ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The COVID-19 pandemic, the resulting recession in the United States and its follow-on effects have impacted and will likely continue to impact business activity across industries, including the Company’s. During 2020, due to factors related to the COVID-19 pandemic such as delays in service at medical facilities and restrictions imposed by government agencies, and the Company’s customers in response to the spread of COVID-19, the Company experienced some delays in delivering certain Gamma Knife procedures and PBRT treatments. Similarly, the Company’s ability to conduct commercial efforts with its customers have been and are likely to continue to be disrupted as customers have turned their focus to dealing with the impact of the COVID-19 pandemic on their operations and have restricted access to their sites in efforts to contain the spread of the virus. The global nature of the pandemic has resulted in authorities implementing numerous measures designed to contain the virus, including travel bans and restrictions, border closures, quarantines, shelter-in-place orders, business limitations and shutdowns. The impact of the COVID-19 pandemic on the global economy and capital markets is significant, and on June 8, 2020 the National Bureau of Economic Research announced that the United States was in an economic recession. An extended economic recession in the United States or elsewhere could have a material adverse effect on the Company’s ability to conduct its business and to access financing, as well as on the Company’s results of operation, financial condition, liquidity and cash flows. The prioritization of COVID-19 treatment and containment has resulted in delays in decisions by the Company’s customers and their patients, obstacles to the Company’s ability to market and deliver its services, declines in treatment volumes and adverse impacts to revenues for both Gamma Knife procedures and PBRT treatments. As a result of the pandemic and related governmental actions, Gamma Knife procedures and PBRT treatments, which currently make up all of the Company’s revenue, may be impacted differently at each of the Company’s various locations and may take longer to recover than other areas of the economy, which may have a material impact on the Company's business. The Company’s Gamma Knife operations in Latin America have experienced a decline in procedures due to the COVID-19 pandemic. Our Gamma Knife and PBRT operations in the United States have also experienced negative impacts from the COVID-19 pandemic. As the COVID-19 pandemic continues to develop, additional impacts may arise that we are not aware of currently.
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The impact of the COVID-19 pandemic for the year ended December 31, 2020 has varied by location based on the stage of containment and actions by government agencies. The impact on treatments and costs in the three-month period ended March 31, 2020 did not appear material. The impact of the COVID-19 pandemic has been greater for the three-month periods ended June 30, 2020, September 30, 2020, and December 31, 2020, including declines in patient volumes and corresponding reductions in Gamma Knife procedures and reduced PBRT fractions during the second and fourth quarters.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company’s consolidated financial statements are prepared in accordance with generally accepted accounting principles and follow general practices within the industry in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.
The most significant accounting policies followed by the Company are presented in Note 2 to the consolidated financial statements. These policies along with the disclosures presented in the other financial statement notes and, in this discussion, and analysis, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts, and the methods, assumptions and estimates underlying those amounts, management has identified revenue recognition and costs of sales for turn-key and revenue sharing arrangements, and the carrying value of fixed assets and useful lives, and as such could be most subject to revision as new information becomes available. The following are our critical accounting policies in which management’s estimates, assumptions and judgments most directly and materially affect the financial statements:
Revenue Recognition
The Company recognizes revenues under Accounting Standards Codification (“ASC”) 842 Leases (“ASC 842”) and ASC 606 Revenue from Contracts with Customers (“ASC 606”). The Company had sixteen (16) Gamma Knife units and one (1) PBRT system in operation as of December 31, 2020. Four (4) of the Company’s customer contracts are through subsidiaries where GKF or its subsidiary is the majority owner and managing partner. Six (6) of the Company’s sixteen (16) current Gamma Knife customers are under fee-per-use contracts, and eight (8) customers are under retail arrangements. The Company, through GKF, also owns and operates single-unit Gamma Knife facilities in Lima, Peru and Guayaquil, Ecuador. These units economically function similar to the Company’s turn-key retail arrangements. The Company’s PBRT system at Orlando Health – UF Health Cancer Center (“Orlando Health”), is also considered a retail arrangement.
