitions may be limited; and
	•		our ability to adjust to changing market conditions may be constrained.

We may not be able to generate sufficient cash to service all of our indebtedness and may not be able to refinance our indebtedness on favorable terms. If we are unable to do so, we may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot provide assurance that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

In addition, we conduct our operations through our subsidiaries. Accordingly, repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us by dividend, debt repayment or otherwise. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity, and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries.

We may find it necessary or prudent to refinance our outstanding indebtedness with longer-maturity debt at a higher interest rate. In addition, our ability to incur secured indebtedness (which would generally enable us to achieve better pricing than the incurrence of unsecured indebtedness) depends in part on the value of our assets, which depends, in turn, on the strength of our cash flows and results of operations, and on economic and market conditions and other factors.

If our cash flows and capital resources are insufficient to fund our debt service obligations or we are unable to refinance our indebtedness, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. If our operating results and available cash are insufficient to meet our debt service obligations, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions, or the proceeds from the dispositions may not be adequate to meet any debt service obligations then due.

We may not be able to obtain additional capital, when desired, on favorable terms, without dilution to our shareholders or at all.

We operate in a market that makes our prospects difficult to evaluate and, to remain competitive, we will be required to make continued investments in capital equipment, facilities and technological improvements. We expect that substantial capital will be required to expand our operations and fund working capital for anticipated growth. If we do not generate sufficient cash flow from operations or otherwise have the capital resources to meet our future capital needs, we may need additional financing to implement our business strategy.

If we raise additional funds through the issuance of our common stock or convertible securities, our shareholders could be significantly diluted. These newly issued securities may have rights, preferences or privileges senior to those of existing shareholders acquiring shares of our common stock in this offering. Additional financing may not, however, be available on terms favorable to us, or at all, if and when needed, and our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our infrastructure or respond to competitive pressures could be significantly limited.

If we are unable to enter into and retain managed care contractual arrangements on acceptable terms, if we experience material reductions in the contracted rates we receive from managed care payers or if we have difficulty collecting from health maintenance organizations, preferred provider organizations, and other third party payors, our results of operations could be adversely affected.

We have experienced (and will likely continue to experience) difficulty in establishing and maintaining relationships with health maintenance organizations, preferred provider organizations, and other third party payors. Health maintenance organizations and other third-party payors have also undertaken cost-containment efforts during the past several years, including revising payment methods and monitoring healthcare expenditures more closely. In addition, many payors have been reluctant to enter into agreements with us, citing a lack of need for our hospital in their networks. The inability of us to negotiate and maintain agreements on favorable terms with health maintenance organizations, preferred provider organizations and other third party payors could reduce our revenues and adversely affect our business.

Our future success depends, in part, on our ability to retain and renew our managed care contracts and enter into new managed care contracts with health maintenance organizations, preferred provider organizations, and other third party payors on terms favorable to us. Other health maintenance organizations, preferred provider organizations and other third party payors may impact our ability to enter into acceptable managed care contractual arrangements or negotiate increases in our reimbursement and other favorable terms and conditions.

In some cases, health maintenance organizations, preferred provider organizations and other third party payors rely on all or portions of Medicare’s severity-adjusted diagnosis-related group system to determine payment rates, which could result in decreased reimbursement from some of these payors if levels of payments to health care providers or payment methodologies under the Medicare program are changed.

Other changes to government health care programs may negatively impact payments from health maintenance organizations, preferred provider organizations and other third party payors and our ability to negotiate reimbursement increases. Any material reductions in the contracted rates we receive for our services, along with any difficulties in collecting receivables from health maintenance organizations, preferred provider organizations and other third party payors, could have a material adverse effect on our financial condition, results of operations or cash flows.

We cannot predict with certainty the effect that the Affordable Care Act may have on our business, financial condition, results of operations or cash flows.

