Note 2 - Summary of Significant Accounting Policies
|12 Months Ended|
Dec. 31, 2017
|Notes to Financial Statements|
|Significant Accounting Policies [Text Block]||
Presentation in the Consolidated Statements
The Company rents and sells medical equipment.
Management believes that the predominant source of revenues and cash flows from this medical equipment is from rentals and most equipment purchased is likely to be rented prior to being sold. Accordingly, the Company has concluded that (i) the assets specifically supporting its
twoprimary revenue streams should be separately disclosed on the balance sheet; (ii) the purchase and sale of medical equipment should be classified solely in investing cash flows based on their predominant source; and (iii) other activities ancillary to the rental process should be consistently classified.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all wholly owned organizations.
All intercompany transactions and account balances have been eliminated in consolidation.
The Company operates in
reportable segment based on management’s view of its business for purposes of evaluating performance and making operating decisions.
’s approach is to make operational decisions and assess performance based on delivering products and services that together provide solutions to its customer base utilizing a functional management structure. Based upon this business model, the chief operating decision maker only reviews consolidated financial information.
The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements, including the notes thereto.
The Company considers critical accounting policies to be those that require more significant judgments and estimates in the preparation of its consolidated financial statements, including the following: revenue recognition, which includes contractual adjustments, accounts receivable and allowance for doubtful accounts, sales return allowances, inventory reserves, long lived assets, intangible assets valuations and income tax valuations. Management relies on historical experience and other assumptions believed to be reasonable in making its judgment and estimates. Actual results could differ materially from those estimates.
The Company accounts for all business combinations using the acquisition method of accounting, which allocates the fair value of the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values.
The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions. The Company
third-party valuation specialists to assist the Company in the allocation. Initial purchase price allocations are subject to revision within the measurement period,
oneyear from the date of acquisition. Acquisition-related expenses and transaction costs associated with business combinations are expensed as incurred.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
threemonths or less to be cash equivalents.
The Company maintains its cash and cash equivalents primarily with
twofinancial institutions and is insured with the Federal Deposit Insurance Corporation (“FDIC”). At times throughout the year, cash and cash equivalents balances might exceed FDIC insurance limits.
Allowance for Doubtful Accounts
and Contractual Allowances
Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required to record net revenues and accounts receivable at their net realizable value
. Accounts receivable are reported at the estimated net realizable amounts from patients,
third-party payors and other direct pay customers for goods provided and services rendered. The Company performs periodic analyses to assess the accounts receivable balances. The Company records an allowance for doubtful accounts and contractual allowance (to reduce gross billed charges to a contractual or estimated net realizable value from
third-party payors) based on management’s assessment of historical and expected estimated collectability of the accounts such that the recorded amounts reflect estimated net realizable value. Upon determination that an account is uncollectible, the account is written-off and charged to the allowance for doubtful accounts for patients or the contractual allowance for
third-party payors. The Company’s allowance for doubtful accounts and contractual allowance are a reduction to accounts receivable on the Company’s consolidated financial position. Additions to the contractual allowance each period offset gross billed charges, which are
notpublicly reported in the Company's filings, to arrive at net revenue, which is publicly reported in the Company's consolidated results of operations. Additions to the allowance for doubtful accounts, however, impact the bad debt expense line item of the Company’s consolidated results of operations.
Due to continuing changes in the health care industry and
third-party reimbursement, it is possible that management
’s estimates could change in the near term, which could have a material impact on the Company’s consolidated business, financial position, results of operations and cash flows.
Following is an analysis of the allowance for doubtful accounts for the Company for the years ended
The Company’s inventories consist of disposable products and related parts and supplies used in conjunction with medical equipment and are stated at the lower of cost (
first-out basis) or net realizable value. The Company periodically performs an analysis of slow moving inventory and records a reserve based on estimated obsolete inventory, which was
$0.2million, respectively, as of
December 31, 2017and
Medical Equipment (“ME”) consists of equipment that the Company purchases from
third-parties and is
1) held for sale or rent, and
2) used in service to generate rental revenue. ME, once placed into service, is depreciated using the straight-line method over the estimated useful lives of the equipment which is typically
sevenyears. The Company does
notdepreciate ME held for sale or rent. When ME in Rental Service assets are sold, or otherwise disposed, the cost and related accumulated depreciation are removed from the accounts and a sale is recorded in the current period. The Company periodically performs an analysis of slow moving ME held for sale or rent and records a reserve based on estimated obsolescence, which was
$0.6million, respectively, as of
December 31, 2017and
Property and Equipment
Property and equipment is stated at acquired cost and depreciated using the straight-line method over the estimated useful lives of the related assets, ranging from
Externally purchased information technology software and hardware are depreciated over
fiveyears, respectively. Leasehold improvements are amortized using the straight-line method over the life of the asset or the remaining term of the lease, whichever is shorter. Maintenance and minor repairs are charged to operations as incurred. When assets are sold, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is recorded in the current period.
