NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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Note 1.
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Basis of Presentation
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In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary for the fair presentation of American Shared Hospital Services’ consolidated financial position as of
June 30, 2019
, the results of its operations for the three and six-month periods ended
June 30, 2019
and
2018
, and the cash flows for the three and six-month periods ended June 30, 2019 and 2018. The results of operations for the three and six-months ended June 30, 2019 are not necessarily indicative of results on an annualized basis. Consolidated balance sheet amounts as of
December 31, 2018
have been derived from audited consolidated financial statements.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended
December 31, 2018
included in American Shared Hospital Services’ Annual Report on Form 10-K filed with the Securities and Exchange Commission.
These consolidated financial statements include the accounts of American Shared Hospital Services and its subsidiaries (the “Company”) as follows: the Company wholly-owns the subsidiaries American Shared Radiosurgery Services (“ASRS”), PBRT Orlando, LLC (“Orlando”), OR21, Inc., and MedLeader.com, Inc. (“MedLeader”); the Company is the majority owner of Long Beach Equipment, LLC (“LBE”); ASRS is the majority-owner of GK Financing, LLC (“GKF”) which wholly-owns the subsidiary Instituto de Gamma Knife del Pacifico S.A.C. (“GKPeru”); GKF is the majority owner of the subsidiaries Albuquerque GK Equipment, LLC (“AGKE”) and Jacksonville GK Equipment, LLC (“JGKE”).
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 GKF. As of
June 30, 2019
, GKF provided Gamma Knife units to fifteen medical centers in the United States in the states of Arkansas, California, Florida, Illinois, Indiana, Massachusetts, Mississippi, Nebraska, New Mexico, New York, Ohio, Oregon, Tennessee, and Texas. GKF also owns and operates a single-unit Gamma Knife facility in Lima, Peru.
The Company through its wholly-owned subsidiary, Orlando, provided proton beam radiation therapy (“PBRT”) and related equipment to a customer in the United States. The Company also directly provides radiation therapy and related equipment, including Intensity Modulated Radiation Therapy, 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 for the purposes of expanding its business internationally; Orlando and LBE to provide proton beam therapy equipment and services in Orlando, Florida and Long Beach, California, respectively; and AGKE and JGKE to provide Gamma Knife equipment and services in Albuquerque, New Mexico and Jacksonville, Florida, respectively. AGKE began operations in the second quarter of 2011 and JGKE began operations in the fourth quarter of 2011. Orlando treated its first patient in April 2016. GKPeru treated its first patient in July 2017. 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
through its
50%
owned OR21, LLC (“OR21 LLC”). The remaining
50%
is owned by an architectural design company. OR21 LLC 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.
Accounting Pronouncements Issued and Adopted
Based on the guidance provided in accordance with Accounting Standards Codification (“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 sixteen hospitals in the United States and owns and operates a single-unit facility in Lima, Peru as of
June 30, 2019
. These seventeen locations operate under different subsidiaries of the Company but offer the same services: 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.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 classification criteria for direct financing and sales-type leases is modified. In July 2018, the FASB issued ASU No. 2018-10
Leases (Topic 842) Codification Improvements to Topic 842
, and ASU No. 2018-11
Leases (Topic 842) Targeted Improvements
(“ASU 2018-11”), in December 2018 the FASB issued ASU No. 2018-20
Leases (Topic 842) Narrow-Scope Improvements
, and in February 2019 the FASB issued ASU No. 2019-01
Leases (Topic 842) Codification Improvements
. ASU 2018-11 provides a new transition method in which an entity can initially apply the new lease standards at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. This standard is effective for annual periods beginning after December 15, 2018. The Company performed an analysis to determine if its revenue agreements with customers fall under the scope of ASU 2016-02 or ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
and concluded that, other than with respect to the Company’s stand-alone facility in Lima, Peru, ASU 2016-02 applied. The Company adopted ASU 2016-02 and related ASUs as of January 1, 2019 using the modified retrospective transition method. The Company elected to initially apply ASU 2016-02 and related ASUs beginning January 1, 2019 and elected to use the package of practical expedients upon adoption. The provisions of the package of practical expedients allowed the Company to not reassess whether any expired or existing contracts are or contain leases, the lease classification for expired or existing contracts, and the Company need not reassess the initial direct costs for any existing leases. The Company also used the hindsight expedient upon adoption which allowed the Company to examine its history when assessing lease term and whether it will exercise renewal options for certain contracts. The Company recognized lease liabilities and right-of-use assets of approximately
$1,362,000
for its operating leases at January 1, 2019, with no initial material impact to its consolidated statements of operations.