As enacted, the the Patient Protection and Affordable Care Act (the “PPACA”) will change how health care services are covered, delivered and reimbursed. The expansion of health insurance coverage under the law may result in a material increase in the number of patients using our facilities who have either private or public program coverage. In addition, a disproportionately large percentage of the new Medicaid coverage is likely to be in states that currently have relatively low income eligibility requirements (for example, Texas, where all of our licensed beds are currently located). On the other hand, the PPACA provides for significant reductions in the growth of Medicare spending and reductions in Medicare and Medicaid disproportionate share hospital payments. A significant portion of both our patient volumes and, as result, our revenues is derived from government health care programs, principally Medicare and Medicaid. Reductions to our reimbursement under the Medicare and Medicaid programs by the PPACA could adversely affect our business and results of operations to the extent such reductions are not offset by increased revenues from providing care to previously uninsured individuals.

We are unable to predict with certainty the full impact of the PPACA on our future revenues and operations at this time due to the law’s complexity and the limited amount of implementing regulations and interpretive guidance, as well as our inability to foresee how individuals and businesses will respond to the choices available to them under the law. Furthermore, many of the provisions of the PPACA that expand insurance coverage will not become effective until 2014 or later. In addition, the PPACA will result in increased state legislative and regulatory changes in order for states to comply with new federal mandates, such as the requirement to establish health insurance exchanges and to participate in grants and other incentive opportunities, and we are unable to predict the timing and impact of such changes at this time. It is also possible that implementation of the PPACA could be delayed or even blocked due to court challenges and efforts to repeal or amend the law.

Our business and financial results could be harmed by violations of existing regulations or compliance with new or changed regulations.

Our business is subject to extensive federal, state and local regulation relating to, among other things, licensure, conduct of operations, ownership of facilities, physician relationships, addition of facilities and services, and reimbursement rates for services. The laws, rules and regulations governing the health care industry are extremely complex and, in certain areas, the industry has little or no regulatory or judicial interpretation for guidance. If a determination is made that we were in material violation of such laws, rules or regulations, we could be subject to penalties or liabilities or required to make significant changes to our operations. Even the public announcement that we are being investigated for possible violations of these laws could have a material adverse effect on our business, financial condition or results of operations, and our business reputation could suffer. Furthermore, health care, as one of the largest industries in the United States, continues to attract much legislative interest and public attention.

We are unable to predict the future course of federal, state and local regulation or legislation, including Medicare and Medicaid statutes and regulations. Further changes in the regulatory framework affecting health care providers could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Among these laws are the federal Anti-kickback Statute, the federal physician self-referral law (commonly called the “Stark Law”), the federal False Claims Act (“FCA”) and similar state laws. We have a variety of financial relationships with physicians and others who either refer or influence the referral of patients to our facilities and other health care facilities, and these laws govern those relationships. The Office of Inspector General of the Department of Health and Human Services (“OIG”) has enacted safe harbor regulations that outline practices deemed protected from prosecution under the Anti-kickback Statute although as discussed below, our arrangements may not fall within the applicable safe harbor regulations.

While we endeavor to comply with the applicable safe harbors, certain of our current arrangements, including joint ventures and financial relationships with physicians and other referral sources and persons and entities to which we refer patients, do not qualify for safe harbor protection.

Failure to qualify for a safe harbor does not mean the arrangement necessarily violates the Anti-kickback Statute but may subject the arrangement to greater scrutiny. However, we cannot offer assurance that practices outside of a safe harbor will not be found to violate the Anti-kickback Statute. Allegations of violations of the Anti-kickback Statute may be brought under the federal Civil Monetary Penalty Law, which requires a lower burden of proof than other fraud and abuse laws, including the Anti-kickback Statute.

Our financial relationships with referring physicians and their immediate family members must comply with the Stark Law by meeting an exception. We attempt to structure our relationships to meet an exception to the Stark Law, but the regulations implementing the exceptions are detailed and complex, and we cannot provide assurance that every relationship complies fully with the Stark Law. Unlike the Anti-kickback Statute, failure to meet an exception under the Stark Law results in a violation of the Stark Law, even if such violation is technical in nature.