Rental Income from Medical Services
The Company recognizes revenues under ASC 842 when services have been rendered and collectability is reasonably assured, on either a fee per use or revenue sharing basis. The terms of the contracts do not contain any guaranteed minimum payments. The Company’s contracts are typically for a ten-year term and are classified as either fee per use or retail. Retail arrangements are further classified as either turn-key or revenue sharing. Revenues from fee per use contracts is determined by each hospital’s contracted rate. Revenues are recognized at the time the procedures are performed, based on each hospital’s contracted rate and the number of procedures performed. Under revenue sharing arrangements, the Company receives a contracted percentage of the reimbursement received by the hospital. The amount the Company expects to receive is recorded as revenue and estimated based on historical experience. Revenue estimates are reviewed periodically and adjusted as necessary. Under turn-key arrangements, the Company receives payment from the hospital in the amount of the hospital’s reimbursement from third party payors, and the Company is responsible for paying all the operating costs of the equipment. Operating costs are determined primarily based on historical treatment protocols and cost schedules with the hospital. The Company records an estimate of operating costs which are reviewed on a regular basis and adjusted as necessary to more accurately reflect the actual operating costs. For turn-key sites, the Company also shares a percentage of net operating profit. The Company records an estimate of net operating profit based on estimated revenues, less estimated operating costs. The operating costs and estimated net operating profit are recorded as other direct operating costs in the consolidated statement of operations. As of December 31, 2020 and 2019, the Company recognized revenues of approximately $16,204,000 and $19,396,000 under ASC 842, respectively.
Revenue from retail arrangements amounted to approximately 64% and 64% of total revenue for the years ended December 31, 2020 and 2019, respectively. Because the revenue estimates are reviewed on a quarterly basis, any adjustments required for past revenue estimates would result in an increase or reduction in revenue during the current quarterly period.
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Patient Income
The Company has stand-alone facilities in Lima, Peru and Guayaquil, Ecuador, where a contract exists between the Company’s facilities and the individual patient treated at the facility. Under ASC 606, the Company acts as the principal in this transaction and provides, at a point in time, a single performance obligation, in the form of a Gamma Knife treatment. Revenue related to a Gamma Knife treatment is recognized on a gross basis at the time when the patient receives treatment. There is no variable consideration present in the Company’s performance obligation and the transaction price is agreed upon per the stated contractual rate. GKPeru's payment terms are typically prepaid for self-pay patients and insurance provider payments are paid net 30 days. GKCE's patient population is primarily covered by a government payor and payments are paid approximately 30 to 60 days upon invoice. The Company did not capitalize any incremental costs related to the fulfillment of its customer contracts. Accounts receivable earned by GKPeru were not significant for the year ended December 31, 2020 and 2019. GKCE's accounts receivable were $467,000 for the year ended December 31, 2020. As of December 31, 2020 and 2019, the Company recognized revenues of approximately $1,633,000 and $1,209,000 under ASC 606, respectively.
2020 Results
For the year ended December 31, 2020, 65% of the Company’s revenue was derived from its Gamma Knife business and 35% was derived from the PBRT system. For the year ended December 31, 2019, 66% of the Company’s revenue was derived from its Gamma Knife business, 30% was derived from the PBRT system, and the remaining 4% from its IGRT business.
TOTAL REVENUE
(in thousands) 2020 Increase(Decrease) 2019
Total revenue in 2020 decreased 13.4% compared to 2019 primarily due to a decrease in average reimbursement for Gamma Knife procedures and a decrease in PBRT fractions. This decrease in volumes was partially attributable to the COVID-19 pandemic.
Gamma Knife Revenue
Revenue from Gamma Knife (in thousands) $ 11,670 (13.9) % $ 13,551
Gamma Knife revenue for 2020 was $11,670,000 compared to $13,551,000 in 2019. Gamma Knife revenue for 2020 decreased $1,881,000 compared to 2019 due to a lower average reimbursement at the Company's retail sites driven by an increase in patients with Medicare coverage and a decrease in patients with Commercial insurance.
The number of Gamma Knife procedures performed in 2020 increased 32 compared to 2019 due to the Company's acquisition of GKCE in June 2020. This increase was offset by a Gamma Knife contract that terminated in October 2020 and due to the impact of the COVID-19 pandemic.
In April 2020, an existing Gamma Knife customer contract expired. The site operated on a month-to-month basis through October 2020, when the customer notified the Company of their intent to terminate. Two additional existing Gamma Knife customers notified the Company of their intent to not renew their contract during the third and fourth quarters of 2020. One of the contracts terminated in February 2021 and the second is set to expire in December 2021.
Revenue per procedure decreased by $1,283 and in 2020 compared to 2019. For 2020, the decrease was due to lower average reimbursement at the Company's retail sites.
Proton Therapy Revenue
Revenue from PBRT (in thousands) $ 6,167 (0.8) % $ 6,214
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PBRT revenue for 2020 was $6,167,000 compared to $6,214,000 in 2019. The number of PBRT fractions performed in 2020 was 5,868 compared to 6,018 in 2019. Revenue per fraction in 2020 was $1,051 compared to $1,033 in 2019. In 2020, the Company's PBRT revenue declined due to an impact on volumes in the second and fourth quarter from the COVID-19 pandemic. The Company's proton therapy system also experienced some down-time for maintenance in the third quarter of 2020.