Accounting Pronouncements Issued and Not Yet Adopted
In February 2018, the FASB issued ASU No. 2018-03 Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2018-03”), which clarifies certain aspects of ASU 2016-01. These are: equity securities without a readily determinable fair value – discontinuation, equity securities without a readily determinable fair value – adjustments, forward contracts and purchased options, presentation requirements for certain fair value option liabilities, fair value option liabilities denominated in a foreign currency, and transition guidance for equity securities without a readily determinable fair value. In August 2018, the FASB issued ASU No. 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements to Fair Value Measurement (“ASU 2018-13”), which amended the effective date and other certain measurement aspects of ASU 2018-03. The new guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. The Company does not expect ASU 2018-03 or ASU 2018-13 to have a significant impact on its consolidated financial statements and related disclosures.
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Note 2.
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Property and Equipment
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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.
Depreciation for PBRT equipment 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 following table summarizes property and equipment as of
June 30, 2019
and
December 31, 2018
:
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June 30,
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December 31,
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2019
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2018
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Medical equipment and facilities
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$
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90,600,000
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$
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94,031,000
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Office equipment
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573,000
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589,000
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Deposits and construction in progress
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2,115,000
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3,832,000
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Deposits towards purchase of proton beam systems
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2,250,000
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2,250,000
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95,538,000
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100,702,000
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Accumulated depreciation
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(52,013,000
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)
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(54,008,000
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)
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Net property and equipment
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$
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43,525,000
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$
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46,694,000
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As of
June 30, 2019
, the Company has one idle Gamma Knife unit with a cumulative net book value of
$729,000
. There are currently no commitments to place into service or trade in this unit during 2019.
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Note 3.
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Long-Term Debt Financing
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Long-term debt consists of
seven
notes with three financing companies collateralized by the Gamma Knife equipment, the individual customer contracts, and related accounts receivable at
June 30, 2019
. As of
June 30, 2019
, long-term debt on the Condensed Consolidated Balance Sheets was
$4,483,000
. See disclosure of future payments below under the heading “Commitments”.
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Note 4.
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Capital Lease Financing
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Capital lease financing consists of
ten
leases with three financing companies, collateralized by Gamma Knife and PBRT equipment, the individual customer contracts, and related accounts receivable at
June 30, 2019
. As of
June 30, 2019
, obligations under capital leases on the Condensed Consolidated Balance Sheets were
$12,605,000
. See disclosure of future payments below under the heading “Commitments”.
The Company determines if a contract is a lease at inception. Under ASC 842
Leases
(“ASC 842”), the Company is a lessor of equipment to various customers. Leases that commenced prior to ASC 842 adoption date were classified as operating leases under historical guidance. As the Company has elected the package of practical expedients allowing to not reassess lease classification, these leases are classified as operating leases under ASC 842 as well. All of the Company’s lessor arrangements entered into after ASC 842 adoption are also classified as operating leases. Some of these lease terms have an option to extend the lease after the initial term, but do not contain the option to terminate early or purchase the asset at the end of the term.
The Company’s Gamma Knife, PBRT, and IGRT contracts with hospitals are classified as operating leases under ASC 842. The related equipment is included in medical equipment and facilities on the Company’s condensed consolidated balance sheets (see further discussion at Note 2). As all income from the Company’s lessor arrangements is solely based on procedure volume, all income is considered variable payments not dependent on an index or a rate. As such, the Company does not measure future operating lease receivable.
