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: June 30, 2017

Commission File Number: 001-16609

 

ALLIANCE HEALTHCARE SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

18201 Von Karman Avenue

Suite 600

Irvine, California 92612

(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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.       ☐

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 July 24, 2017, there were 10,831,300 shares of common stock outstanding.

 

 

 

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ALLIANCE HEALTHCARE SERVICES, INC.

FORM 10-Q

June 30, 2017

Index

 

 

 

 

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PART I—FINANCIAL INFORMATION

ALLIANCE HEALTHCARE SERVICES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share amounts)

 

 

See accompanying notes.

1

 

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ALLIANCE HEALTHCARE SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands, except per share amounts)

 

 

 

 

 

See accompanying notes.

 

 

2

 

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ALLIANCE HEALTHCARE SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

See accompanying notes.

3

 

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ALLIANCE HEALTHCARE SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)

(in thousands)

 

 

 

 

 

See accompanying notes.

 

 

 

4

 

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ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(Unaudited)

 

 

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 (“GAAP”) 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 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 six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. 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, 2016.

For a complete summary of the Company’s significant accounting policies, refer to Note 2, “Summary of Significant Accounting Policies,” in Part IV, Item 15 of the Company’s 2016 Form 10-K, filed with the SEC on March 10, 2017. There have been no material changes to the Company’s significant accounting policies during the six months ended June 30, 2017.

Pending Transaction On April 10, 2017, the Company entered into an agreement and plan of merger (the “Merger Agreement”) by and among Tahoe Investment Group Co., Ltd., an entity organized under the laws of the People’s Republic of China (“Tahoe”), THAIHOT Investment Company Limited, an exempted company incorporated under the laws of the Cayman Islands and indirect wholly-owned subsidiary of Tahoe (“THAIHOT”), THAIHOT Investment Company US Limited, a Delaware corporation and indirect wholly-owned subsidiary of Tahoe (“Parent”) and Alliance Healthcare Services Merger Sub Limited, a Delaware corporation and wholly-owned subsidiary of Parent (“Sub” and together with Tahoe, THAIHOT and Parent, the “Purchaser Parties”) providing for the merger of Sub with and into Alliance (the “Merger”), with Alliance surviving the Merger as a wholly-owned subsidiary of Parent. Under the Merger Agreement, the Purchaser Parties will acquire all of the Company’s outstanding common stock that is not beneficially owned by the Purchaser Parties or owned by the Company as treasury shares for $13.25 per share. The Merger is subject to approval by Alliance’s stockholders, including a non-waiveable condition requiring approval by the holders of a majority of the outstanding shares of Alliance common stock that are not beneficially owned by the Purchaser Parties or certain senior executive officers of the Company, as well as certain other customary closing conditions. The Company’s board of directors, acting on the unanimous recommendation of a special committee, comprised solely of independent and disinterested directors of the Company who are not affiliated with Tahoe or management of the Company (the “Special Committee”), approved the Merger Agreement and the transactions contemplated by the Merger Agreement and resolved to recommend that the Company’s stockholders adopt the Merger Agreement and the transactions contemplated by the Merger Agreement. The Special Committee exclusively negotiated the terms of the Merger Agreement with Tahoe, with the assistance of independent financial and legal advisors. The Company will hold a meeting of stockholders for the purpose of voting on the adoption of the Merger Agreement on August 15, 2017. If completed, the Merger will result in the Company becoming a privately-held company and Alliance’s common stock would no longer be listed on the NASDAQ.

 

At the effective time of the Merger, each issued and outstanding share of common stock, other than shares owned by Alliance as treasury stock, shares beneficially owned by the Purchaser Parties, and shares owned by holders of common stock who shall neither have voted in favor of the Merger nor consented thereto in writing and who shall have properly and validly perfected, and not effectively withdrawn or lost, their statutory appraisal rights under Delaware law (such shares of common stock “dissenting shares”), will be converted into the right to receive $13.25 in cash per share, without interest and subject to any withholding taxes (the “Merger Consideration”). Under the terms of the Merger Agreement, each in-the-money stock option, whether or not exercisable or vested, will be converted into the right to receive the excess of the Merger Consideration over the option exercise price. Restricted stock units (“RSUs”) that are not subject to accelerated vesting in accordance with their terms will be converted into the right to receive restricted cash awards equal to the Merger Consideration multiplied by the number of shares underlying the RSUs and shall continue to be subject to the same vesting and payment conditions and schedules applicable to such RSUs. The Purchaser Parties have informed Alliance that they intend to fund the payment of the aggregate Merger Consideration from cash on hand. The Merger is not subject to a financing condition.

5

 

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ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

The Merger Agreement contains certain termination rights for both Alliance and Parent, and further provides that upon the termination of the Merger Agreement under certain circumstances, Alliance will be required to pay Parent an expense reimbursement amount equal to $1.5 million in immediately available funds or Parent will be required to pay Alliance an expense reimbursement amount equal to $4.5 million in immediately available funds (as applicable). Subject to certain limitations, either Alliance or Parent may terminate the Merger Agreement if the Merger is not consummated by December 15, 2017 (the “Termination Date”); provided that the Company may extend the Termination Date for a single additional 60-day period under certain circumstances.

In connection with the Merger, the Special Committee waived the standstill provisions of the Governance, Voting and Standstill Agreement, dated March 29, 2016, by and among Alliance, THAIHOT and Tahoe solely for the purpose of permitting the Purchaser Parties to enter into the Merger Agreement, perform the Purchaser Parties’ obligations thereunder, and consummate the contemplated transactions.

Upon closing of the Merger, Alliance is expected to remain headquartered in Southern California. Alliance’s executive management team is expected to remain in place. All of Alliance’s divisions within the United States are expected to continue unaffected.

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 unconsolidated investees over which it exercises significant influence but does not control are accounted for under the equity method.

Use of Estimates The preparation of 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 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 for publicly traded business entities. Early adoption of the standard for annual reporting periods beginning on or after December 15, 2016 is permitted. As a publicly traded business entity, ASU 2014-09 will be effective for the Company beginning on January 1, 2018. The Company is currently working through an adoption plan, including identifying its revenue streams and completing a preliminary analysis of how it currently accounts for revenue transactions compared to the revenue accounting required under the new standard. The Company intends to complete its adoption plan in 2017. This plan will include a review of transactions supporting each revenue stream to determine the impact of accounting treatment under Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers,” and the completion of a rollout plan for implementation of the new standard with affected functions in its organization. Because of the nature of the work that remains, at this time the Company is unable to reasonably estimate the impact of adoption on its consolidated financial statements. 

6

 

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ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

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 2016-02 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 non-lease 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 its 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 publicly traded business entities for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. The Company adopted ASU 2016-09 on January 1, 2017. As required by the standard, $0.2 million of tax deficiencies recognized on stock-based compensation expense were reflected in the Company’s condensed consolidated statements of operations and comprehensive income (loss) as a component of “Income tax expense” rather than “Additional paid-in capital” on a prospective basis during the six months ended June 30, 2017. At January 1, 2017, the Company had no previously unrecognized excess tax benefits, the cumulative effect of which would be required by the standard to be recorded as an adjustment to accumulated deficit. The Company also elected to prospectively apply the change in presentation of excess tax benefits wherein excess tax benefits recognized on stock-based compensation expense were classified as operating activities in our condensed consolidated statements of cash flows for the six months ended June 30, 2017. Presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to all periods presented as such cash flows have historically been presented as financing activities. Further, the Company did not elect an accounting policy change to record forfeitures as they occur and thus continues to estimate forfeitures at each period.

Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments 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 publicly traded business entities 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 2016-15 may have on its consolidated financial statements.

Income Taxes In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” This amendment is intended to improve accounting for the income tax consequences of intra-entity transfers of assets other than inventory. In accordance with this guidance, an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The ASU will be effective for the Company beginning on January 1, 2018. Early adoption is permitted. The Company is assessing the impact, if any, that the adoption of ASU 2016-16 may have on its consolidated financial statements.

Statement of Cash Flows: Restricted Cash In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which provides amendments to current guidance to address the classifications and presentation of changes in restricted cash in the statement of cash flows. ASU 2016-18 will be effective for the Company beginning on January 1, 2018. Early adoption is permitted. The Company does not anticipate that the adoption of ASU 2016-18 will have a material impact on its consolidated financial statements.

7

 

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ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

Business Combinations In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within that year. The amendments in ASU 2017-01 should be applied prospectively on or after the effective date. Early adoption is permitted. ASU 2017-01 will be effective for the Company beginning on January 1, 2018. The Company is assessing the impact, if any, that the adoption of ASU 2017-01 may have on its consolidated financial statements.

Accounting Changes and Error Corrections In January 2017, the FASB issued ASU No. 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings.” The new guidance is intended to provide clarity in relation to the disclosure of the impact that ASU 2014-09 and ASU 2016-02 will have on the Company’s financial statements when adopted. The effective date for this guidance is the same as the effective dates for ASU 2014-09 and ASU 2016-02. The Company is currently evaluating the effect that the adoption of ASU 2017-03 will have on its consolidated financial statements.

