NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
Note 1.
|
Basis of Presentation
|
In
the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments
necessary to present fairly American Shared Hospital Services’ consolidated financial position as of March 31, 2018 and
the results of its operations for the three-month periods ended March 31, 2018 and 2017, which results are not necessarily
indicative of results on an annualized basis. Consolidated balance sheet amounts as of December 31, 2017 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, 2017 included in the Company’s 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 subsidiaries Instituto de Gamma Knife del Pacifico S.A.C. (“GKPeru”) and GK Financing U.K., Limited (“GKUK”);
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 subsidiary, GKV Investments,
Inc.), entered into an operating agreement and formed GKF. As of March 31, 2018, GKF provided Gamma Knife units
to sixteen medical centers in the United States in the states of Arkansas, California, Florida, Illinois, Massachusetts, Mississippi,
Nebraska, Nevada, New Jersey, New Mexico, New York, Tennessee, Ohio, Oregon, 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 one customer in the United States. 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, respectively;
Orlando and LBE to provide proton beam therapy equipment and services in Orlando, Florida and Long Beach, California; and AGKE
and JGKE to provide Gamma Knife 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 began operations in April 2016.
GKPeru treated its first patient in July 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
through its 50% owned
OR21, LLC (“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.
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 seventeen hospitals in the United States and owns and operates a single-unit facility
in Lima, Peru as of March 31, 2018. 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 the subsidiaries and locations.
As of December 31, 2016,
the Company had warrants outstanding representing the right to purchase 100,000 shares of the Company’s common stock at $2.20
per share. These warrants were issued with the Notes to four members of the Company’s Board of Directors in a prior year.
During the three-month period ended March 31, 2017, 100,000 of the warrants were exercised. Of the 100,000 outstanding, 50,000
of the warrants exercised were done so through a cashless exercise issuance, totaling approximately 25,000 shares. There are no
warrants outstanding as of March 31, 2018.
On
July 21, 2017, the Company entered into a Maintenance and Support Agreement (the “Mevion Service Agreement”) with Mevion
Medical Systems, Inc. (“Mevion”), formerly Still River Systems, which provides for maintenance and support of the Company’s
PBRT unit at Orlando Health – UF Health Cancer Center (“Orlando Health”). The Mevion Service Agreement began
September 5, 2017 and required an upfront payment of $1,000,000 which was made on August 4, 2017, and further requires payments
over the next 11 months. 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.
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. The Company performed an analysis to determine if its revenue agreements with customers fall under the
scope of ASU No. 2016-02
Leases
(“ASU 2016-02”) or ASU 2014-09 and concluded that, other than with respect to
the Company’s stand-alone facility in Lima, Peru, ASU 2014-09 was not applicable.
The
Company adopted ASU 2014-09 as of January 1, 2018 using the modified retrospective method. The cumulative effect of adopting
ASU 2014-09 did not have a material impact on retained earnings, as reported by the Company, and there was no change to the
Company’s IT environment following adoption. Under ASU 2014-09, the Company determined that, as it relates to the
stand-alone facility in Lima, Peru, a contract exists between GK Peru and the individual patient treated at the facility. 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 in the month 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 and revenues earned by GK Peru were not material for the
three-month period ended March 31, 2018, therefore, no additional disclosures have been made at this time.
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 was effective for the Company on January 1, 2018. The Company adopted ASU
2016-01 on January 1, 2018. There was no significant impact on the consolidated financial statements and related
disclosures.
In
February 2016, the FASB issued 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. 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 and concluded that, other than with respect to the
Company’s stand-alone facility in Lima, Peru, ASU 2016-02 applied. The Company believes it is following an appropriate timeline
to allow for proper recognition, presentation, and disclosure upon adoption of ASU 2016-02.
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, 2018.
The Company does not expect ASU 2016-13 to have a significant impact 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. The Company adopted ASU
2016-15 on January 1, 2018. There was no significant impact 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. The Company adopted ASU 2016-18 on January 1, 2018. For the three-month periods
ending March 31, 2018 and 2017, restricted cash of $350,000 and $250,000 was included as cash, cash equivalents, and restricted
cash at the beginning and end of the reporting periods, respectively.
In
May 2017, the FASB issued ASU No. 2017-09
Compensation – Stock Compensation (Topic 718): Scope of Modification
Accounting
(“ASU 2017-09”), which provides guidance on determining which changes to the terms and conditions
of share-based payment awards require an entity to apply modification accounting under Topic 718. The new guidance is
effective for fiscal years beginning after December 31, 2017. The Company adopted ASU 2017-09 on January 1, 2018. There was
no significant impact on its consolidated financial statements and related disclosures.
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. The new guidance is effective for fiscal years beginning after December 31, 2017
and interim periods within those fiscal years beginning after June 15, 2018. The Company does not expect ASU 2018-03 to have
a significant impact on its consolidated financial statements and related disclosures.
|
Note 2.
|
Per Share Amounts
|
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-month periods ended March 31, 2018 and 2017 excluded approximately 549,000 and 0, respectively,
of the Company’s stock options because the exercise price of the options was higher than the average market price during
the period.