Intangible assets consist of trade names, physician and customer relationships, non-compete agreements and software.
The physician and customer relationships and non-compete agreements arose primarily from the acquisitions of ISI and First Biomedical in
2010and the acquisition of assets from Ciscura Holding Company, Inc. and its subsidiaries (“Ciscura”) in
2015.The Company amortizes the value assigned to the physician and customer relationships on a straight-line basis over the period of expected benefit, which ranges from
twentyyears. The acquired physician and customer relationship base represents a valuable asset of the Company due to the expectation of future business opportunities to be leveraged from the existing relationship with each physician and customer. The Company has long-standing relationships with numerous oncology clinics, physicians, home care and home infusion providers, skilled nursing facilities, pain centers and others. The useful lives of these relationships are based on minimal attrition experienced to date by the Company and expectations of continued minimal attrition. Non-compete agreements are amortized on a straight-line basis with the amortization periods ranging from
fiveyears and acquired software is amortized on a straight-line basis over
threeyears. Trade names associated with the original acquisition of InfuSystem are
indefinite life trade names for impairment annually or as often as deemed necessary. The impairment test for intangible assets with indefinite lives consists of a comparison of the fair value of the intangible assets with their carrying amounts. If the carrying value of the intangible assets exceeds the fair value, an impairment loss is recognized in an amount equal to that excess. The Company determines the fair value of its intangibles assets with indefinite lives (trade names) through the royalty relief income valuation approach. The Company performed its annual impairment analysis as of
October 2017and determined that the fair value of the intangible assets with indefinite lives (trade names) was greater than their carrying value, resulting in
Software Capitalization and Depreciation
We capitalize certain costs incurred in connection with obtaining or developing internal-use software, including payroll and payroll-related costs for employees who are directly associated with
the internal-use software project, external direct costs of materials and services and interest costs while developing the software. Capitalized software costs are included in intangible assets, net and are amortized using the straight-line method over the estimated useful life of
fiveyears. Capitalization of such costs ceases when the project is substantially complete and ready for its intended purpose. Costs incurred during the preliminary project and post-implementation stages, as well as software maintenance and training costs, are expensed in the period in which they are incurred. The company capitalized
$3.5million of internal-use software for the years ended
December 31, 2017and
2016,respectively. Amortization expense for capitalized software was
Long-lived assets held for use, which includes property and equipment and amortizable intangible assets, are reviewed for impairment when events or changes in circumstances indicate that their carrying value
If an impairment indicator exists, the Company assesses the asset or asset group for recoverability. Recoverability of these assets is determined based upon the expected undiscounted future net cash flows from the operations to which the assets relate, utilizing management’s best estimates, appropriate assumptions and projections at the time. If the carrying value is determined
notto be recoverable from future operating cash flows, the asset is deemed impaired and an impairment loss would be recognized to the extent the carrying value exceeded the estimated fair market value of the asset or asset group.
performed an impairment analysis in
December 2017related to our internally developed, internal-use software, specifically looking at the effectiveness and useful lives of each project and sub-project. It was determined that certain projects and sub-projects were
nolonger viable and did
notprovide any further service potential. This resulted in an impairment of approximately
$1.0million for the year ended
December 31, 2017.The Company did
notrecord any impairment related expenses for the year ended
December 31, 2016.
Operating and Capital
eases for all of our corporate and other operating locations are under operating leases and the Company recognizes rent expense on a straight-line basis over the lease terms. Rent holidays and rent escalation clauses, which provide for scheduled rent increases during the lease term, are taken into account in computing straight-line rent expense included in our consolidated statements of operations. The difference between the rent due under the stated periods of the leases compared to that of the straight-line basis is recorded as a component of other long-term liabilities in the consolidated balance sheets. Landlord funded lease incentives, including tenant improvement allowances provided for our benefit, are recorded as leasehold improvement assets and as deferred rent in the consolidated balance sheets and are amortized to depreciation expense and as rent expense credits, respectively. The Company periodically enters into capital leases to finance the purchase of ambulatory infusion pumps. The pumps are capitalized into medical equipment in rental service at their fair market value, which equals the value of the future minimum lease payments, and are depreciated over the useful life of the pumps. Under the terms of all such capital leases, the Company does
nothold title to these pumps and will
notobtain title until such time as the capital lease obligations are settled in full. The weighted average interest rate under capital leases was
December 31, 2017.