IGRT Revenue
(in thousands) 2020 Increase(Decrease) 2019
Revenue from IGRT $ — (100.0) % $ 840
IGRT revenue for 2020 was $0 compared to $840,000 in 2019. IGRT revenue decreased for 2020 as the result of the winding down of the Company’s IGRT system, which was being used as a back-up system at the customer site. The Company’s contract for its IGRT equipment expired in April 2020 and the Company agreed to sell the equipment to its existing customer for $150,000, which was equal to the equipment's salvage value. The Company sold the equipment in July 2020.
COSTS OF REVENUE
(In thousands) 2020 Increase(Decrease) 2019
Percentage of total revenue 75.0 % 66.4 %
The Company's costs of revenue, consisting of maintenance and supplies, depreciation and amortization, and other operating expenses (such as insurance, property taxes, sales taxes, marketing costs and operating costs from the Company’s retail sites) decreased by $314,000 in 2020 compared to 2019.
Maintenance and supplies costs as a percentage of total revenue were 13.4% and 12.7% in 2020 and 2019. Maintenance and supplies costs decreased by $233,000 in 2020 compared to 2019. The decrease in 2020 compared to 2019 was due to a decrease in time and materials costs at the Company's existing sites.
Depreciation and amortization costs as a percentage of total revenue were 38.1% and 35.6% in 2020 and 2019. Depreciation and amortization costs decreased $552,000 in 2020 compared to 2019. The decrease in 2020 compared to 2019 was primarily due to depreciation incurred on the Company's Gamma Knife and IGRT equipment at its location in Boston, Massachusetts in 2019, offset by increased depreciation recognition at two of the Company's expiring Gamma Knife sites. One of these contracts expired in October 2020 and the second expired in the first quarter of 2021.
Other direct operating costs as a percentage of total revenue were 23.5% and 18.1% in 2020 and 2019. Other direct operating costs increased by $471,000 in 2020 compared to 2019. The increase in 2020 is primarily due to operating costs from the Company's acquisition of GKCE in June 2020.
SELLING AND ADMINISTRATIVE EXPENSE
(In thousands) 2020 Increase(Decrease) 2019
Percentage of total revenue 25.8 % 19.7 %
The Company's selling and administrative costs increased $548,000 in 2020 compared to 2019. The increase in 2020 was due to legal and other fees, including, but not limited to the COVID-19 pandemic and the transition in senior management and tax, legal, and consulting fees related to the Company's acquisition of GKCE of approximately $162,000.
INTEREST EXPENSE
(In thousands) 2020 Increase(Decrease) 2019
Percentage of total revenue 5.9 % 6.4 %
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The Company's interest expense decreased $261,000 in 2020 compared to 2019. The decrease in 2020 was primarily due to a lower average principal base for the Company’s lease and debt portfolio, effectively reducing interest expense.
(LOSS) ON WRITE DOWN OF IMPAIRED ASSETS AND ASSOCIATED REMOVAL COSTS
(In thousands) 2020 Increase(Decrease) 2019
(Loss) on write down of impaired assets $ 8,264 * $ 0
Percentage of total revenue 46.3 % 0.0 %
*Not meaningful
As of December 31, 2020, the Company recognized a loss on the write down of impaired assets of $8,264,000. The Company reviewed its long-lived assets and deposits during the fourth quarter of 2020 and concluded events and circumstances existed that indicated the value of these assets was more-than temporarily impaired.
The impaired assets included six (6) Gamma Knife units and related removal costs, and two (2) deposits towards the purchase of proton beam systems and related capitalized interest. The six (6) Gamma Knife units that were impaired consisted of two (2) units that had been taken out of service in prior years, one (1) unit that was taken out of service in 2020 and three (3) units that have already been or the Company anticipates will be taken out of service in 2021.
INTEREST AND OTHER INCOME
(In thousands) 2020 Increase(Decrease) 2019
Interest and other income $ 10 (37.5) % $ 16
Percentage of total revenue 0.1 % 0.1 %
Interest and other income decreased $6,000 in 2020 compared to 2019. Interest and other income is generally comprised of interest expense and interest earned, and increases or decreases generally reflect fluctuations in these amounts.
INCOME TAX EXPENSE
(In thousands) 2020 Increase(Decrease) 2019
Income tax (benefit) expense $ (1,737) * $ 128
Percentage of total revenue (9.7) % 0.6 %
*Not meaningful
Income tax expense decreased $1,865,000 in 2020 compared to 2019. The decrease in income tax benefit provision in 2020 was due to the loss on write-down of impaired assets recorded during the year ended December 31, 2020.
