NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
Basis of Presentation
The unaudited condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with the U.S. Securities and Exchange Commission ("SEC") instructions for Quarterly Reports on Form 10-Q. Accordingly, the condensed consolidated financial statements are unaudited and do not contain all the information required by U.S. generally accepted accounting principles ("GAAP") to be included in a full set of financial statements. The unaudited condensed consolidated balance sheet at
December 31, 2017
has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for a complete set of financial statements. The audited consolidated financial statements for our fiscal year ended
December 31, 2017
, filed with the SEC on Form 10-K on
February 28, 2018
, include a summary of our significant accounting policies and should be read in conjunction with this Form 10-Q. In the opinion of management, all material adjustments necessary to present fairly the results of operations, cash flows, and balance sheets for such periods have been included in this Form 10-Q. All such adjustments are of a normal recurring nature. The results of operations for interim periods are not necessarily indicative of the results of operations for the entire year.
As discussed in Note 2, the results of our Medical Device Sales and Services ("MDSS") are presented as discontinued operations and, as such, are excluded from both continuing operations and segment results for all periods presented.
Use of Estimates
Preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from management’s estimates.
Recently Adopted Accounting Standards
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash,
which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. The pronouncement is effective for fiscal years beginning after December 15, 2017, and for interim periods within those periods, using a retrospective transition method to each period presented. We adopted ASU 2016-18 effective January 1, 2018 which resulted in an increase of
$0.1 million
in net cash flows used in financing activities that was previously reported for
three
months ended March 31, 2017.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,
which amended the existing accounting standards for the accounting for financial instruments. The amendments require equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income. The new standard is effective prospectively for fiscal years beginning after December 15, 2017. We adopted ASU 2016-01 on January 1, 2018. As a result of the adoption, we recorded an increase to retained earnings of
$17 thousand
to recognize the unrealized gains previously recorded within accumulated other comprehensive income. Subsequent changes in the fair value of our marketable securities will be recorded to other expense, net. See Note 7 for further details.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers which supersedes current revenue recognition guidance, including most industry-specific guidance. The guidance provides that an entity recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. We adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method. Under the modified retrospective method, the Company would recognize the cumulative effect of initially applying the standard as an adjustment to opening retained earnings at the date of initial application; however, we did not have any material adjustments as of the date of the adoption. The comparative periods have not been restated and continue to be reported under the accounting standards in effect for those periods. See Note 3 for expanded revenue disclosures and updates to our revenue recognition policy.
Recently Issued Accounting Standards
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,
which simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual, or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the
carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendment should be applied on a prospective basis. The pronouncement is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact that implementation of this guidance will have on our financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842),
which amended the existing accounting standards for the accounting for leases. The amendments are based on the principle that assets and liabilities arising from leases should be recognized within the financial statements. The Company is required to adopt the amendments beginning in 2019. Early adoption is permitted. The amendments must be applied using a modified retrospective transition approach and the FASB decided not to permit a full retrospective transition approach. We currently expect that most of our operating lease commitments will be subject to the update and recognized as operating lease liabilities and right-of-use assets upon adoption. However, we are currently evaluating the effect that implementation of this update will have upon adoption on our consolidated financial position and results of operations.
Note 2. Discontinued Operations
On
February 1, 2018
, the Company completed the sale of its customer contracts relating to our MDSS post-warranty service business to Philips North America LLC ("Philips") pursuant to an Asset Purchase Agreement, dated as of December 22, 2017 for
$8.0 million
. The total cash proceeds were adjusted for deferred revenue liabilities assigned to Philips at the closing date, as well as
$0.5 million
of proceeds held in escrow, subject to claims for breaches of general representation and warranties. The escrow amount was recorded in other current assets as of
March 31, 2018
.
Prior to the contemplation of the transaction entered into above, on
September 28, 2017
, we received notification from Philips that our distribution agreement to sell Philips imaging systems on a commission basis would be terminated, effective December 31, 2017. As a result, our product sales activities within our MDSS reportable segment were also discontinued effective in the first quarter of 2018.
The Company deemed the disposition of our MDSS reportable segment in the first quarter of 2018 to represent a strategic shift that will have a major effect on our operations and financial results, in accordance with the provisions of FASB authoritative guidance on the presentation of financial statements, we have classified the results of our MDSS segment as discontinued operations in our condensed consolidated statement of operations for all periods presented. Additionally, the related assets and liabilities associated with the discontinued operations were reclassified as held for sale in our condensed consolidated balance sheet.