The Company’s lessee operating leases are accounted for as right-of-use (“ROU”) assets, other current liabilities, and lease liabilities on the condensed consolidated balance sheets. Operating lease ROU assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The Company’s operating lease contracts do not provide an implicit rate for calculating the present value of future lease payments, so the Company determined its incremental borrowing rate of approximately
6.0%
by using available market rates and expected lease terms. The operating lease ROU assets and liabilities also include any lease payments made and excludes lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
The Company’s lessee operating lease agreements are for administrative office space and related equipment, and the agreement to lease clinic space for its stand-alone facility in Lima, Peru. These leases have remaining lease terms between
3
and
5 years
, some of which include options to renew or extend the lease. As of
June 30, 2019
, operating ROU assets and liabilities were
$1,238,000
.
The following table summarizes maturities of lessee operating lease ROU assets and liabilities as of
June 30, 2019
:
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Year ending December 31,
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Operating Leases
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2019 (excluding the six-months ended June 30, 2019)
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$
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168,000
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2020
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340,000
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2021
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347,000
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2022
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331,000
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2023
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214,000
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Thereafter
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6,000
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Total lease payments
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1,406,000
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Less imputed interest
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(168,000
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)
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Total
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$
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1,238,000
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Note 6.
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Per Share Amounts
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Per share information has been computed based on the weighted average number of common shares and dilutive common share equivalents outstanding. The computation for the three and six-month periods ended
June 30, 2019
excluded approximately
181,000
and
513,000
, respectively, of the Company’s stock options because the exercise price of the options was higher than the average market price during those periods. The computation for the three and six-month periods ended June 30, 2018 excluded approximately
547,000
of the Company's stock options because the exercise price of the options was higher than the average market price during those periods.
Based on the guidance provided in accordance with ASC 260
Earnings Per Share
(“ASC 260”), the weighted average common shares for basic earnings per share, for the three and six-month periods ended
June 30, 2019
and
2018
, excluded the weighted average impact of the unvested performance share awards, discussed below. These awards are legally outstanding but are not deemed participating securities and therefore are excluded from the calculation of basic earnings per share. The unvested shares are also excluded from the denominator for diluted earnings per share because they are considered contingent shares not deemed probable as of
June 30, 2019
.
The following table sets forth the computation of basic and diluted earnings per share for the three and six-month periods ended
June 30, 2019
and
2018
:
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Three Months ended June 30,
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Six Months ended June 30,
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2019
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2018
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2019
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2018
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Net income attributable to American Shared Hospital Services
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$
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31,000
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$
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287,000
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$
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301,000
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$
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677,000
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Weighted average common shares for basic earnings per share
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5,876,000
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5,834,000
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5,862,000
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5,826,000
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Diluted effect of stock options and restricted stock
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30,000
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28,000
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33,000
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29,000
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Weighted average common shares for diluted earnings per share
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5,906,000
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5,862,000
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5,895,000
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5,855,000
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Basic earnings per share
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$
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0.01
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$
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0.05
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$
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0.05
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$
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0.12
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Diluted earnings per share
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$
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0.01
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$
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0.05
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$
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0.05
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$
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0.12
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Note 7.
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Stock-based Compensation
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In June 2010, the Company’s 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 21, 2019, the Company’s shareholders approved an amendment and restatement of the Plan in order to extend the term of the Plan by two years to February 22, 2022.
