aiq-10q_20160930.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: September 30, 2016

Commission File Number: 001-16609

 

ALLIANCE HEALTHCARE SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

 

DELAWARE

 

33-0239910

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification Number)

 

100 Bayview Circle

Suite 400

Newport Beach, California 92660

(Address of Principal Executive Office) (Zip Code)

(949) 242-5300

(Registrant’s Telephone Number, including Area Code)

 

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

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

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

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of October 28, 2016, there were 10,738,551 shares of common stock, par value $.01 per share, outstanding.

 

 

 


 

ALLIANCE HEALTHCARE SERVICES, INC.

FORM 10-Q

September 30, 2016

Index

 

 

 

Page

PART I—FINANCIAL INFORMATION

 

3

Item 1—Financial Statements:

 

3

Condensed Consolidated Balance Sheets as of September 30, 2016 (Unaudited) and December 31, 2015

 

3

Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015 (Unaudited)

 

4

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (Unaudited)

 

5

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

7

Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

31

Item 3—Quantitative and Qualitative Disclosures about Market Risk

 

46

Item 4—Controls and Procedures

 

47

PART II—OTHER INFORMATION

 

48

Item 1—Legal Proceedings

 

48

Item 1A—Risk Factors

 

48

Item 6—Exhibits

 

49

SIGNATURES

 

50

 

 

2


 

PART I—FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

ALLIANCE HEALTHCARE SERVICES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(unaudited)

 

 

(audited)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

19,608

 

 

$

38,070

 

Accounts receivable, net of allowance for doubtful accounts of $4,307 in 2016 and $5,461 in 2015

 

 

74,605

 

 

 

73,208

 

Prepaid expenses

 

 

12,939

 

 

 

13,463

 

Other receivables

 

 

3,408

 

 

 

3,206

 

Total current assets

 

 

110,560

 

 

 

127,947

 

Plant, property and equipment, net

 

 

206,596

 

 

 

177,188

 

Goodwill

 

 

105,239

 

 

 

102,782

 

Other intangible assets, net

 

 

162,326

 

 

 

162,923

 

Other assets

 

 

22,794

 

 

 

32,820

 

Total assets

 

$

607,515

 

 

$

603,660

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

29,982

 

 

$

20,796

 

Accrued compensation and related expenses

 

 

23,334

 

 

 

19,933

 

Accrued interest payable

 

 

3,254

 

 

 

3,323

 

Current portion of long-term debt

 

 

18,124

 

 

 

17,732

 

Current portion of obligations under capital leases

 

 

3,321

 

 

 

2,674

 

Other accrued liabilities

 

 

28,397

 

 

 

36,453

 

Total current liabilities

 

 

106,412

 

 

 

100,911

 

Long-term debt, net of current portion and deferred financing costs

 

 

498,885

 

 

 

540,353

 

Obligations under capital leases, net of current portion

 

 

13,541

 

 

 

10,332

 

Deferred income taxes

 

 

26,098

 

 

 

23,020

 

Other liabilities

 

 

7,526

 

 

 

6,664

 

Total liabilities

 

 

652,462

 

 

 

681,280

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 1,000,000 shares authorized and no shares issued

   and outstanding

 

 

 

 

 

 

Common stock, $0.01 par value; 100,000,000 shares authorized; 10,896,524

   and 10,774,857 issued in 2016 and 2015, respectively; 10,738,551

   and 10,616,884 outstanding in 2016 and 2015, respectively

 

 

109

 

 

 

108

 

Treasury stock, at cost - 157,973 shares in 2016 and 2015

 

 

(3,138

)

 

 

(3,138

)

Additional paid-in capital

 

 

60,815

 

 

 

29,297

 

Accumulated comprehensive loss

 

 

(293

)

 

 

(511

)

Accumulated deficit

 

 

(195,766

)

 

 

(198,393

)

Total stockholders’ deficit attributable to Alliance HealthCare Services, Inc.

 

 

(138,273

)

 

 

(172,637

)

Noncontrolling interest

 

 

93,326

 

 

 

95,017

 

Total stockholders’ deficit

 

 

(44,947

)

 

 

(77,620

)

Total liabilities and stockholders’ deficit

 

$

607,515

 

 

$

603,660

 

 

 

 

See accompanying notes.