The Company has allocated a portion of interest expense to discontinued operations since the proceeds received from the sale were required to be used to pay down outstanding borrowings under our revolving credit facility with Comerica Bank, a Texas banking association ("Comerica"). The allocation was based on the ratio of proceeds received in the sale to total borrowings for the period. In addition, certain general and administrative costs related to corporate and shared service functions previously allocated to the MDSS reportable segment are not included in discontinued operations.
The following table presents financial results of the MDSS business:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
2018
|
|
2017
|
Total revenues
|
$
|
624
|
|
|
$
|
3,240
|
|
Total cost of revenues
|
516
|
|
|
1,735
|
|
Gross profit
|
108
|
|
|
1,505
|
|
Operating expenses:
|
|
|
|
Marketing and sales
|
85
|
|
|
617
|
|
General and administrative
|
172
|
|
|
208
|
|
Amortization of intangible assets
|
13
|
|
|
204
|
|
Gain on sale of discontinued operations
|
(6,261
|
)
|
|
—
|
|
Total operating expenses
|
(5,991
|
)
|
|
1,029
|
|
Income from discontinued operations
|
6,099
|
|
|
476
|
|
Interest expense
|
(26
|
)
|
|
(122
|
)
|
Income from discontinuing operations before income taxes
|
6,073
|
|
|
354
|
|
Income tax expense
|
(579
|
)
|
|
(179
|
)
|
Income from discontinuing operations
|
$
|
5,494
|
|
|
$
|
175
|
|
The following table summarizes the major classes of assets and liabilities of discontinued operations that were included in the Company's balance sheet:
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31,
2018
|
|
December 31,
2017
|
Carrying amounts of assets included as part of discontinued operations:
|
|
|
|
Intangible assets, net
|
$
|
—
|
|
|
$
|
637
|
|
Goodwill
|
—
|
|
|
1,099
|
|
Total assets classified as held for sale in the condensed consolidated balance sheet
|
$
|
—
|
|
|
$
|
1,736
|
|
Carrying amounts of liabilities included as part of discontinued operations:
|
|
|
|
Deferred revenue
|
$
|
—
|
|
|
$
|
835
|
|
Total liabilities classified as held for sale in the condensed consolidated balance sheet
|
$
|
—
|
|
|
$
|
835
|
|
The following table presents supplemental cash flow information of discontinued operations:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
2018
|
|
2017
|
Operating activities:
|
|
|
|
Depreciation
|
$
|
2
|
|
|
$
|
9
|
|
Amortization of intangible assets
|
$
|
13
|
|
|
$
|
204
|
|
Gain on sale of discontinued operations
|
$
|
(6,261
|
)
|
|
$
|
—
|
|
Stock-based compensation
|
$
|
(1
|
)
|
|
$
|
8
|
|
Investing activities:
|
|
|
|
Proceeds from the sale of discontinued operations
|
$
|
6,844
|
|
|
$
|
—
|
|
Purchases of property, plant and equipment
|
$
|
—
|
|
|
$
|
—
|
|
Note 3. Revenue
Product and Product-Related Revenues and Services Revenue
Product and product-related revenue are generated from the sale of gamma cameras and post-warranty maintenance service contracts within our Diagnostic Imaging reportable segment.
Services revenue are generated from providing diagnostic imaging and cardiac monitoring services to customers within our Diagnostic Services and Mobile Healthcare reportable segments. Services revenue also includes lease income generated from interim rentals of imaging systems to our customers.
Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from revenue.
The majority of our contracts have a single performance obligation as we provide a series of distinct services that are substantially the same and are transferred with the same pattern to the customer. For contracts with multiple performance obligations, we allocate the total transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. We use an observable price to determine the stand-alone selling price for separate performance obligations or a cost plus margin approach when one is not available.
Our products are generally not sold with a right of return and the Company does not provide significant credits or incentives, which may be required for as variable consideration when estimating the amount of revenue to be recognized.