Additionally, if we violate the Anti-kickback Statute or the Stark Law, or if we improperly bill for our services, we may be found to violate the FCA, either under a suit brought by the government or by a private person under a qui tam, or “whistleblower,” suit.

If we fail to comply with the Anti-kickback Statute, the Stark Law, the FCA or other applicable laws and regulations, we could be subjected to liabilities, including civil penalties (including the loss of our licenses to operate one or more facilities), exclusion of one or more facilities from participation in the Medicare, Medicaid and other federal and state health care programs and, for violations of certain laws and regulations, criminal penalties.

We do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations. In the future, different interpretations or enforcement of, or amendment to, these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses. A determination that we have violated these laws, or the public announcement that we are being investigated for possible violations of these laws, could have a material, adverse effect on our business, financial condition, results of operations or prospects, and our business reputation could suffer significantly. In addition, other legislation or regulations at the federal or state level may be adopted that adversely affect our business.

We are also required to comply with various federal and state labor laws, rules and regulations governing a variety of workplace wage and hour issues. From time to time, we have been and expect to continue to be subject to regulatory proceedings and private litigation concerning our application of such laws, rules and regulations.

If we fail to implement and maintain effective internal controls over financial reporting, the price of our common stock may be adversely affected.

We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those controls or the failure of controls that have been established could adversely impact our public disclosures regarding our business, financial condition or results of operations. Management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting, disclosure of management’s assessment of those internal controls or our independent registered public accounting firm’s report on our internal controls may have an adverse effect on the price of our common stock and may require significant management time and resources to remedy.

Future acquisitions may adversely affect our financial condition and results of operations.

As part of our business strategy, we intend to pursue acquisitions of hospitals, surgery centers, diagnostic and imaging centers, and other similar facilities that we believe could enhance or complement our current business operations or diversify our revenue base. Acquisitions involve numerous risks, any of which could harm our business, including:

	•		difficulties integrating the acquired business;
	•		unanticipated costs, capital expenditures or liabilities;
	•		diversion of financial and management resources from our existing business;
	•		difficulties integrating acquired business relationships with our existing business relationships;
	•		risks associated with entering markets in which we have little or no prior experience; and
	•		potential loss of key employees, particularly those of the acquired organizations.

Acquisitions may also result in the recording of goodwill and other intangible assets subject to potential impairment in the future, adversely affecting our operating results. We may not achieve the anticipated benefits of an acquisition if we fail to evaluate it properly, and we may incur costs in excess of what we anticipate. A failure to evaluate and execute an acquisition appropriately or otherwise adequately address these risks may adversely affect our financial condition and results of operations.

The profitability of our business may be affected by highly competitive healthcare industry.

The healthcare industry in general, and the market for hospital services in particular, is highly competitive. In the course of developing and operating a hospital and establishing relationships with local physicians (including surgeons), our business expects to encounter competition from hospitals located in the Houston, Texas area. In addition, the number of freestanding hospitals, surgery centers and diagnostic and imaging centers in the geographic areas in which we operate has increased significantly. There are at least fifty-four (54) existing general hospitals already located in Harris County, Texas with which our business may compete. These hospitals probably offer some or all of the services proposed to be offered by our business. As a result, our business operates in a highly competitive environment.

Regulatory and other changes affecting the healthcare industry expose our business and other industry participants to the risk that they will lose competitive advantages. Many of our existing and potential competitors have significantly greater financial and other resources than our business and there can be no assurance that our business will be able to compete successfully against them. Some of the facilities that compete with our business are owned by governmental agencies or not-for-profit corporations supported by endowments, charitable contributions and/or tax revenues and can finance capital expenditures and operations on a tax-exempt basis.

Our licensed hospital beds are concentrated in certain market areas within Texas, which makes us sensitive to economic, regulatory, environmental and other conditions in those areas.

