Notes
to Consolidated Financial Statements
Note
1 – Business and Basis of Presentation
Business
–
These consolidated
financial statements include the accounts of American Shared Hospital Services (the “Company”) and its subsidiaries
as follows: The Company wholly-owns the subsidiaries American Shared Radiosurgery Services (“ASRS”) , PBRT Orlando,
LLC (“Orlando”), OR21, Inc. (“OR21 LLC”), and MedLeader.com, Inc. (“MedLeader”). The Company
is also the majority owner of Long Beach Equipment, LLC (“LBE”). ASRS is the majority-owner of GK Financing, LLC (“GKF”)
which wholly-owns the subsidiaries Instituto de Gamma Knife del Pacifico S.A.C. (“GKPeru”) and GK Financing U.K., Limited
(“GKUK”). GKF is also the majority-owner of the subsidiaries Albuquerque GK Equipment, LLC (“AGKE”), Jacksonville
GK Equipment, LLC (“JGKE”), and EWRS, LLC (“EWRS”), which, prior to its sale in June 2014, wholly-owned
the subsidiary, EWRS Tibbi Cihazlar Ticaret Ltd Sti (“EWRS Turkey”).
The Company (through ASRS) and Elekta AB,
the manufacturer of the Gamma Knife (through its wholly-owned United States subsidiary, GKV Investments, Inc.), entered into an
operating agreement and formed GK Financing, LLC. During 2016 GKF provided Gamma Knife units to seventeen medical centers in the
United States in the states of Arkansas, California, Connecticut, Florida, Illinois, Massachusetts, Mississippi, Nevada, New Jersey,
New Mexico, New York, Tennessee, Oklahoma, Ohio, Oregon and Texas.
The Company through its wholly-owned subsidiary,
Orlando, provided proton beam radiation therapy (“PBRT”) and related equipment, to a new customer in the United States,
which treated its first patient during the second quarter of 2016. The Company also directly provides radiation therapy and related
equipment, including Intensity Modulated Radiation Therapy (“IMRT”), Image Guided Radiation Therapy (“IGRT”)
and a CT Simulator to the radiation therapy department at an existing Gamma Knife site in Massachusetts.
The Company formed the
subsidiaries GKPeru and GKUK for the purposes of expanding its business internationally into Peru and the United Kingdom; Orlando
and LBE to provide proton beam therapy services in Orlando, Florida and Long Beach, California ; and AGKE and JGKE to provide
Gamma Knife services in Albuquerque, New Mexico and Jacksonville, Florida. AGKE began operation in the second quarter of 2011
and JGKE began operation in the fourth quarter of 2011. Orlando treated its first patient in April 2016. GKPeru is expected to
begin operation in the third quarter of 2017. GKUK is inactive and LBE is not expected to generate revenue within the next two
years.
The
Company continues to develop its design and business model for “The Operating Room for the 21st Century” SM (“OR21”
SM), through its 50% owned OR21, LLC. The remaining 50% is owned by an architectural design company. OR21 is not expected to generate
significant revenue within the next two years.
MedLeader
was formed to provide continuing medical education online and through videos for doctors, nurses and other healthcare workers.
This subsidiary is not operational at this time.
All
significant intercompany accounts and transactions have been eliminated in consolidation.
Note
2 – Accounting Policies
Use of estimates
in the preparation of financial statements
– In preparing the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial
statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant accounting estimates
reflected in the Company’s consolidated financial statements include estimated useful lives of fixed assets and its salvage
values, revenues and costs of sales for turn-key and revenue sharing arrangements, and the carrying value of its Mevion investment.
Actual results could differ from those estimates.
Advertising
costs
– The Company expenses advertising costs as incurred. Advertising costs were $279,000, $115,000, and $155,000
during the years ended December 31, 2016, 2015, and 2014, respectively. Advertising costs are recorded in other direct operating
costs and sales and administrative costs in the consolidated statements of operations.
American
Shared Hospital Services
Notes
to Consolidated Financial Statements
Note
2 – Accounting Policies (continued)
Cash
and cash equivalents
– The Company considers all liquid investments with original maturities of three months or less
at the date of purchase to be cash equivalents. Restricted cash is not considered a cash equivalent for purposes of the consolidated
statements of cash flows.
Restricted
cash
– Restricted cash represents the minimum cash that must be maintained in GKF to fund operations, per the subsidiary’s
operating agreement, and the minimum cash that must be maintained in Orlando per the subsidiary’s financing agreement.
Business
and credit risk
– The Company maintains its cash balances, which exceed federally insured limits, in financial institutions.
Until January 2015, most of the Company’s cash was invested in a certificate of deposit. The Company has not experienced
any losses and believes it is not exposed to any significant credit risk on cash, cash equivalents and securities. The Company
monitors the financial condition of the financial institutions it uses on a regular basis.
All
of the Company’s revenue was provided by eighteen, seventeen, and twenty customers in 2016, 2015, and, 2014, and these customers
constitute accounts receivable at December 31, 2016 and 2015, respectively. The Company performs credit evaluations of its customers
and generally does not require collateral. The Company has not experienced significant losses related to receivables from individual
customers or groups of customers in any particular geographic area.
Accounts
receivable and doubtful accounts
– Accounts receivable are recorded at net realizable value. An allowance for doubtful
accounts is estimated based on historical collections plus an allowance for probable losses. Receivables are considered past due
based on contractual terms and are charged off in the period that they are deemed uncollectible. Recoveries of receivables previously
charged off are recorded as revenue when received.
Non-controlling
interests
- The Company reports its non-controlling interests as a separate component of shareholders’ equity. The Company
also presents the consolidated net income and the portion of the consolidated net income and other comprehensive income allocable
to the non-controlling interests and to the shareholders of the Company separately in its consolidated statements of operations
and comprehensive income (loss).
Property and equipment
– Property and equipment are stated at cost less accumulated depreciation. Depreciation for Gamma Knife, IGRT, and other
equipment is determined using the straight-line method over the estimated useful lives of the assets, which for medical and office
equipment is generally 3 – 10 years, and after accounting for salvage value on the equipment where indicated. Salvage value
is based on the estimated fair value of the equipment at the end of its useful life.
The Company adopted a
new accounting policy for the depreciation of PBRT property and equipment. Depreciation is determined using the modified units
of production method, which is a function of both time and usage of the equipment. This depreciation method allocates costs considering
the projected volume of usage through the useful life of the PBRT unit, which has been estimated at 20 years. The estimated useful
life of the PBRT unit is consistent with the estimated economic life of 20 years.
The Company capitalizes
interest incurred on property and equipment that is under construction, for which deposits or progress payments have been made.
When a rate is not readily available, imputed interest is calculated using the Company’s incremental borrowing rate. The
interest capitalized for property and equipment is the portion of interest cost incurred during the acquisition periods that could
have been avoided if expenditures for the equipment had not been made. The Company capitalized interest of $443,000, $431,000,
and $371,000 in 2016, 2015, and 2014, respectively, as costs of medical equipment.
American
Shared Hospital Services
Notes
to Consolidated Financial Statements
Note
2 – Accounting Policies (continued)
The Company leases Gamma
Knife and radiation therapy equipment to its customers under arrangements typically accounted for as operating leases. At December
31, 2016, the Company held equipment under operating lease contracts with customers with an original cost of $96,270,000 and accumulated
depreciation of $53,306,000. At December 31, 2015, the Company held equipment under operating lease contracts with customers with
an original cost of $83,267,000 and accumulated depreciation of $47,198,000.