Disaggregation of Revenue
The following table presents our revenues disaggregated by major source:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Diagnostic Services
|
Diagnostic Imaging
|
Mobile Healthcare
|
Total
|
Major Goods/Service Lines
|
|
|
|
|
Mobile Imaging and Cardiac Monitoring
|
$
|
11,898
|
|
$
|
—
|
|
$
|
8,079
|
|
$
|
19,977
|
|
Camera
|
—
|
|
1,070
|
|
—
|
|
1,070
|
|
Camera Support
|
—
|
|
1,744
|
|
—
|
|
1,744
|
|
Revenue from Contracts with Customers
|
11,898
|
|
2,814
|
|
8,079
|
|
22,791
|
|
Lease Income
|
127
|
|
28
|
|
2,519
|
|
2,674
|
|
Total Revenues
|
$
|
12,025
|
|
$
|
2,842
|
|
$
|
10,598
|
|
$
|
25,465
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
Services and goods transferred over time
|
$
|
10,964
|
|
$
|
1,720
|
|
$
|
10,491
|
|
$
|
23,175
|
|
Services and goods transferred at a point in time
|
1,061
|
|
1,122
|
|
107
|
|
2,290
|
|
Total Revenues
|
$
|
12,025
|
|
$
|
2,842
|
|
$
|
10,598
|
|
$
|
25,465
|
|
Nature of Goods and Services
Mobile Imaging and Cardiac Monitoring
Within our Diagnostic Services and Mobile Healthcare reportable segments, our sales are derived from providing services and materials to our customers, primarily physician practices and hospitals, that allow them to perform diagnostic imaging services at their site. We typically bundle our services in providing staffing, our imaging systems, licensing, radiopharmaceuticals, and supplies depending on our customers' needs. Our contracts with customers are typically entered into annually and are billed on a fixed rate per-day or per-scan basis, depending on terms of the contract. For the majority of these contracts, the Company has the right to invoice the customer in an amount that directly corresponds with the value to the customer of the Company's performance to date. The Company uses the practical expedient to recognize revenue corresponding with amounts we have the right to invoice for services performed.
Diagnostic Services also offers remote cardiac event monitoring services. These services include provision of a monitor, remote monitoring by registered nurses, and 24 hours a day, 7 days a week monitoring support for our patients and physician customers. We provide our services under contracts with our customers that typically allow for direct billing to Medicare, Medicaid, or third-party private payors once the monitoring cycle is complete. Typically, our contracts can be canceled at any time, and are generally used to define billing responsibilities amongst the parties.
Our cardiac event monitoring services are provided primarily through an independent diagnostic testing facility model which allows us to bill Medicare, Medicaid, or a third-party healthcare insurer directly for services provided. We also receive reimbursement directly from patients through co-pays and self-pay arrangements. Billings for services reimbursed by third party payors, including Medicare, are recorded as revenue net of contractual allowances. Contractual allowances are estimated based on historical collections by Current Procedural Terminology (CPT) code for specific payors, or class of payors. Adjustments to the estimated receipts, based on final settlement with the third-party payors, are recorded upon settlement.
Camera
Within our Diagnostic Imaging segment, camera revenues are generated from the sale of internally developed solid-state gamma camera imaging systems. We recognize revenue upon transfer of control to the customer, which is generally upon delivery and acceptance. We also provide installation services and training on cameras we sell, primarily in the United States. Installation and initial training is generally performed shortly after delivery. The Company recognizes revenues for installation and training over time as the customer receives and consumes benefits provided as the Company performs the installation services.
Our sale of imaging systems includes a
one
-year warranty which we account for as an assurance-type warranty. The expected costs associated with our standard warranties and field service actions continue to be recognized as expense when cameras are sold. Maintenance service contracts sold beyond the term of our standard warranties are accounted for as a service-type warranty and revenue is deferred and recognized ratably over the period of the obligation.
Camera Support
Within our Diagnostic Imaging segment, camera support revenue is derived from the sale of separately-priced extended maintenance contracts to camera owners, training, and paid service arrangements when a customer does not have an extended warranty and parts that are sold by the service department. Our separately priced service contracts range from
12
to
48
months. Service contracts are usually billed at the beginning of the contract period or at periodic intervals (e.g. monthly or quarterly) and revenue is recognized ratably over the term of the agreement.
Services and training revenues are recognized in the period the services and training are performed. Revenue for sales of parts are recognized when the parts are delivered to the customer and control is transferred.
Lease Income
Within primarily our Mobile Healthcare segment, we also generate income from interim rentals of our imaging systems to customers that are in the midst of new construction or refurbishing their current facilities. Rental contracts are structured as either a weekly or monthly payment arrangement and are accounted for as operating leases. Revenues are recognized on a straight-line basis over the term of the rental.
Deferred Revenues
We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. We have determined our contracts do not include a significant financing component. The majority of our deferred revenue relates to payments received on camera support post-warranty service contracts which are billed at the beginning of the annual contract period or at periodic intervals (e.g. monthly or quarterly).
At December 31, 2017, the Company deferred revenues balance was
$2.4 million
, of which
$0.9 million
of this was recognized as revenue during the first quarter. As of
March 31, 2018
, deferred revenue was
$2.0 million
. The decrease of
$0.4 million
was mainly due to the timing of when customer payments are received in relation to the service contract period.
The Company has elected to use the practical expedient under ASC 606 to exclude disclosures of unsatisfied remaining performance obligations for (i) contracts having an original expected length of one year or less or (ii) contracts which the practical expedient has been applied to recognize revenue at the amount to which it has a right to invoice.
Contract Costs
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. The Company applies a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less. These costs mainly include the Company's internal sales commissions; under the terms of these programs these are generally earned and the costs are recognized at the time the revenue is recognized.
Note 4. Basic and Diluted Net Income (Loss) Per Share
For the
three
months ended
March 31, 2018
and
2017
, basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares and vested restricted stock units outstanding during the period. Diluted net income per common share is calculated to give effect to all dilutive securities, if applicable, using the treasury stock method. In periods for which there is a net loss, diluted loss per common share is equal to basic loss per common share, since the effect of including any common stock equivalents would be antidilutive.
The following table sets forth the reconciliation of shares used to compute basic and diluted net income (loss) per share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(shares in thousands)
|
2018
|
|
2017
|
Numerator:
|
|
|
|
Loss from continuing operations
|
$
|
(1,388
|
)
|
|
$
|
(2,251
|
)
|
Income from discontinued operations
|
5,494
|
|
|
175
|
|
Net income (loss)
|
$
|
4,106
|
|
|
$
|
(2,076
|
)
|
|
|
|
|
Denominator:
|
|
|
|
Weighted average shares outstanding - basic
|
20,092
|
|
|
19,933
|
|
Dilutive potential common stock outstanding:
|
|
|
|
Stock options
|
—
|
|
|
—
|
|
Restricted stock units
|
—
|
|
|
—
|
|
Weighted average shares outstanding - diluted
|
20,092
|
|
|
19,933
|
|
|
|
|
|
Income (loss) per common share - basic
|
|
|
|
Continuing operations
|
$
|
(0.07
|
)
|
|
$
|
(0.11
|
)
|
Discontinued operations
|
$
|
0.27
|
|
|
$
|
0.01
|
|
Net income (loss) per common share - basic
|
$
|
0.20
|
|
|
$
|
(0.10
|
)
|
|
|
|
|
Income (loss) per common share - diluted
|
|
|
|
Continuing operations
|
$
|
(0.07
|
)
|
|
$
|
(0.11
|
)
|
Discontinued operations
|
$
|
0.27
|
|
|
$
|
0.01
|
|
Net income (loss) per common share - diluted
|
$
|
0.20
|
|
|
$
|
(0.10
|
)
|
The following weighted average outstanding common stock equivalents were not included in the calculation of diluted net income per share because their effect was anti-dilutive:
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(shares in thousands)
|
2018
|
|
2017
|
Stock options
|
207
|
|
|
315
|
|
Restricted stock units
|
129
|
|
|
69
|
|
Total
|
336
|
|
|
384
|
|
Note 5. Inventories
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31,
2018
|
|
December 31,
2017
|
Inventories:
|
|
|
|
Raw materials
|
$
|
2,486
|
|
|
$
|
2,331
|
|
Work-in-process
|
1,781
|
|
|
2,094
|
|
Finished goods
|
1,933
|
|
|
1,529
|
|
Total inventories
|
6,200
|
|
|
5,954
|
|
Less reserve for excess and obsolete inventories
|
(445
|
)
|
|
(453
|
)
|
Total inventories, net
|
$
|
5,755
|
|
|
$
|
5,501
|
|
Note 6. Property and Equipment
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31,
2018
|
|
December 31, 2017
|
Property and equipment:
|
|
|
|
Land
|
$
|
1,170
|
|
|
$
|
1,170
|
|
Buildings and leasehold improvements
|
2,946
|
|
|
2,946
|
|
Machinery and equipment
|
55,735
|
|
|
55,152
|
|
Computer hardware and software
|
4,633
|
|
|
4,615
|
|
Total property and equipment
|
64,484
|
|
|
63,883
|
|
Less accumulated depreciation
|
(37,308
|
)
|
|
(35,518
|
)
|
Total property and equipment, net
|
$
|
27,176
|
|
|
$
|
28,365
|
|
Note 7. Financial Instruments
Assets and Liabilities Measured at Fair Value on a Recurring Basis.