Our licensed beds are currently located exclusively in market areas within Texas. This concentration in Texas increases the risk that, should any adverse economic, regulatory, environmental or other condition occur in these areas, our overall business, financial condition, results of operations or cash flows could be materially adversely affected.

Furthermore, a natural disaster or other catastrophic event (such as a hurricane) could affect us more significantly than other companies with less geographic concentration, and the property insurance we obtain may not be adequate to cover our losses. In the past, hurricanes have had a disruptive effect on the operations of our business in Texas and the patient populations in those states.

Certain events may adversely affect the ability of seniors to afford our monthly resident fees or entrance fees (including downturns in the economy, housing market, and unemployment among resident family members), which could cause our occupancy rates, revenues and results of operations of our Senior Care segment to decline.

Costs to seniors associated with independent and assisted living services are not generally reimbursable under government reimbursement programs such as Medicare and Medicaid. Only seniors with income or assets meeting or exceeding the comparable median in the regions where our communities are located typically can afford to pay our monthly resident fees. Certain economic events such as economic downturns, softness in the housing market, and higher levels of unemployment among resident family members, could adversely affect the ability of seniors to afford our entrance fees and resident fees. If we are unable to retain and attract seniors with sufficient income and assets required to pay the fees associated with independent and assisted living services and other service offerings in our senior living communities, our occupancy rates, revenues and results of operations could decline.

The inability of seniors to sell real estate may delay their moving into our senior living care communities, which could negatively impact our occupancy rates, revenues, cash flows and results of operations.

Recent housing price declines and reduced home mortgage availability have negatively affected the U.S. housing market. Downturns in the housing markets could adversely affect the ability of seniors to afford our entrance fees and resident fees as our customers frequently use the proceeds from the sale of their homes to cover the cost of our fees. Specifically, if seniors have a difficult time selling their homes, these difficulties could impact their ability to relocate into our communities or finance their stays at our communities with private resources. If the recent volatility in the housing market continues for an extended period, our occupancy rates, revenues, cash flows and results of operations could be negatively impacted.

Our liability insurance may not be sufficient to cover all potential liability.

We may be liable for damages to persons or property, which occur at our business. Although we will attempt to obtain general and professional liability insurance, we may not be able to obtain coverage in amounts sufficient to cover all potential liability. Since most insurance policies contain various exclusions, we will not be insured against all possible occurrences.

As is typical in the healthcare industry, our business is subject to claims and legal actions by patients in the ordinary course of business. To cover these claims, we procure and maintain professional malpractice liability insurance and general liability insurance in amounts that we believe to be sufficient for our operations, although some claims may exceed the scope of the coverage in effect. We also maintain umbrella coverage for our operations. Losses up to our self-insured retentions and any losses incurred in excess of amounts maintained under such insurance are funded from working capital.

The cost of malpractice and other liability insurance, and the premiums and self-retention limits of such insurance, have risen significantly in recent years. We cannot assure you that any insurance we obtain will continue to be available at reasonable prices that will allow us to maintain adequate levels of coverage for our business. We also cannot assure you that our cash flow will be adequate to provide for professional and general liability claims in the future.

We depend on key individuals to maintain and manage our business in a rapidly changing market.

The continued services of our executive officers and other key individuals are essential to our success. Any of our key employees and individuals, including our Chairman, Hassan Chahadeh, M.D., President Donald W. Sapaugh and Chief Financial Officer, Michael L. Griffin, may resign at any time. These individuals are in charge of the strategic planning and operations of our business and the loss of the services of one or more of these individuals could disrupt our operations and damage our ability to grow our business. We do not currently have key person life insurance policies covering any of our employees.

To implement our business plan, we intend to hire additional employees, particularly in the areas of healthcare. Our ability to continue to attract and retain highly skilled employees is a critical factor in our success. Competition for highly skilled personnel is intense. We may not be successful in attracting, assimilating or retaining qualified personnel to satisfy our current or future needs. Our ability to develop our business would be adversely affected if we are unable to retain existing personnel or hire additional qualified personnel.

