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 September 30, 2017 and the results of its operations for the three and nine-month periods ended September 30, 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 GKF. As of September 30, 2017, 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 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 equipment and services in Orlando, Florida and Long Beach, California; 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. 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”),
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, Rental Income from Medical Services.
The Company provides Gamma Knife, PBRT, and IGRT equipment to seventeen hospitals in the United States as of September 30, 2017.
The Company, through GKF, also owns and operates a single-unit Gamma Knife facility in Lima, Peru. 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 Orlando Health – UF Health Cancer
Center (“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.
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. During the nine-month
period ended September 30, 2017, 100,000 of the warrants were exercised. 50,000 of the 100,000 warrants were exercised via a cashless
exercise resulting in the net issuance of approximately 25,000 shares. There are no warrants outstanding as of September 30, 2017.
In
April 2017, an existing customer exercised their 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”), the Company did not classify or measure the asset as held for sale prior to the lease termination, because
the Gamma Knife unit was not available for immediate sale.
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. 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 has a project team in place to analyze the impact
of ASU 2014-09 to its revenue stream in Peru. The Company believes it is following an appropriate timeline to allow for proper
recognition, presentation, and disclosure upon adoption of ASU 2014-09. The Company intends to adopt the standard at the date
required for public companies, but has not yet selected a transition method. The Company does not anticipate any change to its
IT control environment from the adoption of ASU 2014-09.
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 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 conclude 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
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.
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. Early adoption is permitted, including adoption in an interim period. The Company is evaluating
the effect that ASU 2017-09 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 and nine-month periods ended September 30, 2017 excluded approximately 14,000 stock
options, respectively, because the exercise price of the options was higher than the average market price during those periods.
The computation for the three-month period ended September 30, 2016 excluded approximately 571,000 stock options and the nine-month
period ended September 30, 2016 excluded approximately 600,000 stock options and 200,000 common stock warrants, because the exercise
price of the options or warrants was higher than the average market price during those periods.
The
following table sets forth the computation of basic and diluted earnings per share for the three and nine-month periods ended September
30, 2017 and 2016:
|
|
Three Months ended September 30,
|
|
|
Nine Months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net income attributable to American Shared Hospital Services
|
|
$
|
99,000
|
|
|
$
|
334,000
|
|
|
$
|
505,000
|
|
|
$
|
478,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares for basic earnings per share
|
|
|
5,947,000
|
|
|
|
5,554,000
|
|
|
|
5,745,000
|
|
|
|
5,553,000
|
|
Diluted effect of stock options and restricted stock
|
|
|
94,000
|
|
|
|
39,000
|
|
|
|
167,000
|
|
|
|
11,000
|
|
Weighted average common shares for diluted earnings per share
|
|
|
6,041,000
|
|
|
|
5,593,000
|
|
|
|
5,912,000
|
|
|
|
5,564,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
|
$
|
0.09
|
|
|
$
|
0.09
|
|
Diluted earnings per share
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
|
$
|
0.09
|
|
|
$
|
0.09
|
|
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 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 awards, in the amount of $58,000
and $158,000 is reflected in net income for the three and nine-month periods ended September 30, 2017 compared to $42,000 and $161,000
in the same periods prior year, respectively. At September 30, 2017, there was approximately $330,000 of unrecognized compensation
cost related to non-vested share-based compensation arrangements granted under the Plan, excluding the unrecognized compensation
cost associated with the Award Agreements, 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 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 and that as of September 30, 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 and nine-month periods ended September 30, 2017. The
unrecognized stock-based compensation expense for these awards was approximately $542,000 as of September 30, 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
restricted stock awards, consisting primarily of annual automatic grants and deferred compensation to non-employee directors,
for the nine-month period ended September 30, 2017:
|
|
Restricted
Stock
Awards
|
|
|
Grant Date
Weighted-
Average
Fair Value
|
|
|
Intrinsic
Value
|
|
Outstanding at January 1, 2017
|
|
|
4,000
|
|
|
$
|
2.25
|
|
|
$
|
-
|
|
Granted
|
|
|
22,000
|
|
|
$
|
3.47
|
|
|
$
|
-
|
|
Vested
|
|
|
(17,000
|
)
|
|
$
|
3.16
|
|
|
$
|
-
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Outstanding at September 30, 2017
|
|
|
9,000
|
|
|
$
|
3.58
|
|
|
$
|
-
|
|
The
following table summarizes stock option activity for the nine-month period ended September 30, 2017:
|
|
Stock
Options
|
|
|
Grant Date
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Life (in
Years)
|
|
|
Intrinsic
Value
|
|
Outstanding at January 1, 2017
|
|
|
625,000
|
|
|
$
|
2.85
|
|
|
|
4.25
|
|
|
$
|
-
|
|
Granted
|
|
|
19,000
|
|
|
$
|
3.62
|
|
|
|
6.80
|
|
|
$
|
-
|
|
Exercised
|
|
|
(4,000
|
)
|
|
$
|
2.81
|
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited
|
|
|
(23,000
|
)
|
|
$
|
2.82
|
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding at September 30, 2017
|
|
|
617,000
|
|
|
$
|
2.87
|
|
|
|
3.63
|
|
|
$
|
-
|
|
Exercisable at September 30, 2017
|
|
|
300,000
|
|
|
$
|
2.82
|
|
|
|
3.43
|
|
|
$
|
9,000
|
|
Note 4. Investment in Equity Securities
As
of September 30, 2017, and December 31, 2016, the Company had a $579,000 investment in the common stock of Mevion, 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 September 30, 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 additional impairment needed
to be recognized as of September 30, 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 September 30, 2017 and December 31, 2016 were as follows
(in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Carrying
Value
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, restricted cash
|
|
$
|
1,665
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,665
|
|
|
$
|
1,665
|
|
Investment in equity securities
|
|
|
-
|
|
|
|
-
|
|
|
|
579
|
|
|
|
579
|
|
|
|
579
|
|
Total
|
|
$
|
1,665
|
|
|
$
|
-
|
|
|
$
|
579
|
|
|
$
|
2,244
|
|
|
$
|
2,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt obligations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,809
|
|
|
$
|
6,809
|
|
|
$
|
6,716
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,809
|
|
|
$
|
6,809
|
|
|
$
|
6,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 reaffirmed in 2008. There were no shares repurchased during the three and
nine-month periods ended September 30, 2017 or 2016, respectively. There are approximately 72,000 shares remaining under this repurchase
authorization as of September 30, 2017.
Note 7. Income Taxes
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 nine-month periods ended September 30, 2017 and 2016 by applying the actual effective tax rates to income or
(loss) reported within the condensed consolidated financial statements through those periods.