Stock-based compensation expense associated with the Company’s stock options to employees is calculated using the Black-Scholes valuation model. The Company’s stock awards have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimates. The estimated fair value of the Company’s option grants is estimated using assumptions for expected life, volatility, dividend yield, and risk-free interest rate which are specific to each award. The estimated fair value of the Company’s options is amortized over the period during which an employee is required to provide service in exchange for the award (requisite service period), usually the vesting period. Accordingly, stock-based compensation cost before income tax effect for the Company’s options and restricted stock units in the amount of
$53,000
and $
108,000
is reflected in net income for the three and six-month periods ended
June 30, 2019
compared to $
57,000
and $
112,000
in the same periods of the prior year, respectively. At
June 30, 2019
, there was approximately
$118,000
of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan, excluding unrecognized compensation cost associated with the performance share awards, discussed below. This cost is expected to be recognized over a period of approximately
five years
.
On January 4, 2017, the Company entered into a Performance Share Award Agreement with three executive officers of the Company (the “Award Agreements”) for
161,766
restricted stock awards which vest upon the achievement of certain performance metrics. The Award Agreements expire on March 31, 2020. Based on the guidance in ASC 718
Stock Compensation
(“ASC 718”), the Company concluded these were performance-based awards with vesting criteria tied to performance metrics. As of
December 31, 2017
, the Company achieved one of those certain performance metrics under the Award Agreements and recognized stock compensation expense of approximately
$108,000
related to these awards. As of
June 30, 2019
, it is not probable that any of the remaining required metrics for vesting will be achieved. The unrecognized stock-based compensation expense for these awards was approximately
$434,000
and unvested awards were approximately
129,000
as of
June 30, 2019
. If and when the Company determines that the remaining performance metrics’ achievement becomes probable, the Company will record a cumulative catch-up stock-based compensation amount and the remaining unrecognized amount will be recorded over the remaining requisite service period of the awards.
The following table summarizes stock option activity for the six-month periods ended
June 30, 2019
and
2018
:
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Stock
Options
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Grant Date
Weighted-
Average
Exercise
Price
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Weighted-
Average
Remaining
Contractual
Life (in
Years)
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Intrinsic
Value
|
|
Outstanding at January 1, 2019
|
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613,000
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$
|
2.85
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|
|
3.18
|
|
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$
|
—
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Granted
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18,000
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$
|
2.91
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|
7.00
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$
|
—
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Exercised
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(16,000
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)
|
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$
|
2.59
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|
|
—
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|
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$
|
—
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Forfeited
|
|
(12,000
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)
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$
|
3.05
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|
|
—
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|
|
$
|
—
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|
|
Outstanding at June 30, 2019
|
|
603,000
|
|
|
$
|
2.86
|
|
|
2.34
|
|
|
$
|
57,000
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|
Exercisable at June 30, 2019
|
|
477,000
|
|
|
$
|
2.87
|
|
|
2.22
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2018
|
|
615,000
|
|
|
$
|
2.87
|
|
|
3.48
|
|
|
$
|
—
|
|
|
Granted
|
|
16,000
|
|
|
$
|
2.68
|
|
|
6.96
|
|
|
$
|
—
|
|
|
Forfeited
|
|
(18,000
|
)
|
|
$
|
3.15
|
|
|
0
|
|
|
$
|
—
|
|
|
Outstanding at June 30, 2018
|
|
613,000
|
|
|
$
|
2.85
|
|
|
3.18
|
|
|
$
|
32,000
|
|
|
Exercisable at June 30, 2018
|
|
382,000
|
|
|
$
|
2.86
|
|
|
3.04
|
|
|
$
|
—
|
|
The Company generally calculates its effective income tax rate at the end of an interim period using an estimate of the annualized effective income tax rate expected to be applicable for the full fiscal year. However, when a reliable estimate of the annualized effective income tax rate cannot be made, the Company computes its provision for income taxes using the actual effective income tax rate for the results of operations reported within the year-to-date periods. The Company’s effective income tax rate is highly influenced by relative income or losses reported and the amount of the nondeductible stock-based compensation associated with grants of its common stock options and from the results of foreign operations. A small change in estimated annual pretax income (loss) can produce a significant variance in the annualized effective income tax rate given the expected amount of these items. As a result, the Company has computed its provision for income taxes for the three and six-month periods ended
June 30, 2019
by applying the actual effective tax rates to income or (loss) reported within the condensed consolidated financial statements through those periods.
