Note 2 - Summary of Significant Accounting Policies
|12 Months Ended|
Dec. 31, 2020
|Notes to Financial Statements|
|Significant Accounting Policies [Text Block]||
Summary of Significant Accounting Policies
Certain prior period reclassifications were made to conform with the current period presentation. These reclassifications had
noeffect on reported income (loss), overall cash flows, total assets, total liabilities or stockholders' equity as previously reported.
Presentation in the Consolidated Statements
The Company rents and sells medical equipment. The Company purchases medical equipment directly for sale as well as medical equipment that is purchased for either rental or sale and that is unallocated at the time of purchase (“Unallocated Assets”). Management believes that the predominant source of revenues and cash flows from the Unallocated Assets is from rentals and most equipment purchased is likely to be rented prior to being sold. The Company 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 Unallocated Assets should be classified solely in investing cash flows based on their predominant source while medical equipment purchased specifically for sales activity should be classified in operating cash flows; 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.
2019,the Company reorganized its segment reporting from
onereportable segment to
tworeportable segments, Integrated Therapy Services (“ITS”) and Durable Medical Equipment Services (“DME Services”), due to changes in our internal reporting and the information evaluated by our chief operating decision-maker. See Note
12for segment disclosures.
The Company'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 Company's Chief Executive Officer, whom the Company has determined to be its chief operating decision-maker, reviews segment financial information.
Use of Estimates
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, leases, accounts receivable and allowance for doubtful accounts, income taxes, and long-lived asset valuations. Management relies on historical experience and other assumptions believed to be reasonable in making its judgments 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 that are insured with the Federal Deposit Insurance Corporation (“FDIC”). At times throughout the year, cash and cash equivalents balances might exceed FDIC insurance limits.
Accounts Receivable and Allowance for Doubtful Accounts
Amounts billed that have
notyet been collected that also meet the conditions for unconditional right to payment are presented as accounts receivable. Accounts receivable related to rental service and delivery of products are reported at their estimated transaction prices, inclusive of adjustments for variable consideration, based on the amounts expected to be collected from payers. The Company writes off accounts receivable once collection efforts have been exhausted and an account is deemed to be uncollectible. An allowance for doubtful accounts is established as a result of an adverse change in the Company's payers' ability to pay outstanding billings. The allowance for doubtful accounts was
$0.4million as of
December 31, 2020and
The Company's inventories consist of disposable medical supplies, replacement parts and other 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
million as of
December 31, 2020and
Medical Equipment (“Equipment”) consists of equipment that the Company purchases from
third-parties and is (
1) for sale or rent, and (
2) used in service to generate rental revenue. Equipment, 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 Equipment held for sale or rent. When Equipment 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 Equipment used in service to generate rental revenue and records a reserve based on estimated obsolescence, which was
$0.7million as of
December 31, 2020and
2019,respectively. The Company performs a similar analysis of slow-moving Equipment for sale or rent and records a reserve, which was less than
million as of
December 31, 2020and
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
sevenyears. 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 and software. The physician and customer relationships arose primarily from previous acquisitions. 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. Acquired software is amortized on a straight-line basis over
threeyears. Trade names associated with the original acquisition of InfuSystem are
Management tests indefinite life trade names for impairment annually or more frequently if 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 for trade names with indefinite lives through the royalty relief income valuation approach. The Company performed its annual impairment analysis as of the last day of
October 2020and determined that the fair value of the trade names with indefinite lives was greater than their carrying value, resulting in
Software Capitalization and Depreciation
The Company capitalizes 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 did
capitalize any internal-use software for the years ended
December 31, 2020and
2019,respectively. Amortization expense for capitalized software was
Impairment of Long-Lived Assets
Long-lived assets held for use, which includes medical equipment in rental service, property and equipment and amortizable intangible assets, are reviewed for impairment when events or changes in circumstances indicate that their carrying value
notbe recoverable. 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.
The Company assesses impairment indicators related to its internally-developed, internal-use software, specifically looking at the effectiveness and useful lives of each project and sub-project to determine if impairment indicators are present. In
2019,respectively, the Company assessed the impairment indicators and found
noneto be present.
January 1, 2019 (the “Effective Date”), the Company adopted Accounting Standards Update (“ASU”)
10,Codification Improvements to Topic
842,Leases; and ASU
11,Targeted Improvements (collectively, “Topic
842”) using a modified retrospective transition approach, which requires Topic
842to be applied to all leases existing at the date of initial application. Under Topic
842,lessees are required to recognize a lease liability and right-of-use asset (“ROU asset”) for all leases and to disclose key information about leasing arrangements. Additionally, leases are classified as either financing or operating; the classification determines the pattern of expense recognition and classification within the statement of operations. The Company elected to apply its lease accounting policy only to leases with a term greater than
842provides several optional practical expedients that we adopted at transition. The Company elected the “package of practical expedients”, which does
notrequire it to reassess its prior conclusions regarding lease identification, lease classification and initial direct costs. The Company did
notelect the practical expedient of hindsight to the evaluation of lease options (e.g. renewal).