The following table presents information about our financial assets that are measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques we utilize to determine such fair value at
March 31, 2018
and
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of March 31, 2018
|
(in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Equity securities
|
$
|
116
|
|
|
$
|
88
|
|
|
$
|
—
|
|
|
$
|
204
|
|
Total
|
$
|
116
|
|
|
$
|
88
|
|
|
$
|
—
|
|
|
$
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of December 31, 2017
|
(in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Equity securities
|
$
|
97
|
|
|
$
|
111
|
|
|
$
|
—
|
|
|
$
|
208
|
|
Total
|
$
|
97
|
|
|
$
|
111
|
|
|
$
|
—
|
|
|
$
|
208
|
|
We did not reclassify any investments between levels in the fair value hierarchy during the
three
months ended
March 31, 2018
.
The investment in equity securities consists of common stock of publicly traded companies. The fair value of these securities is based on the closing prices observed on
March 31, 2018
.
Securities Available-for-Sale
As of
March 31, 2018
, securities available-for-sale consist of investments in equity securities that are publicly traded. These investments include shares held in Birner Dental Management Services ("Birner Dental"), a publicly traded company whose board of directors include a current Director of the Company. We classify a portion of equity securities as available-for-sale and as current assets, as the sale of such securities may be required prior to maturity to execute management strategies. One of our equity securities, Perma-Fix Medical S.A. ("Perma-Fix Medical"), is classified as an other asset (non-current), as the investment is strategic in nature and our current intent is to hold the investment over a several year period. Securities available-for-sale are carried at fair value, with the unrealized gains and losses presented within 'other expense, net' on our condensed consolidated statement of operations. As of December 31, 2017, the accumulated unrealized gains on these investments was
$17 thousand
, which was reclassified from accumulated other comprehensive income into beginning retained earnings upon adoption of ASU 2016-01.
The following table sets forth the composition of securities available-for-sale as of
March 31, 2018
and
December 31, 2017
(in thousands).
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Cost
|
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Unrealized
|
|
Fair Value
|
As of March 31, 2018
|
Gains
|
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Losses
|
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Equity securities
|
$
|
221
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|
|
$
|
—
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$
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(17
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)
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$
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204
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$
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221
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$
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—
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$
|
(17
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)
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$
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204
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|
|
|
|
|
|
|
|
|
|
Cost
|
|
Unrealized
|
|
Fair Value
|
As of December 31, 2017
|
Gains
|
|
Losses
|
|
Equity securities
|
$
|
191
|
|
|
$
|
17
|
|
|
$
|
—
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|
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$
|
208
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|
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$
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191
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|
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$
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17
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|
|
$
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—
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|
$
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208
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|
Note 8. Debt
A summary of long-term debt is as follows:
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March 31, 2018
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December 31, 2017
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(in thousands)
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Amount
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Weighted-Average Interest Rate
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Amount
|
|
Weighted-Average Interest Rate
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Long-term debt:
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Revolving Credit Facility
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$
|
13,001
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|
4.25%
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$
|
19,500
|
|
|
3.90%
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Total borrowings
|
$
|
13,001
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|
|
|
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$
|
19,500
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|
|
|
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On June 21, 2017, the Company entered into a Revolving Credit Agreement (the “Comerica Credit Agreement”) with Comerica. The Comerica Credit Agreement provides for a
five
-year revolving credit facility with a maximum credit amount of
$25.0 million
maturing in June 2022, upon which a balloon payment on the balance is due. Under the Comerica Credit Facility, the Company can request the issuance of letters of credit in an aggregate amount not to exceed
$1.0 million
at any one time. In connection with the sale of our post-warranty service customer contracts to Philips, the Company entered into an Amendment No. 1 to the Comerica Credit Agreement, dated January 30, 2018 (the "Amendment"). The Amendment to the Comerica Credit Agreement reduced the revolving credit commitment from
$25.0 million
to
$20.0 million
. As of
March 31, 2018
, our borrowing availability under the Comerica Credit Agreement was
$6.9 million
.
