2.	Summary of Significant Accounting Policies

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.

 

Segments

The Company operates in one business segment based on management's view of its business for purposes of evaluating performance and making operating decisions.

The Company utilizes shared services including but not limited to, human resources, payroll, finance, sales, pump repair and maintenance services, as well as certain shared assets and sales, general and administrative costs. The Company's approach is to make operational decisions and assess performance based on delivering products and services that together provide solutions to our customer base, utilizing functional management structure and shared services where possible. Based upon this business model, the chief operating decision maker only reviews consolidated 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, which includes contractual adjustments; accounts receivable and allowance for doubtful accounts; sales return allowances; inventory reserves; long lived assets; intangible assets; income taxes; and goodwill valuation. 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.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains its cash and cash equivalents primarily with two financial institutions and is fully insured with the Federal Deposit Insurance Corporation (FDIC).

Accounts Receivable and Allowance for Doubtful Accounts

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. It records an allowance for doubtful accounts based on the 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.

Accounts receivable are reduced by an allowance for amounts that could become uncollectible in the future. The Company's estimate for its allowance for doubtful accounts is based upon management's assessment of historical and expected net collections by payor. 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 an impact on its 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 December 31, 2011, 2010 and 2009 (in thousands):

 

		Balance at beginning of Period				Acquired in acquisition				Charged to costs and expenses				Deductions (1)				Balance at end of Period
Allowance for doubtful accounts — 2011		$	1,796			$	—			$	4,099			$	(4,122	)		$	1,773
Allowance for doubtful accounts — 2010		$	1,842			$	37			$	4,515			$	(4,598	)		$	1,796
Allowance for doubtful accounts — 2009		$	1,552			$	—			$	4,006			$	(3,716	)		$	1,842

(1)	Deductions represent the write-off of uncollectible account receivable balances.

 

Inventory

Our inventory consists of infusion pumps and related parts and supplies and is stated at a cost that approximates the lower of cost or market method utilizing the first in, first out (FIFO) approach. The Company periodically performs an analysis of slow moving inventory and records a reserve based on estimated obsolete inventory, which was $0.2 million for each of the years ended December 31, 2011 and 2010.

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 three to seven years. Rental equipment, consisting primarily of infusion pumps that the Company acquires from third-parties, is depreciated over a period of five years. Information Technology (IT) software and hardware are depreciated over three years. 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.

Long-Lived Assets

The Company accounts for the impairment and disposition of long-lived assets in accordance with the accounting standard which addresses financial accounting and reporting for the impairment of long-lived assets and for the disposal of long-lived assets. In accordance with this standard, long-lived assets to be held are reviewed for events or changes in circumstances, which indicate that their carrying value may not be 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 not to 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. The Company reviews the carrying value of long-lived assets if there is an indicator of impairment. As a result of this assessment, the Company recognized a non-cash charge of approximately $1.4 million in property and equipment and inventory, of which $1.2 million was recorded in cost of revenues for the year ended December 31, 2011.

Goodwill Valuation

Goodwill arising from business combinations represents the excess of the purchase price over the estimated fair value of the net assets of the businesses acquired.

Goodwill is tested annually for impairment or more frequently if circumstances indicate the possibility of impairment. Significant judgments required to estimate fair value include estimating future cash flows, and determining appropriate discount rates, growth rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value which could trigger impairment.

At June 30, 2011, the Company determined that there may be market conditions relating to the stock price, elimination of warrants, and business forecasts to conclude that the carrying value of the Company's single reporting unit exceeds the fair market value, and therefore could indicate impairment of goodwill. As a result of the triggering events, the Company performed an impairment test of goodwill as of June 30, 2011 and concluded that impairment of goodwill existed. For more information, refer to the "Goodwill and Intangible Assets" discussion included in Note 6.

Additionally, at September 30, 2011, based on a significant decline in the Company's market capitalization the Company concluded that there was an additional indicator to require the Company to perform an interim goodwill impairment analysis and as a result, the Company concluded that an impairment loss was probable and could be reasonably estimated. For more information, refer to the "Goodwill and Intangible Assets" discussion included in Note 6.