In
July 2016, an existing customer provided notice of their intent to exercise the option to purchase the Gamma Knife unit at their
hospital at the end of the lease term for a predetermined purchase price, pursuant to the lease agreement. The lease will terminate
April 2017 and the unit will be depreciated to the purchase price at the time of the sale. Based on the guidance provided in Accounting
Standards Codification (“ASC”) 360
Property, Plant and Equipment
(“ASC 360”), because the Gamma
Knife unit is not available for immediate sale, the Company has not classified and measured the asset as held for sale.
Investment
in equity securities –
As of December 31, 2016 the Company had common stock representing an approximate 0.46% interest
in Mevion Medical Systems, Inc. (“Mevion”), and accounts for this investment under the cost method. The carrying value
of the Company’s investment in Mevion was $579,000 as of December 31, 2016 and December 31, 2015. The Company reviews its
investment in Mevion for impairment on a quarterly basis, or as events or circumstances might indicate that the carrying value
of the investment may not be recoverable. See Note 4 – Investment in Equity Securities for further discussion regarding
impairment of the investment
Fair
value of financial instruments
– The Company’s disclosures of the fair value of financial instruments is
based on a fair value hierarchy which prioritizes the inputs to the valuation techniques used to measure fair value into
three levels. Level 1 inputs are unadjusted quoted market prices in active markets for identical assets and liabilities that
the Company has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices within
Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs
for assets or liabilities, and reflect the Company’s own assumptions about the assumptions that market participants
would use in pricing the asset or liability.
The estimated
fair value of the Company’s assets and liabilities as of December 31, 2016 and December 31, 2015 were as follows (in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Carrying Value
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, restricted cash
|
|
$
|
3,121
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,121
|
|
|
$
|
3,121
|
|
Certificate of deposit
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Investment in equity securities
|
|
|
-
|
|
|
|
-
|
|
|
|
579
|
|
|
|
579
|
|
|
|
579
|
|
Total
|
|
$
|
3,121
|
|
|
$
|
-
|
|
|
$
|
579
|
|
|
$
|
3,700
|
|
|
$
|
3,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances on line of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Debt obligations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,354
|
|
|
$
|
7,354
|
|
|
$
|
7,311
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,354
|
|
|
$
|
7,354
|
|
|
$
|
7,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, restricted cash
|
|
$
|
2,259
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,259
|
|
|
$
|
2,259
|
|
Investment in equity securities
|
|
|
-
|
|
|
|
-
|
|
|
|
579
|
|
|
|
579
|
|
|
|
579
|
|
Total
|
|
$
|
2,259
|
|
|
$
|
-
|
|
|
$
|
579
|
|
|
$
|
2,838
|
|
|
$
|
2,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt obligations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,744
|
|
|
$
|
9,744
|
|
|
$
|
9,597
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,744
|
|
|
$
|
9,744
|
|
|
$
|
9,597
|
|
American
Shared Hospital Services
Notes
to Consolidated Financial Statements
Note
2 – Accounting Policies (continued)
Revenue
recognition
-
Revenue
is recognized when services have been rendered and collectability is reasonably assured, on either a fee per use or revenue sharing
basis. As of December 31, 2016, there are no guaranteed minimum payments. The Company’s contracts are typically for a ten
year term and are classified as either fee per use or retail. Retail arrangements are further classified as either turn-key or
revenue sharing. Revenue from fee per use contracts is determined by each hospital’s contracted rate. Revenue is recognized
at the time the procedures are performed, based on each hospital’s contracted rate. Under revenue sharing arrangements,
the Company receives a contracted percentage of the reimbursement received by the hospital. The amount the Company expects to
receive is recorded as revenue and estimated based on historical experience. Under turn-key arrangements, the Company receives
payment from the hospital in the amount of its reimbursement from third party payors, and the Company is responsible for paying
all the operating costs of the Gamma Knife. The Company also records an estimate of net operating profit based on estimated revenues,
less estimated operating costs. The gross amount the Company expects to receive from the hospital, in the amount of its reimbursement
from third party payors, is recorded as revenue and estimated based on historical experience and hospital contracts with third
party payors. Revenue estimates are reviewed periodically and adjusted as necessary. The operating costs of the Gamma Knife and
estimated net operating profit are recorded as other direct operating costs in the consolidated statement of operations. Revenue
recognition is consistent with guidelines provided under the applicable accounting standards for revenue recognition.
Stock-based compensation
–
The Company measures all stock-based compensation awards at fair value and records such expense in its consolidated financial
statements over the requisite service period of the related award. See Note 8 for additional information on the Company’s
stock-based compensation programs.
Costs
of revenue –
The Company's costs of revenue consist primarily of maintenance and supplies, depreciation and amortization,
and other operating expenses (such as insurance, property taxes, sales taxes, marketing costs and operating costs from the Company’s
retail sites). Costs of revenues are recognized as incurred.
Sales
and Marketing
– The Company markets its services through its preferred provider status with Elekta and a direct sales
effort led by its Vice President of Sales and Business Development and its Chief Operating Officer. The Company’s current
business is the outsourcing of stereotactic radiosurgery services and radiation therapy services. The Company typically provides
the equipment, as well as planning, installation, reimbursement and marketing support services.
Income
taxes
– The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax
assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. See
Note 8 for further discussion on income taxes.
Comprehensive
income (loss)
– Comprehensive income (loss) encompasses all changes in shareholders’ equity other than those arising
from transactions with stockholders, and consists of net loss and foreign currency translation adjustments.
Functional
currency
– Based on guidance provided in accordance with ASC 830,
Foreign Currency Matters
(“ASC 830”),
the Company analyzes its operations outside the United States to determine the functional currency of each operation. Management
has determined that these operations are initially accounted for in U.S. dollars since the primary transactions incurred are in
U.S. dollars and the Company provides significant funding towards the startup of the operation. When Management determines that
an operation has become predominantly self-sufficient, the Company will change its accounting for the operation to the local currency
from the U.S. dollar.
Gains
and losses from foreign currency transactions and remeasurement are listed in the Company’s consolidated statements of operations.
The net foreign currency loss was $0 in 2016 and 2015, compared to a gain for 2014, prior to the sale of EWRS Turkey, of $161,000.
American
Shared Hospital Services
Notes
to Consolidated Financial Statements
Note
2 – Accounting Policies (continued)
Cumulative
translation adjustment
– Based on guidance provided in accordance with Accounting Standards Update (“ASU”)
No 2013-05
Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries of
Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity
(“ASU
2013-05”),
the Company no longer holds
a
financial interest in EWRS Turkey. As such, the cumulative translation adjustments previously recognized under accumulated other
comprehensive (loss) were released into net income as a
component of the loss for the
sale of EWRS Turkey in the statement of operations. The total cumulative translation adjustment of $779,000, previously recognized
under accumulated other comprehensive income (loss), was included as a component of the loss calculation for the sale of EWRS
Turkey, reported in the statement of operations for the year ended 2014.
Discontinued
Operations
– Based on guidance provided in accordance with ASU No. 2014-08
Reporting Discontinued Operations and
Disclosures of Disposals of Components of an Entity
(“ASU 2014-08”), the Company has analyzed the factors that
define a discontinued operation and determined that the sale of EWRS Turkey is
considered
the sale of a significant component, but does not represent a major shift in the business, and therefore is not a discontinued
operation.
Effective
May 31, 2014 (with closing occurring June 10, 2014) the Company sold EWRS Turkey for EUR 4.2 million (approximately $6.0M). The
proceeds were used to reduce outstanding debt and the excess was cash to the Company of $768,000. The Company recorded a loss
on sale of subsidiary of $572,000.
The
Company was also eligible for an earn-out in fiscal years 2014 and 2015 based on future revenue derived from the units sold to
Euromedic. The Company did not meet its earn-out milestone for 2014 or 2015.