The Company recogn
izes revenue for selling, renting and servicing new and pre-owned infusion pumps and other medical equipment to oncology practices as well as other alternate site settings including home care and home infusion providers, skilled nursing facilities, pain centers and others, and billing the oncology practice, or the
third-party payor (“TPP”) or alternative site setting when persuasive evidence of an arrangement exists; services have been rendered; the price to the customer is fixed or determinable; and collectability is reasonably assured. Persuasive evidence of an arrangement is determined to exist, and collectability is reasonably assured, when the Company (i) receives a physician’s written order and assignment of benefits, signed by the physician and patient, respectively, (ii) has verified actual pump usage via a patient treatment log (“PTL”) and insurance coverage and (iii) receives patient acknowledgement of assignment of benefits. The Company recognizes rental revenue from electronic infusion pumps as earned, normally on a month-to-month basis. Pump rentals are billed at the Company’s established rates, which often differ from contractually allowable rates provided by
third-party payors such as Medicare, Medicaid and commercial insurance carriers. All billings to
third-party payors are recorded net of provision for contractual adjustments to arrive at net revenues while billings made directly to an oncology practice and alternative site setting are recorded at a pre-determined amount with any uncollectible amount is recorded as bad debt expense in general and administrative expenses. The Company performs an analysis to estimate sales returns and records an allowance for returns when the related sale is recognized. This estimate is based on historical sales returns.
Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required to record net revenues and accounts receivable at their net realizable values.
Inherent in these estimates is the risk that the estimates will have to be revised or updated as additional information becomes available. Specifically, the complexity of many
third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payors
mayresult in adjustments to amounts originally recorded. Due to continuing changes in the health care industry and
third-party reimbursement, it is possible that management’s estimates could change in the near term, which could have a material impact on the Company’s results of operations and cash flows.
the Company’s largest contracted payor was a national association comprised of multiple members, which in the aggregate, accounted for approximately
24%of the Company’s net revenues from our Oncology Business and approximately
13%of our total revenues for the year ended
December 31, 2017,respectively. For
2017,our next largest contracted payor, was a national association comprised of multiple members, which, in the aggregate, accounted for approximately
6%of our net revenues from our Oncology Business and approximately
6%of our total revenues for the year ended
December 31, 2017,respectively.
the Company’s largest contracted payor was Medicare, which accounted for approximately
21%of our net revenues from our Oncology Business and approximately
13%of our total revenues for the year ended
December 31, 2016,respectively. Our next largest contracted payor, was a national association comprised of multiple members, which, in the aggregate, accounted for approximately
19%of our net revenues from our Oncology Business and approximately
13%of our total revenues for the year ended
December 31, 2016,respectively.
We also contract with various other
third-party payor organizations, Medicaid, commercial Medicare replacement plans, self-insured plans and numerous other insurance carriers. Other than the payors noted above,
noother single payor represented more than
third-party payor net revenue.
The Company recognizes deferred income tax liabilities and assets based on: (
1) the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years the differences are expected to reverse and (
2) the tax credit carry forwards.
Deferred income tax (expense) benefit results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when, in the opinion of management, it is more likely than
notthat some or all of any deferred tax assets will
Provisions for federal, state and foreign taxes are calculated based on reported pre-tax earnings based on current tax law and include the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Certain items of income and expense are recognized in different time periods for financial reporting than for income tax purposes; thus, such provisions differ from the amounts currently receivable or payable.
The Company follows a
two-step approach for recognizing uncertain tax positions.
First it evaluates the tax position for recognition by determining if the weight of available evidence indicates that it is more-likely-than-
notto be sustained upon examination. Second, for positions that are determined to be more-likely-than-
notto be sustained, it recognizes the tax benefits as the largest benefit that has a greater than
50%likelihood of being sustained. The Company establishes a reserve for uncertain tax positions liability that is comprised of unrecognized tax benefits and related interest and penalties. The Company recognizes interest and penalties related to uncertain tax positions in the provision of income taxes.