Intangible Assets

Intangible assets consist of trade names, physician and customer relationships, non-compete agreements and software. The trade names, physician and customer relationships and non-compete agreements arose primarily from the acquisitions of InfuSystem and First Biomedical. The Company amortizes the value assigned to the physician and customer relationships on a straight-line basis over the period of expected benefit, which is 15 years. The acquired physician and customer relationship base represents a valuable asset of InfuSystem 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. These relationships are expected, on average, to have a 15 year useful life, 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 over five years and software is amortized on a straight-line basis over three years. Management tests non-amortizable intangible assets (i.e., trade names such as InfuSystem) for impairment annually.

As of June 30, 2011, the Company determined that there may be market conditions relating to the stock price, elimination of warrants, and business forecasts to conclude that there may be impairment of the Company's indefinite lived intangibles relating to trade names. As a result, the Company performed an impairment test of its indefinite lived intangibles as of June 30, 2011 and concluded that there was impairment of its trade names. For more information, refer to the "Goodwill and Intangible Assets" discussion included in Note 6.

As of September 30, 2011, based on a significant decline in our market capitalization, the Company concluded that there was an additional indicator to require an interim indefinite lived intangibles impairment analysis relating to trade names and as a result, the Company concluded that an impairment loss was probable and could be reasonably estimated. For more information, refer to the "Goodwill and Intangible Assets" discussion included in Note 6.

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive loss consists only of the unrealized loss on the single interest rate swap in place as of December 31, 2011 and 2010, net of taxes. For more information on the interest rate swap, refer to Note 7. There was an other comprehensive loss of $0.2 million and $0.1 million related to the unrealized loss on the swap for the years ended December 31, 2011 and 2010, respectively. The tax impact on the loss was less than $0.1 million and $0.1 million, leaving a net accumulated other comprehensive loss of $0.1 million for each of the years ended December 31, 2011 and 2010, respectively. The following table summarizes comprehensive loss for the year ended December 31, 2011 and 2010 (in thousands):

 

		2011				2010
Net loss		$	(45,443	)		$	(1,852	)
Accumulated other comprehensive loss on derivatives, net of taxes			(72	)			(64	)
Total comprehensive income (loss)		$	(45,515	)		$	(1,916	)

Revenue Recognition

The Company recognizes 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, 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 receives 1) a physician's written order and assignment of benefits, signed by the physician and patient, respectively, and the Company has 2) verified actual pump usage and 3) insurance coverage. 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. The Company performs an analysis to estimate sales returns and records an allowance. 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 they 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 may result 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 an impact on our results of operations and cash flows.

The Company's largest payor is Medicare, which accounted for approximately 31% of its gross billings for ambulatory infusion pump services for each of the years ended December 31, 2011, 2010 and 2009, respectively. The Company has contracts with various individual Blue Cross/Blue Shield affiliates which in the aggregate accounted for approximately 21%, 23% and 22% of its gross billings for ambulatory infusion pump services for the years ended December 31, 2011, 2010 and 2009, respectively. No individual payor (other than Medicare and the Blue Cross/Blue Shield entities) accounts for greater than 6% of the Company's ambulatory infusion pump services gross billings for the fiscal years ended December 31, 2011, 2010 and 2009.

Income Taxes

The Company recognizes deferred tax liabilities and assets based on 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. 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 not that some or all of any deferred tax assets will not be realized. For more information, refer to the "Income Taxes" discussion included in Note 9.

Share Based Payment

All entities are required to recognize stock compensation expense in an amount equal to the fair value of share based payments made to employees, among other requirements. Under the fair value based method, compensation cost is measured at the grant date based on the fair value of the award and is recognized on a straight-line basis over the award vesting period. Accordingly, share based payments issued to officers and directors are measured at fair value and recognized as expense over the related vesting periods.

In 2007, the Company adopted the 2007 Stock Incentive Plan (the "Plan") providing for the issuance of a maximum of 2.0 million shares of common stock in connection with the grant of stock-based or stock-denominated awards. In addition, the Company has made certain grants of restricted stock outside of the Plan. On May 27, 2011, the Company's stockholders approved the reservation of an additional 3.0 million shares to be issued under the 2007 Stock Incentive Plan.

During the year ended December 31, 2011, the Company granted 0.7 million restricted shares, of which 0.1 million shares vested immediately, with the remaining shares entitling the holder to receive at the end of a vesting period, a specified number of shares of the Company's stock.