We depend on relationships with the physicians who use our hospital.

Our success depends upon the efforts and success of physicians and physician groups who will provide healthcare services at our hospital, and particularly on the strength of our relationship with those groups comprised of surgeons and other physicians in the Houston, Texas area.

There can be no assurance that we will be successful in identifying and establishing relationships with surgeons or other physicians. In particular, there can be no assurance that we will be successful in integrating those physicians into a delivery system that will improve operating efficiencies and reduce costs while providing quality patient care. The physicians who will use our hospital will not be employees of our business, and many, if not all, of them will serve on the medical staffs of hospitals other than our hospital.

Our business could be adversely affected if a significant number of key physicians or a group of physicians providing services at our hospital:

	•		terminates their relationship with, or reduces their use of our hospital;
	•		fails to maintain the quality of care provided or to otherwise adhere to professional standards at our hospital; suffers any damage to their reputation;
	•		exits the Houston, Texas market entirely;
	•		experiences major changes in the composition or leadership of the physician group; or
	•		elects to join a competing hospital systems as an employee.

Insufficient business is likely to make it impossible for us to repay our indebtedness to our third party lenders. There is no assurance that we will be able to enter into managed care or similar contracts that would provide patients to our hospital. In addition, there can be no assurance that our business will be able to maintain its utilization at satisfactory levels.

A nationwide shortage of qualified nurses could affect our ability to grow and deliver quality, cost-effective services.

Our business depends on qualified nurses to provide quality service to our patients. There is currently a nationwide shortage of qualified nurses. This shortage and the more stressful working conditions it creates for those remaining in the profession are increasingly viewed as a threat to patient safety and may trigger the adoption of state and federal laws and regulations intended to reduce that risk. For example, some states are reported to be considering legislation that would prohibit forced overtime for nurses. Growing numbers of nurses are also joining unions that threaten and sometimes call work stoppages.

In response to this shortage of qualified nurses, our business is likely to have to increase wages and benefits from time to time to recruit and retain nurses or to engage expensive contract nurses until hiring permanent staff nurses. Our business may not be able to increase the rates it charges to offset these increased costs. Also, the shortage of qualified nurses may in the future delay our ability to achieve the operational goals of our business on schedule by limiting the number of patient beds available during start-up phases.

We are subject to liabilities from claims by various taxing authorities.

As of September 30, 2011 we owed approximately $4,362,000 to various taxing authorities, including the Internal Revenue Service. As of November 14, 2011, we have paid $1,715,000 toward these obligations and the current amounts due are approximately $2,647,000. We are currently working on satisfying such tax liabilities. However, there can be no assurance that any liability owed to such taxing authorities will be resolved to the satisfaction of our company, which in turn, may adversely affect our business and results of operations.

We do not own the land on which our primary hospital is located and, as such, are subject to a Lease Agreement with Cambridge Properties and various risks related to such lease arrangement.

Cambridge Properties owns the land and building on which UGH is located. UGH has leased the hospital space from Cambridge Properties pursuant to a lease agreement (the “Lease Agreement”). The Lease Agreement is a “triple net” lease with an initial term of ten (10) years beginning October 1, 2006, plus tenant’s option to renew the term for two additional ten (10) year periods. In previous years, we have been in litigation with Cambridge Properties concerning the rights and obligations under the Lease Agreement, including expenses chargeable to us as additional rent. In addition, we have responded to notices of past due rent by making periodic payments of rent as permitted by our current cash flow requirements. If we fail to make rent payments in the future or are otherwise in default of the Lease Agreement, the Lease Agreement may be terminated and we would have no further right to occupy and operate UGH. There can also be no assurance that our efforts in any future litigation with Cambridge Properties will be successful. Adverse outcomes in any such proceedings will result in substantial harm to our business operations.

We are subject to various licensure requirements.

We require licensing, permits, certification, and accreditation from various federal and Texas agencies as well as from accrediting agencies or organizations for our business. If the State of Texas determines that there is a failure to comply with licensure requirements, it has the authority to deny, suspend or revoke our license.

