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, 2019 and the results
of its operations for the three-month periods ended March 31, 2019 and 2018, which results 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 March 31, 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 March 31, 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.
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 adopted
ASU 2016-13 as of January 1, 2019 and there was no significant impact on its consolidated financial statements and related disclosures
as a result.
In
July 2018, the FASB issued ASU No. 2018-09, Codification Improvements (“ASU 2018-09”). This standard does not prescribe
any new accounting guidance, but instead makes minor improvements and clarifications of several different FASB Accounting Standards
Codification areas based on comments and suggestions made by various stakeholders. Certain updates are applicable immediately while
others provide for a transition period to adopt as part of the next fiscal year beginning after December 15, 2018. The Company
adopted ASU 2018-09 as of January 1, 2019 and there was no significant impact on its consolidated financial statements as a result.
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.
|
Note 2.
|
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.
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 March 31, 2019 and December 31, 2018:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Medical equipment and facilities
|
|
$
|
90,214,000
|
|
|
$
|
94,031,000
|
|
Office equipment
|
|
|
573,000
|
|
|
|
589,000
|
|
Deposits and construction in progress
|
|
|
2,026,000
|
|
|
|
3,832,000
|
|
Deposits towards purchase of proton beam systems
|
|
|
2,250,000
|
|
|
|
2,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,063,000
|
|
|
|
100,702,000
|
|
Accumulated depreciation
|
|
|
(49,998,000
|
)
|
|
|
(54,008,000
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
45,065,000
|
|
|
$
|
46,694,000
|
|
As
of March 31, 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.
|
Note 3.
|
Long-Term Debt Financing
|
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 March 31, 2019. As of March 31, 2019, long-term debt on the Condensed Consolidated
Balance Sheets was $4,937,000. See disclosure of future payments below under the heading “Commitments”.
|
Note 4.
|
Capital Lease Financing
|
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 March 31, 2019. As of March 31, 2019, obligations under capital leases on
the Condensed Consolidated Balance Sheets were $13,669,000. 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 March 31, 2019, operating ROU assets and liabilities were $1,300,000.
The
following table summarizes maturities of lessee operating lease ROU assets and liabilities as of March 31, 2019:
Year ending December 31,
|
|
Operating Leases
|
|
|
|
|
|
2019 (excluding the three-months ended March 31, 2019)
|
|
$
|
250,000
|
|
2020
|
|
|
340,000
|
|
2021
|
|
|
347,000
|
|
2022
|
|
|
331,000
|
|
2023
|
|
|
214,000
|
|
Thereafter
|
|
|
6,000
|
|
|
|
|
|
|
Total lease payments
|
|
|
1,488,000
|
|
Less imputed interest
|
|
|
(188,000
|
)
|
Total
|
|
$
|
1,300,000
|
|
|
Note 6.
|
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, 2019 and 2018 excluded approximately 547,000 and 549,000,
respectively, of the Company’s stock options because the exercise price of the options was higher than the average market
price during those periods.
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, 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 March 31,
2019.
The
following table sets forth the computation of basic and diluted earnings per share for the three-month periods ended March 31,
2019 and 2018:
|
|
Three Months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net income attributable to American Shared Hospital Services
|
|
$
|
270,000
|
|
|
$
|
390,000
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares for basic earnings per share
|
|
|
5,853,000
|
|
|
|
5,818,000
|
|
Diluted effect of stock options and restricted stock
|
|
|
33,000
|
|
|
|
37,000
|
|
Weighted average common shares for diluted earnings per share
|
|
|
5,886,000
|
|
|
|
5,855,000
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.05
|
|
|
$
|
0.07
|
|
Diluted earnings per share
|
|
$
|
0.05
|
|
|
$
|
0.07
|
|
|
Note 7.
|
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 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 $55,000
and $55,000 is reflected in net income for the three-month periods ended March 31, 2019 and 2018, respectively. At March 31, 2019,
there was approximately $114,000 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, 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 March 31, 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 three-month period ended March 31, 2019:
|
|
Stock
Options
|
|
|
Grant Date
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Life (in
Years)
|
|
|
Intrinsic
Value
|
|
Outstanding at January 1, 2019
|
|
|
613,000
|
|
|
$
|
2.85
|
|
|
|
3.14
|
|
|
$
|
-
|
|
Outstanding at March 31, 2019
|
|
|
613,000
|
|
|
$
|
2.85
|
|
|
|
2.43
|
|
|
$
|
34,000
|
|
Exercisable at March 31, 2019
|
|
|
489,000
|
|
|
$
|
2.87
|
|
|
|
2.31
|
|
|
$
|
-
|
|
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, 2019 by applying the actual
effective tax rates to income or (loss) reported within the condensed consolidated financial statements through those periods.