Asset
Retirement Obligations
– Based on the guidance provided in ASC 410
Asset Retirement Obligations
(“ASC 410”),
the Company analyzed the lease agreement with Orlando Health for the PBRT system and determined an asset retirement obligation
(“ARO”) exists to remove the unit at the end of the lease term. The fair value of the ARO liability is not reasonable
to estimate at this time, due to uncertainties about timing, cost and, outcome of the ARO, therefore no liability has been recorded
as of December 31, 2016. The Company will re-evaluate this position on a periodic basis when facts and circumstances change that
could affect this conclusion.
Earnings
per share
– Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders
by the weighted average number of common shares outstanding for the year. The fully vested restricted stock units not issued and
outstanding, are also included therein. Diluted earnings per share reflect the potential dilution that could occur if common shares
were issued pursuant to the exercise of options or warrants.
American
Shared Hospital Services
Notes
to Consolidated Financial Statements
Note
2 – Accounting Policies (continued)
The
following table illustrates the computations of basic and diluted earnings per share for the years ended December 31, 2016, 2015,
and 2014.
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
for basic and diluted earnings (loss) per share
|
|
$
|
930,000
|
|
|
$
|
(1,522,000
|
)
|
|
$
|
(952,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic and diluted earnings (loss) per
share – weighted-average shares
|
|
|
5,570,000
|
|
|
|
5,519,000
|
|
|
|
5,028,000
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
13,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted (loss) earnings per
share – adjusted weighted-average shares
|
|
|
5,583,000
|
|
|
|
5,519,000
|
|
|
|
5,028,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common
share- basic
|
|
$
|
0.17
|
|
|
$
|
(0.28
|
)
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common
share- diluted
|
|
$
|
0.17
|
|
|
$
|
(0.28
|
)
|
|
$
|
(0.19
|
)
|
In 2016,
options outstanding to purchase 581,000 shares of common stock at an exercise price range of $2.43 - $3.15 per share were not
included in the calculation of diluted earnings per share because they would be anti-dilutive.
In 2015,
options outstanding to purchase 614,000 shares of common stock at an exercise price range of $2.05 - $3.15 per share, and warrants
to purchase 200,000 shares of common stock, issued with promissory notes, at an exercise price of $2.20, were not included in
the calculation of diluted earnings per share because they would be anti-dilutive.
In 2014,
options outstanding to purchase 633,000 shares of common stock at an exercise price range of $2.43 - $6.16 per share, and warrants
to purchase 200,000 shares of common stock, issued with promissory notes, at an exercise price of $2.20, were not included in
the calculation of diluted earnings per share because they would be anti-dilutive.
Business
segment information
-
Based on the guidance provided in accordance with ASC 280
Segment Reporting
(“ASC 280”), the Company has
analyzed its subsidiaries which are all in the business of leasing radiosurgery and radiation therapy equipment to healthcare
providers, and concluded there is one reportable segment, Medical Services Revenue. The Company provides Gamma Knife, PBRT,
and IGRT equipment to eighteen hospitals in the
United States as of December 31, 2016.
These eighteen locations operate under different subsidiaries of the Company, but offer the same service, radiosurgery and
radiation therapy. The operating results of the subsidiaries are reviewed by the Company’s Chief Executive Officer and
Chief Financial Officer, who are also deemed the Company’s Chief Operating Decision Makers (“CODMs”) and
this is done in conjunction with all of the subsidiaries and locations.
The Company
did not have any international operations as of December 31, 2016, but the Company’s unit in Peru is expected to begin operations
in 2017 and is reflected in the property and equipment table below for 2016.
American
Shared Hospital Services
Notes
to Consolidated Financial Statements
Note
2 – Accounting Policies (continued)
The following
table provides a break out of domestic and foreign allocations of medical services revenues and net property and equipment:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Medical services revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Property and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
93
|
%
|
|
|
93
|
%
|
|
|
94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
7
|
%
|
|
|
7
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Nonmonetary transactions
–
Based on guidance provided in accordance with ASC No. 845
Nonmonetary Transactions
(“ASC 845”), barter transactions
with commercial substance are recorded at the estimated fair value of the products exchanged, unless the products received have
a more readily determinable estimated fair value. The Company entered into a lease agreement in December 2014 where the lessee
exchanged certain medical services equipment for a nominal amount and more beneficial contract terms related to the revenue sharing
arrangement. The Company estimated and recorded the fair value of the equipment received and recognized deferred revenue. The
fair value of the equipment received during the year ended December 31, 2014 was $700,000.
Long lived
asset impairment
– The Company assesses the recoverability of its long-lived assets when events or changes in circumstances
indicate their carrying value may not be recoverable. Such events or changes in circumstances may include: a significant adverse
change in the extent or manner in which a long-lived asset is being used, significant adverse change in legal factors or in the
business climate that could affect the value of a long-lived asset, an accumulation of costs significantly in excess of the amount
originally expected for the acquisition or development of a long-lived asset, current or future operating or cash flow losses
that demonstrate continuing losses associated with the use of a long-lived asset, or a current expectation that, more likely than
not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful
life. The Company performs impairment testing at the asset group level that represents the lowest level for which identifiable
cash flows are largely independent of the cash flows of other assets and liabilities. The Company assesses recoverability of a
long-lived asset by determining whether the carrying value of the asset group can be recovered through projected undiscounted
cash flows over their remaining lives. If the carrying value of the asset group exceeds the forecasted undiscounted cash flows,
an impairment loss is recognized, measured as the amount by which the carrying amount exceeds estimated fair value. An impairment
loss is charged to the consolidated statement of operations in the period in which management determines such impairment. No such
impairment has been noted as of December 31, 2016 and 2015.
Recently issued and adopted accounting
pronouncements
– In May 2014, the Financial Accounting Standards Board “(FASB”) issued Accounting Standards
Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers
(Topic 606), ("ASU 2014-09"), which
requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or
services to customers. The ASU will replace most existing revenue recognition guidance in United States Generally Accepted Accounting
Principles (“GAAP”) when it becomes effective. In December 2016, FASB issued ASU 2016-20
Technical Corrections
and Improvements to Topic 606,
(“ASU 2016-20”), which affects some narrow aspects of ASU 2014-09. The new standard
is effective for the Company for annual reporting periods beginning after December 15, 2017 and interim reporting periods therein.
Early application is permitted for reporting periods beginning after December 15, 2016. The standard permits the use of either
the retrospective or cumulative effect transition method. In July 2015, the FASB voted to delay the effective date of this standard
until the first quarter of 2018. The Company has a project team in place to analyze the impact of ASU 2014-09 to its revenue stream.
This includes performing a review of current policies to identify potential differences that would result from applying ASU 2014-09.
The Company believes it is following an appropriate timeline to allow for proper recognition, presentation, and disclosure upon
adoption. The Company intends to adopt the standard at the date required for public companies, but has not selected a transition
method.
American
Shared Hospital Services
Notes
to Consolidated Financial Statements
Note
2 – Accounting Policies (continued)
In August 2014, FASB issued ASU No.
2014-15,
Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern
(“ASU
2014-15”), which provides guidance on determining when and how to disclose going-concern uncertainties in financial
statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to
continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain
disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.
The new standard was effective for the Company for the year ended December 31, 2016. The Company adopted ASU 2014-15 as of
December 31, 2016 and concluded there is no material impact on the condensed consolidated financial statements and related
disclosures.