Intangibles – Goodwill and Other In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment,” which eliminates the second step from the goodwill impairment test and instead requires an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. The amendments in ASU 2017-04 are effective for public business entities for annual or interim goodwill impairment tests in annual periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early-adopted ASU 2017-04 on a prospective basis during the six months ended June 30, 2017. The adoption did not have any impact on the Company’s consolidated financial statements.

Share-based Payments – Modification Accounting In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting,” which amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. The amendments in ASU 2017-09 are effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted. ASU 2017-09 will be effective for the Company beginning on January 1, 2018. The Company’s adoption of ASU 2017-09 will not have a material impact on its consolidated financial statements.

3. Acquisitions and Transactions

Tahoe Transaction

On September 16, 2015, Tahoe 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 $102.5 million, or $18.50 per share (the “Tahoe Transaction”). In connection with the Tahoe Transaction, Tahoe and the Selling Stockholders agreed to bear a specified portion of the following Company expenses related to the Tahoe 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 Tahoe Transaction in excess of $1.0 million. In addition, following approval of an authorized special committee of the board of directors, Tahoe funded a new management incentive arrangement which involved the issuance of $1.5 million in cash-based awards to the Company’s management. The expenses associated with the cash-based awards were recognized by the Company over the required service period of the awards. The Company received reimbursements of $15.3 million, which were net of taxes of $0.2 million, prior to the Tahoe Transaction close from the Selling Stockholders. These reimbursements were accounted for as capital contributions from the Selling Stockholders. The Company accounted for reimbursements of $13.5 million received subsequent to the Tahoe Transaction close from Tahoe as capital contributions. Costs that are a direct result of the Tahoe Transaction are included in “Shareholder transaction costs” in the Company’s consolidated statements of operations and comprehensive income (loss).

8

 

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ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

The Tahoe Transaction closed on March 29, 2016. Tahoe, through a wholly-owned subsidiary, owned an aggregate of approximately 51% of the Company’s outstanding shares of common stock as of June 30, 2017. The Company has not agreed to pay any management fees to Tahoe for any financial advisory services provided to the Company.

On April 10, 2017, the Company entered into a Merger Agreement with Tahoe, pursuant to which Tahoe will acquire all of the Company’s outstanding common stock that is not beneficially owned by Tahoe or owned by the Company as treasury shares. See Note 1 for details.

Pro Forma Impact of Acquisition

The following table provides pro forma revenues and results of operations as if the May 2016 acquisition of American Health Centers, Inc. had occurred at the beginning of the year prior to its acquisition date. The pro forma results were prepared from financial information obtained from the seller of the businesses, as well as information obtained during the due diligence process associated with the acquisition. The pro forma results reflect certain adjustments related to the acquisition, 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 acquisition been made as of the beginning of the respective periods or of results that may occur in the future.

 

Restructuring Plan

From time to time, the Company’s management implements individually 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:

 

The restructuring plans, under which costs were incurred during the three and six months ended June 30, 2017 and 2016, were adopted at varying times, beginning in 2009, and are expected to be completed by the first quarter of 2021.

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 June 30, 2017, a total of 995,439 shares remained available for grant under the 1999 Equity Plan.

9

 

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ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

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

 

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

 

 

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

 

Stock Awards

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

The following table summarizes the Company’s RSU activity:

 

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ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

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 operations and comprehensive income (loss):

 

 

 

 

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:

 

 

The Company’s derivative instruments are primarily pay-fixed, receive-variable interest rate swaps based on the London interbank offered rate (“LIBOR”) swap rate. The Company has elected to use the income approach to value these derivatives, using observable Level 2 market expectations at measurement date and standard valuation techniques to convert future amounts to a single present amount assuming that participants are motivated, but not compelled to transact. Level 2 inputs for interest rate swap valuations are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts on LIBOR for the first two years) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR cash and swap rates at commonly quoted intervals and implied volatilities for options). According to ASC 820, “Fair Value Measurement,” the fair value measurement of an asset or liability must reflect the nonperformance risk of the entity and the counterparty. Therefore, the impact of the counterparty’s creditworthiness and the Company’s creditworthiness have also been factored into the fair value measurement of the derivative instruments. For additional information see Note 10.

The fair value of the liability for contingent consideration related to acquisitions was estimated using probability-adjusted performance estimates (Level 3 inputs) over the performance periods following the transaction dates. These estimates represent inputs for which market data are not available and are developed using the best information available about the assumptions that market participants would use when pricing the liability. Significant increases or decreases to either of these inputs in isolation would result in a significantly higher or lower liability. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings.

 

11

 

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ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

Changes in the fair value of the Company’s Level 3 liabilities for the six months ended June 30, 2017 were as follows:

 

 

During the three and six months ended June 30, 2017, none of the Company’s financial instruments were transferred from one level to another.

Instruments Not Recorded at Fair Value on a Recurring Basis

The following table summarizes the fair values and book values of the Company’s long-term debt:

 

The fair value of long-term debt is estimated using Level 2 inputs based on quoted market prices or pricing models using current market rates.

Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis

The Company also measures the fair value of certain assets on a non-recurring basis (utilizing Level 3 inputs), generally on an annual basis, in connection with acquisitions, or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include goodwill, intangible assets, long-lived assets and investments in unconsolidated investees. See Note 7 for a discussion of the Company’s annual impairment test for goodwill and indefinite-lived intangible assets.

6. Impairment Charges

During the six months ended June 30, 2017, the Company reassessed its plans for the use of purchased software and determined it would not be able to utilize certain capabilities as planned. Accordingly, the Company recorded a non-cash charge to write down the asset by $0.9 million in its Radiology Division.

During the six months ended June 30, 2017, the Company closed a site location and, as a result, recorded a non-cash charge to write off $0.2 million of the remaining value of the physicians’ referral network associated with that center in its Radiology Division.

There were no impairment charges during the six months ended June 30, 2016.

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ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

7. Goodwill and Intangible Assets

Changes in the carrying amount of goodwill are as follows:

 

Intangible assets consisted of the following:

 

 

In 2017, the Company intends to perform its annual impairment test for goodwill and indefinite-lived intangible assets in the fourth quarter, absent other events occurring or changes in circumstances that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. Based on financial information as of June 30, 2017, impairment testing was not required during the six months then ended.

Amortization expense for finite-lived intangible assets is reported as “Amortization expense” in the consolidated statements of operations and comprehensive income (loss). As of June 30, 2017, estimated future amortization expense for each of the fiscal years ending December 31, is presented below:

 

 

 

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ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

8. Supplemental Balance Sheet Information

Plant, property and equipment, net as of June 30, 2017 are as follows:

Plant, property and equipment, net as of December 31, 2016 are as follows:

 

Other accrued liabilities consisted of the following:

 

 

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ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

9. Long-Term Debt and Senior Subordinated Credit Facility

Long-term debt consisted of the following:

 

 

Equipment debt, collateralized by equipment, has interest rates ranging from 2.39% to 9.00% and is payable in various monthly principal and interest installments through 2021. Certain of the Company’s equipment debt obligations are subject to covenants with which it must comply on a quarterly or annual basis. An amendment to the financing agreement with Bank of the West (“BOW”) was executed on April 28, 2017, retroactive to March 31, 2017, that modified certain financial covenants. The Company was in compliance with all covenants as of June 30, 2017.

Capital leases, collateralized by equipment, have interest rates ranging from 2.68% to 6.23% and are payable in various monthly principal and interest installments through 2022.

Credit Facility and Senior Secured Term Loan Refinancing

On June 3, 2013, the Company replaced its existing credit facility with a new senior secured credit agreement with Credit Suisse AG, Cayman Islands Branch, as administrative agent, and the other lenders party thereto (the “Credit Agreement”). The Credit Agreement consists of (i) a $340.0 million, six-year term loan facility, (ii) a $50.0 million, five-year revolving loan facility, including a $20.0 million sublimit for letters of credit, (iii) uncommitted incremental loan facilities of $100.0 million of revolving or term loans, plus an additional amount if the Company’s pro forma leverage ratio is less than or equal to 3.25, subject to receipt of lender commitments and satisfaction of specified conditions, and (iv) a $80.0 million delayed draw term loan facility, which was drawn within thirty days of June 3, 2013 and used for the redemption of the Company’s $190.0 million of 8% Senior Notes (“Notes”). The delayed draw term loan facility converted into, and matched the terms of, the $340.0 million term loan facility.

On October 11, 2013, the Company entered into an amendment to the Credit Agreement (the “First Amendment”). Pursuant to the First Amendment, the Company raised $70.0 million in incremental term loan commitments to repurchase the remaining Notes. The Company used the proceeds from the incremental term loan commitments, borrowings under its revolving loan facility and cash on hand to complete the redemption of all its outstanding Notes on December 4, 2013.

On June 19, 2015, the Company entered into a second amendment to the Credit Agreement (the “Second Amendment”). Pursuant to the Second Amendment, the Company raised the remaining $30.0 million in incremental term loan commitments. The funds were used to repay all outstanding borrowings under the Company’s revolving loan facility, to pay fees and expenses related to the Second Amendment, and for general corporate purposes. The incremental term loan under the Second Amendment was funded at 99.5% of the principal amount. Upon funding, the incremental term loans were converted to match all the terms of existing term loans.