 

 

3


 

ALLIANCE HEALTHCARE SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

(Unaudited)

(in thousands, except per share amounts)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenues

 

$

127,121

 

 

$

120,784

 

 

$

376,162

 

 

$

348,717

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues, excluding depreciation and amortization

 

 

71,132

 

 

 

67,057

 

 

 

211,985

 

 

 

196,428

 

Selling, general and administrative expenses

 

 

23,061

 

 

 

24,543

 

 

 

71,501

 

 

 

66,298

 

Transaction costs

 

 

138

 

 

 

432

 

 

 

986

 

 

 

1,964

 

Shareholder transaction costs

 

 

1,009

 

 

 

 

 

 

3,516

 

 

 

 

Severance and related costs

 

 

762

 

 

 

277

 

 

 

3,186

 

 

 

731

 

Impairment charges

 

 

 

 

 

71

 

 

 

 

 

 

6,817

 

Depreciation expense

 

 

13,899

 

 

 

12,247

 

 

 

40,677

 

 

 

35,952

 

Amortization expense

 

 

2,556

 

 

 

2,377

 

 

 

7,493

 

 

 

6,907

 

Interest expense, net

 

 

9,072

 

 

 

6,660

 

 

 

25,439

 

 

 

19,582

 

Other income, net

 

 

(1,915

)

 

 

(10,451

)

 

 

(6,249

)

 

 

(10,324

)

Total costs and expenses

 

 

119,714

 

 

 

103,213

 

 

 

358,534

 

 

 

324,355

 

Income before income taxes, earnings from unconsolidated

   investees, and noncontrolling interest

 

 

7,407

 

 

 

17,571

 

 

 

17,628

 

 

 

24,362

 

Income tax expense

 

 

1,862

 

 

 

5,098

 

 

 

3,137

 

 

 

5,304

 

Earnings from unconsolidated investees

 

 

(282

)

 

 

(592

)

 

 

(927

)

 

 

(3,047

)

Net income

 

 

5,827

 

 

 

13,065

 

 

 

15,418

 

 

 

22,105

 

Less: Net income attributable to noncontrolling interest

 

 

(4,469

)

 

 

(5,861

)

 

 

(12,791

)

 

 

(15,111

)

Net income attributable to Alliance HealthCare Services, Inc.

 

$

1,358

 

 

$

7,204

 

 

$

2,627

 

 

$

6,994

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss), net of taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

5,827

 

 

$

13,065

 

 

$

15,418

 

 

$

22,105

 

Unrealized gain (loss) on hedging transactions, net of taxes of $15,

   $0, $17, and $0

 

 

24

 

 

 

(8

)

 

 

(18

)

 

 

(149

)

Reclassification adjustment for losses included in net income, net

   of taxes of $89, $0, $226 and $0

 

 

148

 

 

 

 

 

 

236

 

 

 

 

Total comprehensive income, net of taxes

 

 

5,999

 

 

 

13,057

 

 

 

15,636

 

 

 

21,956

 

Comprehensive income attributable to noncontrolling interest

 

 

(4,469

)

 

 

(5,861

)

 

 

(12,791

)

 

 

(15,111

)

Comprehensive income attributable to Alliance HealthCare

   Services, Inc.

 

$

1,530

 

 

$

7,196

 

 

$

2,845

 

 

$

6,845

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income per common share attributable to Alliance HealthCare

   Services, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.12

 

 

$

0.67

 

 

$

0.24

 

 

$

0.65

 

Diluted

 

$

0.12

 

 

$

0.67

 

 

$

0.24

 

 

$

0.65

 

Weighted-average number of shares of common stock and

   common stock equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

10,888

 

 

 

10,716

 

 

 

10,850

 

 

 

10,715

 

Diluted

 

 

10,963

 

 

 

10,815

 

 

 

10,953

 

 

 

10,832

 

 

 

 

 

See accompanying notes.

 

 

4


 

ALLIANCE HEALTHCARE SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

15,418

 

 

$

22,105

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Provision for doubtful accounts

 

 

1,663

 

 

 

2,373

 

Share-based payment

 

 

2,187

 

 

 

1,242

 

Depreciation and amortization

 

 

48,170

 

 

 

42,859

 

Amortization of deferred financing costs

 

 

5,690

 

 

 

2,602

 

Accretion of discount on long-term debt

 

 

383

 

 

 

357

 

Adjustment of derivatives to fair value

 

 

520

 

 

 

100

 

Distributions from unconsolidated investees

 

 

955

 

 

 

3,332

 

Earnings from unconsolidated investees

 

 

(927

)

 

 

(3,047

)

Deferred income taxes

 

 

2,413

 

 

 

4,043

 

Gain on sale of assets

 

 

(1,279

)

 

 

(685

)

Changes in fair value of contingent consideration related to acquisitions

 

 

(4,640

)

 

 

 

Non-cash gain on step acquisition

 

 

 

 

 

(9,950

)

Gain on acquisition

 

 

 

 

 

(209

)

Other non-cash gain

 

 

(248

)

 

 

 

Impairment charges

 

 

 

 

 

6,817

 

Excess tax benefit from share-based payment arrangements

 

 

(87

)

 

 

5

 

Changes in operating assets and liabilities, net of the effects of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,787

)

 

 

(2,674

)

Prepaid expenses

 

 

220

 

 

 

(1,106

)

Other receivables

 

 

1,392

 

 

 

451

 

Other assets

 

 

279

 

 

 

1,488

 

Accounts payable

 

 

8,026

 

 

 

(363

)

Accrued compensation and related expenses

 

 

3,401

 

 

 

(968

)

Accrued interest payable

 

 

(69

)

 

 

116

 

Income taxes payable

 

 

551

 

 

 