The Company anticipates that it will continue to record income tax expense if it operates profitably in the future. Currently there are state income tax payments required for most states in which the Company operates. At December 31, 2020, the Company exhausted the remainder of its net operating loss carryforward for federal income tax return purposes. The Company has net operating loss carryforwards for state income tax purposes.
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NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTERESTS
(In thousands) 2020 Increase(Decrease) 2019
Percentage of total revenue (3.7) % 3.7 %
Net income attributable to non-controlling interests decreased $1,429,000 in 2020 compared to 2019. Net income attributable to non-controlling interests represents the pre-tax income earned by the 19% non-controlling interest in GKF, and the pre-tax income or losses of the non-controlling interests in various subsidiaries controlled by GKF. The decrease or increase in net income attributable to non-controlling interests reflects the relative profitability of GKF. The decrease in 2020 compared to 2019 was due to the loss on write off of impaired assets.
NET INCOME ATTRIBUTABLE TO AMERICAN SHARED HOSPITAL SERVICES
(In thousands,except per share amounts) 2020 Increase(Decrease) 2019
Net (loss) income attributable to ASHS $ (7,058) * $ 659
Net (loss) income per share attributable to ASHS, diluted $(1.14) * $ 0.11
*Not meaningful
Net (loss) attributable to American Shared Hospital Services was $7,058,000 in 2020 compared to net income of $659,000 in 2019. Net loss decreased $7,717,000 in 2020 compared to 2019 due primarily to the loss on write down of impaired assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $4,325,000 at December 31, 2020 compared to $1,779,000 at December 31, 2019, an increase of $2,546,000. The Company’s expected primary cash needs on both a short and long-term basis are for capital expenditures, business expansion, working capital, and other general corporate purposes.
Operating activities provided cash of $9,745,000 in 2020, which was driven by non-cash charges for depreciation and amortization of $6,970,000, stock-based compensation expense of $299,000, non-cash lease expense of $288,000, a loss on the write-down of impaired assets of $8,184,000, interest expense associated with lease liabilities of $65,000, changes in receivables of $2,966,000, changes in prepaid and other assets of $762,000, and changes in other accrued liabilities, income taxes payable of $179,000, and deferred revenue of $263,000. These were offset by a net loss of $7,716,000, an income tax benefit of $2,162,000, and net lease liabilities of $353,000.
The Company’s trade accounts receivable decreased by $2,591,000 to $4,303,000 at December 31, 2020 from $6,894,000 at December 31, 2019, primarily due to an outstanding payment related to a contractual Medicare adjustment for one of the Company's Gamma Knife contracts, which was collected in January 2020, and an increase in collections from the Company's proton therapy customer. The number of days revenue (sales) outstanding (“DSO”) in accounts receivable as of December 31, 2020 decreased to 88 days compared to 122 days at December 31, 2019. DSO can and does fluctuate depending on timing of customer payments received and the mix of fee per use versus retail customers. Retail sites generally have longer collection periods than fee per use sites.
Investing activities used $2,389,000 of cash in 2020 due to payments made towards the purchase of property and equipment of $455,000 and payment for the Acquisition of $2,084,000, offset by proceeds from the sale of equipment of $150,000.
Financing activities used $4,810,000 of cash during 2020, primarily due to principal payments on long-term debt of $1,726,000, principal payments towards finance leases of $3,199,000, principal payments on short-term financing of $519,000, and distributions to non-controlling interests of $761,000. These decreases were offset by long-term debt financing of the Acquisition of $1,425,000.
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The Company had a working capital deficit at December 31, 2020 of $1,530,000 compared to working capital of $2,528,000 at December 31, 2019. The $4,058,000 decrease in net working capital was due to an decrease in accounts receivable and other receivables of $2,488,000, an increase in accounts payable of $126,000, an increase in employee compensation and benefits of $171,000, an increase in accrued liabilities of $266,000, asset retirement obligations of $1,270,000, an increase in income taxes payable of $243,000, working capital payment due of $197,000, increase in lease liabilities of $26,000, and an increase in finance leases of $2,236,000. This was offset by an increase in cash and restricted cash of $2,546,000, increases in prepaid and other assets of $50,000, and a decrease in long term debt of $369,000. The Company believes that its cash flow from cash on hand, operations, and other cash resources are adequate to meet its scheduled debt and finance lease obligations during the next 12 months. See additional discussion below related to commitments.
The Company, in the past, has secured financing for its Gamma Knife and radiation therapy units. The Company has secured financing for its projects from several lenders and anticipates that it will be able to secure financing on future projects from these or other lending sources, but there can be no assurance that financing will continue to be available on acceptable terms.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Consolidated Financial Statements and Financial Statement Schedules included at page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a)Evaluation of disclosure controls and procedures.
Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (“Exchange Act”) Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this annual report, have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.
(b)Management’s report on internal control over financial reporting.
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to its management and Board of Directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). Based on this assessment management believes that, as of December 31, 2020, the Company’s internal control over financial reporting is effective based on those criteria.
In June 2020, the Company acquired Gamma Knife Center Ecuador S.A. (“GKCE”). Management excluded GKCE from its report on internal controls over financial reporting as of December 31, 2020. GKCE's financial statements constitute 3.8% and 3.6% of the Company’s consolidated total assets (excluding $1,343,000 of goodwill and intangible assets and $19,000 of land, which were integrated into the Company’s control environment), and revenues, respectively. The Company will include GKCE in its assessment of the effectiveness of internal controls over financial reporting in fiscal year 2021 annual management report, the annual management report following the first anniversary of the acquisition.
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(c)Changes in internal controls over financial reporting.
Our Chief Executive Officer and our Chief Financial Officer have evaluated the changes to the Company’s internal control over financial reporting that occurred during our last fiscal quarter ended December 31, 2020, as required by paragraph (d) of Exchange Act Rules 13a-15 and 15d-15, and have concluded that there were no such changes that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding directors is incorporated herein by reference from the Company’s definitive Proxy Statement for the 2021 Annual Meeting of Shareholders (the “2021 Proxy Statement”). Information regarding executive officers of the Company, included herein under the caption “Executive Officers of the Company” in Part I, Item 1 above, is incorporated herein by reference.
Information concerning the identification of our standing audit committee required by this Item is incorporated by reference from the 2021 Proxy Statement.
Information concerning our audit committee financial experts required by this Item is incorporated by reference from the 2021 Proxy Statement.
Information concerning compliance with Section 16(a) of the Exchange Act required by this Item is incorporated by reference from the 2021 Proxy Statement.
We have adopted a Code of Ethics that is available on our website at www.ashs.com. The information on our website is not part of this report. You may also request a copy of this document free of charge by writing our Corporate Secretary.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated herein by reference from the 2021 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information required by this Item is incorporated herein by reference from the 2021 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information required by this Item is incorporated herein by reference from the 2021 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this Item is incorporated herein by reference from the 2021 Proxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)Financial Statements and Schedules.
The following Financial Statements and Schedules are filed with this Report:
Report of Independent Registered Public Accounting Firm
Audited Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Shareholders' Equity
Consolidated Statements of Cash Flows
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Notes to Consolidated Financial Statements
Financial Statement Schedules- no schedules are included since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto.
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(b)Exhibits.
The following Exhibits are filed with this Report.
ExhibitNumber Incorporated by reference herein
Description Form Exhibit Date
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21.1 * Subsidiaries of American Shared Hospital Services
23.1 * Consent of Independent Registered Public Accounting Firm
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101.INS * XBRL Instance Document
101.SCH * XBRL Taxonomy Extension Schema Document
101.CAL * XBRL Taxonomy Calculation Linkbase Document
101.DEF * XBRL Taxonomy Definition Linkbase Document
101.LAB * XBRL Taxonomy Label Linkbase Document
101.PRE * XBRL Taxonomy Extension Presentation Linkbase Document
* Filed herewith.
ǂ Furnished herewith.
• Indicates management compensatory plan, contract, or arrangement.
ITEM 16. FORM 10-K SUMMARY
The Optional summary in Item 16 has not been included in this Form 10-K.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN SHARED HOSPITAL SERVICES
(Registrant)
April 6, 2021 By: /s/ Raymond C. Stachowiak
Raymond C. Stachowiak
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ Raymond C. Stachowiak Chief Executive Officer April 6, 2021
Raymond C. Stachowiak
/s/ Ernest A. Bates Chairman of the Board April 6, 2021
Ernest A. Bates, M.D.
/s/ Daniel G. Kelly Jr. Director April 6, 2021
Daniel G. Kelly JR.
/s/ David A. Larson Director April 6, 2021
David A. Larson, M.D.
/s/ Sandra A. J. Lawrence Director April 6, 2021
Sandra A. J. Lawrence
/s/ S. Mert Ozyurek Director April 6, 2021
S. Mert Ozyurek
Craig K. Tagawa
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AMERICAN SHARED HOSPITAL SERVICES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
and
CONSOLIDATED FINANCIAL STATEMENTS
AS OF December 31, 2020 and 2019,
and
FOR THE YEARS ENDED DECEMBER 31, 2020
CONTENTS
PAGE
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F- 3
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets F- 6
Statements of operations F- 7
Statement of shareholders’ equity F- 8
Statements of cash flows F- 9
Notes to financial statements F- 11
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
American Shared Hospital Services, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of American Shared Hospital Services, Inc. (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, shareholders’ equity and cash flows for the years then ended, and the related notes. In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our auditswe are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our auditsincluded performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.