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|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
This quarterly report to the Securities and Exchange Commission may be deemed to contain certain forward-looking statements with respect to the financial condition, results of operations and future plans of American Shared Hospital Services (including statements regarding the expected continued expansion of the MEVION S250 systems, the expansion of the Company’s proton therapy business, and the timing of treatments by new Gamma Knife systems), which involve risks and uncertainties including, but not limited to, the risk of variability of financial results between quarters, the risk of the Gamma Knife and radiation therapy businesses, and the risks of developing The Operating Room for the 21
st
Century
SM
program. Further information on potential factors that could affect the financial condition, results of operations and future plans of American Shared Hospital Services is included in the filings of the Company with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
and the definitive Proxy Statement for the Annual Meeting of Shareholders held on June 21, 2019.
The Company recognizes revenues under ASC 842 and ASC 606
Revenue from Contracts with Customers
(“ASC 606”). The Company had sixteen Gamma Knife units, one PBRT system and one IGRT machine in operation as of
June 30, 2019
and
2018
. Three of the Company’s customer contracts are through subsidiaries where GKF or its subsidiary is the majority owner and managing partner. Seven of the Company’s sixteen current Gamma Knife customers are under fee-per-use contracts, and eight customers are under retail arrangements. The Company, through GKF, also owns and operates a single-unit Gamma Knife facility in Lima, Peru. This unit economically functions similarly to the Company’s turn-key retail arrangements. The Company’s contracts to provide radiation therapy and related equipment services to an existing Gamma Knife customer and the Company’s PBRT system at Orlando Health – UF Health Cancer Center (“Orlando Health”), are also considered retail arrangements.
Rental income from medical services
– The Company recognizes revenues under ASC 842 when services have been rendered and collectability is reasonably assured, on either a fee per use or revenue sharing basis. The terms of the contracts do not contain any 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. Revenues from fee per use contracts is determined by each hospital’s contracted rate. Revenues are recognized at the time the procedures are performed, based on each hospital’s contracted rate and the number of procedures performed. 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. Revenue estimates are reviewed periodically and adjusted as necessary. Under turn-key arrangements, the Company receives payment from the hospital in the amount of the hospital’s reimbursement from third party payors, and the Company is responsible for paying all the operating costs of the equipment. Operating costs are determined primarily based on historical treatment protocols and cost schedules with the hospital. The Company records an estimate of operating costs which are reviewed on a regular basis and adjusted as necessary to more accurately reflect the actual operating costs. For turn-key sites, the Company also shares a percentage of net operating profit. The Company records an estimate of net operating profit based on estimated revenues, less estimated operating costs. The operating costs and estimated net operating profit are recorded as other direct operating costs in the condensed consolidated statement of operations. For the three and six-month periods ended
June 30, 2019
, the Company recognized revenues of approximately $4,904,000 and $10,011,000, respectively, under ASC 842.
Patient income
– The Company has a stand-alone facility in Lima, Peru, where a contract exists between GKPeru and the individual patient treated at the facility. Under ASC 606, the Company acts as the principal in this transaction and provides, at a point in time, a single performance obligation, in the form of a Gamma Knife treatment. Revenue related to a Gamma Knife treatment is recognized on a gross basis at the time when the patient receives treatment. There is no variable consideration present in the Company’s performance obligation and the transaction price is agreed upon per the stated contractual rate. Payment terms are typically prepaid for self-pay patients and insurance provider payments are paid net 30 days. The Company did not capitalize any incremental costs related to the fulfillment of its customer contracts. Accounts receivable earned by GKPeru were not significant for the three and six-month periods ended
June 30, 2019
. For the three and six-month periods ended
June 30, 2019
, the Company recognized revenues of approximately $293,000 and $507,000, respectively, under ASC 606.