In January
2015, the FASB issued ASU No. 2015-01,
Income Statement-Extraordinary and Unusual Items
(Subtopic 225-20):
Simplifying
Income Statement Presentation by Eliminating the Concept of Extraordinary Items
(“ASU 2015-01”), which eliminates
from GAAP the concept of extraordinary items and requires that an entity separately classify, present, and disclose extraordinary
events and transactions. This ASU will also align more closely GAAP income statement presentation guidance with International
Accounting Standards (“IAS”) 1, Presentation of Financial Statements, which prohibits the presentation and disclosure
of extraordinary items. The new standard was effective for the Company on January 1, 2016. The standard permits the use of either
the retrospective or prospective application. The Company adopted ASU 2015-01 on January 1, 2016 and the adoption did not have
a material impact on the condensed consolidated financial statements and related disclosures.
In February
2015, the FASB issued ASU No. 2015-02,
Consolidation
(Topic 810): Amendments to the Consolidation Analysis (“ASU
2015-02”), which is intended to improve targeted areas of consolidation guidance for legal entities. The ASU focuses on
the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain
legal entities. In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB
ASC and improves current GAAP. The new standard was effective for the Company on January 1, 2016. The Company adopted ASU 2015-02
on January 1, 2016 and the adoption did not have a material impact on the condensed consolidated financial statements and related
disclosures.
In
April 2015, the FASB issued ASU No. 2015-03,
Interest—Imputation of Interest (Subtopic 835-30): Simplifying the
Presentation of Debt Issuance Costs
(“ASU 2015-03”), which requires that debt issuance costs related to a
recognized debt liability, be presented in the balance sheet as a direct deduction from the carrying amount of that debt
liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected
by the amendments in this ASU. The new standard was effective for the Company on January 1, 2016.
The Company
adopted ASU 2015-03 on January 1, 2016, on a retrospective basis. Debt issuance costs that were previously recorded as other assets
on the Company’s condensed consolidated Balance Sheets were reclassified as an offset to the respective debt instrument
for which they were derived. As of December 31, 2016 and December 31, 2015, $67,000 and $72,000 were reclassified from current
and noncurrent other assets to current and noncurrent debt, respectively.
In January
2016, the FASB issued ASU No. 2016-01
Recognition and Measurement of Financial Assets and Financial Liabilities
(“ASU
2016-01”) which requires equity investments, except those accounted for under the equity method of accounting or those that
result in consolidation of the investee, to be measured at fair value with changes in fair value recognized in net income. The
new guidance is effective for the Company on January 1, 2018. Early adoption is permitted. The standard permits the use of cumulative-effect
transition method. The Company is evaluating the effect that ASU 2016-01 will have on its consolidated financial statements and
related disclosures.
In
February 2016, the FASB issued ASU No. 2016-02
Leases
(“ASU 2016-02”), which requires lessees to
recognize, for all leases, at the commencement date, a lease liability and a right-of-use asset. Under the new guidance,
lessor accounting is largely unchanged. The new guidance is effective for the Company on January 1, 2019. Early adoption is
permitted. The Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and
related disclosures.
In March 2016, the FASB issued
ASU No. 2016-09
Compensation – Stock Compensation
(Topic 718) (“ASU 2016-09”) which changes five aspects
of accounting for share-based payment award transactions including 1) accounting for income taxes; 2) classification of excess
tax benefits on the statement of cash flows; 3) forfeitures; 4) minimum statutory tax withholding requirements; and 5) classification
of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The new
guidance is effective for the Company for interim and annual periods beginning after December 15, 2016. Early adoption is permitted.
The Company is evaluating the effect that ASU 2016-09 will have on its consolidated financial statements and related disclosures.
American
Shared Hospital Services
Notes
to Consolidated Financial Statements
Note
2 – Accounting Policies (continued)
In June 2016,
the FASB issued ASU No. 2016-13
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments
(“ASU 2016-13”), which requires measurement and recognition of expected credit losses for financial
assets held. The new guidance is effective for fiscal periods beginning after December 15, 2019. Early adoption is permitted for
fiscal periods beginning after December 15, 2018. The Company is evaluating the effect that ASU 2016-13 will have on its consolidated
financial statements and related disclosures.
In August
2016, the FASB issued ASU No. 2016-15
Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and
Cash Payments
(“ASU 2016-15”), which provides guidance on eight specific cash flow issues: debt prepayment or
extinguishment costs; settlement of zero-coupon or other debt instruments with coupon interest rates that are insignificant in
relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination;
proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; distributions
received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows
and application of the Predominance Principle. The new guidance is effective for fiscal periods beginning after December 15, 2017
and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company
is evaluating the effect that ASU 2016-15 will have on its consolidated financial statements and related disclosures.
In
November 2016, the FASB issued ASU No. 2016-18
Statement of Cash Flows (Topic 230) – Restricted Cash
(“ASU 2016-18”), which requires that a statement of cash flows explain the change during the period in total
cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally
described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when
reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new guidance is
effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption
is permitted, including adoption in an interim period. The Company is evaluating the effect that ASU 2016-18 will have on its
consolidated financial statements and related disclosures.
Note
3 – Property and Equipment
Property
and equipment consists of the following:
|
|
DECEMBER 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Medical equipment and facilities
|
|
$
|
96,270,000
|
|
|
$
|
83,267,000
|
|
Office equipment
|
|
|
537,000
|
|
|
|
721,000
|
|
Deposits and construction in progress
|
|
|
6,073,000
|
|
|
|
5,796,000
|
|
Deposits towards purchase of proton beam systems
|
|
|
2,000,000
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,880,000
|
|
|
|
94,784,000
|
|
Accumulated depreciation
|
|
|
(53,549,000
|
)
|
|
|
(47,661,000
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
51,331,000
|
|
|
$
|
47,123,000
|
|
The Company
has equipment that is secured under capitalized leases, which is included in Medical equipment and facilities, with a total cost
of $43,703,000 and associated accumulated depreciation of $16,642,000 as of December 31, 2016 and a total cost of $31,025,000
and associated accumulated depreciation of $13,417,000 as of December 31, 2015. As of December 31, 2016, the Company has two idle
Gamma Knife units with a cumulative net book value of $1,483,000.
One unit was traded in during 2016 to place a new unit
at a new customer site in 2017. The Company plans to trade the second unit in for a new unit or place this unit at a new site.
American
Shared Hospital Services
Notes
to Consolidated Financial Statements
Note
3 – Property and Equipment (continued)
As
of December 31, 2016, the Company has $6,073,000 in construction in progress. Approximately $3,500,000 of this balance relates
to the Company’s unit in Peru which has been under construction and is expected to be installed at a new customer site in
2017. The remaining construction in progress consists of progress payments made for a Cobalt-60 reload, deposits on Gamma Knife
units, capitalized and imputed interest, and other costs associated with on-going projects of the Company.
As of December
31, 2016, the Company has $2,000,000 in deposits toward the purchase of two MEVION S250 PBRT systems from Mevion. The Company
has a commitment for the remaining balance for each system. The Company’s first MEVION S250 treated its first patient in
April 2016. The Company’s second and third PBRT units will not begin construction until the Company identifies satisfactory
placement sites. The Company has entered into a partnership agreement (LBE) with a radiation oncology physician group, which has
contributed $400,000 towards the deposits on the third machine. The Company reviews the carrying value of these deposits for impairment
on a quarterly basis, or as events or circumstances might indicate that the carrying value may not be recoverable. The Company
has reviewed the deposits, in light of available information, as of December 31, 2016 and has not identified any impairment. See
Note 12-Commitments and Contingencies for additional discussion on purchase commitments.
Note
4 – Investment in Equity Securities
As of December
31, 2016 and December 31, 2015 the Company had a $579,000 investment in the common stock of Mevion Medical Systems, Inc. (“Mevion”),
formerly Still River Systems, representing an approximate 0.46% interest in Mevion. The Company accounts for this investment under
the cost method. The Company carries its investment in Mevion at cost and reviews it for impairment on a quarterly basis, or as
events or circumstances might indicate that the carrying value of the investment may not be recoverable.