Share Based Payments
The determination of the fair value of stock option awards
and stock appreciation rights (collectively, “Share-Based Awards”) on the date of grant using option-pricing models is affected by the Company’s stock price, as well as assumptions regarding a number of other inputs using the Black-Scholes pricing model. These variables include the Company’s expected stock price volatility over the expected term of the Share-Based Awards, actual and projected employee stock option exercise behaviors, risk-free interest rates and expected dividends. The expected volatility is based on the historical volatility. The Company uses historical data to estimate Share-Based Awards exercise and forfeiture rates. The expected term represents the period over which the Share-Based Awards are expected to be outstanding. The dividend yield is an estimate of the expected dividend yield on the Company’s stock. The risk-free rate is based on U.S. Treasury yields in effect at the time of the grant for the expected term of the Share-Based Awards. All Share-Based Awards are amortized based on their graded vesting over the requisite service period of the awards. Compensation costs are recognized over the requisite service period using the accelerated method and included in selling expenses and general and administrative expenses, based upon the department to which the associated employee or non-employee resides.
Deferred Debt Issuance Costs
Capitalized debt issuance costs as of
2016relate to the Chase Credit Facility. The Company classified the costs related to the agreement as both current and non-current liabilities and are netted against current and non-current debt. The Company amortizes these costs using the interest method through the maturity date of the underlying debt.
The Company reports its earnings per share in accordance with the “Earnings Per Share” topic of the
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), which requires the presentation of both basic and diluted earnings per share on the statements of operations. The diluted weighted average common shares include adjustments for the potential effects of outstanding stock options but only in the periods in which such effect is dilutive under the treasury stock method. Included in our basic and diluted weighted average common shares are those stock options and common stock shares due to participants granted from the
2014stock incentive plan. Antidilutive stock awards are comprised of stock options and unvested share awards, which would have been antidilutive in the application of the treasury stock method in accordance with “Earnings Per Share” topic of FASB ASC.
In accordance with this topic, the following table reconciles income and share amounts utilized to calculate basic and diluted net
loss per common share (in thousands, except shares):
tock options of
notincluded in the calculation for the years ended
December 31, 2017and
2016,respectively, because they would have an anti-dilutive effect.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets
December 31, 2017and
2016for cash, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short-term nature of these instruments (Level I). The carrying value of the Company’s long-term debt with variable interest rates approximates fair value based on instruments with similar terms (Level II).
The Company has adopted ASC
820,Fair Value Measurements, which defines fair value, establishes a framework for assets and liabilities being measured and reported at fair value and appends disclosures about fair value measurements.
For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date.
three-level fair value hierarchy prioritizes the inputs used to measure fair value as follows:
Recent Accounting Pronouncements and Developments
May 2017,the FASB issued Accounting Standards Update ("ASU"
09,“Stock Compensation - Scope of Modification Accounting”, which provides guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic
718.The new standard is effective for fiscal years beginning after
December 15, 2017 (i.e. a
January 1, 2018effective date). The adoption will
nothave a material impact on its consolidated financial position, results of operations, cash flows and/or disclosures.
January 2017,the FASB issued ASU
04,“Intangibles - Goodwill and Other (Topic
350): Simplifying the Test for Goodwill Impairment”, which changes the subsequent measurement of goodwill impairment by eliminating Step
2from the impairment test. Under the new guidance, an entity will measure impairment using the difference between the carrying amount and the fair value of the reporting unit. The new standard is effective for fiscal years beginning after
December 15, 2019 (i.e. a
January 1, 2020effective date), with early adoption permitted for goodwill impairment tests with measurement dates after
January 1, 2017.The Company believes the adoption will
nothave a material impact on its consolidated financial
position, results of operations, cash flows and/or disclosures.
May 2014,the FASB issued Accounting Standards Update (“ASU”)
09,“Revenue from Contracts with Customers (Topic
606)”, which supersedes the revenue recognition requirements in Accounting Standard Codification (“ASC”)
605), and most industry-specific guidance. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In
August 2015,the FASB issued ASU
14,“Revenue from Contracts with Customers
– Deferral of the Effective Date”, which defers the effective date of ASU
09to annual reporting periods beginning after
December 15, 2017,and interim periods therein. In
2016,the FASB issued ASU
08,“Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”, ASU
10,“Identifying Performance Obligations and Licensing”, and ASU
12,“Revenue from Contracts with Customers - Narrow-Scope Improvements and Practical Expedients”. Entities have the choice to adopt these updates using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a modified retrospective approach with the cumulative effect of these standards recognized at the date of the adoption.
’s approach to analyze the impact of the new standard on its revenue contracts included a review of existing contracts with customers for each revenue stream, an evaluation of the specific terms of those contracts and the appropriate treatment under the new standards, and a comparison of that new treatment to its existing accounting policies to identify differences. The Company will adopt the requirements of the new standard on
January 1, 2018using the modified retrospective approach.