Retail Revenue Recognition – Estimates of Reimbursement Rates and Payor Mix
As discussed in Note 2 in the Company’s consolidated financial statements, retail revenue amounted to approximately $11,418,000, which was approximately 64% of total consolidated revenue, during the year ended December 31, 2020. The related accounts receivable balance for total retail sites accounted for 68% of total accounts receivable at December 31, 2020. The Company has retail customer revenue classified as either turn-key or revenue sharing that are recognized under Accounting Standards Codification (“ASC”) 842 Leases (“ASC 842”). Under revenue sharing arrangements, the Company receives a contracted percentage of the reimbursement received by the hospital. Under turn-key arrangements, the Company receives payment from the hospital based on the amount of the hospital’s reimbursement from third party payors.
We identified management’s estimates of reimbursement rates and payor mix to record retail revenue and related accounts receivable, as a critical audit matter. Retail revenue and related accounts receivable involves significant judgment and estimation, including measurement uncertainty, by management based on the estimates and assumptions used and are subject to adjustments based on actual reimbursements received by the Company. In turn, auditing management’s judgments and estimates related to retail revenue and related accounts receivable involved a high degree of subjectivity, as they are based on estimates of reimbursement rates and payor mix.
The primary procedures we performed to address this critical audit matter included:
a.Obtaining management’s reconciliation of retail revenue and accounts receivable by site agreeing to supporting documentation related to the estimated reimbursement rates and payor mix used in the calculation.
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a.Obtaining third party confirmations, confirming number of procedures, payment dates and amounts paid, and reconciling confirmed amounts to management’s reconciliation, in order to validate approximate rate per procedure.
a.Testing subsequent cash receipts and evaluating the reasonableness of the estimates through a look-back analysis over retail revenue as compared to accounts receivable balances previously recognized.
a.Developing an independent expectation of reimbursement rates per procedure based on historical trends, procedures, and payment amounts received through confirmation directly with the hospital, and comparing to management’s estimates.
Property and Equipment - Salvage Value on Equipment
As described in Note 2 to the consolidated financial statements, property and equipment are stated at cost less accumulated depreciation. Depreciation for Gamma Knife, 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.
We identified management’s estimates of salvage value including qualitative assessments of certain equipment as a critical audit matter. Determination of salvage values involves significant judgment and estimation, involving measurement uncertainty, as there is no active resale market for the Gamma Knife units due to limited sellers and buyers and trade-ins for the equipment are not guaranteed. Trade-ins are highly dependent on future demand, values and the Company’s relationship with supplier, a related party of the Company. In turn, auditing management’s judgments and estimates related to salvage value of certain equipment, involved a high degree of subjectivity.
The primary procedure we performed to address this critical audit matter included:
a.Evaluating management’s determination of salvage values by comparing determined salvages values with historical trade-in transactions and publicly available transaction information, which included reviewing relevant purchase agreements, supplier agreements and evaluating publicly available transaction information.
Valuation of Certain Tangible and Intangible Assets Acquired Through Business Combination
As described in Note 4 to the consolidated financial statements, the Company completed the acquisition of Gamma Knife Center Ecuador S.A. (“GKCE”) from GKCE’s selling majority shareholders in June 2020. The Company subsequently executed agreements to acquire 1.3% of the total outstanding shares in July 2020 and intends to acquire the remaining 0.7% at later date. The total purchase consideration for 100% of the outstanding shares of GKCE was approximately $2,869,000, including a base purchase price of $2,000,000, subject to certain price adjustments for current assets and liabilities and tax withholding. The transaction was accounted for as a business combination using the acquisition method, whereby the total consideration transferred, identifiable assets acquired, and liabilities assumed are based on the respective acquisition-date fair values.
As part of the acquisition, the Company acquired tangible assets, including building, equipment and other property and equipment with a fair value of approximately $723,000 and intangible assets, consisting of the acquired entity’s trade name, with a fair value of approximately $78,000. We identified the judgment and estimation of the methodologies and assumptions used in the valuation by management, in the determination of the fair value of these assets, as a critical audit matter. Significant assumptions used to estimate the fair value of these tangible and intangible assets included discount rates, useful lives, expected future cash flows, internal rate of return, revenue forecast and growth rates. Given these factors, the related audit effort in evaluating management’s estimates required a high degree of auditor judgment.