55

 

Other accrued liabilities

 

 

864

 

 

 

(4,248

)

Net cash provided by operating activities

 

 

82,095

 

 

 

64,695

 

Investing activities:

 

 

 

 

 

 

 

 

Equipment purchases

 

 

(52,977

)

 

 

(39,382

)

Increase in deposits on equipment

 

 

(8,122

)

 

 

(13,024

)

Acquisitions, net of cash received

 

 

(6,659

)

 

 

(22,657

)

Proceeds from sale of assets

 

 

1,663

 

 

 

868

 

Net cash used in investing activities

 

 

(66,095

)

 

 

(74,195

)

Financing activities:

 

 

 

 

 

 

 

 

Principal payments on equipment debt and capital lease obligations

 

 

(12,437

)

 

 

(6,664

)

Proceeds from equipment debt

 

 

11,793

 

 

 

23,295

 

Principal payments on term loan facility

 

 

(3,900

)

 

 

(8,651

)

Proceeds from term loan facility

 

 

 

 

 

29,850

 

Principal payments on revolving loan facility

 

 

(45,000

)

 

 

(28,000

)

Proceeds from revolving loan facility

 

 

29,000

 

 

 

26,000

 

Payments of debt issuance costs and deferred financing costs

 

 

(25,493

)

 

 

(801

)

Distributions to noncontrolling interest in subsidiaries

 

 

(18,045

)

 

 

(13,734

)

Contributions from noncontrolling interest in subsidiaries

 

 

1,113

 

 

 

 

Excess tax benefit from share-based payment arrangements

 

 

87

 

 

 

(5

)

Issuance of common stock

 

 

1

 

 

 

 

Proceeds from exercise of stock options

 

 

614

 

 

 

25

 

Settlement of contingent consideration related to acquisitions

 

 

(825

)

 

 

 

Proceeds from shareholder transaction

 

 

28,630

 

 

 

 

Net cash (used in) provided by financing activities

 

 

(34,462

)

 

 

21,315

 

Net (decrease) increase in cash and cash equivalents

 

 

(18,462

)

 

 

11,815

 

Cash and cash equivalents, beginning of period

 

 

38,070

 

 

 

33,033

 

Cash and cash equivalents, end of period

 

$

19,608

 

 

$

44,848

 

 

 

 

See accompanying notes.

5


 

ALLIANCE HEALTHCARE SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)

(in thousands)

 

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

19,100

 

 

$

16,973

 

Income taxes paid, net of refunds

 

 

102

 

 

 

327

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Capital lease obligations related to the purchase of equipment

 

 

1,499

 

 

 

1,294

 

Changes in equipment purchases in accounts payable and accrued equipment

 

 

(2,491

)

 

 

2,417

 

Noncontrolling interest assumed in connection with acquisitions (Note 3)

 

 

2,948

 

 

 

30,417

 

Fair value of contingent consideration related to acquisitions (Note 3)

 

 

420

 

 

 

 

Extinguishment of note receivable

 

 

 

 

 

3,071

 

Transfer of equity investment as consideration in step acquisition (Note 3)

 

 

 

 

 

690

 

Transfer of equipment as consideration in step acquisition (Note 3)

 

 

 

 

 

477

 

Transfer of fair value of equity investment in step acquisition (Note 3)

 

 

 

 

 

13,645

 

 

 

 

See accompanying notes.

 

 

 

6


 

ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

1. Basis of Presentation, Principles of Consolidation, and Use of Estimates

Basis of Presentation The accompanying condensed consolidated financial statements have been prepared by Alliance HealthCare Services, Inc. (the “Company” or “Alliance”) in accordance with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the U.S. (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes to the consolidated financial statements for the year ended December 31, 2015.

For a complete summary of the Company’s significant accounting policies, refer to Note 1, “Summary of Significant Accounting Policies,” in Part II, Item 8 of the Company’s 2015 Form 10-K/A, filed with the SEC on April 29, 2016. There have been no material changes to the Company’s significant accounting policies during the nine months ended September 30, 2016.

Principles of Consolidation The accompanying condensed consolidated financial statements of the Company include the assets, liabilities, revenues and expenses of all subsidiaries over which the Company exercises control. Intercompany transactions have been eliminated. The Company evaluates participating rights in its assessment of control in determining consolidation of joint venture partners. The Company records noncontrolling interest related to its consolidated subsidiaries that are not wholly owned. Investments in non-consolidated investees over which it exercises significant influence but does not control are accounted for under the equity method.