Based on guidance provided in ASC 320
Investments–Debt
and Equity Securities
(“ASC 320”) and Staff Accounting Bulletins (“SAB”)
Topic 5M Other Than Temporary
Impairment (“OTTI”) of Certain Investments in Equity Securities
(“SAB Topic 5M”), the Company analyzed
the related events of Mevion, that occurred in the second and third quarters of 2015 and its impact on the Company’s investment.
The Company determined that these circumstances indicated a decline in value of its Mevion investment that was other-than-temporary,
and concluded that a write-down of the carrying value should be recognized. As of June 30, 2015, the Company adjusted its investment
in Mevion to the estimated fair value of approximately $600,000 and recorded a $2,114,000 impairment loss. The $2,114,000 other
than temporary impairment of its investment in Mevion is recorded in other income (loss) on the Company’s Condensed Consolidated
Statement of Operations.
During the period ended December 31, 2015,
the Company engaged a third party expert to review and corroborate its assessment of the fair value of the Mevion investment. The
third party utilized the market approach and an option waterfall model calibrated to Mevion’s last round of funding. Each
equity class was examined and priced according to its liquidation preferences. Based on the third party analysis, an additional
impairment loss of $26,000 was recognized by the Company during the three months ended December 31, 2015. The fair value of the
Company’s investment in Mevion, as of December 31, 2015 and December 31, 2016 was approximately $579,000. The impairment
loss for the year ended December 31, 2015 was $2,140,000.
The Company
reviewed this investment at December 31, 2016 in light of both current market conditions and the ongoing needs of Mevion to raise
cash to continue its development of the first compact, single room PBRT system. Based on its analysis, the Company determined
no additional impairment needs to be recognized as of December 31, 2016.
The Company’s
first MEVION S250 PBRT unit was contracted with Orlando Health, Inc. under a ten (10) year, revenue sharing arrangement. The Marjorie
and Leonard Williams Center for Proton Therapy at Orlando Health treated its first patient on April 6, 2016.
American
Shared Hospital Services
Notes
to Consolidated Financial Statements
Note
5 – Long-Term Debt
Long-term debt consists primarily of six
notes with financing companies collateralized by the Gamma Knife equipment having an aggregate net book value of $14,684,000,
the individual customer contracts and related accounts receivable at December 31, 2016. In addition, the loan to finance the Company’s
unit in Peru is guaranteed by GKF and collateralized by the Company’s stock in the subsidiary, IGKP. These notes are payable
in 12 to 84 fully amortizing monthly installments, mature between June 2018 and November 2021, and are collateralized by the respective
Gamma Knife units. The notes accrue interest at fixed annual rates between 3.95% and 7.48%.
The following
are contractual maturities of long-term debt by year at December 31, 2016:
Year ending December 31,
|
|
Principal
|
|
|
Interest
|
|
2017
|
|
$
|
2,205,000
|
|
|
$
|
378,000
|
|
2018
|
|
|
2,146,000
|
|
|
|
247,000
|
|
2019
|
|
|
1,536,000
|
|
|
|
138,000
|
|
2020
|
|
|
963,000
|
|
|
|
61,000
|
|
2021
|
|
|
461,000
|
|
|
|
14,000
|
|
Thereafter
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,311,000
|
|
|
$
|
838,000
|
|
Note
6 – Obligations Under Capital Leases
The Company has twelve
capital lease obligations with four financing companies, collateralized by Gamma Knife and PBRT equipment having an aggregate
net book value of $27,061,000, the individual customer contracts and related accounts receivable at December 31, 2016. These obligations
have imputed interest rates ranging between 4.73% and 13.00%, are payable in 41 to 84 monthly installments, and mature between
June 2017 and April 2022. As of December 31, 2015, the Company had eleven capital lease obligations with four finance companies
with an aggregate net book value of $17,608,000. At the end of each lease term, the Company has a bargain purchase option to purchase
the equipment.
Future
minimum lease payments, together with the present value of the net minimum lease payments under capital leases at December 31,
2016, are summarized as follows:
|
|
Net Present Value
|
|
|
|
of Minimum
|
|
|
|
Lease Payments
|
|
Year ending December 31,
|
|
|
|
|
2017
|
|
$
|
6,725,000
|
|
2018
|
|
|
5,439,000
|
|
2019
|
|
|
4,184,000
|
|
2020
|
|
|
2,869,000
|
|
2021
|
|
|
5,066,000
|
|
Thereafter
|
|
|
218,000
|
|
Total capital lease payments
|
|
|
24,501,000
|
|
Less imputed interest
|
|
|
4,776,000
|
|
|
|
|
19,725,000
|
|
Less current portion
|
|
|
4,873,000
|
|
|
|
$
|
14,852,000
|
|
American
Shared Hospital Services
Notes
to Consolidated Financial Statements
Note
7 – Line of Credit
As of December 31, 2014
the Company had a $9,000,000 renewable line of credit with a bank secured by a certificate of deposit. The line of credit had been
in place since June 2004. The Company’s earnings in 2013 were insufficient to satisfy the “profitability” covenant
in the line of credit and the Company was not in compliance with the covenant until the bank waived this default on August 8, 2014
and agreed to change the maturity date of the facility to December 31, 2014. The line was paid-off using the proceeds from the
certificate of deposit on January 2, 2015.
Note
8 – Income Taxes
As of December 31, 2016,
2015 and 2014 the Company recorded income tax provision expense of $943,000, $434,000 and $129,000, respectively. The increase
in 2016 is due to income from the PBRT system and operations of the Company’s subsidiaries. The increase in 2015 is due
to income from operations of the Company’s subsidiaries. The loss incurred during the year ended December 31, 2015 on the
write-down of the Company’s investment in equity securities is a capital loss which is treated as non-deducible expense
for income tax provision purposes and as such, a full valuation allowance was recorded against this loss and the net impact to
the provision was $0.
The components of the provision
for income taxes as of December 31, 2016, 2015 and 2014 consist of the following:
|
|
YEARS ENDED DECEMBER 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
24,000
|
|
|
$
|
35,000
|
|
|
$
|
-
|
|
State
|
|
|
146,000
|
|
|
|
103,000
|
|
|
|
54,000
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total current
|
|
|
170,000
|
|
|
|
138,000
|
|
|
|
54,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
680,000
|
|
|
|
353,000
|
|
|
|
(131,000
|
)
|
State
|
|
|
93,000
|
|
|
|
(57,000
|
)
|
|
|
40,000
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
166,000
|
|
Total deferred
|
|
|
773,000
|
|
|
|
296,000
|
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
943,000
|
|
|
$
|
434,000
|
|
|
$
|
129,000
|
|
American
Shared Hospital Services
Notes
to Consolidated Financial Statements
Note
8 – Income Taxes (continued)
Significant components
of the Company’s deferred tax liabilities and assets as of December 31, 2016 and 2015 are as follows:
|
|
DECEMBER 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
(7,595,000
|
)
|
|
$
|
(6,831,000
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(7,595,000
|
)
|
|
|
(6,831,000
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
2,783,000
|
|
|
|
2,859,000
|
|
Accruals and allowances
|
|
|
193,000
|
|
|
|
172,000
|
|
Tax credits
|
|
|
380,000
|
|
|
|
356,000
|
|
Other – net
|
|
|
200,000
|
|
|
|
163,000
|
|
Capital loss carryover
|
|
|
1,228,000
|
|
|
|
1,217,000
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
4,784,000
|
|
|
|
4,767,000
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(1,365,000
|
)
|
|
|
(1,340,000
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets net of valuation allowance
|
|
|
3,419,000
|
|
|
|
3,427,000
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(4,176,000
|
)
|
|
$
|
(3,404,000
|
)
|
These amounts are presented
in the financial statements as follows:
|
|
DECEMBER 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Deferred income taxes (non-current)
|
|
$
|
(4,176,000
|
)
|
|
$
|
(3,404,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,176,000
|
)
|
|
$
|
(3,404,000
|
)
|
The provision for income
taxes differs from the amount computed by applying the U.S. federal statutory tax rate (34% in 2016, 2015 and 2014) to income
before taxes as follows:
|
|
YEARS ENDED DECEMBER 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Computed expected federal income tax
|
|
$
|
637,000
|
|
|
$
|
(360,000
|
)
|
|
$
|
(280,000
|
)
|
State income taxes, net of federal benefit
|
|
|
169,000
|
|
|
|
(55,000
|
)
|
|
|
66,000
|
|
Non-deductible expenses
|
|
|
42,000
|
|
|
|
40,000
|
|
|
|
21,000
|
|
Change in valuation allowance
|
|
|
25,000
|
|
|
|
792,000
|
|
|
|
416,000
|
|
Other
|
|
|
70,000
|
|
|
|
17,000
|
|
|
|
(94,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
943,000
|
|
|
$
|
434,000
|
|
|
$
|
129,000
|
|
American
Shared Hospital Services
Notes
to Consolidated Financial Statements
Note 8 – Income
Taxes (continued)
At December 31, 2016, the
Company has a net operating loss carryforward for federal income tax return purposes of approximately $7,589,000 which expire between
2022 and 2034. The Company has net operating loss carryforwards for state income tax purposes of approximately $1,041,000 that
begin to expire in 2029. The Company has net operating loss carryforwards for Peru and UK income tax purposes of approximately
$541,000 that begin to expire in 2017.