The primary procedures we performed to address this critical audit matter included:
a.Evaluating the appropriateness of the methodologies and assumptions used to estimate the fair value of certain tangible (real property and equipment) and intangible (trade name) assets, including involving valuation specialists, where specialized skill or knowledge was needed, to assist with our evaluation. Our valuation specialist assisted primarily in the evaluation of the qualification of the appraiser and valuation specialist used by management, consideration of methodologies used in the appraisal of real property, including review of market information utilized to determine fair value, and in relation to the valuation of trade name, review of the methodology, discount rate, royalty rate, useful life (indefinite), and internal rate of return.
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a.Evaluating assumptions and inputs used in projected financial information of the acquired entity, which primarily related to revenue growth rates, including testing the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. Specifically, when evaluating the assumptions related to the revenue growth rates and changes in the business that would drive these forecasted growth rates, we compared the assumptions to industry trends and subsequent interim period results to evaluate management’s estimates as of the date of the transaction.
/s/ Moss Adams LLP
San Francisco, California
April 6, 2021
We have served as the Company’s auditor since 2000.
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AMERICAN SHARED HOSPITAL SERVICESCONSOLIDATED BALANCE SHEETS
DECEMBER 31,
ASSETS
CURRENT ASSETS
INTANGIBLE ASSETS 78,000 —
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Asset retirement obligations 1,270,000 —
Working capital payment due 197,000 —
LONG-TERM LEASE LIABILITIES, less current portion 581,000 827,000
COMMITMENTS AND CONTINGENCIES (See Note 12)
SHAREHOLDERS’ EQUITY
Common stock, no par value
See accompanying notes
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AMERICAN SHARED HOSPITAL SERVICESCONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
Costs of revenue:
Loss on write down of impaired assets and associated removal costs 8,264,000 —
Net (loss) income per share attributable to American Shared Hospital Services:
(Loss) income per common share- basic $ (1.14) $ 0.11
(Loss) income per common share- diluted $ (1.14) $ 0.11
See accompanying notes
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AMERICAN SHARED HOSPITAL SERVICESCONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
Issuance of restricted stock awards 83,000 — — — — — —
Cash distributions to non-controlling interests — — — — — (939,000) (939,000)
Cash distributions to non-controlling interests — — — — — (761,000) (761,000)
NCI investment in acquisition — — — — — 17,000 17,000
Restricted common shares returned to plan (129,000) — — — — — —
See accompanying notes
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AMERICAN SHARED HOSPITAL SERVICESCONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
OPERATING ACTIVITIES
Loss on write down impaired assets 8,184,000 —
Accrued interest on lease financing — 29,000
Interest expense associated with lease liabilities 65,000 76,000
Changes in operating assets and liabilities:
Accounts payable, accrued liabilities and deferred revenue 263,000 28,000
Net insurance proceeds receivable — 160,000
INVESTING ACTIVITIES
Payment for purchase of property and equipment (455,000) (990,000)
Payment for acquisition, net of cash acquired (2,084,000) —
Proceeds from sale of equipment 150,000 —
FINANCING ACTIVITIES
Proceeds from financing from acquisition 1,425,000 —
Distributions to non-controlling interests (761,000) (939,000)
Debt issuance costs (30,000) —
Proceeds from warrants and options exercised — 42,000
Principal payments on short-term financing (519,000) (51,000)
Net change in cash, cash equivalents and restricted cash 2,546,000 (13,000)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of year $ 4,325,000 $ 1,779,000
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SUPPLEMENTAL CASH FLOW DISCLOSURE
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Lease reassessment right of use assets and lease liabilities $ 67,000 $ —
Interest capitalized to property and equipment $ 119,000 $ 110,000
Acquisition of equipment with finance leases $ 496,000 $ 1,293,000
Acquisition of equipment with long-term debt financing $ 1,184,000 $ —
Acquisition of insurance with short-term financing $ 634,000 $ 526,000
Estimated subsequent working capital payment for acquisition $ 154,000 $ —
See accompanying notes
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AMERICAN SHARED HOSPITAL SERVICESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BUSINESS AND BASISOF PRESENTATION
Business– 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”). GKF formed HoldCo GKC S.A. (“HoldCo”) to acquire Gamma Knife Center Ecuador S.A. (“GKCE”).
The Company (through ASRS) and Elekta AG (“Elekta”), the manufacturer of the Gamma Knife (through its wholly-owned United States subsidiary, GKV Investments, Inc.), entered into an operating agreement and formed GKF. During 2020 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 single-unit Gamma Knife facilities in Lima, Peru and Guayaquil, Ecuador. 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 formed the subsidiary GKPeru and acquired GKCE for the purposes of expanding its business internationally; Orlando and LBE to provide PBRT 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.