Use of Estimates The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

 

 

2. Recent Accounting Pronouncements

Revenue Recognition In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606),” to clarify and converge the revenue recognition principles under GAAP and International Financial Reporting Standards and to develop guidance that would streamline and enhance revenue recognition requirements while also providing a more robust framework for addressing revenue issues. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. Key provisions of the ASU involve a 5-step model specific to recognizing revenue derived from customer contracts. In addition, ASU 2014-09 provides implementation guidance on several other important topics, including the accounting for certain revenue-related costs. The Company is currently assessing the impacts this guidance may have on its consolidated financial statements and disclosures as well as the transition method it will use to adopt the guidance. The Company is considering the impact of the new guidance on its ability to recognize revenue for certain contracts. In addition, the Company will be required to capitalize costs to acquire new contracts, whereas currently, the Company expenses those costs as incurred. In August 2015, the FASB issued an amendment to provide a one-year deferral of the effective date to annual reporting periods beginning on or after December 15, 2017. Early adoption is not permitted. ASU 2014-09 will be effective for the Company beginning on January 1, 2018.

7


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

September 30, 2016

(Unaudited)

(Dollars in thousands, except per share amounts)

 

Going Concern In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements—Going Concern (Subtopic 205-40).” Under GAAP, a going concern is presumed unless and until an entity’s liquidation becomes imminent. When an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, “Presentation of Financial Statements—Liquidation Basis of Accounting.” However, there may be conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, even if liquidation is not imminent. In those situations, financial statements should continue to be prepared under the going concern basis of accounting. ASU 2014-15 provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to determine whether to disclose information about relevant conditions and events. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. ASU 2014-15 will be effective for the Company beginning with the year ending December 31, 2016. The Company is assessing the impact, if any, that the adoption of ASU 2014-15 may have on the Company’s consolidated financial statements.

Simplifying the Presentation of Debt Issuance Costs In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Cost” that changes the presentation of debt issuance costs in financial statements. ASU 2015-03 requires entities to present such costs in the balance sheet as a direct reduction to the related debt liability rather than as a deferred cost (i.e., an asset) as required by current guidance. In August 2015, the FASB issued clarifying authoritative guidance for debt issuance costs incurred in connection with line-of-credit arrangements. The guidance states that an entity should defer and present these debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement. ASU 2015-03 does not change the recognition or measurement of debt issuance costs and is effective for fiscal years beginning after December 15, 2015. The guidance is required to be applied retrospectively to all prior periods presented. As of December 31, 2015, the Company had $6,594 in deferred financing costs, net that was reclassified to offset long-term debt, net of current portion. Other than the revised balance sheet presentation and related disclosures, the adoption of the guidance on January 1, 2016 did not have a material impact on the Company’s consolidated financial statements.

Balance Sheet Classification of Deferred Taxes In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which requires entities to present deferred tax assets (“DTAs”) and deferred tax liabilities (“DTLs”) as noncurrent in a classified balance sheet. The ASU simplifies the current guidance, which requires entities to separately present DTAs and DTLs as current and noncurrent in a classified balance sheet. The adoption of ASU 2015-17 is effective for publicly traded business entities for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Early adoption is permitted. The Company elected to early-adopt this guidance and applied it retrospectively to periods presented in the consolidated financial statements. As of December 31, 2015, the Company had $6,496 in DTAs that was reclassified to offset long-term DTLs. Other than the revised balance sheet presentation and related disclosures, the adoption of ASU 2015-17 on January 1, 2016 did not have a material impact on the Company’s consolidated financial statements.

Leases In February 2016, the FASB issued ASU 2016-02, “Leases,” to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU supersedes the current guidance. The primary difference between current guidance and ASU 2015-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. ASU 2016-02 also requires an entity to separate the lease components from the nonlease components (for example, maintenance services or other activities that transfer a good or service to the customer) in a contract. Only the lease components must be accounted for in accordance with this guidance. ASU 2016-02 is effective for publicly traded business entities for annual reporting periods beginning after December 15, 2018, including interim reporting periods within that reporting period. Early adoption is permitted. ASU 2016-02 will be effective for the Company beginning on January 1, 2019. The Company is assessing the impact, if any, that the adoption of ASU 2016-02 may have on the Company’s consolidated financial statements.

Share-Based Payments In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718),” which simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for public business entities for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. Early adoption is permitted. ASU 2016-09 will be effective for the Company beginning on January 1, 2017. The Company is assessing the impact, if any, that the adoption of ASU 2016-09 may have on the Company’s consolidated financial statements.

8


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

September 30, 2016

(Unaudited)

(Dollars in thousands, except per share amounts)

 

Statement of Cash Flows In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which is intended to reduce diversity in the classification of transactions related to debt prepayment or debt extinguishment costs, zero-coupon debt instruments settlement, contingent consideration payments made after a business combination, insurance claims settlement and corporate-owned life insurance settlement, distributions from equity method investments and beneficial interests in securitization transactions. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. ASU 2016-15 will be effective for the Company beginning on January 1, 2018. The Company is assessing the impact, if any, that the adoption of ASU 2016-02 may have on the Company’s consolidated financial statements.

 

 

3. Acquisitions and Transactions

Thai Hot Transaction

On September 16, 2015, Fujian Thai Hot Investment Co., Ltd. (“Thai Hot”) agreed to purchase approximately 5,537,945 shares of the Company’s common stock from funds managed by Oaktree Capital Management, L.P. (“Oaktree”) and MTS Health Investors, LLC (“MTS”), and Larry C. Buckelew (together, the “Selling Stockholders”) for approximately $102,500, or $18.50 per share (the “Thai Hot Transaction”). In connection with the Thai Hot Transaction, Thai Hot and the Selling Stockholders agreed to bear a specified portion of the following Company expenses related to the Thai Hot Transaction: (i) 100% of the fees and expenses incurred by the Company in connection with the amendment or waiver of its credit agreement, and (ii) all reasonable and documented fees and expenses incurred by the Company in connection with the Thai Hot Transaction in excess of $1,000. In addition, subject to the approval of the Company’s board of directors or an authorized special committee of the board of directors, Thai Hot funded a new management incentive arrangement which involved the issuance of $1,500 in cash-based awards to the Company’s management. The expenses associated with the cash-based awards will be recognized by the Company over the required service period of the awards. The Company received reimbursements of $15,343, which were net of taxes of $213, prior to the Thai Hot Transaction close from the Selling Stockholders. These reimbursements were accounted for as capital contributions from the Selling Stockholders. The Company accounted for reimbursements of $13,500 received subsequent to the Thai Hot Transaction close from Thai Hot as capital contributions. Costs that are a direct result of the Thai Hot transaction are included in shareholder transaction costs.

The Thai Hot Transaction closed on March 29, 2016.  As a result of the Thai Hot Transaction, Thai Hot, through a wholly owned subsidiary, owned an aggregate of approximately 51.5% of the outstanding shares of common stock of the Company.  The Company has not agreed to pay any management fees to Thai Hot for any financial advisory services provided to the Company.

2016 Acquisition

American Health Centers, Inc.

On April 22, 2016, the Company, through its Radiology Division, acquired the mobile business practice of American Health Centers, Inc. (“AHC”), a provider of fixed and mobile radiology and nuclear medicine services in New Hampshire and Vermont. The Company acquired 8 mobile radiology sites, and 5 mobile nuclear medicine sites, effective May 19, 2016. The combined cash purchase price, net of related contingent consideration, totaled $4,209. The Company financed this acquisition using the revolving line of credit. For additional information, see Note 8.

The following table summarizes recognized amounts of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Equipment, net

 

$

2,354

 

Goodwill

 

 

335

 

Identifiable intangible assets

 

 

1,940

 

Total consideration

 

$

4,629

 

9


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

September 30, 2016

(Unaudited)

(Dollars in thousands, except per share amounts)

 

As a result of this acquisition, the Company recorded goodwill of $335, which largely represents intangible assets that do not qualify for separate recognition, including existing patients and the solid record of patient care in the local community. In addition, the Company recorded intangible assets of $1,940, of which $1,600 was assigned to customer contracts, which is being amortized over 15 years, and $340 was assigned to a non-competition agreement, which is being amortized over 5 years. A portion of the recorded goodwill and intangible assets is being amortized over 15 years for tax purposes. The Company recorded the intangible assets at fair value at the acquisition date, which was estimated using the income approach. The results for the three and nine months ended September 30, 2016 included $936 and $1,573, respectively, of net revenue and $382 and $651, respectively, of net income before income taxes generated by AHC.

The values assigned to the various assets and liabilities acquired in this transaction are preliminary and may be subject to adjustment as the calculation of their respective fair values could be subject to change.

The agreement includes contingent consideration arrangements, which are based on performance of the 18-month period following the transaction date. The fair value of these contingent consideration arrangements of $420 and $405 as of the acquisition date and September 30, 2016, respectively, was estimated using the Company’s established fair value approach. For additional information, see Note 5.

2015 Acquisitions

Pacific Cancer Institute, Inc.

On December 31, 2015, the Company, through its Oncology Division, acquired a 95% controlling interest in the Pacific Cancer Institute, Inc. (“PCI”), a state-of-the-art radiation therapy and stereotactic radiosurgery (“SRS”) center located in Maui, Hawaii. The purchase price consisted of $11,013 in cash, net of holdback liabilities. The Company financed this acquisition using the revolving line of credit. For additional information, see Note 8.

As a result of this acquisition, the Company recorded goodwill of $6,505, which largely represents intangible assets that do not qualify for separate recognition, including existing patients and the solid record of patient care in the local community. In addition, the Company recorded intangible assets of $8,800, of which $1,800 was assigned to physician referral network, $5,400 was assigned to Certificates of Need (“CONs”), $650 was assigned to non-solicitation and non-competition agreements and $950 was assigned to trademarks, which are being amortized over 5 to 15 years. The Company recorded the intangible assets at fair value at the acquisition date, which was estimated using the income approach. A portion of the recorded goodwill and intangible assets is being amortized over 15 years for tax purposes. The results for the three and nine months ended September 30, 2016 included $1,285 and $3,999 of net revenue, respectively, and $(21) and $198 of net (loss) income, respectively, generated by PCI.

The agreement includes contingent consideration arrangements, which are based on performance of the 12-month period following the transaction date. As of September 30, 2016, the Company did not record a liability related to these contingent consideration arrangements since it believes that the achievement of the future performance goals is unlikely.  