During the year ended December 31, 2010, the Company granted 3.4 million restricted shares. Of the total shares granted, 1.4 million shares entitle a holder to receive, at the end of a vesting period, a specified number of shares of the Company's common stock. The remaining 2.0 million shares granted entitle the holder to receive common stock when the shares vest based upon certain market conditions tied to the Company's stock price, or certain performance conditions including a change in control.

Share based compensation expense recognized for the year ended December 31, 2011, 2010 and 2009 was $1.2 million, $5.9 million and $0.8 million, respectively.

Warrants and Derivative Financial Instruments

On April 18, 2006, the Company consummated its initial public offering ("IPO") of 16.7 million units. Each unit consisted of one share of common stock and two redeemable common stock purchase warrants expiring April 11, 2011. Each warrant entitled the holder to purchase from the Company one share of its common stock at an exercise price of $5.00. On May 18, 2006, the Company sold an additional 0.2 million units (the "Overallotment Units") to FTN Midwest Securities Corp., the underwriter of its IPO (FTN Midwest), pursuant to a partial exercise by FTN Midwest of its overallotment option. The Warrant Agreement provided for the Company to register the shares underlying the warrants in the absence of the Company's ability to deliver registered shares to the warrant holders upon warrant exercise.

Freestanding derivative contracts required to be settled in a company's own stock, including common stock warrants, are required to be designated as equity instruments, assets or liabilities. Under the provisions of the accounting standards, a contract designated as an asset or a liability must be carried at its fair value on a company's balance sheet, with any changes in fair value recorded in the company's results of operations. A contract designated as an equity instrument must be included within equity and no fair value adjustments are required from period to period.

On February 16, 2010 the Company announced an Offer to Exchange common stock for outstanding warrants. At the time, the Company had 35.1 million outstanding warrants. The exchange offer expired on March 17, 2010. Holders of the Company's warrants had the option to exchange their warrants for either One (1) share of Common Stock for every thirty-five (35) Warrants tendered, or One (1) share of Common Stock for every twenty-five (25) Warrants tendered, provided the recipient agreed to be subject to a lock-up provision precluding transfer of the shares of Common Stock received for six months following the expiration of the Exchange Offer. The lock-up provision expired in September 2010. Based on the final count, 25.6 million Warrants were properly tendered; 24.8 million were tendered for shares of Common Stock subject to a lock-up, and 0.9 million were tendered for unrestricted shares of Common Stock. Under the terms of the Exchange Offer, the Company issued an aggregate 1.0 million shares of Common Stock in exchange for the tendered Warrants. After the exchange, there were 8.3 million publicly held warrants and 1.1 million privately held warrants outstanding. The Company recognized a loss of $0.5 million as a result of the exchange.

The 8.3 million remaining warrants expired on April 11, 2011 and the Company recorded a realized gain of $0.1 million, which is included on the gain in derivatives line item on the income statement, during the year ended December 31, 2011.

Cash Flow Hedge

The Company is exposed to risks associated with future cash flows related to the variability of the interest rate on its term loan with Bank of America. In order to manage the exposure of these risks, the Company enters into interest rate swaps. On July 20, 2010, the Company entered into a single interest rate swap and designated the swap as a cash flow hedge. The fair value of the swap is presented on the Company's consolidated balance sheet within derivative liabilities, unrealized changes in the fair value are included in accumulated other comprehensive loss within the stockholders' equity section on the Company's consolidated balance sheet, and any realized changes would be included in the Company's consolidated statement of operations within interest expense.

 

Deferred Debt Issuance Costs

Capitalized debt issuance costs as of December 31, 2011 and 2010 relate to the Company's Bank of America credit facility. The Company classifies the costs related to the Bank of America credit facility as non-current assets and amortizes them using the interest method through the maturity date of June 2014. For a further discussion of the Company's deferred debt issuance costs, see Note 8.