Utilization of the domestic
NOL and tax credit forwards may be subject to a substantial annual limitation due to ownership change limitations that may have
occurred or that could occur in the future, as required by the Internal Revenue Code Section 382, as well as similar state provisions.
In general, an “ownership change,” as defined by the code, results from a transaction or series of transactions over
a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by
certain stockholders or public groups. Any limitation may result in expiration of all or a portion of the NOL or tax credit carryforwards
before utilization.
At December 31, 2016, the
Company has a capital loss carryforward for federal income tax return purposes of approximately $3,316,000 which starts to expire
in 2018. The Company has capital loss carryforwards for state income tax purposes of approximately $150,000 which starts to expire
in 2018.
Due to the uncertainty that
the Company will generate capital gains in future years to utilize its capital loss carryforward, a valuation allowance has been
placed against the deferred tax asset. Due to uncertainty surrounding the realization of impairment losses, capital losses and
foreign operating losses in future years, the Company has placed a valuation allowance against a portion of its net domestic and
foreign deferred tax assets. The net valuation allowance increased by $25,000, $792,000, and $416,000 for the tax years ended December
31, 2016, 2015, and 2014, respectively.
The tax return years 2012
through 2016 remain open to examination by the major domestic taxing jurisdictions to which the Company is subject. Net operating
losses generated on a tax return basis by the Company for calendar years 1999 through 2004, 2009, 2010, 2012, 2014, 2015, and 2016
remain open to examination by the major domestic taxing jurisdictions.
The Company has
adopted accounting standards which prescribe a recognition threshold and measurement attribute for the financial statement
recognition and measurement of uncertain tax positions taken or expected to be taken in a company’s income tax return,
and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition. Additionally, these accounting standards specify that tax positions for which the timing of the
ultimate resolution is uncertain should be recognized as long-term liabilities. The Company has made no reclassifications
between current taxes payable and long term taxes payable under this guidance. Also, the Company had no amounts of
unrecognized tax benefits that, if recognized, would affect its effective income tax rate for the years ended December 31,
2016, 2015 and 2014.
The Company’s policy for deducting interest
and penalties is to treat interest as interest expense and penalties as taxes. As of December 31, 2016, the Company had no amount
accrued for the payment of interest and penalties related to unrecognized tax benefits.
Note
9 – Shareholders’ Equity
Incentive
Compensation Plan
In
June 2010 shareholders approved an amendment and restatement of the Company’s stock incentive plan, renaming it the Incentive
Compensation Plan (the “Plan”), and among other things, increasing the number of shares of the Company’s common
stock reserved for issuance under the Plan to 1,630,000. The Plan provides that the shares reserved under the Plan are available
for issuance to officers of the Company, other key employees, non-employee directors, and advisors. The Plan is a successor to
the Company’s previous plans, and any shares awarded and outstanding under those plans were transferred to the Plan. No
further grants or share issuances will be made under the previous plans. On June 16, 2015, the Company’s shareholders approved
an amendment and restatement of the Plan in order to extend the term of the Plan by two years. As of December 31, 2016, approximately
658,000 shares remain available for grant under the Plan.
The
Plan provides for nonqualified stock options, qualified (or incentive) stock options and stock grants. The Plan has a provision
to reduce the number of shares reserved for award and issuance under the Plan by a ratio of 1.59 shares of common stock for each
share of common stock that is issued pursuant to a Full Value Award (stock grant).
The
Plan also provides for an Incentive Bonus Program with incentive bonus opportunities through performance unit awards and special
cash incentive programs tied to the attainment of pre-established performance milestones.
Provisions
of the Plan include an automatic annual grant to each non-employee director of options to purchase up to 2,000 shares on the date
of the Company’s Annual Shareholder Meeting, at an exercise price equal to the market price of the Company’s common
shares on that date, an automatic annual grant of 500 restricted stock units of the Company’s common shares and an annual
cash retainer fee for Board or Board Committee service, which may be converted to restricted stock unit awards. Options and restricted
stock units awarded under the automatic annual grant program for non-employee directors vest after one year. Restricted stock
units awarded in lieu of retainer fees vest quarterly, over a one year period. These awards become outstanding upon the conclusion
of the individual Board members service on the Company’s Board of Directors. Other options may vest fully and immediately,
or over periods of time as determined by the Plan Administrator, but no longer than seven years from the grant date. Discretionary
options currently awarded under the Plan vest over a period of 5 years.
Under the Plan, a total
of 219,000 restricted stock units have been granted, consisting of 30,000 of annual automatic grants to non-employee directors
and the corporate secretary, 179,000 of deferred retainer fees to non-employee members of the Board, and 10,000 grants issued
in lieu of commission, to one employee of the Company. Of the total restricted stock units granted under the Plan 215,000 of them
are fully vested but not yet deemed issued and outstanding as of December 31, 2016. The Company granted 4,000 shares of restricted
stock and 37,000 shares of restricted stock in lieu of retainer fees in 2016 with a weighted fair value of $1.94 per share. For
the year ended December 31, 2016, total compensation expense recorded in the consolidated statements of operations related to
restricted stock units in lieu of retainer fees was $70,000. For the year ended December 31, 2016, total compensation expense
recorded in the consolidated statements of income for annual restricted stock units awarded was $8,000, with an offsetting tax
benefit of $3,000, as this expense is deductible for income tax purposes. As of December 31, 2016, there was $4,000 of total unrecognized
compensation cost related to annual restricted stock units which is expected to be recognized over a period of .5 years. During
2016, 2015, and 2014 shares of restricted stock units totaling 4,000, 3,000, and 3,000, respectively, with a fair value of approximately
$8,000, $7,000 and $6,000, respectively, vested and became unrestricted.