The values assigned to the various assets and liabilities acquired in this transaction are preliminary and may be subject to adjustment as the calculation of their respective fair values could be subject to change.

AHIP-Florida, LLC

On October 14, 2015, the Company, through its Interventional Division, acquired a 60% controlling interest in PRC Associates, LLC (“PRC”), a premier provider of interventional pain management healthcare with 8 locations in Central Florida and the Palm Coast. The purchase price consisted of $15,014 in cash, net of $264 cash acquired. The Company financed this acquisition using the revolving line of credit. For additional information, see Note 8. The purchase agreement includes a mandatory redemption provision allowing the noncontrolling interest holder to sell 10% of its noncontrolling interest to the Company after the closing date.

10


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

September 30, 2016

(Unaudited)

(Dollars in thousands, except per share amounts)

 

As a result of this acquisition, the Company recorded goodwill of $8,234, which largely represents intangible assets that do not qualify for separate recognition, such as prominent leadership and the solid record of patient care programs that set national standards for quality coordinated care in pain management. In addition, the Company recorded intangible assets of $15,600, of which $12,100 was assigned to physician referral network, $1,800 was assigned to non-solicitation and non-competition agreements and $1,700 was assigned to trademarks, which are being amortized over 5 to 15 years. The Company recorded the intangible assets at fair value at the acquisition date, which was estimated using the income approach. A portion of the recorded goodwill and intangible assets is being amortized over 15 years for tax purposes. The results for the three and nine months ended September 30, 2016 included $3,389 and $9,986 of net revenue, respectively, and $414 and $1,160 of net income, respectively, generated by PRC.

The agreement includes contingent consideration arrangements, which are based on performance of the 12-month period following the transaction date. The fair value of these contingent consideration arrangements of $150 was estimated using management’s estimates as of September 30, 2016.

The values assigned to the various assets and liabilities acquired in this transaction are preliminary and may be subject to adjustment as the calculation of their respective fair values could be subject to change.

Alliance-HNI, LLC and Subsidiaries

On August 1, 2015, the Company obtained through its Radiology Division an additional 15.5% interest in its previously non-consolidated investment, Alliance-HNI, LLC (“AHNI”) through a step acquisition. Prior to August 1, 2015, the Company held a noncontrolling interest in AHNI, pursuant to its acquisition of Medical Consultants Imaging, Co. (“MCIC”), which held a 50% interest in a joint venture that was subsequently renamed AHNI.

Prior to the step acquisition on August 1, 2015, AHNI had three subsidiaries: Alliance-HNI Leasing Co. (“AHNIL”), Alliance-HNV PET/CT Services, LLC (“AHNVPS”), and Alliance-HNV PET/CT Leasing, LLC (“AHNVPL”). AHNI held a 98% interest in AHNIL, which AHNI consolidated, a 53.4% interest in AHNVPS, and effectively, a 53.3% interest in AHNVPL through its ownership in AHNVPS, both of which AHNI did not consolidate. In addition to the Company’s original 50% investment in AHNI, it also had a 46.6% direct interest in AHNVPS prior to the step acquisition and, accordingly, the Company has historically consolidated AHNVPS and AHNVPL.

On August 1, 2015, the Company contributed its 46.6% interest in HNVPS and its rights to certain assets to AHNI in exchange for an additional 15.5% interest in AHNI. After the transaction the Company holds a 65.5% interest in AHNI which, in turn, holds all of the outstanding interest in AHNVPS. As a result of gaining a controlling interest in AHNI, the Company began consolidating AHNI effective August 1, 2015.

Pursuant to ASC 805, “Business Combinations,” the transaction is considered a step acquisition and the Company was required to remeasure its previously held equity interest in AHNI at its acquisition-date fair value and recognize any resulting gain or loss. AHNVPS assets that the Company was in control of before and after the acquisition were maintained at their carrying amounts immediately before the acquisition date and no gain or loss or resulting goodwill was recognized on these assets.

The fair value of the consideration transferred was based on the net book value of the assets transferred by the Company to AHNI at the acquisition date because the Company had control of those assets before and after the transaction. The Company recorded goodwill of $2,988, which largely represents intangible assets that do not qualify for separate recognition. In addition, the Company recorded intangible assets of $13,700. The intangible assets consist primarily of physician referral networks, trademarks, and certificates of need, a portion of which is being amortized over 15 years.

11


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

September 30, 2016

(Unaudited)

(Dollars in thousands, except per share amounts)

 

The Pain Center of Arizona

On February 17, 2015, the Company purchased approximately a 59% membership interest in The Pain Center of Arizona (“TPC”), a comprehensive full-time pain management medical practice with 12 locations within the state of Arizona. The purchase price consisted of $24,087 in cash, net of $234 cash acquired and net of extinguishment of $3,071 of related-party notes receivable. The Company financed this acquisition using the revolving line of credit.

As a result of this acquisition, the Company recorded goodwill of $22,566, which largely represents intangible assets that do not qualify for separate recognition, such as prominent leadership and the solid record of patient care programs that set national standards for quality coordinated care in pain management. In addition, the Company recorded intangible assets of $24,600, of which $13,500 was assigned to physician referral network and $11,100 was assigned to trademarks, which are being amortized over 20 years. The Company recorded the intangible assets at fair value at the acquisition date, which was estimated using the income approach. A portion of the recorded goodwill and intangible assets is being amortized over 15 years for tax purposes. The fair value of noncontrolling interest related to this transaction was estimated to be $20,598 as of the acquisition date using the implied fair value based on the Company’s ownership percentage. The results for the three and nine months ended September 30, 2016 included $7,830 and $23,623 of net revenue, respectively, and $714 and $1,770 of net loss, respectively, generated by TPC. The results for the three and nine months ended September 30, 2015 included $8,957 and $20,980 of net revenue, respectively, and $804 and $1,095 of net income, respectively, generated by TPC.

The agreement includes contingent consideration arrangements, which are based on performance of the 12-month period following the transaction date. The Company paid $810 of the contingent consideration during the nine months ended September 30, 2016.

Pro Forma Impact of Acquisitions

The following table provides pro forma revenues and results of operations for the nine months ended September 30, 2016 and the three and nine months ended September 30, 2015, as if the acquisitions had occurred on January 1, 2015. The pro forma results were prepared from financial information obtained from the sellers of the businesses, as well as information obtained during the due diligence process associated with the acquisitions. The pro forma results reflect certain adjustments related to the acquisitions, such as increased depreciation and amortization expense resulting from the stepped-up basis to fair value of assets acquired and adjustments to reflect the Company’s borrowing and tax rates. The pro forma operating results do not include any anticipated synergies related to combining the businesses. Accordingly, such pro forma operating results were prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been made as of January 1, 2015 or of results that may occur in the future.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2016

 

 

2015

 

Revenues

 

$

127,078

 

 

$

376,842

 

 

$

373,844

 

Net income attributable to Alliance HealthCare Services, Inc.

 

 

8,168

 

 

 

2,914

 

 

 

9,629

 

Basic earnings per share

 

 

0.76

 

 

 

0.27

 

 

 

0.90

 

Diluted earnings per share

 

 

0.76

 

 

 

0.27

 

 

 

0.89

 

 

12


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

September 30, 2016

(Unaudited)

(Dollars in thousands, except per share amounts)

 

Restructuring Plan

From time to time, the Company’s management implements immaterial restructuring plans, including the closure or consolidation of certain sites as a result of the loss of certain customers. The impact of the charges resulting from restructuring plans are summarized below:

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

2016

 

 

2015

 

Cost of revenues, excluding depreciation and amortization

 

$

172

 

 

$

176

 

$

925

 

 

$

572

 

Selling, general and administrative expenses

 

 

45

 

 

 

40

 

 

143

 

 

 

135

 

Other expense, net

 

 

67

 

 

 

 

 

567

 

 

 

 

Total restructuring charges

 

$

284

 

 

$

216

 

$

1,635

 

 

$

707

 

 

 

 

4. Share-Based Payment

Stock Option Plans and Awards

In November 1999, the Company adopted an employee stock option plan (as amended and restated, the “1999 Equity Plan”) pursuant to which options and awards with respect to a total of 3,005,000 shares have become available for grant. As of September 30, 2016, a total of 1,024,866 shares remained available for grant under the 1999 Equity Plan. During the first quarter of 2016, the vesting for 71,057 options was accelerated due to a change in control in connection with the closing of the Thai Hot Transaction. There were no options for which vesting was accelerated during 2015.

The following weighted average assumptions were used in the estimated grant date fair value calculations for stock option awards:

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

Risk free interest rate

 

 

1.53

%

 

 

1.65

%

Expected dividend yield

 

 

%

 

 

%

Expected stock price volatility

 

 

66.5

%

 

 

65.2

%

Average expected life (in years)

 

 

6.00

 

 

 

6.00

 

Weighted average fair value on grant date

 

$

4.32

 

 

$

14.25

 

 

The following table summarizes the Company’s stock option activity:

 

 

Number of

Shares

 

 

Weighted-

Average

Exercise Price

 

 

Weighted-Average

Remaining Contractual

Term (in years)

 

 

Aggregate

Intrinsic

Value (1)

 

Outstanding at December 31, 2015

 

 

646,290

 

 

$

19.91

 

 

 

 

 

 

 

 

 

Granted

 

 

200,388

 

 

 

7.16

 

 

 

 

 

 

 

 

 

Exercised

 

 

(121,667

)

 

 

5.05

 

 

 

 

 

 

$

1,386

 

Canceled/forfeited

 

 

(64,798

)

 

 

24.00

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2016

 

 

660,213

 

 

 

18.37

 

 

 

6.43

 

 

$

114

 

Vested and expected to vest in the future at September 30, 2016

 

 

618,096

 

 

 

19.08

 

 

 

6.23

 

 

$

114

 

Vested and exercisable at September 30, 2016

 

 

415,540

 

 

 

22.41

 

 

 

4.93

 

 

$

114

 

 

(1)

Represents the difference between the exercise price and the value of the Company’s stock at the time of exercise, for exercised grants. For outstanding awards, represents the difference between the exercise price and the value of the Company’s stock at fiscal quarter-end.