In connection with the Amendment, during the three months ended
March 31, 2018
, approximately
$0.1 million
of unamortized loan fees were written off in proportion to the decrease in our borrowing capacity. As of
March 31, 2018
, the unamortized loan fees were
$0.2 million
, which are being amortized on a straight-line basis to interest expense over the
five
-year term.
At the Company’s option, the Comerica Credit Facility will bear interest at either (i) the LIBOR Rate, as defined in the Comerica Credit Agreement, plus a margin of
2.35%
; or (ii) the PRR-based Rate, plus a margin of
0.5%
. As further defined in the Comerica Credit Agreement, the "PRR-based Rate" means the greatest of (a) the Prime Rate in effect on such day (as defined in the Comerica Credit Agreement) plus
0.5%
, or (b) the daily adjusting LIBOR Rate plus
2.50%
. In addition to interest on outstanding borrowings under the Comerica Credit Facility, the revolving credit note bears an unused line fee of
0.25%
, which is presented as interest expense. As of
March 31, 2018
, we had outstanding borrowings under the Comerica Credit Agreement of
$13.0 million
at a weighted average interest rate of
4.25%
.
The Comerica Credit Agreement contains certain representations, warranties, events of default, as well as certain affirmative and negative covenants customary for credit agreements of this type. These covenants include restrictions on borrowings, investments and divestitures, as well as limitations on the Company’s ability to make certain restricted payments. The Comerica Credit Agreement requires us to comply with certain financial covenants, including a Fixed Charge Coverage Ratio and a Funded Debt to Adjusted EBITDA Ratio (each as defined in the Comerica Credit Agreement). The Fixed Charge Coverage Ratio is calculated based on the ratio of (a) Adjusted EBITDA, less (i) cash income taxes paid for such period, less (ii), FCCR Capital Expenditures (as defined in the Comerica Credit Agreement) made during such period, less (iii) payments, repurchases or redemptions of stock made during such period, less (iv) Distributions and Purchases (each as defined in the Comerica Credit Agreement) made during such period, to (b) (i) the Current Maturities of Long Term Debt (each as defined in the Comerica Credit Agreement) as of the last day of such period plus (ii) interest paid during such period. The Fixed Charge Coverage ratio is measured on a quarterly basis as of the most recent fiscal quarter end. Under the Comerica Credit Agreement, we must maintain a fixed charge ratio of at least
1.25
to 1.00 for each trailing twelve-month period as of the end of each fiscal quarter. The funded debt to Adjusted EBITDA ratio (as defined in the Comerica Credit Agreement) must be not more than
2.25
to 1.00 measured at each fiscal quarter.
Upon the occurrence and during the continuation of an event of default under the Comerica Credit Agreement, Comerica may, among other things, declare the loans and all other obligations under the Comerica Credit Agreement immediately due and payable and increase the interest rate at which loans and obligations under the Comerica Credit Agreement bear interest. Pursuant to a separate Security Agreement dated June 21, 2017, between the Company, its subsidiaries and Comerica Bank, the Comerica Credit Facility is secured by a first-priority security interest in substantially all of the assets (excluding real estate) of the Company and its subsidiaries and a pledge of all shares and membership interests of the Company’s subsidiaries.
At
March 31, 2018
, the Company was in compliance with all covenants.
Note 9. Commitments and Contingencies
Other Matters
In addition to commitments and obligations in the ordinary course of business, we have been, and will likely continue to be, subject to litigation or administrative proceedings incidental to our business, such as claims related to customer disputes, employment practices, wage and hour disputes, product liability, professional liability, commercial disputes, licensure restrictions or denials, and warranty or patent infringement. Responding to litigation or administrative proceedings, regardless of whether they have merit, can be expensive and disruptive to normal business operations. We are not able to predict the timing or outcome of these matters.
Note 10. Income Taxes
We provide for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of differences between the tax basis of assets or liabilities and their carrying amounts in the financial statements. We provide a valuation allowance for deferred tax assets if it is more likely than not that these items will expire before we are able to realize their benefit. We calculate the valuation allowance in accordance with the authoritative guidance relating to income taxes, which requires an assessment of both positive and negative evidence regarding the realizability of these deferred tax assets, when measuring the need for a valuation allowance. Significant judgment is required in determining any valuation allowance against deferred tax assets. As of December 31, 2017, as a result of a three-year cumulative loss and recent events, such as the unanticipated termination of the Philips distribution agreement and its effect on our near term forecasted income, we concluded that a full valuation allowance was necessary to offset our deferred tax assets. We intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal.