842also provides practical expedients for an entity's ongoing accounting. The Company elected the “combining lease and non-lease components” practical expedient and also elected to apply the short-term lease recognition exemption to certain leases; therefore, the Company did
notrecognize ROU assets and lease liabilities for these leases.
In adopting Topic
842,the Company determined and will continue to determine whether an arrangement is a lease at inception. The Company's operating leases are primarily for office space, service facility centers and equipment under operating lease arrangements that expire at various dates over the next
tenyears. The Company's leases do
notcontain any restrictive covenants. The Company's office leases generally contain renewal options for periods ranging from
fiveyears. Because the Company is
notreasonably certain to exercise these renewal options, the options are
notconsidered in determining the lease term, and payments associated with the option years are excluded from lease payments. The Company's office leases do
notcontain any material residual value guarantees. The Company's equipment leases generally do
notcontain renewal options. The Company is
notreasonably certain to exercise the renewal options for those equipment leases that do contain renewal options, thus, the options are
notconsidered in determining the lease term and payments associated with the option years are excluded from lease payments.
For the Company's equipment leases, the Company used and will use the implicit rate in the lease as the discount rate, when available. Otherwise, the Company uses its incremental borrowing rate as the discount rate. For the Company's office leases, the implicit rate is typically
notavailable, so the Company used and will use its incremental borrowing rate as the discount rate. The incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments. The Company's lease agreements include both lease and non-lease components. The Company elected the practical expedient that allows it to combine lease and non-lease components for all of its leases.
Payments due under the Company's operating leases include fixed payments as well as variable payments. For the Company's office leases, variable payments include amounts for the Company's proportionate share of operating expenses, utilities, property taxes, insurance, common area maintenance and other facility-related expenses. For the Company's equipment leases, variable payments
mayconsist of sales taxes, property taxes and other fees.
Revenue is recognized at the time and in an amount that reflects the consideration expected to be received for the performance obligations that have been provided. Accounting Standards Codification (“ASC”) Topic
606– Revenue from Contracts with Customers (“ASC
606”) defines contracts as written, oral and through customary business practice. Under this definition, the Company considers contracts to be created at the time that the rental service is authorized or an order to purchase product is agreed upon regardless of whether or
notthere is a written contract.
The Company has
twoseparate and distinct performance obligations offered to its customers: a rental service performance obligation or a product sale performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is defined as the unit of account for revenue recognition under ASC
606.These performance obligations are related to separate revenue streams and at
nopoint are they combined into a single transaction. Sources of net revenues include commercial insurance payers, government insurance payers, medical facilities and patients.
The Company generates the majority of its revenue from the rental of infusion pumps to its customers and a minority of its revenue from product sales. For the rental service performance obligation, revenue is based on its standalone price, determined by using reimbursement rates established by
third-party payer or other contracts. Revenue is recognized in the period in which the related performance obligation is satisfied, which is typically at the point in time that a patient concludes a treatment, or in certain arrangements, based on the number of pumps that a facility has onsite. The Company's revenues related to product sales are recognized at the time that control of the product has been transferred to the customer; either at the time the product is shipped or the time the product has been received by the customer, depending on the delivery terms. The Company does
notcommit to long-term contracts to sell customers a certain minimum quantity of products.
The Company employs certain significant judgments to estimate the dollar amount of revenue, and related concessions, allocated to the rental service and sale of products. These judgments include, among others, the estimation of variable consideration. Variable consideration, specifically related to the Company's
third-party payer rental revenues, is estimated as implied price concessions resulting from differences between the rates charged for services performed and the expected reimbursements for commercial payers and other implied customer concessions. The estimates for variable consideration are based on historical collections with similar payers, aged accounts receivable by payer class and payer correspondence using the portfolio approach, which provide a reasonable basis for estimating the variable portion of a transaction. The Company doesn't believe it is probable that a significant reversal of revenue will occur in future periods because (i) there is
nosignificant uncertainty about the amount of considerations that are expected to be collected based on collection history and (ii) the large number of sufficiently similar contracts allows the Company to adequately estimate the component of variable consideration.
Net revenues are adjusted when changes in estimates of variable consideration occur. Changes in estimates typically arise as a result of new information obtained, such as actual payment receipt or denial, or pricing adjustments by payers. Subsequent changes to estimates of transaction prices are recorded as adjustments to net revenue in the period of the change. Subsequent changes that are determined to be the result of an adverse change in the payer's ability to pay are recorded as an allowance for doubtful accounts.
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 payers
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.
Cost of Revenues
Cost of revenues include the costs of servicing and maintaining pumps, products sold, shipping and other direct and indirect costs related to net revenues. Shipping and handling costs incurred after control over a product has transferred to a customer are accounted for as a fulfillment cost.