 

13


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

September 30, 2016

(Unaudited)

(Dollars in thousands, except per share amounts)

 

The following table summarizes the Company’s unvested stock option activity:

 

 

 

Shares

 

 

Weighted-

Average

Grant-Date

Fair Value

 

 

Aggregate Unrecognized Compensation

 

 

Weighted Average

Period Over

Which Expected

to be Recognized

(in years)

 

 

Total Fair Value

 

Unvested at December 31, 2015

 

 

158,671

 

 

$

15.01

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

200,388

 

 

 

4.32

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested

 

 

(107,613

)

 

 

14.01

 

 

 

 

 

 

 

 

 

 

$

1,508

 

Forfeited

 

 

(6,773

)

 

 

7.34

 

 

 

 

 

 

 

 

 

 

 

 

 

Unvested at September 30, 2016

 

 

244,673

 

 

$

6.91

 

 

$

786

 

 

 

2.0

 

 

 

 

 

 

Stock Awards

The 1999 Equity Plan permits the award of restricted stock, restricted stock units, stock bonus awards and performance-based stock awards (collectively referred to as “stock awards”).

In the third quarter of 2014, 25,000 restricted stock units (“RSU”), which vest based upon achieving certain market performance conditions, were granted to executive management. Specifically, the Company’s closing stock price per common share must equal or exceed a value of $40.00 per share for 10 consecutive days between the dates of January 1, 2015 and April 21, 2017. If these conditions are not achieved before April 21, 2017, these RSUs will expire. In accordance with ASC 718, expense related to restricted stock units that vest based on achieving a market condition should not be recognized until the derived vesting period has been met, and at such time the derived vesting period becomes the requisite service period. Since the market condition has not been met, and is currently not probable of being met based on the current market condition, the Company has not recognized any expense related to these RSUs.

These RSUs contain provisions that vesting may be accelerated under a change in control of the Company. The RSU Award agreement provided that in the event of a change in control, the unvested portion of the award will convert into the right to receive a cash amount (the “Cash Right”) equal to the number of unvested restricted stock units multiplied by the per share consideration received by the holders of the Company’s common stock in the change in control and the Cash Right shall vest on the six month anniversary of the consummation of the change in control subject to the executive’s continued service through such date; provided, that in the event the executive is terminated without “cause” or for “good reason” (each as defined in the executive’s employment agreement) the Cash Right shall vest in full on the date of such termination (the “Cash Right Conversion”). The Thai Hot Transaction constituted a change in control under the terms of the RSU Award agreement and for purposes of the Cash Right Conversion, the special committee of the board of directors approved that the per share consideration received by the holders of the Company’s common stock upon the consummation of the Thai Hot Transaction was $18.50 per share. The monetary value of the Cash Right of $463 was paid during the three months ended September 30, 2016. For additional information on the Thai Hot Transaction, see Note 3.

The following table summarizes the Company’s restricted stock unit activity:

 

 

 

Shares

 

 

Weighted-

Average

Grant-Date

Fair Value

 

 

Aggregate Unrecognized Compensation

 

 

Weighted Average Period

Over Which Expected

to be Recognized

(in years)

 

Unvested at December 31, 2015

 

 

74,413

 

 

$

9.18

 

 

 

 

 

 

 

 

 

Granted

 

 

85,206

 

 

 

6.93

 

 

 

 

 

 

 

 

 

Vested

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(2,577

)

 

 

6.93

 

 

 

 

 

 

 

 

 

Unvested at September 30, 2016

 

 

157,042

 

 

$

7.85

 

 

$

540

 

 

 

2.5

 

 

14


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

September 30, 2016

(Unaudited)

(Dollars in thousands, except per share amounts)

 

Share-based compensation expense

The following table summarizes pre-tax, share-based compensation expense included within selling, general and administrative expenses in the condensed consolidated statements of income:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Share-based compensation expense

 

$

407

 

 

$

423

 

 

$

2,650

 

(1)

$

1,242

 

 

 

(1)

Includes Cash Right of $463.

 

 

5. Fair Value of Financial Instruments

Instruments Measured at Fair Value on a Recurring Basis

The following table summarizes the valuation of the Company’s financial instruments that are reported at fair value on a recurring basis as of September 30, 2016 and December 31, 2015:

 

 

 

Fair Value as of September 30, 2016

 

 

Fair Value as of December 31, 2015

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration related to

   acquisitions

 

$

705

 

 

$

 

 

$

 

 

$

705

 

 

$

5,750

 

 

$

 

 

$

 

 

$

5,750

 

Mandatorily redeemable

   noncontrolling interest

 

 

2,386