On March 29, 2016, the Company entered into a third amendment to the Credit Agreement (the “Third Amendment”). Pursuant to the Third Amendment, (i) the defined term “Investors” was amended to include THAIHOT so that the sale by the Selling Stockholders would not be deemed to constitute a change of control, and (ii) the soft call provision was reinstated to commence on the date the Third Amendment is effective and end the date that is twelve months after such commencement.

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ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

Under the soft call provision, which expired on March 29, 2017, if the Company made a voluntary prepayment of any term loan or prepaid, refinanced, substituted or replaced any term loan, and such action resulted in a reduction in the effective interest cost or weighted average yield of the term loan, then the Company should pay to the administrative agent, for the ratable account of each of the lenders holding term loans, a prepayment premium equal to 1.0% of the aggregate principal amount of the term loans so prepaid, refinanced, substituted or replaced.

In connection with the Third Amendment, the Company paid fees totaling $25.0 million, which were capitalized and amortized using the effective interest method as interest expense over the term of the Credit Agreement. These fees were paid by both the buyer and sellers in the Tahoe Transaction.

Borrowings under the Credit Agreement bear interest through maturity at a variable rate based upon, at the Company’s option, either the LIBOR or the base rate (which is the highest of the administrative agent’s prime rate, one-half of 1.00% in excess of the overnight federal funds rate, and 1.00% in excess of the one-month LIBOR rate), plus, in each case, an applicable margin. With respect to the term loan facilities, the applicable margin for LIBOR loans is 3.25% per annum, and with respect to the revolving loan facility, the applicable margin for LIBOR loans ranges from 3.00% to 3.25% per annum, based on the applicable leverage ratio, and in each case, with a LIBOR floor of 1.00%. The applicable margin for base rate loans under the term loan facilities is 2.25% per annum and under the revolving loan facility ranges from 2.00% to 2.25% per annum, based on the applicable leverage ratio. The Company is required to pay a commitment fee which ranges from 0.38% to 0.50% per annum, based on the applicable leverage ratio, on the undrawn portion available under the revolving loan facility and variable per annum fees with respect to outstanding letters of credit.

The Company is required to make quarterly amortization payments on the term loan of $1.3 million. The Company is also required to make mandatory prepayments of term loans under the Credit Agreement, subject to specified exceptions, from excess cash flow (as defined in the Credit Agreement) and with the proceeds of asset sales, debt issuances and specified other events.

As of June 30, 2017, the Company had $30.4 million of available borrowings under the revolving loan facility, net of $15.0 million outstanding on the revolving loan facility and $4.6 million outstanding in letters of credit. The revolving loan facility matures on June 3, 2018.

Obligations under the Credit Agreement are guaranteed by substantially all the Company’s direct and indirect domestic subsidiaries. The obligations under the Credit Agreement and the guarantees are secured by a lien on substantially all tangible and intangible property, and by a pledge of all of the shares of stock and limited liability company interests of the Company’s direct and indirect domestic subsidiaries, of which the Company now owns or later acquires more than a 50% interest, subject to limited exceptions.

In addition to other covenants, the Credit Agreement places limits on the ability of the Company and its subsidiaries to declare dividends or redeem or repurchase capital stock; prepay, redeem or purchase debt; incur liens and engage in sale-leaseback transactions; make loans and investments; incur additional indebtedness; amend or otherwise alter debt and other material agreements; engage in mergers, acquisitions and asset sales; and transact with affiliates and alter the business conducted by the Company and its subsidiaries.

The Credit Agreement also contains a leverage ratio covenant requiring the Company to maintain a maximum ratio of consolidated total debt to Consolidated Adjusted EBITDA, as defined in the Credit Agreement, that ranges from 4.95 to 1.00 to 4.30 to 1.00. At June 30, 2017, the Credit Agreement required a maximum leverage ratio of not more than 4.30 to 1.00. As of June 30, 2017, the Company’s ratio of consolidated total debt to Consolidated Adjusted EBITDA calculated pursuant to the Credit Agreement was 3.95 to 1.00. Failure to comply with the covenants in the Credit Agreement could permit the lenders under the Credit Agreement to declare all amounts borrowed under the Credit Agreement, together with accrued interest and fees, to be immediately due and payable and to terminate all commitments under the Credit Agreement. As of June 30, 2017, the Company was in compliance with the covenants for the Credit Agreement.

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ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

Notes Payable and Line of Credit with PNC

The Company had notes payable to PNC Equipment Finance, LLC (“PNC”) totaling $7.1 million at June 30, 2017. The notes payable are due in various installments through September 2021 at interest rates between 2.39% and 2.63% per annum. The notes are also collateralized by equipment and contain restrictive covenants. The Company also has a $3.0 million line of credit with PNC, with interest calculated based on LIBOR plus 1.50%. As of June 30, 2017, there was $2.1 million amount outstanding on the line of credit.

 

 

10. Derivatives

Interest Rate Cash Flow Hedges

The Company entered into multiple interest rate swap agreements to hedge the future cash interest payments on portions of its variable rate bank debt. As of June 30, 2017 and December 31, 2016, the Company had interest rate swap agreements to hedge approximately $12.6 million and $15.5 million of its variable rate bank debt, respectively, or 2.25% and 2.70% of total debt, respectively. The amount that the Company expects to reclassify from “Unrealized gain (loss) on hedging transactions, net of taxes” to “Interest expense, net” over the next twelve months is immaterial.

The Company’s interest rate cash flow hedges consist of:

 

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ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

The following tables summarize the amounts of income (loss) recognized from derivative instruments for the periods indicated and the line items in the accompanying condensed consolidated statements of operations and comprehensive income (loss) where the results are recorded for cash flow hedges:

 

 

 

The effect of non-designated derivative instruments on the condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2017 and 2016 was immaterial.

 

 

11. Income Taxes

For the three and six months ended June 30, 2017, the Company recorded income tax expense of $2.4 million and $2.4 million, respectively, or 115.0% and 163.7%, respectively, of the Company’s pre-tax income. For the three and six months ended June 30, 2016, the Company recorded an income tax expense of $2.2 million and $1.3 million, respectively, which were 47.4% and 50.1%, respectively, of the Company’s pre-tax income. The provision (benefit) for income taxes for interim periods is determined using an estimate of the Company’s annual effective tax rate, which is applied to current year-to-date pre-tax income (loss). Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is recorded. The Company’s effective tax rate for the three and six months ended June 30, 2017 and 2016 differed from the federal statutory rate principally as a result of state income taxes and permanent non-deductible tax items, which include “Shareholder transaction costs,” share-based payments, unrecognized tax benefits and other permanent differences. Pursuant to the Company’s adoption of ASU 2016-09 on January 1, 2017, $0.2 million of tax deficiencies recognized on stock-based compensation expense were reflected in the Company’s condensed consolidated statements of operations and comprehensive income (loss) as a component of the “Income tax expense” rather than “Additional paid-in capital” on a prospective basis during the six months ended June 30, 2017. See Note 2 for details.

As of June 30, 2017 and December 31, 2016, the Company has provided a liability for $0.3 of unrecognized tax benefits related to various federal and state income tax matters. The tax-effected amount that would reduce the Company’s effective income tax rate if recognized is $0.3 million and $0.2 million as of June 30, 2017 and December 31, 2016, respectively.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in “Income tax expense.” Accrued interest and penalties related to unrecognized tax benefits as of June 30, 2017 and December 31, 2016 were not material.

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ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

The Company is subject to U.S. federal income tax as well as income tax of multiple state tax jurisdictions. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2013 through 2016. The Company’s and its subsidiaries’ state income tax returns are open to audit under the applicable statutes of limitations for the years ended December 31, 2012 through 2016. The Company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.

 

 

12. (Loss) Income Per Common Share

The following table sets forth the computation of basic and diluted net (loss) income per share: 

 

13. Commitments and Contingencies

Purchase Commitments

The Company has maintenance contracts with its equipment vendors and other service providers for substantially all of its radiology and oncology equipment. The contracts range from 1 to 5 years from inception and extend through the year 2021, but may be canceled by the Company under certain circumstances. The Company’s total contract payments were $11.7 million and $10.0 million for the three months ended June 30, 2017 and 2016, respectively, and $22.8 million and $20.3 million for the six months ended June 30, 2017 and 2016, respectively. At June 30, 2017, the Company had binding equipment purchase commitments totaling $19.0 million.

Guarantees and Indemnities

The Company has applied the disclosure provisions of ASC 460, “Guarantees,” to its agreements that contain guarantee or indemnification clauses. These disclosure provisions expand those required by ASC 440, “Commitments,” and ASC 450, “Contingencies,” by requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantor’s performance is remote.

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ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

In the normal course of business, the Company has made certain guarantees and indemnities, under which it may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions. The Company indemnifies other parties, including customers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold the other party harmless against losses arising from certain events as defined within the particular contract, which may include, for example, litigation or claims arising from a breach of representations or covenants. In addition, the Company has entered into indemnification agreements with its executive officers and directors and the Company’s bylaws contain similar indemnification obligations. Under these arrangements, the Company is obligated to indemnify, to the fullest extent permitted under applicable law, its current or former officers and directors for various amounts incurred with respect to actions, suits or proceedings in which they were made, or threatened to be made, a party as a result of acting as an officer or director.

It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made related to these indemnifications have been immaterial. At June 30, 2017, the Company has determined that no liability is necessary related to these guarantees and indemnities.

Litigation

In November 2015, the Company was served with a lawsuit in the United States District Court for the Northern District of Ohio by Todd S. Elwert, DC, Inc. The Complaint alleges violations of the Junk Fax Prevention Act for allegedly sending an unsolicited advertisement to Plaintiff which promoted commercial availability and/or quality of the Company’s services. The Plaintiff further alleges that it is part of a class of similarly situated chiropractors who received the blast fax, and as such, requested class certification.  The Company filed its response on December 17, 2015 and is currently in the discovery phase of the lawsuit. The Company intends to vigorously defend itself against the lawsuit and currently believes the ultimate disposition of these matters will not have a material adverse effect on its consolidated financial statements.

Other Matters

The Company is involved from time to time in routine litigation and regulatory matters incidental to the conduct of its business. The Company believes that resolution of such matters will not have a material adverse effect on its consolidated financial statements.

 

 

14. Related Party Transactions

Ownership Structure

On September 16, 2015, Tahoe agreed to purchase approximately 5,537,945 shares of the Company’s common stock from funds managed by the Selling Stockholders. Tahoe, through a wholly-owned subsidiary, owned an aggregate of approximately 51% of the Company’s outstanding shares of common stock as of June 30, 2017.

On April 10, 2017, the Company entered into a Merger Agreement with the Purchaser Parties, pursuant to which the Purchaser Parties will acquire all of the Company’s outstanding common stock that is not beneficially owned by Tahoe or owned by the Company as treasury shares. See Note 1 for details.

Management Agreements

The Company had direct ownership in two unconsolidated investees at June 30, 2017 and December 31, 2016.

The following table summarizes revenues from management agreements with unconsolidated equity investees:

 

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ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

The Company derives revenue from management agreements from services provided as part of its ongoing operations for and on behalf of the unconsolidated equity investees, which reimburse the Company for the actual amount of the expenses incurred. The Company records the expenses as “Cost of revenues, excluding depreciation and amortization” and the reimbursement as “Revenues” in its condensed consolidated statements of operations and comprehensive income (loss).

The following table summarizes the revenue and reimbursed expenses related to the Company’s unconsolidated equity investees:

 

 

15. Investments in Unconsolidated Investees

The Company has direct ownership in two unconsolidated investees at June 30, 2017. The Company owns 15% and 50% of these investees, respectively, and provides management services under agreements with these investees, expiring at various dates through 2025. Both of these investees are accounted for under the equity method because the Company does not exercise control over the operations of these investees.

Set forth below are certain balance sheet data as of June 30, 2017 and December 31, 2016 and operating results for the three and six months ended June 30, 2017 and 2016 for the aggregate of the Company’s unconsolidated investees.

 

 

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ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

 

16. Stockholders’ Deficit

The following table summarizes changes in the Company’s consolidated stockholders’ deficit, including noncontrolling interest, during the six months ended June 30, 2017.

 

The following table summarizes changes in the Company’s consolidated stockholders’ deficit, including noncontrolling interest, during the six months ended June 30, 2016.

 

 

17. Segment Information

 

In accordance with ASC 280, “Segment Reporting,” and based on the nature of the financial information that is received by the chief operating decision maker (“CODM”), the Company operates in three operating segments (Radiology, Oncology and Interventional) that also qualify as reportable segments under the definition of ASC 280. Each of these reportable segments, on a stand-alone basis, provides and makes available their respective medical services in similar settings and operates within a singular regulatory environment. Further, management assesses the segment operations and each segment’s degree of efficiency and performance based on this structure of financial reporting and primarily makes operating decisions from these reportable segment results.

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ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

The Radiology segment is comprised of diagnostic imaging services including MRI, PET/CT and other imaging services. The Oncology segment is comprised of radiation oncology services. The Interventional segment is comprised of therapeutic, minimally invasive pain management procedures and services. All intercompany revenues, expenses, payables, and receivables are eliminated in consolidation and are not reviewed when evaluating segment performance. Each segment’s performance is evaluated based on revenue and Adjusted EBITDA.

The following table summarizes the Company’s revenue by segment:

 

Adjusted EBITDA represents net income before: income taxes; net income attributable to noncontrolling interest; interest expense, net; depreciation expense; amortization expense; share-based payment; severance and related costs; restructuring charges; transaction costs; shareholder transaction costs; impairment charges; legal matters (income) expense, net; changes in fair value of contingent consideration related to acquisitions; and other non-cash benefits, net. Adjusted EBITDA is the most frequently used measure of each segment’s performance and is commonly used in setting performance goals. The following table summarizes the Company’s Adjusted EBITDA by segment:

 

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ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

The reconciliation of income before income taxes, earnings from unconsolidated investees, and noncontrolling interest to total Adjusted EBITDA is shown below:

 

The following table summarizes the Company’s identifiable assets by segment:

 

 

The following table summarizes the Company’s equipment capital expenditures by segment:

 

 

 

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Overview

We are a leading national provider of outsourced and joint venture healthcare services to hospitals and providers. We also operate freestanding outpatient radiology, oncology and interventional clinics, and Ambulatory Surgical Centers (“ASC”) that are not owned by hospitals or providers. Our diagnostic imaging services are delivered through our Radiology Division (Alliance Radiology), oncology services through our Oncology Division (Alliance Oncology), and interventional and pain management services through our Interventional Division (Alliance Interventional). We are the nation’s largest provider of advanced diagnostic mobile imaging services, an industry-leading operator of fixed-site radiology centers, and a leading provider of stereotactic radiosurgery (“SRS”) nationwide. As of June 30, 2017, we operated 609 diagnostic imaging, radiation therapy, and interventional radiology systems, including 99 fixed-site radiology centers across the country, and 36 radiation therapy centers and SRS facilities. With a strategy of partnering with hospitals, health systems and physician practices, we provide quality healthcare services for over 1,100 hospitals and healthcare partners in 46 states where approximately 2,450 Alliance Team Members are committed to providing exceptional patient care and exceeding customer expectations. We were incorporated in the state of Delaware on May 27, 1987.

Service Overview

We operate in three reportable business segments: Radiology, Oncology and Interventional. The following table summarizes our revenues by segment as a percentage of total revenue.

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For additional information on reportable business segments, see Note 17 of “Notes to Condensed Consolidated Financial Statements.”

Our clients and partners contract with us to provide radiology, oncology and interventional services to:

Recent Developments

Pending Tahoe Merger Agreement

On April 10, 2017, we entered into an agreement and plan of merger with Tahoe Investment Group Co., Ltd. and certain of its subsidiaries under which the Purchaser Parties will acquire all of our outstanding common stock that is not beneficially owned by Tahoe or owned by us as treasury shares. See Note 1 of the “Notes to Condensed Consolidated Financial Statements” for additional details. A copy of the Merger Agreement is attached as Exhibit 2.1 to the Form 8-K filed by the Company on April 11, 2017.

Factors Affecting our Results of Operations

Pricing

Continued expansion of health maintenance organizations, preferred provider organizations and other managed care organizations have influence over the pricing of our services because these organizations can exert great control over patients’ access to our services and reimbursement rates for accessing those services.

Cost of revenues

The principal components of our cost of revenues include: compensation paid to technologists, therapists, drivers and other clinical staff; system maintenance costs; insurance; medical supplies; system transportation; team members’ travel costs; and professional costs related to the delivery of radiation therapy and professional radiology interpretation services. Because a majority of these expenses are fixed, increased revenues as a result of higher scan and treatment volumes per system significantly improves our margins, while lower scan and treatment volumes result in lower margins.

Selling, general and administrative expenses

The principal components of selling, general and administrative expenses are: sales and marketing costs, corporate overhead costs, provision for doubtful accounts and share-based payment.

Net income attributable to noncontrolling interest and Earnings from unconsolidated investees

We record net income attributable to noncontrolling interest and earnings from unconsolidated investees related to our consolidated and unconsolidated subsidiaries, respectively. These subsidiaries primarily provide shared-service and fixed-site diagnostic imaging, radiation therapy, and interventional services.

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Third-party payer reimbursement rates and policies

Payments to us by third-party payers depend substantially upon each payer’s coverage, coding and reimbursement policies. Third-party payers may impose limits on coverage or reimbursement for diagnostic imaging services, including denying reimbursement for tests that do not follow recommended diagnostic procedures. In addition, we are subject to a variety of billing and coding requirements, including the implementation of the International Classification of Diseases, 10th Edition (“ICD-10”) on October 1, 2015. The adoption of ICD-10 could create claims processing issues for our clinics or our payers that could result in additional claims submission or payment delays or denials.

Critical Accounting Policies

Information with respect to our critical accounting policies which management believes could have the most significant effect on our reported results and require subjective or complex judgments by management is contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our 2016 Form 10-K. Management believes that there have been no significant changes during the six months ended June 30, 2017 in the our critical accounting policies from those disclosed in Part II, Item 7 of our 2016 Form 10-K.

Seasonality

We experience seasonality in the revenues and margins generated for our services. First and fourth quarter revenues are typically lower than those from the second and third quarters. First quarter revenue is affected primarily by fewer calendar days and inclement weather, typically resulting in fewer patients being scanned or treated during the period. Fourth quarter revenues are affected by holiday and client and patient vacation schedules, resulting in fewer scans or treatments during the period. The variability in margins is higher than the variability in revenues due to the fixed nature of our costs. We also experience fluctuations in our revenues and margins due to acquisition activity and general economic conditions, including recession or economic slowdown.

Results of Operations

The following table shows our results of operations:

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The table below provides MRI statistical information:

 

The table below provides PET/CT statistical information:

 

The table below provides Oncology statistical information:

 

The table below provides Interventional statistical information:

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Following are the components of revenue:

 

 

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

Revenue increased $11.9 million, or 9.5%, to $137.3 million during the three months ended June 30, 2017 compared to $125.3 million during the three months ended June 30, 2016 due to increases in Radiology, Oncology and Interventional revenue of $1.6 million, $8.1 million and $2.4 million, respectively.

Total Radiology revenue increased by $1.6 million, or 1.8%, to $89.1 million during the three months ended June 30, 2017 compared to $87.5 million during the three months ended June 30, 2016. MRI revenue increased $1.7 million, or 3.5%, to $50.5 million during the three months ended June 30, 2017 compared to $48.8 million during the three months ended June 30, 2016. Scan-based MRI revenue increased $0.3 million, or 0.7%, during the three months ended June 30, 2017 to $42.2 million from $41.9 million during the three months ended June 30, 2016. The increase in scan-based MRI revenue was primarily due to an increase in revenue per scan, partially offset by year-over-year decreases in the average number of scan-based systems in service and in the total number of scan-based MRI scans. Scans per system per day was 9.36 during each of the three months ended June 30, 2017 and 2016. The revenue per scan increased from $307.39 during the three months ended June 30, 2016 to $312.53 during the three months ended June 30, 2017. The average number of scan-based systems in service decreased to 214.9 systems during the three months ended June 30, 2017 from 216.5 systems during the same period in the prior year. Total scan-based MRI scan volume decreased 0.9% to 135,014 scans during the three months ended June 30, 2017 from 136,251 scans during the three months ended June 30, 2016. Non scan-based MRI revenue increased $1.4 million to $8.3 million during the three months ended June 30, 2017 over the same period in 2016. Included in the revenue totals above are fixed-site imaging center revenues, which decreased $2.2 million, or 7.9%, to $25.3 million during the three months ended June 30, 2017 from $27.5 million during the three months ended June 30, 2016.

PET/CT revenue decreased $0.1 million, or 0.2%, to $32.0 million during the three months ended June 30, 2017 compared to $32.1 million in the same period in 2016. This decrease was primarily due to year-over-year decreases in the average number of scan-based systems in service and revenue per scan, partially offset by increases in scans per system per day and the total number of PET/CT scans. The average number of scan-based PET/CT systems in service decreased to 109.1 systems during the three months ended June 30, 2017 compared to 110.7 systems during the three months ended June 30, 2016. The average revenue per PET/CT scan decreased from $885.34 per scan during the three months ended June 30, 2016 to $865.82 per scan during the three months ended June 30, 2017. Scans per system per day increased to 5.67 during the three months ended June 30, 2017 from 5.51 during the three months ended June 30, 2016. The total volume of PET/CT scans increased 3.1% from 34,863 scans during the three months ended June 30, 2016 to 35,957 scans during the three months ended June 30, 2017.

Oncology revenue increased $8.1 million, or 31.4%, to $33.9 million during the three months ended June 30, 2017 compared to $25.8 million during the three months ended June 30, 2016 primarily due to a 50.8% increase in the number of Linac treatments performed primarily due to our recently formed Cancer Care Partnership with the Healthcare Authority of the City of Huntsville and the Center for Cancer Care in November 2016, partially offset by a 10.4% decrease in the number of SRS patients treated during the three months ended June 30, 2017 compared to the three months ended June 30, 2016.

Interventional revenue increased $2.4 million, or 21.3%, to $13.8 million during the three months ended June 30, 2017 compared to $11.4 million during the three months ended June 30, 2016 primarily driven by increases in mix of the procedures performed in our ASCs.

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Corporate / Other revenue was $0.4 million and $0.5 million during the three months ended June 30, 2017 and 2016, respectively.

Cost of revenues, excluding depreciation and amortization, increased $8.2 million, or 11.7%, to $78.2 million during the three months ended June 30, 2017 compared to $69.9 million during the three months ended June 30, 2016. The overall increase in cost of revenues was primarily due to our recently formed Cancer Care Partnership with the Healthcare Authority of the City of Huntsville and the Center for Cancer Care in November 2016, as well as incremental radiology resources to support volume growth. The increase in cost of revenues is comprised of a $4.0 million increase in compensation and related employee expenses, a $2.1 million increase in maintenance and related costs, a $0.7 million increase in insurance expense, a $0.6 million increase in license, taxes and fees expense, and a $0.6 million increase in rent expense. Cost of revenues, as a percentage of revenue, increased to 56.9% during the three months ended June 30, 2017 compared to 55.8% during the three months ended June 30, 2016.

Selling, general and administrative expenses decreased $1.2 million, or 5.1%, to $22.0 million during the three months ended June 30, 2017 compared to $23.2 million in the same period of 2016. The decrease to selling, general and administrative expenses was driven by decreases of $0.6 million in compensation and related employee expenses primarily resulting from a reduction in headcount and $0.6 million in legal matters expense, net primarily due to a favorable settlement received during the three months ended June 30, 2017. Selling, general and administrative expenses as a percentage of revenue was 16.0% during the three months ended June 30, 2017 compared to 18.5% during the three months ended June 30, 2016.

Transaction costs decreased $0.3 million, or 64.7%, to $0.2 million during the three months ended June 30, 2017 compared to $0.4 million during the three months ended June 30, 2016. Transaction costs represent due diligence and other expenses incurred in connection with business acquisitions and partnership investments pursuant to ongoing strategic planning by management.

Shareholder transaction costs were $2.5 million and $1.5 million during the three months ended June 30, 2017 and 2016, respectively. Shareholder transaction costs are a direct result of the pending Merger Agreement with Tahoe, as well as the Tahoe Transaction, whereby Tahoe and the Selling Stockholders agreed to bear a specified portion of the transaction costs. Further discussion of the Merger Agreement and Tahoe Transaction is disclosed in Note 1 and Note 3, respectively, of the “Notes to Condensed Consolidated Financial Statements.”

Severance and related costs decreased $0.3 million to $0.4 million during the three months ended June 30, 2017 compared to $0.7 million during the three months ended June 30, 2016. During the three months ended June 30, 2016, an executive officer departed from our Company, leading to higher expenses.

Impairment charges were $1.1 million during the three months ended June 30, 2017. There were no impairment charges during the three months ended June 30, 2016. During the three months ended June 30, 2017, we reassessed our plans for the use of purchased software and determined we would not be able to utilize certain capabilities as planned. Accordingly, we recorded a non-cash charge to write down the asset by $0.9 million in our Radiology Division. During the three months ended June 30, 2017, we also recorded a non-cash charge of $0.2 million to write off finite-lived intangible assets associated with the closure of a site location. We wrote off the remaining value of the physicians’ referral network associated with that center in our Radiology Division.

Depreciation expense increased slightly to $13.8 million during the three months ended June 30, 2017 compared to $13.7 million during the three months ended June 30, 2016, due to due to capital investments during the last twelve months.

Amortization expense increased $0.8 million, or 31.3%, to $3.3 million during the three months ended June 30, 2017 compared to $2.5 million during the three months ended June 30, 2016 due to our recently formed Cancer Care Partnership with the Healthcare Authority of the City of Huntsville and the Center for Cancer Care in November 2016.

Interest expense, net was $8.9 million in each of the three months ended June 30, 2017 and 2016.

Other income, net decreased $3.2 million, or 88.9%, to $0.4 million during the three months ended June 30, 2017 compared to $3.5 million during the three months ended June 30, 2016 primarily due to a non-cash gain of $3.0 million recognized during the three months ended June 30, 2016 as a result of remeasuring the our contingent consideration liabilities related to our acquisitions of The Pain Center of Arizona (“TPC”), Pacific Cancer Institute (“PCI”) and PRC Associates, LLC (“PRC”).

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Income tax expense increased $0.2 million to $2.4 million, or 115.0% of pre-tax income, during the three months ended June 30, 2017 compared to $2.2 million, or 47.4% of pre-tax income, during the three months ended June 30, 2016. This rate differed from the federal statutory rate principally as a result of state income taxes and permanent non-deductible tax items, including “Shareholder transaction costs,” share-based payments, unrecognized tax benefits, and other permanent differences.

Earnings from unconsolidated investees were $0.4 million in each of the three months ended June 30, 2017 and 2016.

Net income attributable to noncontrolling interest increased $1.9 million, or 51.6%, to $5.7 million during the three months ended June 30, 2017 compared to $3.7 million during the three months ended June 30, 2016. The increase was mostly attributable to an increase in the year-over-year net income we derived from our joint venture partners.

Net loss attributable to Alliance HealthCare Services, Inc. was $0.3 million, or $0.03 per share on a diluted basis, during the three months ended June 30, 2017 compared to net income of $2.5 million, or $0.23 per share on a diluted basis, during the three months ended June 30, 2016.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

Revenue increased $18.2 million, or 7.3%, to $267.2 million during the six months ended June 30, 2017 compared to $249.0 million during the six months ended June 30, 2016 due to increases in Radiology, Interventional and Oncology revenue of $3.7 million, $12.1 million and $2.4 million, respectively.

Total Radiology revenue increased by $3.7 million, or 2.2%, to $176.9 million during the six months ended June 30, 2017 compared to $173.2 million during the six months ended June 30, 2016. MRI revenue increased $3.6 million, or 3.7%, to $99.9 million during the six months ended June 30, 2017 compared to $96.3 million during the six months ended June 30, 2016. Scan-based MRI revenue decreased slightly during the six months ended June 30, 2017 to $83.4 million from $83.5 million during the six months ended June 30, 2016. The decrease in scan-based MRI revenue was primarily due to year-over-year decreases in the average number of scan-based systems in service and the total number of scan-based MRI scans, partially offset by increases in revenue per scan and scans per system per day. The average number of scan-based systems in service decreased to 215.4 systems during the six months ended June 30, 2017 from 217.5 systems during the same period in the prior year. Total scan-based MRI scan volume decreased 0.8% to 267,232 scans during the six months ended June 30, 2017 from 269,484 scans during the six months ended June 30, 2016. The revenue per scan increased from $309.67 during the six months ended June 30, 2016 to $312.24 during the six months ended June 30, 2017. Scans per scan-based system per day increased to 9.29 during the six months ended June 30, 2017 from 9.22 during the six months ended June 30, 2016. Non scan-based MRI revenue increased $3.6 million to $16.5 million during the six months ended June 30, 2017 over the same period in 2016. Included in the revenue totals above are fixed-site imaging center revenues, which decreased $2.8 million, or 5.1%, to $52.0 million during the six months ended June 30, 2017 from $54.7 million during the six months ended June 30, 2016.

PET/CT revenue increased by $0.4 million, or 0.7%, to $64.2 million during the six months ended June 30, 2017 compared to $63.8 million during the six months ended June 30, 2016. This increase was primarily due to year-over-year increases in scans per system per day and the total number of PET/CT scans, partially offset by the average number of scan-based systems in service and revenue per scan. Scans per system per day increased to 5.62 during the six months ended June 30, 2017 from 5.49 during the six months ended June 30, 2016. The total volume of PET/CT scans increased 2.5% from 69,460 scans during the six months ended June 30, 2016 to 71,221 scans during the six months ended June 30, 2017. The average number of scan-based PET/CT systems in service decreased to 108.6 systems during the six months ended June 30, 2017 compared to 109.3 systems during the six months ended June 30, 2016. The average revenue per PET/CT scan decreased from $883.33 per scan during the six months ended June 30, 2016 to $875.08 per scan during the six months ended June 30, 2017.

Oncology revenue increased $12.1 million, or 23.3%, to $64.0 million during the six months ended June 30, 2017 compared to $51.9 million during the six months ended June 30, 2016 primarily due to a 43.3% increase in the number of Linac treatments performed primarily due to our recently formed Cancer Care Partnership with the Healthcare Authority of the City of Huntsville and the Center for Cancer Care in November 2016, partially offset by a 13.6% decrease in the number of SRS patients treated during the six months ended June 30, 2017 compared to the six months ended June 30, 2016.

Interventional revenue increased $2.4 million, or 10.5%, to $25.5 million during the six months ended June 30, 2017 compared to $23.1 million during the six months ended June 30, 2016 primarily driven by increases in mix of the procedures performed in our ASCs.

Corporate / Other revenue was $0.8 million and $0.9 million during the six months ended June 30, 2017 and 2016, respectively.

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Cost of revenues, excluding depreciation and amortization, increased $12.4 million, or 8.8%, to $153.2 million during the six months ended June 30, 2017 compared to $140.9 million during the six months ended June 30, 2016. The overall increase in cost of revenues was primarily due to our recently formed Cancer Care Partnership with the Healthcare Authority of the City of Huntsville and the Center for Cancer Care in November 2016, as well as incremental radiology resources to support volume growth. The increase in cost of revenues is comprised of a $7.4 million increase in compensation and related employee expenses, a $2.8 million increase in maintenance and related costs, a $1.1 million increase in insurance expense, and a $1.1 million increase in license, taxes and fees expense. Cost of revenues, as a percentage of revenue, increased to 57.3% during the six months ended June 30, 2017 compared to 56.6% during the six months ended June 30, 2016.

Selling, general and administrative expenses decreased $2.9 million, or 6.0%, to $45.5 million during the six months ended June 30, 2017 compared to $48.4 million in the same period of 2016. The decrease to selling, general and administrative expenses was driven by decreases of $1.5 million in compensation and related employee expenses primarily resulting from a reduction in headcount and $1.6 million in share-based compensation primarily related to a change in control in connection with the Tahoe Transaction in March 2016. Further discussion of the Tahoe Transaction is disclosed in Note 3 of the “Notes to Condensed Consolidated Financial Statements.” Selling, general and administrative expenses as a percentage of revenue was 17.0% during the six months ended June 30, 2017 compared to 19.5% during the six months ended June 30, 2016.

Transaction costs decreased $0.5 million, or 63.0%, to $0.3 million during the six months ended June 30, 2017 compared to $0.8 million during the six months ended June 30, 2016. Transaction costs represent due diligence and other expenses incurred in connection with business acquisitions and partnership investments pursuant to ongoing strategic planning by management.

Shareholder transaction costs were $3.4 million and $2.5 million during the six months ended June 30, 2017 and 2016, respectively. Shareholder transaction costs are a direct result of the pending Merger Agreement with Tahoe, as well as the Tahoe Transaction, whereby Tahoe and the Selling Stockholders agreed to bear a specified portion of the transaction costs. Further discussion of the Merger Agreement and Tahoe Transaction is disclosed in Note 1 and Note 3, respectively, of the “Notes to Condensed Consolidated Financial Statements.”

Severance and related costs decreased $1.4 million to $1.0 million during the six months ended June 30, 2017 compared to $2.4 million during the six months ended June 30, 2016. During the six months ended June 30, 2016, an executive officer departed from our Company, leading to higher expenses.

Impairment charges were $1.1 million during the six months ended June 30, 2017. There were no impairment charges during the six months ended June 30, 2016. During the six months ended June 30, 2017, we reassessed our plans for the use of purchased software and determined we would not be able to utilize certain capabilities as planned. Accordingly, we recorded a non-cash charge to write down the asset by $0.9 million in our Radiology Division. During the six months ended June 30, 2017, we also recorded a non-cash charge of $0.2 million to write off finite-lived intangible assets associated with the closure of a site location. We wrote off the remaining value of the physicians’ referral network associated with that center in our Radiology Division.

Depreciation expense increased $1.1 million, or 4.0%, to $27.9 million during the six months ended June 30, 2017 compared to $26.8 million during the six months ended June 30, 2016, due to capital investments during the last twelve months.

Amortization expense increased $1.6 million, or 32.7%, to $6.5 million during the six months ended June 30, 2017 compared to $4.9 million during the six months ended June 30, 2016 due to our recently formed Cancer Care Partnership with the Healthcare Authority of the City of Huntsville and the Center for Cancer Care in November 2016.

Interest expense, net increased $1.3 million, or 7.8%, to $17.6 million during the six months ended June 30, 2017 compared to $16.4 million during the six months ended June 30, 2016 primarily due to an increase in deferred financing costs associated with the amendments to our credit facility, partially offset by a decrease in interest expense resulting from a decrease in borrowings under our senior secured credit agreement. Of the $1.3 million increase, $2.0 million resulted from the March 29, 2016 third amendment to our credit facility, which was executed in connection with the Tahoe Transaction. This expense was paid by the buyer and sellers involved in the Tahoe Transaction.

Other income, net decreased $3.5 million, or 79.8%, to $0.9 million during the six months ended June 30, 2017 compared to $4.3 million during the six months ended June 30, 2016 primarily due to a non-cash gain of $3.6 million recognized during the six months ended June 30, 2016 as a result of remeasuring the our contingent consideration liabilities related to our acquisitions of TPC, PCI and PRC.

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Income tax expense increased $1.1 million to $2.4 million, or 163.7% of pre-tax income, during the six months ended June 30, 2017 compared to $1.3 million, or 50.1% of pre-tax income, during the six months ended June 30, 2016. This rate differed from the federal statutory rate principally as a result of state income taxes and permanent non-deductible tax items, including “Shareholder transaction costs,” share-based payments, unrecognized tax benefits, and other permanent differences.

Earnings from unconsolidated investees were $0.7 million and $0.6 million during the six months ended June 30, 2017 and 2016, respectively.

Net income attributable to noncontrolling interest increased $2.4 million, or 28.9%, to $10.7 million during the six months ended June 30, 2017 compared to $8.3 million during the six months ended June 30, 2016. The increase was mostly attributable to a increase in the year-over-year net income we derived from our joint venture partners.

Net loss attributable to Alliance HealthCare Services, Inc. was $0.9 million, or $0.08 per share on a diluted basis, during the six months ended June 30, 2017 compared to net income of $1.3 million, or $0.12 per share on a diluted basis, during the six months ended June 30, 2016.

Adjusted EBITDA

Total Adjusted EBITDA is not a measure of financial performance under GAAP. We believe that, in addition to GAAP metrics, this non-GAAP metric is a useful measure for investors for a variety of reasons. Our management regularly communicates Adjusted EBITDA and their interpretation of such results to our board of directors. We also compare actual periodic Adjusted EBITDA against internal targets as a key factor in determining cash incentive compensation for executives and other employees, largely because we view Adjusted EBITDA results as indicative of how our radiology, oncology and interventional businesses are performing and are being managed.

Our definition of Adjusted EBITDA is consistent with the definition pursuant to our Credit Agreement and represents net (loss) income before: income tax expense; interest expense, net; depreciation expense; amortization expense; share-based payment; severance and related costs; net income attributable to noncontrolling interest; restructuring charges; transaction costs; shareholder transaction costs; impairment charges; legal matters (income) expense, net; changes in fair value of contingent consideration related to acquisitions; and other non-cash benefits, net, which include gain on sale of assets, net. The components used to reconcile net (loss) income to Adjusted EBITDA are consistent with our historical presentation of Adjusted EBITDA.

The presentation of a non-GAAP metric does not imply that the reconciling items presented are non-recurring, infrequent or unusual. In general, non-GAAP metrics have certain limitations as analytical financial measures and are used in conjunction with GAAP results to evaluate our operating performance and by considering independently the economic effects of the items that are, or are not, reflected in non-GAAP metrics. We compensate for such limitations by providing GAAP-based disclosures concerning the excluded items in our financial disclosures. As a result of these limitations, and because non-GAAP metrics may not be directly comparable to similarly titled measures reported by other companies, the non-GAAP metrics are not an alternative to the most directly comparable GAAP measure or an alternative to any other GAAP measure of operating performance.

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Total Adjusted EBITDA increased 10.9% to $38.2 million during the three months ended June 30, 2017 compared to $34.4 million during the three months ended June 30, 2016. The changes in Adjusted EBITDA by segment are shown below. The overall increase was primarily driven by increases in Radiology, Oncology and Interventional Adjusted EBITDA, partially offset by a decrease in Corporate / Other Adjusted EBITDA. Radiology Adjusted EBITDA increased due to strong customer retention and continued same-store volume growth in PET/CT. Oncology Adjusted EBITDA increased due to our recently formed Cancer Care Partnership with the Healthcare Authority of the City of Huntsville and the Center for Cancer Care in November 2016. Adjusted EBITDA growth in Interventional was driven by increases in mix of the procedures performed in our new ASCs, which were partially offset by additional expenses related to new ASC capacity as well as platform investments made to strengthen management and development capabilities. Corporate / Other Adjusted EBITDA decreased due to increased spend related to our efforts to expand our business into China and asset gains which are included in our Radiology segment beginning in the current period.

Total Adjusted EBITDA increased 9.5% to $71.0 million during the six months ended June 30, 2017 compared to $64.8 million during the six months ended June 30, 2016. The changes in Adjusted EBITDA by segment are shown below. The overall increase was primarily driven by increases in Radiology, Oncology and Interventional Adjusted EBITDA, partially offset by a decrease in Corporate / Other Adjusted EBITDA. Radiology Adjusted EBITDA increased due to strong customer retention and continued same-store volume growth in PET/CT. Oncology Adjusted EBITDA increased due to our recently formed Cancer Care Partnership with the Healthcare Authority of the City of Huntsville and the Center for Cancer Care in November 2016. Adjusted EBITDA growth in Interventional was driven by increases in mix of the procedures performed in our new ASCs, which were partially offset by additional expenses related to new ASC capacity as well as platform investments made to strengthen management and development capabilities. Corporate / Other Adjusted EBITDA decreased due to increased spend related to our efforts to expand our business into China, temporary upfront costs in connection with the relocation of our headquarter facilities, increases in auditor fees, changes in the 2016 long-term incentive structure executed in connection with the March 29, 2016 Tahoe Transaction, and asset gains which are included in our Radiology segment beginning in the current period.

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The reconciliation of net (loss) income to Adjusted EBITDA is shown below:

 

 

Liquidity and Capital Resources

Our primary source of liquidity is cash provided by operating activities. We generated $49.5 million and $57.9 million of cash flow from operating activities in the six months ended June 30, 2017 and 2016, respectively. Our ability to generate cash flow is affected by numerous factors, including demand for MRI, PET/CT, other diagnostic imaging, radiation oncology, interventional services and other revenues. Our ability to generate cash flow from operating activities is also dependent upon the collections of our accounts receivable. The provision for doubtful accounts decreased by $0.2 million during the six months ended June 30, 2017 compared to the six months ended June 30, 2016. Our number of days of revenue outstanding for our accounts receivable falls within our expected range and historical experience at 54 days as of June 30, 2017 and 55 days at December 31, 2016. We believe our number of days of revenue outstanding is comparable to other radiology and oncology providers. As of June 30, 2017, we had $30.4 million of available borrowings under our revolving loan facility, net of $15.0 million outstanding on the revolving loan facility and $4.6 million outstanding in letters of credit. Our revolving loan facility matures on June 3, 2018.

We used cash of $20.3 million and $54.1 million for investing activities in the six months ended June 30, 2017 and 2016, respectively. Investing activities during the first six months of 2017 included $11.2 million in cash used for equipment purchases and $8.0 million in cash used for deposits on equipment.

Capital expenditures totaled $11.2 million and $34.0 million during the six months ended June 30, 2017 and 2016, respectively. We purchased 1 MRI systems, 4 PET/CT systems, and 2 other imaging equipment units, upgraded various imaging equipment and traded-in or sold a total of 21 systems during the six months ended June 30, 2017. We expect to purchase additional systems in the remainder of 2017 and finance substantially all of these purchases with our available cash, cash from operating activities and financing and equipment leases.

Net cash used in financing activities for the six months ended June 30, 2017 of $28.8 million was primarily due to principal payments on equipment debt and capital lease obligations of $8.1 million, principal payments on revolving loan facility of $20.0 million, principal payments on term loan facility of $2.6 million, principal payment on note payable of $3.0 million, and distributions to noncontrolling interest in subsidiaries of $11.4 million, partially offset by our proceeds from equipment debt and revolving loan facility of $2.2 million and $13.5 million, respectively, and contributions from noncontrolling interest in subsidiaries of $1.0 million.

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We had cash and cash equivalents of $22.7 million and $22.2 million at June 30, 2017 and December 31, 2016, respectively. Available cash and cash equivalents are held in accounts managed by third-party financial institutions and consist of invested cash and cash in our operating accounts. The invested cash is invested in interest-bearing funds managed by third-party financial institutions. To date, we have experienced no loss or lack of access to our invested cash or cash equivalents; however, we cannot assure that access to our invested cash and cash equivalents will not be affected by adverse conditions in the financial markets. At June 30, 2017 and December 31, 2016, we had $28.3 million and $15.4 million, respectively, in our accounts with third-party financial institutions that exceeded the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. While we monitor daily the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be adversely affected if the underlying financial institutions fail or could be subject to other adverse conditions in the financial markets.

We believe that, based on current levels of operations, our cash flow from operating activities, together with other available sources of liquidity, including borrowings available under our revolving loan facility, will be sufficient over the next year to fund anticipated capital expenditures and make required payments of principal and interest on our debt and other contracts. As of June 30, 2017, we are in compliance with all covenants contained in our senior secured credit agreement.

Credit Facility

On June 3, 2013, we replaced our existing credit facility with a new senior secured credit agreement with Credit Suisse AG, Cayman Islands Branch, as administrative agent, and the other lenders party thereto (the “Credit Agreement”). The Credit Agreement consists of (i) a $340.0 million, six-year term loan facility, (ii) a $50.0 million, five-year revolving loan facility, including a $20.0 million sublimit for letters of credit, (iii) uncommitted incremental loan facilities of $100.0 million of revolving or term loans, plus an additional amount if our pro forma leverage ratio is less than or equal to 3.25, subject to receipt of lender commitments and satisfaction of specified conditions, and (iv) a $80.0 million delayed draw term loan facility, which was drawn within thirty days of June 3, 2013 and used for the redemption of our 8% Senior Notes due 2016 (the “Notes”). The delayed draw term loan facility converted into, and matched the terms of, the $340.0 million term loan facility.