Effective January 1, 2015, the Centers for Medicare and Medicaid (“CMS”) established a Comprehensive Ambulatory Payment Classification for single session radiosurgery treatments. CMS has established a 2019 total reimbursement rate of approximately $9,300 ($9,100 in 2018) for a Medicare Gamma Knife treatment. The approximate CMS reimbursement rates for delivery of proton therapy for a simple treatment without compensation for 2019 will be $520 ($522 in 2018) and $1,079 ($1,053 in 2018) for simple with compensation, intermediate and complex treatments, respectively.
Revenues increased by $28,000 and $44,000 to
$5,197,000
and
$10,518,000
for the three and six-month periods ended
June 30, 2019
compared to
$5,169,000
and
$10,474,000
for the same periods in the prior year, respectively.
Revenues generated from the Company’s PBRT system increased by $46,000 and $469,000 to $1,409,000 and $3,051,000 for the three and six-month periods ended
June 30, 2019
compared to $1,363,000 and $2,582,000 for the same periods in the prior year, respectively. The increase in PBRT revenues was due to higher volumes for the three and six-month periods ended
June 30, 2019
.
The number of PBRT fractions increased by 111 and 439 to 1,409 and 2,955 for the three and six-month periods ended
June 30, 2019
compared to 1,298 and 2,516 for the same periods in the prior year, respectively. The increase in PBRT volume was the result of the continuing increased awareness of the benefits of proton therapy treatment.
Gamma Knife revenue increased $6,000 and decreased $271,000 to $3,600,000 and $7,011,000 for the three and six-month periods ended
June 30, 2019
compared to $3,594,000 and $7,282,000 for the same periods in the prior year, respectively. Excluding a contractual adjustment related to Medicare reimbursement at one of the Company's existing sites, Gamma Knife revenue decreased $394,000 and $671,000 for the three and six-month periods ended
June 30, 2019
compared to the same periods in the prior year, respectively. The decrease in Gamma Knife revenue for the three and six-month periods ended
June 30, 2019
was due to a contract labor dispute at one of the Company's existing sites resulting in no procedures performed during the second quarter. This issue was resolved and the site began treating patients in July 2019. The expiration of two customer contracts in April 2018 and January 2019 and an unfavorable payor mix at the Company's retail sites also contributed to the decline in revenues for the three and six-month periods ended
June 30, 2019
.
The number of Gamma Knife procedures decreased by 16 and 33 to 361 and 736 for the three and six-month periods ended
June 30, 2019
compared to 377 and 769 for the same periods in the prior year, respectively. Excluding the two customer sites whose contracts expired April 2018 and January 2019 and the site that reported no procedures, Gamma Knife procedures increased 17 and 30 compared to the same periods in the prior year.
Revenue generated from the Company’s IGRT contract decreased $24,000 and $154,000 to $188,000 and $456,000 for the three and six-month periods ended
June 30, 2019
compared to $212,000 and $610,000 for the same periods in the prior year, respectively. The decrease in IGRT revenue was due to lower volumes.
Total costs of revenue increased by $380,000 and $665,000 to $
3,468,000
and $
6,852,000
for the three and six-month periods ended
June 30, 2019
compared to $
3,088,000
and $
6,187,000
for the same periods in the prior year, respectively.
Maintenance and supplies increased by $25,000 and $67,000 to $
652,000
and $
1,320,000
for the three and six-month periods ended
June 30, 2019
compared to $
627,000
and $
1,253,000
for the same periods in the prior year, respectively. The increase in maintenance and supplies was due to the annual increase from the renewal of the Mevion Service Agreement (see further discussion below under the heading “Commitments”) which began September 2017.
Depreciation and amortization increased by $344,000 and $581,000 to $
2,008,000
and $
3,902,000
for the three and six-month periods ended
June 30, 2019
compared to $
1,664,000
and $
3,321,000
for the same periods in the prior year, respectively. The increase was due to depreciation incurred on the Company’s new Gamma Knife site in Merrillville, Indiana, the PBRT system, and the Company’s IGRT equipment, offset partially by the two Gamma Knife contracts which expired in April 2018 and January 2019. The Company also recognized additional fixed asset value in connection to the contractual adjustment related to Medicare reimbursement at an existing customer site, causing an increase in depreciation expense.