The Company identified the same performance obligation under Topic
606as compared with deliverables and separate units of account previously identified under Topic
605.The Company offers certain types of variable consideration to customers.
The new standard requires the Company to estimate these amounts. The Company anticipates that the timing and measurement of revenue will be consistent with its current revenue recognition although its approach to revenue recognition will now be based on the transfer of control. As a result, there will be
noimpact on its consolidated financial statements on its adoption of the new standard as of
January 1, 2018.
The Company has determined the impact of adopting the standard on its control framework and notes minimal, insignificant changes to its system and other controls process. The Company is finalizing the impact of Topic
606on the disclosures for its consolidated financial statement footnotes and expects the disclosures to be enhanced in the
February 2016,the FASB issued ASU
02”). Under ASU
02,an entity will be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU
02offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, ASU
02is effective for annual reporting periods beginning after
December 15, 2018,including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company is currently evaluating the impact of the pending adoption of the new standard on our consolidated financial statements, but the standard will result in the Company recording right of use assets and liabilities on the consolidated statement of financial position for leases currently classified as operating leases.
March 2016,the FASB issued ASU
— Stock Compensation (Topic
09”). The guidance changes how companies account for certain aspects of equity-based payments to employees. Entities will be required to recognize income tax effects of awards in the income statement when the awards vest or are settled. The guidance also allows an employer to repurchase more of an employee’s shares than it can under current guidance for tax withholding purposes providing for withholding at the employee’s maximum rate as opposed to the minimum rate without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The updated guidance is effective for annual periods beginning after
December 15, 2016.Effective
January 1, 2017,the Company adopted the accounting guidance contained within ASU
09.As a result, the Company recorded a
$0.2million deferred tax asset and a
$0.2million increase to retained earnings on
January 1, 2017to recognize the Company’s excess tax benefits that existed as of
December 31, 2016 (modified retrospective application). The Company also elected to account for forfeited stock based compensation expense as it occurs.
June 2016,the FASB issued ASU
Financial Instruments (Topic
326) Credit Losses” (“ASU
13changes the impairment model for most financial assets and certain other instruments. Under the new standard, entities holding financial assets and net investment in leases that are
notaccounted for at fair value through net income are to be presented at the net amount expected to be collected. An allowance for credit losses will be a valuation account that will be deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. ASU
13is effective as of
January 1, 2020.Early adoption is permitted. The Company is currently evaluating the impact of ASU
August 2016,the FASB issued ASU
15,“Statement of Cash Flows (Topic
230): Classification of Certain Cash Receipts and Cash Payments” (“ASU
15”). The amendments in this ASU introduce clarifications to the presentation of certain cash receipts and cash payments in the statement of cash flows. The primary updates include additions and clarifications of the classification of cash flows related to certain debt repayment activities, contingent consideration payments related to business combinations, proceeds from insurance policies, distributions from equity method investees and cash flows related to securitized receivables. ASU
15is effective for annual periods beginning after
December 15, 2017,including interim periods within those fiscal years. Early adoption is permitted, including in interim periods. ASU
15requires retrospective application to all prior periods presented upon adoption. The adoption of this new standard on
January 1, 2018will
nothave a material impact on the Company
’s consolidated financial position, results of operations, cash flows and/or disclosures.
November 2015,the FASB issued ASU
17,“Income Taxes (Topic
740): Balance Sheet Classification of Deferred Taxes” (“ASU
17”), simplifying the balance sheet classification of deferred taxes by requiring all deferred taxes, along with any related valuation allowance, to be presented as noncurrent. ASU
17is effective for the Company beginning in the
maybe applied either prospectively or retrospectively. The Company has chosen to apply this guidance prospectively, thus prior periods were
notretrospectively adjusted. The adoption of this guidance resulted in
an initial balance sheet reclassification of
$2.7million of current deferred tax assets to noncurrent, however, as of
December 31, 2017,the Company established a full valuation allowance for all deferred tax assets, as management determined that it is more likely than
notthe Company will
notrecognize the benefits of its federal and state deferred tax assets. Cumulative losses in recent years and
noassurance of future taxable income is the basis for the Company’s assessment that the deferred tax assets require a full valuation allowance. A valuation allowance of
$11.4million has been established at
December 31, 2017.
The entire disclosure for all significant accounting policies of the reporting entity.
Reference 1: http://www.xbrl.org/2003/role/presentationRef