On October 11, 2013, we entered into an amendment to the Credit Agreement (the “First Amendment”). Pursuant to the First Amendment, we raised $70.0 million in incremental term loan commitments to repurchase the remaining Notes. We used the proceeds from the incremental term loan commitments, borrowings under our revolving loan facility and cash on hand to complete the redemption of all our outstanding Notes on December 4, 2013.

On June 19, 2015, we entered into a second amendment to the Credit Agreement (the “Second Amendment”). Pursuant to the Second Amendment, we raised the remaining $30.0 million in incremental term loan commitments. The funds were used to repay all outstanding borrowings under our revolving loan facility, to pay fees and expenses related to the Second Amendment, and for general corporate purposes. The incremental term loans under the Second Amendment were funded at 99.5% of principal amount. Upon funding, the incremental term loans were converted to match all the terms of existing term loans.

On March 29, 2016, we entered into a third amendment to the Credit Agreement (the “Third Amendment”). Pursuant to the Third Amendment, (i) the defined term “Investors” was amended to include THAIHOT Investment Company Limited, so that the sale by the Selling Stockholders would not be deemed to constitute a change of control and (ii) the soft call provision was reinstated to commence on the date the Third Amendment is effective and end the date that is twelve months after such commencement.

Under the soft call provision, which expired on March 29, 2017, if we made a voluntary prepayment of any term loan or prepaid, refinanced, substituted or replaced any term loan, and such action resulted in a reduction in the effective interest cost or weighted average yield of the term loan, then we should pay to the administrative agent, for the ratable account of each of the lenders holding term loans, a prepayment premium equal to 1.0% of the aggregate principal amount of the term loans so prepaid, refinanced, substituted or replaced.

In connection with the Third Amendment, we paid fees totaling $25.0 million, which were capitalized and amortized using the effective interest method as interest expense over the term of the Credit Agreement. These fees were paid by both the buyer and sellers in the Tahoe Transaction.

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Borrowings under the Credit Agreement bear interest through maturity at a variable rate based upon, at our option, either the London interbank offered rate (“LIBOR”) or the base rate (which is the highest of the administrative agent’s prime rate, one-half of 1.00% in excess of the overnight federal funds rate, and 1.00% in excess of the one-month LIBOR rate), plus, in each case, an applicable margin. With respect to the term loan facilities, the applicable margin for LIBOR loans is 3.25% per annum, and with respect to the revolving loan facility, the applicable margin for LIBOR loans ranges from 3.00% to 3.25% per annum, based on the applicable leverage ratio, and in each case, with a LIBOR floor of 1.00%. The applicable margin for base rate loans under the term loan facilities is 2.25% per annum and under the revolving loan facility ranges from 2.00% to 2.25% per annum, based on the applicable leverage ratio. We are required to pay a commitment fee which ranges from 0.375% to 0.50% per annum, based on the applicable leverage ratio, on the undrawn portion available under the revolving loan facility and variable per annum fees with respect to outstanding letters of credit.

We are required to make quarterly amortization payments on the term loan of $1.3 million. We are also required to make mandatory prepayments of term loans under the Credit Agreement, subject to specified exceptions, from excess cash flow (as defined in the Credit Agreement), and with the proceeds of asset sales, debt issuances and specified other events.

Our obligations under the Credit Agreement are guaranteed by substantially all our direct and indirect domestic subsidiaries. Our obligations under the Credit Agreement and our guarantees are secured by a lien on substantially all of our tangible and intangible property, and by a pledge of all of our shares of stock and limited liability company interests of our direct and indirect domestic subsidiaries, of which we now own or later acquire more than a 50% interest, subject to limited exceptions.

In addition to other covenants, the Credit Agreement places limits on our ability, including our subsidiaries, to declare dividends or redeem or repurchase capital stock; prepay, redeem or purchase debt; incur liens and engage in sale-leaseback transactions; make loans and investments; incur additional indebtedness; amend or otherwise alter debt and other material agreements; engage in mergers, acquisitions and asset sales; transact with affiliates and alter the business we and our subsidiaries conduct.

The Credit Agreement also contains a leverage ratio covenant requiring us to maintain a maximum ratio of consolidated total debt to Consolidated Adjusted EBITDA that ranges from 4.95 to 1.00 to 4.30 to 1.00. At June 30, 2017, the Credit Agreement required a maximum leverage ratio of not more than 4.30 to 1.00. Failure to comply with the covenants in the Credit Agreement could permit the lenders under the Credit Agreement to declare all amounts borrowed under the Credit Agreement, together with accrued interest and fees, to be immediately due and payable and to terminate all commitments under the Credit Agreement. As of June 30, 2017, we were in compliance with the covenants for the Credit Agreement. Our ratio of consolidated total debt to Consolidated Adjusted EBITDA calculated pursuant to the Credit Agreement was 3.95 to 1.00 as of June 30, 2017. As of June 30, 2017, there was $495.1 million outstanding under the term loan facility and $15.0 million in borrowings under the revolving loan facility.

Equipment Debt

Certain of our equipment debt obligations are subject to covenants with which we must comply on a quarterly or annual basis. An amendment to the financing agreement with Bank of the West (“BOW”) was executed on April 28, 2017, retroactive to March 31, 2017, that modified certain financial covenants. We were in compliance with all covenants as of June 30, 2017.

Interest Rate Swaps

We entered into multiple interest rate swap agreements to hedge the future cash interest payments on portions of our variable rate bank debt (Note 10 of the “Notes to Condensed Consolidated Financial Statements”). At June 30, 2017, we had interest rate swap agreements to hedge approximately $12.6 million of variable rate bank debt, or 2.25% of total debt. The amount we expect to reclassify from accumulated other comprehensive income to interest expense, net over the next twelve months is immaterial.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, please refer to Note 2 of the “Notes to Condensed Consolidated Financial Statements.”

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Cautionary Statement Regarding Forward-looking Statements

Certain statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations, particularly in the sections entitled “Overview,” “Results of Operations” and “Liquidity and Capital Resources,” and elsewhere in this Quarterly Report on Form 10-Q, are “forward-looking statements,” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

In some cases you can identify these statements by forward-looking words, such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “seek,” “intend” and “continue” or similar words. Forward-looking statements may also use different phrases. Forward-looking statements address, among other things, our future expectations, projections of our future results of operations or of our financial condition and other forward-looking information and include statements related to our improvement plan, including our efforts to grow the Radiology, Oncology, and Interventional Divisions, and expected annualized savings.

Statements regarding the following subjects, among others, are forward-looking by their nature:

(a) future legislation and other healthcare regulatory reform actions, and the effect of that legislation and other regulatory    actions on our business;

(b) our expectations with respect to future radiology services and oncology and interventional volumes and revenues;

(c) the effect of seasonality on our business;

(d) expectations with respect to capital expenditures in 2017;

(e) the effect of recent accounting pronouncements on our results of operations and cash flows or financial position;

(f) our business and strategic plans, including the effect of growth and cost-cutting initiatives;

(g) our compliance with legal and regulatory requirements;

(h) compliance with our debt covenants;

(i) unrecognized tax benefits and the adequacy of our tax provisions; and

(j) our belief regarding the sufficiency of our cash and cash equivalents to meet our working capital, capital expenditure and other cash needs.

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We believe it is important to communicate our expectations to our investors. There may be events in the future, however, that we are unable to predict accurately or that we do not fully control that cause actual results to differ materially from those expressed or implied by our forward-looking statements, including:

Further information about factors that could materially affect us, including our results of operations and financial condition, is contained under “Risk Factors” in Item 1A in our 2016 Form 10-K. Except as required by law, we undertake no obligation to revise or update any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or changes to future results over time or otherwise.

 

 

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There have been no material changes in the information provided in the section entitled “Quantitative and Qualitative Disclosures about Market Risk” in the 2016 Form 10-K.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, we have investments in certain unconsolidated entities. As we do not control or manage these entities, our disclosure controls and procedures with respect to such entities are more limited than those we maintain with respect to our consolidated subsidiaries. These unconsolidated entities are not considered material to our consolidated financial position or results of operations.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such time at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There has not been any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

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PART II—OTHER INFORMATION

For a description of our legal proceedings, please refer to Part I, Item 1, Note 13 of the “Notes to Condensed Consolidated Financial Statements” contained in this Form 10-Q, which is incorporated herein by reference in response to this Item.

We have included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016, a description of risks and uncertainties that could affect our business, future performance or financial condition (the “Risk Factors”). The Risk Factors are hereby incorporated in Part II, Item 1A of this quarterly report on Form 10-Q. There have been no material changes in our risk factors from those disclosed in the Risk Factors. Investors should consider the Risk Factors prior to making an investment decision with respect to our stock.

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(a) Exhibits

 

 

 

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

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