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-month periods ended March 31, 2018 and 2017, 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 March 31,
2018.
The
following table sets forth the computation of basic and diluted earnings per share for the three-month periods ended March 31,
2018 and 2017:
|
|
Three Months ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net income attributable to American Shared Hospital Services
|
|
$
|
390,000
|
|
|
$
|
293,000
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares for basic earnings per share
|
|
|
5,818,000
|
|
|
|
5,685,000
|
|
Diluted effect of stock options and restricted stock
|
|
|
37,000
|
|
|
|
199,000
|
|
Weighted average common shares for diluted earnings per share
|
|
|
5,855,000
|
|
|
|
5,884,000
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.07
|
|
|
$
|
0.05
|
|
Diluted earnings per share
|
|
$
|
0.07
|
|
|
$
|
0.05
|
|
|
Note 3.
|
Stock-based Compensation
|
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 27, 2017, 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, 2020.
Stock-based
compensation expense associated with the Company’s stock-based options to employees is calculated using the Black-Scholes
valuation model. 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 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 $55,000 and $50,000 is reflected in net income for the three-month periods ended March 31, 2018 and 2017, respectively.
At March 31, 2018, there was approximately $238,000 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 March 31, 2018, 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 March 31, 2018. 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 unvested restricted stock awards, consisting primarily of annual automatic grants and deferred compensation
to non-employee directors, for the three-month period ended March 31, 2018:
|
|
Restricted
Stock Units
|
|
|
Grant Date
Weighted-
Average Fair
Value
|
|
|
Intrinsic
Value
|
|
Outstanding at January 1, 2018
|
|
|
4,000
|
|
|
$
|
3.77
|
|
|
$
|
-
|
|
Granted
|
|
|
31,000
|
|
|
$
|
2.55
|
|
|
$
|
-
|
|
Vested
|
|
|
(8,000
|
)
|
|
$
|
2.55
|
|
|
$
|
-
|
|
Outstanding at March 31, 2018
|
|
|
27,000
|
|
|
$
|
2.73
|
|
|
$
|
-
|
|
The following
table summarizes stock option activity for the three-month period ended March 31, 2018:
|
|
Stock
Options
|
|
|
Grant Date
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Life (in
Years)
|
|
|
Intrinsic
Value
|
|
Outstanding at January 1, 2018
|
|
|
615,000
|
|
|
$
|
2.87
|
|
|
|
3.48
|
|
|
$
|
-
|
|
Outstanding at March 31, 2018
|
|
|
615,000
|
|
|
$
|
2.87
|
|
|
|
3.23
|
|
|
$
|
-
|
|
Exercisable at March 31, 2018
|
|
|
395,000
|
|
|
$
|
2.86
|
|
|
|
3.12
|
|
|
$
|
19,000
|
|
|
Note 4.
|
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 March 31, 2018 and December 31, 2017 were as follows (in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Carrying
Value
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, restricted cash
|
|
$
|
3,101
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,101
|
|
|
$
|
3,101
|
|
Total
|
|
$
|
3,101
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,101
|
|
|
$
|
3,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt obligations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,569
|
|
|
$
|
5,569
|
|
|
$
|
5,577
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,569
|
|
|
$
|
5,569
|
|
|
$
|
5,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, restricted cash
|
|
$
|
2,502
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,502
|
|
|
$
|
2,502
|
|
Total
|
|
$
|
2,502
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,502
|
|
|
$
|
2,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt obligations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,082
|
|
|
$
|
6,082
|
|
|
$
|
6,057
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,082
|
|
|
$
|
6,082
|
|
|
$
|
6,057
|
|
|
Note 5.
|
Repurchase of Common Stock
|
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 of Directors reaffirmed in 2008. There were no shares repurchased during the
three-month periods ended March 31, 2018 and 2017. There are approximately 72,000 shares remaining under this repurchase authorization
as of March 31, 2018.
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-month period ended March 31, 2018 by
applying the actual effective tax rates to income or (loss) reported within the condensed consolidated financial statements through
those periods.
On
December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act
(the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that affect fiscal 2017, including,
but not limited to requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable
over eight years. The Tax Act also establishes new tax laws that will affect 2018 and later years, including, but not limited to,
a reduction of the U.S. federal corporate tax rate from 34% to 21%, a general elimination of U.S. federal income taxes on dividends
from foreign subsidiaries, net operating loss deduction limitations, a base erosion, anti-tax abuse tax and a deduction for foreign-derived
intangible income and a new provision designed to tax global intangible low-taxed income. As a result of the Tax Act, the Company
revalued its federal and state deferred tax liabilities based on a 21% tax rate as opposed to a 34% tax rate for the year ended
December 31, 2017.