We also hold a number of other licenses and permits for our various departments. Numerous requirements must be met to renew and maintain all required licenses, permits and accreditations, and no assurance can be given that all such required licenses, permits and accreditations will be renewed or maintained.

We are subject to various environmental regulations.

In response to growing public concerns over the presence of contaminants affecting health, safety, and the quality of the environment, federal, state, and local governments have enacted numerous laws designed to clean up existing environmental problems and to implement practices intended to minimize future environmental problems. The principal federal statutes enacted in this regard are the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”) and the Resource Conservation Recovery Act of 1976 (“RCRA”). CERCLA addresses the practices involved in handling, utilizing, and disposing of hazardous substances, and imposes liability for cleaning up contamination in soil and groundwater. Under CERCLA, the parties who may be liable for the costs of cleaning up environmental contamination include the current owner of the contaminated property, the owner of the property at the time of contamination, the person who arranged for the transportation of the hazardous substances, and the person who transported the hazardous substances. RCRA provides for a “cradle to grave” regulatory program to control and manage hazardous wastes, and is administered by the United States Environmental Protection Agency (“EPA”). RCRA sets treatment and storage requirements for hazardous wastes, and requires that persons who generate, transport, treat, store, or dispose of hazardous wastes meet EPA permit requirements and follow EPA guidelines. We may, in certain aspects of our business, be subject to CERCLA and RCRA. Specifically, by owning our primary hospital, we could become liable under CERCLA for the costs of cleaning up any contamination on the site of our hospital.

Risks Related to Our Common Stock

An active, liquid trading market for our common stock may not develop.

We cannot predict the extent to which investor interest in our company will lead to the development of an active and liquid trading market. If an active and liquid trading market does not develop, you may have difficulty selling any of our common stock that you purchase. The market price of our common stock may decline, and you may not be able to sell your shares of our common stock at or above the price you paid, or at all.

Our stock price may be volatile.

The market price of our common stock could be subject to wide fluctuations in response to, among other things, the risk factors described in this section, and other factors beyond our control, such as fluctuations in the valuation of companies perceived by investors to be comparable to us.

Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions, such as recessions, interest rate changes or international currency fluctuations, may negatively affect the market price of our common stock.

In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may become the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

Our principal shareholders, executive officers and directors own a significant percentage of our common stock and will continue to have significant control of our management and affairs, and they can take actions that may be against your best interests.

Our executive officers, current directors and holders of five percent or more of our common stock beneficially own an aggregate of approximately 41% of our outstanding common stock as of November 14, 2011. Pursuant to the terms of the Merger, these shares are subject to “lock-up leak-out” resale restrictions that limit the number of shares that may be resold to 1/24 of such shares per month (on a non-cumulative basis) over the 24 month period beginning six months following the closing date of the Merger. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling shareholders. Also, as a result, these shareholders, acting together, may be able to control our management and affairs and matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying or preventing a change in control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if such a change in control would benefit our other shareholder.

Further, Hassan Chahadeh holds 3,000 shares of Series B Preferred Stock, which, except as otherwise required by law, has the number of votes equal to the number of votes of all outstanding shares of capital stock plus one additional vote so that such shareholder shall always constitute a majority of our voting rights.

Therefore, Hassan Chahadeh retains the voting power to approve all matters requiring shareholder approval and has significant influence over our operations. The interests of these shareholders may be different than the interests of other shareholder on these matters. This concentration of ownership could also have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could reduce the price of our common stock

Our stock price could decline due to the large number of outstanding shares of our common stock eligible for future sale.

Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could cause the market price of our common stock to decline. These sales could also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

As of November 14, 2011, (i) 232,000,000 of our outstanding shares of common stock are subject to “lock-up leak-out” resale restrictions that limit the number of shares that may be resold to 1/24 of such shares per month (on a non-cumulative basis) over the 24 month period beginning six months following March 28, 2011, the closing date of the Merger and (ii) 21,895,894 of our outstanding shares are subject to “lock-up leak-out” resale restrictions that limit the number of shares that may be resold to 1/12 of such shares per month (on a non-cumulative basis) over the 12 month period beginning six months following June 30, 2011, the closing date of the TrintyCare and Autimis acquisitions. Additionally, pursuant to certain registration rights agreements executed in connection with the Merger, we have granted shareholders holding 232,000,000 shares of our common stock the right to include up to 20% of their shares (subject to customary restrictions) for resale in the event we conduct an underwritten public offering of common stock pursuant to a registration statement under the Securities Act. Our shares of common stock may also be sold under Rule 144 under the Securities Act, depending on their holding period and subject to restrictions in the case of shares held by persons deemed to be our affiliates. As restrictions on resale end or upon registration of any of these shares for resale, the market price of our common stock could drop significantly if the holders of these shares sell them or are perceived by the market as intending to sell them.

Furthermore, because our common stock is traded on the Over-The-Counter Bulletin Board, our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock. Additionally, at present, we have a limited number of shares in our public float, and as a result, there could be extreme fluctuations in the price of our common stock. Further, due to the limited volume of our shares which trade and our limited public float, we believe that our stock prices (bid, ask and closing prices) are entirely arbitrary, are not related to the actual value of the Company, and do not reflect the actual value of our common stock (and in fact reflect a value that is much higher than the actual value of our common stock). Shareholders and potential investors in our common stock should exercise caution before making an investment in our company, and should not rely on the publicly quoted or traded stock prices in determining our common stock value, but should instead determine the value of our common stock based on the information contained in our public reports, industry information, and those business valuation methods commonly used to value private companies.

Investors may face significant restrictions on the resale of our common stock due to federal regulations of penny stocks.

Our common stock will be subject to the requirements of Rule 15(g)9, promulgated under the Securities Exchange Act as long as the price of our common stock is below $5.00 per share. Under such rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser’s consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990, also requires additional disclosure in connection with any trades involving a stock defined as a penny stock.

Generally, the SEC defines a penny stock as any equity security not traded on an exchange or quoted on NASDAQ that has a market price of less than $5.00 per share. The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market and the risks associated with it. Such requirements could severely limit the market liquidity of the securities and the ability of purchasers to sell their securities in the secondary market.

In addition, various state securities laws impose restrictions on transferring “penny stocks” and as a result, investors in the common stock may have their ability to sell their shares of the common stock impaired.

We currently do not intend to pay dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.

We currently do not plan to declare dividends on shares of our common stock in the foreseeable future. Consequently, your only opportunity to achieve a return on your investment in our company will be if the market price of our common stock appreciates and you sell your shares at a profit. There is no guarantee that the price of our common stock will ever exceed the price that you pay.

ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

As of July 1, 2011, UGHS, TrinityCare Senior Living, LLC, Donald W. Sapaugh and Al Denson executed an amendment to the Purchase and Sale Agreement, pursuant to which UGHS acquired 51% of the ownership interests of TrinityCare Senior Living, LLC. (“TrinityCare LLC”). The purchase price for the acquisition was increased by an aggregate of 1,500,000 shares of UGHS Common Stock issued collectively to Mr. Sapaugh and Mr. Denson to induce them to provide credit support in the form of personal guarantees of certain bank debt assumed in the acquisition of the senior living facility in Port Lavaca, Texas. The shares were issued without registration in reliance on the exemption in Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D thereunder. The Company believes the exemption is available because the offering was made solely and only to the parties to the TrinityCare LLC acquisition following comprehensive due diligence investigation and without any public offering or solicitation.

Except for the matter described above or as previously disclosed in Current Reports on Form 8-K that we have filed, we have not sold any of our equity securities during the period covered by this Report that were not registered under the Securities Act.

ITEM 3.		DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.		(REMOVED AND RESERVED)

ITEM 5.		OTHER INFORMATION