Intraperiod tax allocation rules require us to allocate our provision for income taxes between continuing operations and other categories of comprehensive income, such as discontinued operations. In periods in which we have a year-to-date pre-tax loss from continuing operations and pre-tax income in other categories of comprehensive income, such as discontinued operations, we must consider that income in determining the amount of tax benefit that results from a loss in continuing operations and that shall be allocated to continuing operations. For the three months ended
March 31, 2018
, we recorded income of
$5.5 million
, net of tax, in discontinued operations related to our MDSS reportable segment and a loss of
$1.4 million
, net of tax, in continuing operations.
As a result of the intraperiod tax allocation rules, for the
three
months ended
March 31, 2018
, the Company recorded an income tax benefit of
$0.5 million
within continuing operations and
$0.6 million
of income tax expense within discontinued operations. For the
three
months ended March 31, 2017, the Company recorded an income tax expense of
$0.6 million
and
$0.2 million
within continuing operations and discontinued operations, respectively.
For the
three
months ended
March 31, 2018
, the Company expects to utilize
$1.1 million
of net operating losses associated with projected taxable income in discontinued operations mainly attributable to the gain on the sale of our MDSS post-warranty service contract business. The utilization of net operating losses in 2018 results in a reduction in our deferred tax asset balance, with a corresponding reduction in our valuation allowance, due to our full valuation allowance position discussed above.
As of
March 31, 2018
, we had unrecognized tax benefits of approximately
$3.9 million
related to uncertain tax positions. Included in the unrecognized tax benefits were
$3.5 million
of tax benefits that, if recognized, would reduce our annual effective tax rate, subject to the valuation allowance.
We file income tax returns in the US and in various state jurisdictions with varying statutes of limitations. We are no longer subject to income tax examination by tax authorities for years prior to 2013; however, our net operating loss and research credit carryovers arising prior to that year are subject to adjustment. It is our policy to recognize interest expense and penalties related to uncertain income tax matters as a component of income tax expense.
Note 11. Segments
Our reporting segments have been determined based on the nature of the products and/or services offered to customers or the nature of their function in the organization. We evaluate performance based on the gross profit and operating income (loss). The Company does not identify or allocate its assets by operating segments.
During the first quarter of 2018, we have classified the results of our MDSS segment as discontinued operations in our condensed consolidated statement of operations for all periods presented. Accordingly, segment results have been recast for all periods presented to reflect MDSS as discontinued operations. As costs of shared service functions previously allocated to MDSS are not allocable to discontinued operations, prior period corporate costs have been reallocated amongst the continuing reportable segments.
Segment information is as follows:
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Three Months Ended March 31,
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(in thousands)
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2018
|
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2017
|
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Revenue by segment:
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Diagnostic Services
|
$
|
12,025
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|
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$
|
12,202
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|
Diagnostic Imaging
|
2,842
|
|
|
2,783
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|
Mobile Healthcare
|
10,598
|
|
|
10,855
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Condensed consolidated revenue
|
$
|
25,465
|
|
|
$
|
25,840
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Gross profit by segment:
|
|
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Diagnostic Services
|
$
|
2,247
|
|
|
$
|
2,836
|
|
|
Diagnostic Imaging
|
1,245
|
|
|
1,128
|
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Mobile Healthcare
|
1,115
|
|
|
1,638
|
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Condensed consolidated gross profit
|
$
|
4,607
|
|
|
$
|
5,602
|
|
|
Income (loss) from continuing operations by segment:
|
|
|
|
|
Diagnostic Services
|
$
|
(290
|
)
|
|
$
|
16
|
|
|
Diagnostic Imaging
|
(204
|
)
|
|
(437
|
)
|
|
Mobile Healthcare
|
(1,115
|
)
|
|
(1,030
|
)
|
|
Condensed consolidated loss from continuing operations
|
$
|
(1,609
|
)
|
|
$
|
(1,451
|
)
|
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|
Note 12. Subsequent Events
On May 1, 2018, the Company announced a cash dividend of
$0.055
per share payable on May 30, 2018, to shareholders of record on May 15, 2018.