Other direct operating costs increased by $11,000 and $17,000 to $
808,000
and $
1,630,000
for the three and six-month periods ended
June 30, 2019
compared to $
797,000
and $
1,613,000
for the same periods in the prior year, respectively. The increase was due to operating costs incurred at the Company’s new site in Merrillville, Indiana.
Selling and administrative costs increased by $49,000 and $119,000 to $
1,081,000
and $
2,136,000
for the three and six-month periods ended
June 30, 2019
compared to $
1,032,000
and $
2,017,000
for the same periods in the prior year, respectively. The increase was primarily due to legal and other consulting fees.
Interest expense decreased by $60,000 and $118,000 to $
346,000
and $
713,000
for the three and six-month periods ended
June 30, 2019
compared to $
406,000
and $
831,000
for the same periods in the prior year, respectively. The decrease was due to a lower average principal base on the Company’s debt and leases in the first half of 2019 compared to the same period in the prior year, effectively reducing interest expense.
Interest and other income was consistent with and decreased by $1,000 to $
4,000
and $
8,000
for the three and six-month periods ended
June 30, 2019
compared to $
4,000
and $
9,000
for the same periods in the prior year, respectively. Interest and other income is comprised of interest expense and interest earned.
Income tax expense decreased by $142,000 and $168,000 to $
27,000
and $
151,000
for the three and six-month periods ended
June 30, 2019
compared to $
169,000
and $
319,000
for the same periods in the prior year, respectively. The decrease in income tax expense for the three and six-month period ended
June 30, 2019
is due to lower taxable income attributable to the Company.
Net income attributable to non-controlling interest increased by $35,000 and decreased by $101,000 to $248,000 and $373,000 for the three and six-month periods ended
June 30, 2019
compared to $213,000 and $474,000 for the same periods in the prior year, respectively. Net income attributable to non-controlling interests represents net income earned by the 19% non-controlling interest in GKF, and net income of the non-controlling interests in various subsidiaries controlled by GKF. The decrease or increase in net income attributable to non-controlling interests reflects the relative profitability of GKF.
Net income decreased $256,000 and $376,000 to
$31,000
, or
$0.01
per diluted share and
$301,000
, or
$0.05
per diluted share, for the three and six-month periods ended
June 30, 2019
compared to net income of
$287,000
, or
$0.05
per diluted share, and
$677,000
or
$0.12
per diluted share, for the same periods in the prior year, respectively. The decrease in net income for the three and six-month periods ended
June 30, 2019
was due to increased operating expense and selling and administrative costs.
Liquidity and Capital Resources
The Company had cash, cash equivalents and restricted cash of $2,256,000 at
June 30, 2019
compared to $1,792,000 at
December 31, 2018
. The Company’s cash position increased by $
464,000
primarily due to cash from operating activities of $
4,213,000
and proceeds from insurance of $
160,000
. These increases were offset by payment for the purchase of property and equipment of $
746,000
, payments on long-term debt and capital leases of $
3,087,000
, and distributions to non-controlling interests of $
76,000
.
The Company has scheduled interest and principal payments under its debt obligations of approximately $2,165,000 and scheduled capital lease payments of approximately $5,275,000 during the next 12 months. The Company believes that its cash flow from cash on hand, operations, and other cash resources are adequate to meet its scheduled debt and capital lease obligations during the next 12 months. See additional discussion below related to commitments.
The Company as of
June 30, 2019
had shareholders’ equity of $
31,754,000
, working capital of $
1,349,000
and total assets of $
55,567,000
.