American
Shared Hospital Services
Notes
to Consolidated Financial Statements
Note
9 – Shareholders’ Equity (continued)
Changes
in stock options outstanding under the Incentive Compensation Plans during 2016 are as follows :
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Options
|
|
of
Options
|
|
|
Price
|
|
|
Term
(Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
|
614,000
|
|
|
$
|
2.86
|
|
|
|
5.10
|
|
|
|
|
|
Granted
|
|
|
20,000
|
|
|
$
|
2.19
|
|
|
|
6.44
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
(9,000
|
)
|
|
$
|
2.50
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
625,000
|
|
|
$
|
2.85
|
|
|
|
4.25
|
|
|
$
|
315,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2016
|
|
|
85,000
|
|
|
$
|
2.76
|
|
|
|
3.98
|
|
|
$
|
50,000
|
|
The weighted average grant-date fair value
of the options granted during the years 2016, 2015 and 2014 was $0.97, $1.15, and $1.23 respectively. There were no options exercised
during the years ended, and accordingly, no total intrinsic value of options exercised during any of the years ended December
31, 2016 and 2015 and 2014. Total stock-based compensation expense recognized for stock options for the years ended December 2016,
2015, and 2014 was $139,000, $138,000, and $51,000, respectively.
There was
no cash received from options exercised under any share-based payment arrangements for the years ended December 31, 2016, 2015
and 2014, and as a result, there was no actual tax benefit realized for tax deductions from option exercises in any of those years.
American
Shared Hospital Services
Notes
to Consolidated Financial Statements
Note
9 – Shareholders’ Equity (continued)
A summary
of the status of the Company’s non-vested stock options as of December 31, 2016, and changes during the year ended December
31, 2016 is presented below:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Grant-Date
|
|
Nonvested Options
|
|
of
Options
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2015
|
|
|
532,000
|
|
|
$
|
1.18
|
|
Granted
|
|
|
20,000
|
|
|
$
|
0.97
|
|
Vested
|
|
|
(12,000
|
)
|
|
$
|
1.22
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2016
|
|
|
540,000
|
|
|
$
|
1.17
|
|
At December 31, 2016, there was
approximately $378,000 of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under
the Plan. This cost is expected to be recognized over a period of approximately three years.
The Company’s
stock-based awards to employees are calculated using the Black-Scholes options valuation model. The Black-Scholes model was developed
for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition,
the Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. The
Company’s stock-based awards have characteristics significantly different from those of traded options, and changes in the
subjective input assumptions can materially affect the present value estimates. For these reasons, management believes that the
existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees.
The fair
value of the Company’s option grants issued during 2016, 2015 and 2014 were estimated using assumptions for expected life,
volatility, dividend yield, forfeiture rate, and risk-free interest rate which are specific to each award as summarized in the
following table. The estimated fair value of the Company’s options is amortized over the period during which the optionee
is required to provide service in exchange for the award, usually the vesting period.
The
fair value of the Company’s option grants under the Plan in 2016, 2015 and 2014 was estimated using the following assumptions:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Expected life (years)
|
|
|
7.0
|
|
|
|
7.0
|
|
|
|
7.0
|
|
Expected forfeiture rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected volatility
|
|
|
53
|
%
|
|
|
41
|
%
|
|
|
40
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
2.0
|
%
|
|
|
2.0
|
%
|
|
|
2.0
|
%
|
American
Shared Hospital Services
Notes
to Consolidated Financial Statements
Note
9 – Shareholders’ Equity (continued)
Repurchase
of Common Stock, Common Stock Warrants and Stock Options
In
1999 and 2001, the Board of Directors approved resolutions authorizing the Company to repurchase up to a total of 1,000,000 shares
of its own stock on the open market, which the Board reaffirmed in 2008. There were no shares of the Company repurchased during
2016 or 2015. During 2014, the Company repurchased approximately 1,000 shares of its stock on the open market. There are approximately
72,000 shares remaining under this repurchase authorization.
Note
10 – Retirement Plan
The
Company has a defined-contribution retirement plan (the “Retirement Plan”) that allows for a matching safe harbor
contribution. For 2016, the Board of Directors elected to match participant deferred salary contributions up to a maximum of 4%
of the participant’s annual compensation. Discretionary profit sharing contributions are allowed under the Retirement Plan
in years that the Board does not elect a safe harbor match. The Company has accrued approximately $28,000 for the estimated safe
harbor matching contribution for the year ended December 31, 2016. The Company contributed $27,000 and $39,000 to the Retirement
Plan for the safe harbor match for the years ended December 31, 2015 and December 31, 2014, respectively.
Note
11 – Operating Leases
The
Company leases office space and equipment under operating leases expiring at various dates through 2016 and 2020. On August 13,
2016, the Company entered into a 7 year operating lease for an office space located in San Francisco, CA. The commencement date
of the new lease coincided with the termination of the Company’s existing lease space. Future minimum payments under non-cancelable
operating leases, net of expected sublease income, having initial terms of more than one year consisted of the following:
Year ending December
31,
|
|
|
|
|
|
|
|
2017
|
|
$
|
260,000
|
|
2018
|
|
|
267,000
|
|
2019
|
|
|
272,000
|
|
2020
|
|
|
244,000
|
|
2021
|
|
|
252,000
|
|
Thereafter
|
|
|
424,000
|
|
|
|
|
|
|
|
|
$
|
1,719,000
|
|
Payments
for repair and maintenance agreements incorporated in operating lease agreements are not included in the future minimum operating
lease payments shown above.
Net rent expense was
$307,000, $175,000, and $191,000 for the years ended December 31, 2016, 2015 and 2014, respectively, and includes the above operating
leases as well as month-to-month rental and certain executory costs. Total rent expense was recognized net of sublease income of
$76,000, $191,000, and $173,000 for the years ended December 31, 2016, 2015 and 2014, respectively. In 2013, the Company subleased
a portion of its existing office space through the remainder of its lease term at a rate lower than its lease rate, resulting in
a cumulative loss of $115,000. This loss was amortized against total rent expense over the term of the sublease and it is included
in total rent expense for 2016.
American
Shared Hospital Services
Notes
to Consolidated Financial Statements
Note
12 – Commitments and Contingencies
As of December 31, 2016,
the Company had commitments to purchase two MEVION S250 PBRT systems for $25,800,000 and the Company had $2,000,000 in non-refundable
deposits toward the purchase of these two PBRT systems from Mevion. The non-refundable deposits are recorded in the consolidated
balance sheets as deposits and construction in progress. The Company’s first MEVION S250 PBRT treated its first patient in
April 2016. The Company and Mevion have not agreed on construction and delivery timetables for the second and third PBRT units
for which the Company has purchase commitments. The Company is actively seeking sites for these units but to date has not entered
into agreements with any party for either placement of a PBRT unit or the related financing. In the past, the Company and Mevion
have established construction and delivery timetables, and therefore progress payment dates, only after the Company has notified
Mevion that there is a proposed site for the unit. Accordingly, the timing of the required payments for the remaining $25,800,000
of the Company’s purchase commitments remains uncertain. The Company’s position is that these payments should not commence
until a site is available for a PBRT unit and the related financing is in place.
As of December 31, 2016,
the Company had commitments to purchase one Gamma Knife Perfexion system, one Cobalt-60 reload, and is scheduled to install one
Gamma Knife Model 4C system, which the Company previously financed and owns. Total Gamma Knife commitments as of December 31, 2016
were $3,160,000. The Model 4C unit is scheduled to be installed in the third quarter of 2017 at the Company’s new customer
site in Peru. There are cash requirements for the Peru commitment in the next 12 months of approximately $200,000. The Company
believes that cash flow from cash on hand and operations will be sufficient to cover this payment. The Perfexion unit is for a
new site which will start treating patients in the latter half of 2017. The Company has secured financing for this unit. The Cobalt-60
reload is for an existing customer and occurred in the first quarter of 2017. The Company obtained financing for this reload as
well. There are no other significant cash requirements in the next 12 months. There can be no assurance that financing will be
available for the Company’s current or future projects, or at terms that are acceptable to the Company.
The Company estimates
the following commitments for each of the equipment systems, with expected timing of payments as follows as of December 31, 2016:
|
|
2017
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Proton Beam Units
|
|
$
|
-
|
|
|
$
|
25,800,000
|
|
|
$
|
25,800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gamma Knife Units
|
|
|
3,160,000
|
|
|
|
-
|
|
|
|
3,160,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commitments
|
|
$
|
3,160,000
|
|
|
$
|
25,800,000
|
|
|
$
|
28,960,000
|
|
Note
13 – Note, Warrant, & Common Stock Purchase Agreement
The Company entered into a common
stock purchase agreement (the “Purchase Agreement”) with three members of the Company’s Board of Directors,
to sell, in a private offering, an aggregate of 650,000 shares of the Company’s common stock, no par value, for gross proceeds
of approximately $1,600,000. The private offering closed on June 12, 2014. The Shares are restricted securities and may not be
offered or sold absent registration under the Securities Act of 1933. Pursuant to the terms of the Purchase Agreement, the Company
has agreed to provide demand registration rights with respect to the Shares, with certain limited exceptions. The Company filed
its Form S-3 registration statement on May 29, 2015. Pursuant to the terms of the Purchase Agreement, the Company has also granted
the Investors a one-year preemptive right to participate pro rata in future issuances of the Company’s common stock.
American
Shared Hospital Services
Notes
to Consolidated Financial Statements
Note
13 – Note, Warrant, & Common Stock Purchase Agreement (continued)
In October 2014, the Company entered
into a Note and Warrant Purchase Agreement (the “Note and Warrant Purchase Agreement”) with four members of the
Company’s Board of Directors to issue an aggregate of $1,000,000 in principal amount of promissory notes (the
“Notes”) and warrants (the “Warrants”) to purchase an aggregate of 200,000 shares of the common
stock, no par value (the “Common Stock”), of the Company (the “Notes and Warrants Offering”). The
Notes incurred interest at a rate of 15.0% per annum and had a maturity date of October 22, 2017. Interest only payments were
due monthly with the option to prepay the outstanding principal on or after December 31, 2015. The Warrants expire three
years after their initial issuance date and may be exercised for a purchase price equal to $2.20 per share of Common Stock,
the closing price per share of the Company’s Common Stock on the New York Stock Exchange MKT on the date preceding the
date of the Note and Warrant Purchase Agreement. During the year ended December 31, 2016, 100,000 of the warrants were
exercised and 100,000 remain outstanding as of the year ended.
During the year ended December 31, 2016,
the Company paid down the Notes. Based on the guidance provided in accordance with ASC 405
Extinguishment of Liabilities
(“ASC 405”) and ASC 470
Debt Modifications and Extinguishments
(“ASC 470”), the pay-down of the
Notes is considered an extinguishment of debt and, as such, the difference between the net carrying amount of the Notes and the
costs of extinguishment was recognized as a loss on the Company’s condensed consolidated Statements of Operations. As of
December 31, 2016, the Company recorded a loss on early extinguishment of debt of $108,000. The Notes were issued with common stock
warrants with an estimated fair value of $145,000. The unamortized balance of the discount on the Notes, of $80,000, and deferred
fees incurred from the issuance of the Note of approximately $28,000, were recorded as a loss on early extinguishment.
Concurrently with the Note and Warrant
Purchase Agreement, the Company entered into a common stock purchase agreement (the “Common Stock Purchase Agreement”)
with one member of the Company’s Board of Directors to sell, in a private offering, 100,000 shares of the Company’s
Common Stock (the “Private Placement Shares”), for gross proceeds of $220,000 (the “Common Stock Offering”
and, together with the Notes and Warrants Offering, the “Private Offering”). The Common Stock Purchase Agreement contains
terms and conditions that are customary for a transaction of this type.
The Company received gross proceeds of
$1,220,000 in the Private Offering, which were used, together with cash on hand, to make two payments of $1,000,000 each to Mevion
as deposits pursuant to the terms of purchase commitments with Mevion.
Note
14 – Related Party Transactions
The Company’s
Gamma Knife and IGRT businesses in Turkey were operated through EWRS Turkey. GKF owned indirectly 70% of EWRS Turkey, through
its 70% ownership of EWRS LLC. The remaining 30% ownership of EWRS LLC was held by EMKA LLC (“EMKA”). EMKA is owned
and operated by Mert Ozyurek (“Mr. Ozyurek”) who also sits on the Board of Directors of the Company. Mr. Ozyurek operates
a foreign company called Ozyurek A.S. Prior to the sale of EWRS Turkey in 2014, the Company purchased its two Gamma Knife units
from Ozyurek A.S. and had contracts for service and maintenance on the machines. In addition, the Company reimbursed EMKA its
share of marketing fees in its attempt to achieve the earn-out from the sale of EWRS Turkey. The Company believes all its transactions
with Mr. Ozyurek were arm’s-length transactions.
The
Company’s Gamma Knife business is operated through its 81% indirect interest in its GKF subsidiary.
The
remaining 19% of GKF is owned by a wholly owned U.S. subsidiary of Elekta, which is the manufacturer of the Gamma Knife.
Since
the Company purchases its Gamma Knife units from Elekta, there are significant related party transactions with Elekta such as
equipment purchases, commitments to purchase equipment, deposits for such equipment purchases, and costs to maintain the equipment.
The Company believes that all its transactions with Elekta are arm’s-length transactions. At December 31,
2016, the Company had commitments to purchase one Gamma Knife Perfexion system and one Cobalt-60 reload from Elekta, as discussed
in Note 12 – Commitments and Contingencies.
American
Shared Hospital Services
Notes
to Consolidated Financial Statements
Note
14 –Related Party Transactions (continued)
The Company entered into a Purchase
Agreement in 2014 to sell 650,000 shares of the Company’s common stock for proceeds of approximately $1,600,000 with
three members of the Company’s Board of Directors. Also in 2014, the Company entered into a Note and Warrant Purchase
Agreement with four members of the Company’s Board of Directors to issue $1,000,000 in principal amount of Notes and
Warrants to purchase 200,000 shares of the Company’s common stock. Concurrently with the Note and Warrant Purchase
Agreement, the Company entered into Common Stock Purchase Agreement with one member of the Company’s Board of Directors
to sell 100,000 shares of the Company’s Common Stock for $220,000. The Company believes all its transactions with the
members of the Company’s Board of Directors were arm’s-length transactions. See Note 13 – Note, Warrant,
& Common Stock Purchase Agreement for additional information.
The Company
has a common stock investment in Mevion which is recorded on the balance sheet as of December 31, 2016 at its fair value of approximately
$579,000. In addition to the equity interest, the Company has purchased one MEVION S250 PBRT machine from Mevion, and has $2,000,000
in non-refundable deposits towards the purchase of two additional MEVION S250 machines. The Company believes all of its transactions
with Mevion were arm’s-length transactions. See Note 4 – Investment in Equity Securities for additional information.
Note
15 – Major Customers
The
Company’s revenue was provided by eighteen customers in 2016, seventeen customers in 2015 and twenty customers in 2014.
In 2016 and 2015, one customer accounted for more than 10% or total revenue. In 2014, no one customer accounted for more than
10% of total revenue. At December 31, 2016 and 2015, two and three customers each accounted for more than 10% of total accounts
receivable, respectively.
Note
16 – Subsequent Events
On January 4, 2017, the Company entered into a Performance Share Award Agreement (the “Agreements”)
with three executive officers of the Company for 162,000 restricted stock awards which vest upon the achievement of certain
performance metrics.