Earnings Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share assumes the issuance of potentially dilutive shares of common stock during the periods. The following table reconciles the numerators and denominators of basic and diluted earnings (loss) per share computations for the years ended December 31, 2011, 2010 and 2009:

 

		2011				2010				2009
Numerator:
Net (loss) income (in thousands)		$	(45,443	)		$	(1,852	)		$	774
Denominator:
Weighted average common shares outstanding:
Basic			21,074,093				19,721,378				18,609,797
Dilutive effect of non-vested awards			—				—				321,559
Diluted			21,074,093				19,721,378				18,931,356
Net (loss) earnings per share:
Basic		$	(2.16	)		$	(0.09	)		$	0.04
Diluted		$	(2.16	)		$	(0.09	)		$	0.04

For the year ended December 31, 2011, 2.6 million unvested restricted shares were not included in the calculation because they would have an anti-dilutive effect. For the year ended December 31, 2010, the following warrants, stock options and restricted shares were not included in the calculation because they would have an anti-dilutive effect because of the net loss: 8.3 million outstanding warrants issued in connection with the IPO, 1.1 million warrants issued privately, less than 0.1 million vested stock options and 2.2 million in unvested restricted shares. For the years ended December 31, 2009 the following warrants were not included in the calculation because they would have an anti-dilutive effect: 33.8 million outstanding warrants issued in connection with the IPO and 1.4 million warrants issued privately. For the year ended December 31, 2009, there were 0.1 million vested stock options granted under the 2007 Stock Incentive Plan that were not included in the calculation as they would have an anti-dilutive effect.

Recently Issued Accounting Standards

In May 2011, the FASB issued Accounting Standards Update, or ASU, No. 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards", or IFRS. This update amends Accounting Standards Codification Topic 820, "Fair Value Measurement and Disclosure." ASU 2011-04 clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. ASU 2011-04 is effective for annual and interim reporting periods beginning on or after December 15, 2011, which means that it will be effective for the fiscal quarter beginning January 1, 2012. The new guidance is to be adopted prospectively and early adoption is not permitted. The Company does not believe that adoption of ASU 2011-04 will have a significant impact on financial position, results of operations or cash flows.

In June 2011, the FASB issued ASU No. 2011-05, "Presentation of Comprehensive Income." ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders' equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company believes the adoption of ASU 2011-05 concerns presentation and disclosure only and will not have an impact on the Company's consolidated financial position or results of operations.

On September 15, 2011, the FASB issued an ASU 2011-08, Intangibles — Goodwill and Other (Topic 350) Testing Goodwill for Impairment. The Board's objective was to simplify goodwill impairment testing by permitting assessment of qualitative factors to determine whether events and circumstances lead to the conclusion that it is necessary to perform the two-step goodwill impairment test currently required under Topic 350, Intangibles — Goodwill and Other. Currently, Topic 350 requires entities to test goodwill on an annual basis by comparing the fair value of a reporting unit to its carrying value including goodwill (Step one). The second part of the test must be performed to measure the amount of impairment if the carrying value of a reporting unit exceeds the fair value under Step one. Under the amendment, entities are not required to calculate the fair value of a reporting unit unless they conclude that it is more likely than not that the unit's carrying value is greater than its fair value based on an assessment of events and circumstances. The "more likely than not" threshold is when there is a likelihood of more than 50% that a reporting unit's carrying value is greater than its fair value. The Company does not anticipate adoption to have a material impact to the Company's consolidated financial statements.

Subsequent Events

An activist stockholder group consisting of Kleinheinz Capital Partners, Meson Capital Partners, Boston Avenue Capital and certain of their affiliates (the "Kleinheinz Dissident Group") is seeking to gain control of the Board of Directors of the Company. The Kleinheinz Dissident Group has circulated to stockholders a consent solicitation requesting written agent designations from our stockholders to enable them to call a special meeting of stockholders to consider the removal of our current Board of Directors without cause, and to replace the Board with individuals nominated by the Kleinheinz Dissident Group. On February 27, 2012, the Kleinheinz Dissident Group delivered documentation to the Company purporting to contain agent designations from a majority of stockholders and demanding that the Company call a special meeting. In addition, on February 27, 2012, the Kleinheinz Dissident Group delivered notice to the Company stating its intention to nominate a competing slate for election to our Board of Directors at the Company's regular 2012 annual meeting. On March 5, 2012 the Company announced that it had determined that the demand for a call of a special meeting met the Company's by-law requirement and that the Company would reschedule such meeting on or before May 12, 2012. The Company cannot predict the outcome of this matter at this time. On March 5, 2012 the Company announced that it had determined that the demand for a call of a special meeting met the Company's by-law requirement.

Other than listed above, the Company has evaluated subsequent events after December 31, 2011 and concluded that no material transactions occurred subsequent to that date that require adjustment to the Consolidated Financial Statements.