Commitments
On December 20, 2018, the Company signed Second Amendments to two System Build Agreements (the “Amendments”) for the Company’s second and third PBRT units from Mevion Medical Systems, Inc. (“Mevion”). The Company and Mevion have agreed to upgrade 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. The Company projects that it will be required to commence delivery of the second and third PBRT units no later than 2023. In the event the Company is unable to enter into customer agreements within the requisite time frame or receive an extension from Mevion, the Company could forfeit its deposits.
As of
June 30, 2019
, the Company had commitments to purchase two MEVION S250i PBRT systems for $34,000,000 and the Company had $
2,250,000
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.
As of
June 30, 2019
, the Company had commitments to perform six Cobalt-60 reloads and install six Leksell Gamma Knife Icon Systems ("Icon") at existing customer sites, and purchase one LINAC system, to be placed at a new customer site. Three of the Cobalt-60 reloads are scheduled to occur in the second half of 2019 and three are scheduled to occur in 2020. One of the Icon upgrades will occur in 2019 and the remaining upgrades will occur in 2020. Total Gamma Knife and LINAC commitments as of
June 30, 2019
were $8,110,000. It is the Company’s intent to finance these commitments. There are no significant cash requirements, pending financing, for these commitments 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.
On July 21, 2017, the Company entered into a Maintenance and Support Agreement (the “Mevion Service Agreement”) with Mevion, which provides for maintenance and support of the Company’s PBRT unit at Orlando Health. The Mevion Service Agreement began September 5, 2017 and renews annually. The agreement requires an annual prepayment of $1,285,000 which was made on August 6, 2018 for the current contractual period. This payment portion was recorded as a prepaid contract and will be amortized over the one-year service period. The Mevion Service Agreement is for a five (5) year period. On December 20, 2018, the Company signed a Second Amendment to the Mevion Service Agreement, where the Company agreed to increase the annual service payment by $250,000, effective for the second service year, and for each year thereafter, if a second Mevion PBRT unit is not placed at Orlando Health prior to September 2019. The Company has accrued the pro-rata portion of this additional maintenance expense for the three and six-month periods ended
June 30, 2019
.
As of
June 30, 2019
, the Company had commitments to service and maintain its Gamma Knife and PBRT equipment. The service commitments are carried out via contracts with Mevion and Elekta AB. In addition, in April 2019, the Company signed agreements to service the Icon upgrades which will be installed at various dates between 2019 and 2020. The Company’s commitment to purchase a LINAC in 2019 also includes a 9-year agreement to service the equipment. Total service commitments as of
June 30, 2019
were $
11,068,000
. The Gamma Knife and certain other service contracts are paid monthly, as service is performed. The Company believes that cash flow from cash on hand and operations will be sufficient to cover these payments.
The Company estimates the following for each of the equipment commitments, service contracts, long-term debt and capital lease financing, and operating leases with expected timing of payments as follows as of
June 30, 2019
:
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Payments Due by Period
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Contractual Obligations
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Total amounts
committed
|
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2019
|
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2020-2022
|
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2023
|
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After
5 years
|
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Long-term debt (includes interest)
|
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$
|
5,029,000
|
|
|
$
|
1,257,000
|
|
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$
|
2,686,000
|
|
|
$
|
334,000
|
|
|
$
|
752,000
|
|
|
Capital leases (includes interest)
|
|
14,627,000
|
|
|
2,817,000
|
|
|
10,978,000
|
|
|
524,000
|
|
|
308,000
|
|
|
Future equipment purchases
|
|
42,110,000
|
|
|
4,635,000
|
|
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37,475,000
|
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—
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—
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Equipment service contracts
|
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11,068,000
|
|
|
1,469,000
|
|
|
7,154,000
|
|
|
345,000
|
|
|
2,100,000
|
|
|
Operating leases
|
|
1,309,000
|
|
|
171,000
|
|
|
962,000
|
|
|
176,000
|
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—
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Total contractual obligations
|
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$
|
74,143,000
|
|
|
$
|
10,349,000
|
|
|
$
|
59,255,000
|
|
|
$
|
1,379,000
|
|
|
$
|
3,160,000
|
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