2019,the Company's largest contracted payer was a national payer which accounted for approximately
8%of ITS net revenues for
2019,respectively, and approximately
5%of total consolidated net revenues for
The Company also contracts with various other
third-party payer organizations, Medicaid, commercial Medicare replacement plans, self-insured plans, facilities of our Medicare patients and numerous other insurance carriers. Other than the payer noted above,
noother single payer represented more than
7%of the Company's ITS net revenue.
The Company recognizes deferred income tax liabilities and assets based on (i) 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 (ii) the tax credit carryforwards. Deferred income tax (expense) benefit results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when 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 it is more-likely-than-
notthat the position will be sustained upon examination. Second, for positions that are determined are 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 adjusts this liability in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position, or more information becomes available.
The Company adopted ASU
12,Income Taxes (Topic
740): Simplifying the Accounting for Income Taxes, in the
2019.This guidance simplifies various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic
740and also clarifies and amends existing guidance to improve consistent application. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2020.Early adoption is permitted, including adoption in any interim period for which financial statements have
notyet been issued. Certain amendments
maybe applied on a retrospective, modified retrospective or prospective basis. As permitted, the Company elected to early adopt this guidance for the year ended
December 31, 2019.The adoption of this guidance did
nothave a significant impact on the Company's financial statements and primarily resulted in the reclassification of an immaterial amount from non-income tax expense to income tax expense related to the accounting for franchise taxes, with
noimpact to the Company's consolidated net income, equity or cash flows.
The Company periodically repurchases shares of its common stock. These repurchases take place either as part of a board-authorized program, which
mayinclude open market transactions or privately negotiated transactions and
maybe made under a Rule
1plan, or in targeted stock purchase agreements approved by the board. Treasury stock is accounted for using the par value method.
The Company determines the fair value of stock option awards, restricted stock awards and stock appreciation rights (collectively, “Share-Based Awards”) on the date of grant using option-pricing models which are 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 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 general and administrative expenses.
Additionally, the Company also determines the fair value of performance-based restricted stock units (“PSUs”) based upon the type of performance measure. These awards typically vest after the Company's achievement of either Company performance relative to specified performance measure goals for a specific fiscal period or when the market value of the Company's stock price reaches a target value for a minimum number of consecutive trading days. Under Financial Accounting Standards Board (“FASB”) ASC Topic
718,the provisions of the PSUs that vest upon achievement of a target market value are considered a market condition, and therefore the effect of that market condition is reflected in the grant date fair value for this type of award. A
third-party valuation expert was engaged to complete a “Monte Carlo simulation” to account for the market condition. That simulation takes into account the beginning stock price of the Company's common stock, the expected volatilities for the Company's stock price and the expected risk-free rate of return. The single grant-date fair value computed by this valuation method is recognized by the Company in accounting for the awards regardless of the actual future outcome of the market condition. The grant date fair value of the other PSUs is calculated as the closing price of the Company's common stock on the grant date multiplied by the number of shares subject to the award. Company performance measure goals are considered a performance condition and the grant-date fair value for those PSUs corresponds with management's expectation of the probable outcome of the performance conditions as of the grant date.
Deferred Debt Issuance Costs
Capitalized debt issuance costs as of
December 31, 2020and
2019relate to the Company's credit facility. The costs related to the agreement 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.
Earnings Per Share
The Company reports its earnings per share in accordance with ASU
11,Earnings Per Share (Topic
260), 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 restricted stock awards due to participants granted from the
2014stock incentive plan. Anti-dilutive stock awards are comprised of stock options and unvested restricted stock awards, which would have been anti-dilutive in the application of the treasury stock method in accordance with ASU
11,Earnings Per Share (Topic
260). In periods where the Company records a net loss, the diluted per share amount is the same as the basic per share amount.
In accordance with this topic, the following table reconciles income and share amounts utilized to calculate basic and diluted net income per common share as of
December 31 (in thousands, except shares):
Stock options of less than
million shares were
notincluded in the calculations for both the years ended
December 31, 2020and
2019because they would have an anti-dilutive effect.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets as of
December 31, 2020and
2019for cash, accounts receivable, accounts payable and other current liabilities 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. A
three-level fair value hierarchy prioritizes the inputs used to measure fair value as follows:
Recent Accounting Pronouncements and Developments
June 2016,the FASB issued ASU
13,“Financial Instruments (Topic
326) Credit Losses”. Topic
326changes 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. Topic
326was originally effective as of
January 1, 2020,although in
November 2019,the FASB delayed the effective date until fiscal years beginning after
December 15, 2022for SEC filers eligible to be smaller reporting companies under the SEC's definition. The Company qualifies as a smaller reporting company under the SEC's definition. Early adoption is permitted. The Company is currently evaluating the impact of Topic
326on its consolidated balance sheets, statements of operations, statements of cash flows and related disclosures.
The entire disclosure for all significant accounting policies of the reporting entity.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef