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 (consisting
of only normal recurring accruals) necessary to present fairly American Shared Hospital Services’ consolidated financial
position as of March 31, 2017 and the results of its operations for the three month periods ended March 31, 2017 and 2016, which
results are not necessarily indicative of results on an annualized basis. Consolidated balance sheet amounts as of December 31,
2016 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, 2016 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. (“OR21”), 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 United States subsidiary, GKV
Investments, Inc.), entered into an operating agreement and formed GK Financing, LLC. During 2017 GKF provided Gamma Knife units
to seventeen medical centers in the United States in the states of Arkansas, California, Connecticut, Florida, Illinois, Massachusetts,
Mississippi, Nevada, New Jersey, New Mexico, New York, Tennessee, Oklahoma, Ohio, Oregon, and Texas.
The
Company through its wholly-owned subsidiary, Orlando, provided proton beam radiation therapy (“PBRT”) and related equipment
to a 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 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 treated its first
patient in April 2016. GKPeru is expected to begin operations in the third quarter of 2017. GKUK is inactive and LBE is not
expected to generate revenue within the next two years.
The Company continues
to develop its design and business model for “The Operating Room for the 21st Century”
SM
(“OR21”
SM
), through its 50% owned OR21, LLC (“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 ASC 280
Segment Reporting
(“ASC 280”), the Company has analyzed
its subsidiaries which are all in the business of leasing radiosurgery and radiation therapy equipment to healthcare providers,
and concluded there is one reportable segment, Medical Services Revenue. The Company provides Gamma Knife, PBRT, and IGRT equipment
to eighteen hospitals in the United States as of March 31, 2017. These eighteen locations operate under different subsidiaries
of the Company, but offer the same service, radiosurgery, and radiation therapy. The operating results of the subsidiaries are
reviewed by the Company’s Chief Executive Officer and Chief Financial Officer, who are also deemed the Company’s Chief
Operating Decision Makers (“CODMs”) and this is done in conjunction with all of the subsidiaries and locations.
In
February 2016, the Company used proceeds from the lease financing of its MEVION S250 at UF Health Cancer Center at Orlando Health
(“Orlando Health”) to pay down $1,000,000 in Promissory Notes (the “Notes”) with four members of the Company’s
Board of Directors. Based on the guidance provided in accordance with ASC 405
Extinguishment of Liabilities
(“ASC
405”) and ASC 470
Debt Modifications and Extinguishments
(“ASC 470”), the pay-down of the Notes is considered
an extinguishment of debt and, as such, the difference between the net carrying amount of the Notes and the costs of extinguishment
was recognized as a loss on the Company’s condensed consolidated statements of operations. During the year ended December
31, 2016, the Company recorded a loss on early extinguishment of debt of $108,000. The Notes were issued with common stock warrants
with an estimated fair value of $145,000. The unamortized balance of the discount on the Notes, of $80,000, and deferred fees
incurred from the issuance of the Note of approximately $28,000, were recorded as a loss on early extinguishment.
In
July 2016, an existing customer provided notice of its intent to exercise the option to purchase the Gamma Knife unit at its
hospital at the end of the lease term for a predetermined purchase price, pursuant to the lease agreement. The lease terminated
in April 2017, at which time, the unit was depreciated to the purchase price of the sale. Based on the guidance provided in ASC
360
Property, Plant and Equipment
(“ASC 360”), because the Gamma Knife unit was not available for immediate
sale, the Company did not classify or measure the asset as held for sale prior to the lease termination.
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, 2017.
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 has a project team in place to analyze the impact of ASU 2014-09 to its revenue stream. This includes performing a
review of current policies to identify potential differences that would result from applying ASU 2014-09. The Company believes
it is following an appropriate timeline to allow for proper recognition, presentation, and disclosure upon adoption. The Company
intends to adopt the standard at the date required for public companies, but has not yet selected a transition method.
In
January 2016, the FASB issued ASU No. 2016-01
Recognition and Measurement of Financial Assets and Financial Liabilities
(“ASU 2016-01”) which requires equity investments, except those accounted for under the equity method of accounting
or those that result in consolidation of the investee, to be measured at fair value with changes in fair value recognized in net
income. The new guidance is effective for the Company on January 1, 2018. Early adoption is permitted. The standard permits the
use of cumulative-effect transition method. The Company is evaluating the effect that ASU 2016-01 will have on its consolidated
financial statements and related disclosures.
In
February 2016, the FASB issued ASU No. 2016-02
Leases
(“ASU 2016-02”), which requires lessees to recognize,
for all leases, at the commencement date, a lease liability, and a right-of-use asset. Under the new guidance, lessor accounting
is largely unchanged. The new guidance is effective for the Company on January 1, 2019. Early adoption is permitted. The Company
is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures.
In
March 2016, the FASB issued ASU No. 2016-09
Compensation – Stock Compensation
(Topic 718) (“ASU 2016-09”)
which changes five aspects of accounting for share-based payment award transactions including 1) accounting for income taxes; 2)
classification of excess tax benefits on the statement of cash flows; 3) forfeitures; 4) minimum statutory tax withholding requirements;
and 5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding
purposes. The new guidance is effective for the Company for interim and annual periods beginning after December 15, 2016. The Company
adopted ASU 2016-09 on January 1, 2017. The Company elected to estimate the impact of forfeitures. There was no material impact
on the consolidated financial statements and related disclosures.
In
June 2016, the FASB issued ASU No. 2016-13
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments
(“ASU 2016-13”), which requires measurement and recognition of expected credit losses
for financial assets held. The new guidance is effective for fiscal periods beginning after December 15, 2019. Early adoption
is permitted for fiscal periods beginning after December 15, 2018. The Company is evaluating the effect that ASU 2016-13 will
have on its consolidated financial statements and related disclosures.
In
August 2016, the FASB issued ASU No. 2016-15
Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts
and Cash Payments
(“ASU 2016-15”), which provides guidance on eight specific cash flow issues: debt prepayment
or extinguishment costs; settlement of zero-coupon or other debt instruments with coupon interest rates that are insignificant
in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination;
proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; distributions
received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows
and application of the Predominance Principle. The new guidance is effective for fiscal periods beginning after December 15, 2017
and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company
is evaluating the effect that ASU 2016-15 will have on its consolidated financial statements and related disclosures.
In
November 2016, the FASB issued ASU No. 2016-18
Statement of Cash Flows (Topic 230) – Restricted Cash
(“ASU
2016-18”), which requires that a statement of cash flows explain the change during the period in total cash, cash equivalents,
and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash
and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and
end-of-period total amounts shown on the statement of cash flows. The new guidance is effective for fiscal years beginning after
December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim
period. The Company is evaluating the effect that ASU 2016-18 will have on its consolidated financial statements and related disclosures.
|
Note 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, 2017 and 2016 excluded approximately 0 and 617,000, 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 period ended March 31, 2017, excluded the weighted average impact of the
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. These shares are also excluded from the denominator for
diluted earnings per share because they are considered contingent shares as of March 31, 2017.
The following table sets forth the computation of basic and diluted earnings per share for the three month
periods ended March 31, 2017 and 2016:
|
|
Three Months ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net income attributable to American Shared Hospital Services
|
|
$
|
293,000
|
|
|
$
|
51,000
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares for basic earnings per share
|
|
|
5,685,000
|
|
|
|
5,541,000
|
|
Diluted effect of stock options and restricted stock
|
|
|
199,000
|
|
|
|
-
|
|
Weighted average common shares for diluted earnings per share
|
|
|
5,884,000
|
|
|
|
5,541,000
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.05
|
|
|
$
|
0.01
|
|
Diluted earnings per share
|
|
$
|
0.05
|
|
|
$
|
0.01
|
|
|
Note 3.
|
Stock-based Compensation
|
In June 2010 shareholders approved an amendment
and restatement of the Company’s stock incentive plan, renaming it the Incentive Compensation Plan (the “Plan”),
and among other things, increasing the number of shares of the Company’s common stock reserved for issuance under the Plan
to 1,630,000. The Plan provides that the shares reserved under the Plan are available for issuance to officers of the Company,
other key employees, non-employee directors, and advisors. The Plan is a successor to the Company’s previous plans, and any
shares awarded and outstanding under those plans were transferred to the Plan. No further grants or share issuances will be made
under the previous plans. On June 16, 2015, the Company’s shareholders approved an amendment and restatement of the Plan
in order to extend the term of the Plan by two years. The Company’s shareholders will vote to approve the amendment and restatement
of the Plan by an additional two years at the annual shareholder meeting to be held on June 27, 2017.
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 $50,000 and $59,000 is reflected in net income for the three month periods ended March 31, 2017 and 2016, respectively.
At March 31, 2017, there was approximately $356,000 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 three years.
On
January 4, 2017, the Company entered into a Performance Share Award Agreement (the “Agreements”) with three executive
officers of the Company for 161,766 restricted stock awards which vest upon the achievement of certain performance metrics. The
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 and that as of March 31, 2017 it
is not probable that any of the required metrics for vesting will be achieved. As a result, the Company has not recognized any
stock-based compensation expense associated with these awards for the three month period ended March 31, 2017. The unrecognized
stock-based compensation expense for these awards was approximately $542,000 as of March 31, 2017. If and when the Company determines
that the 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, 2017:
|
|
Restricted
Stock
Units
|
|
|
Grant Date
Weighted-
Average
Fair Value
|
|
|
Intrinsic
Value
|
|
Outstanding at January 1, 2017
|
|
|
4,000
|
|
|
$
|
2.25
|
|
|
$
|
-
|
|
Granted
|
|
|
18,000
|
|
|
$
|
3.40
|
|
|
$
|
-
|
|
Vested
|
|
|
(4,000
|
)
|
|
$
|
3.40
|
|
|
$
|
-
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Outstanding at March 31, 2017
|
|
|
18,000
|
|
|
$
|
3.21
|
|
|
$
|
20,000
|
|
The
following table summarizes stock option activity for the three month period ended March 31, 2017:
|
|
Stock
Options
|
|
|
Grant Date
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Life (in
Years)
|
|
Outstanding at January 1, 2017
|
|
|
625,000
|
|
|
$
|
2.85
|
|
|
|
4.25
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(2,000
|
)
|
|
$
|
2.81
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2017
|
|
|
623,000
|
|
|
$
|
2.85
|
|
|
|
4.02
|
|
Exercisable at March 31, 2017
|
|
|
304,000
|
|
|
$
|
2.83
|
|
|
|
3.80
|
|
|
Note 4.
|
Investment in Equity Securities
|
As
of March 31, 2017 and December 31, 2016 the Company had a $579,000 investment in the common stock of Mevion Medical Systems, Inc.
(“Mevion”) formerly Still River Systems, representing an approximate 0.46% interest in Mevion. The Company accounts
for this investment under the cost method. The Company carries its investment in Mevion at cost and reviews it for impairment
on a quarterly basis, or as events or circumstances might indicate that the carrying value of the investment may not be recoverable.
The
Company reviewed this investment at March 31, 2017 in light of both current market conditions and the current operations of Mevion
as they continue to grow their PBRT business. Based on its analysis, the Company determined no impairment needed to
be recognized as of March 31, 2017.
|
Note 5.
|
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, 2017 and December 31, 2016 were as follows (in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Carrying Value
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, restricted cash
|
|
$
|
2,653
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,653
|
|
|
$
|
2,653
|
|
Investment in equity securities
|
|
|
-
|
|
|
|
-
|
|
|
|
579
|
|
|
|
579
|
|
|
|
579
|
|
Total
|
|
$
|
2,653
|
|
|
$
|
-
|
|
|
$
|
579
|
|
|
$
|
3,232
|
|
|
$
|
3,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt obligations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,040
|
|
|
$
|
7,040
|
|
|
$
|
7,812
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,040
|
|
|
$
|
7,040
|
|
|
$
|
7,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, restricted cash
|
|
$
|
3,121
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,121
|
|
|
$
|
3,121
|
|
Investment in equity securities
|
|
|
-
|
|
|
|
-
|
|
|
|
579
|
|
|
|
579
|
|
|
|
579
|
|
Total
|
|
$
|
3,121
|
|
|
$
|
-
|
|
|
$
|
579
|
|
|
$
|
3,700
|
|
|
$
|
3,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt obligations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,354
|
|
|
$
|
7,354
|
|
|
$
|
7,311
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,354
|
|
|
$
|
7,354
|
|
|
$
|
7,311
|
|
|
Note 6.
|
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 period ended March 31, 2017 or 2016. There are approximately 72,000 shares remaining under this repurchase authorization
as of March 31, 2017.
We
generally calculate our 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, we compute our provision for income taxes using the actual effective income tax rate for the results
of operations reported within the year-to-date periods. Our 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 our common stock options
and historically 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, we have
computed our provision for income taxes for the three month periods ended March 31, 2017 and 2016 by applying the actual effective
tax rates to income reported within the condensed consolidated financial statements through those periods.