On June 12, 2020, GKF, through HoldCo, purchased approximately 98% of the total outstanding shares of GKCE, from GKCE’s majority shareholders (the “Acquisition”). As of December 31, 2020, the Company had acquired approximately 99.3% of the total outstanding shares of GKCE and intends to acquire the remaining 0.7% at a later date. The base purchase price for the Acquisition, including acquisition of the minority shares was approximately $2,000,000. This purchase price was paid with $575,000 in cash and a $1,425,000 loan from the United States International Development Finance Corporation (“DFC”). The purchase price is subject to certain post-closing adjustments, including adjustment for GKCE's working capital and excess cash. The DFC loan is denominated in U.S. dollars, which is also the currency of Ecuador. See “Note 4. GKCE Acquisition” for further discussion.
The Company continues to develop its design and business model for The Operating Room for the 21st CenturySM through its 50% owned OR21, LLC (“OR21”). The remaining 50% of OR21 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.
The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic and the extent and duration of the future impact on the Company's business is highly uncertain and difficult to predict. The COVID-19 pandemic has adversely impacted, and is likely to further adversely impact, nearly all aspects of the Company’s business and markets, including its employees, operations, contractors, customers, government and third party payors and others. The full extent to which the pandemic will directly or indirectly impact the Company's business, results of operations and financial condition will depend on future developments that are highly uncertain and difficult to predict.
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AMERICAN SHARED HOSPITAL SERVICESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – ACCOUNTING POLICIES
Use of estimates in the preparation of financial statements – In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant accounting estimates reflected in the Company’s consolidated financial statements include the estimated useful lives of fixed assets and its salvage values, revenues and costs of sales for turn-key and revenue sharing arrangements. Actual results could differ from those estimates.
Advertising costs – The Company expenses advertising costs as incurred. Advertising costs were $237,000 and $144,000 during the years ended December 31, 2020 and 2019. Advertising costs are recorded in other direct operating costs and sales and administrative costs in the consolidated statements of operations.
Cash and cash equivalents – The Company considers all liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Restricted cash is not considered a cash equivalent for purposes of the consolidated statements of cash flows.
Restricted cash – Restricted cash represents the minimum cash that must be maintained in GKF to fund operations, per the subsidiary’s operating agreement, the minimum cash that must be maintained by GKF per it’s financing agreement with DFC, and the minimum cash that must be maintained in Orlando per the subsidiary’s financing agreement.
Business and credit risk – The Company maintains its cash balances, which exceed federally insured limits, in financial institutions. The Company believes it is not exposed to any significant credit risk on cash, cash equivalents. The Company monitors the financial condition of the financial institutions it uses on a regular basis.
All of the Company’s revenue was provided by eighteen and seventeen customers in 2020 and 2019. One customer accounted for approximately 35% and 30% of the Company’s total revenue in 2020 and 2019. At December 31, 2020, four customers each individually accounted for 11%, 11%, 11% and 20% of total accounts receivable, respectively. At December 31, 2019, three customers each individually accounted for 12%, 15% and 30% of total accounts receivable, respectively. The Company performs credit evaluations of its customers and generally does not require collateral. The Company has not experienced significant losses related to receivables from individual customers or groups of customers in any particular geographic area.
All of the Company’s radiosurgery devices have been purchased through Elekta, to date. However, there are other manufacturers that also make radiosurgery devices.
Accounts receivable and doubtful accounts – Accounts receivable are recorded at net realizable value. An allowance for doubtful accounts is estimated based on historical collections plus an allowance for probable losses. Receivables are considered past due based on contractual terms and are charged off in the period that they are deemed uncollectible. Recoveries of receivables previously charged off are offset against bad debt expense when received.
Non-controlling interests - The Company reports its non-controlling interests as a separate component of shareholders’ equity. The Company also presents the consolidated net income and the portion of the consolidated net income allocable to the non-controlling interests and to the shareholders of the Company separately in its consolidated statements of operations.
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. The Company acquired a building as part of the Acquisition in June 2020. Depreciation for buildings is determined using the straight-line method over 20 years.
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AMERICAN SHARED HOSPITAL SERVICESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – ACCOUNTING POLICIES (CONTINUED)
Depreciation for PBRT and related 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 Company capitalizes interest incurred on property and equipment that is under construction, for which deposits or progress payments have been made. When a rate is not readily available, imputed interest is calculated using the Company’s incremental borrowing rate. The interest capitalized for property and equipment is the portion of interest cost incurred during the acquisition periods that could have been avoided if expenditures for the equipment had not been made. The Company capitalized interest of $119,000 and $110,000 in 2020 and 2019, respectively, as costs of medical equipment.
The Company leases Gamma Knife and radiation therapy equipment to its customers under arrangements accounted for as operating leases. At December 31, 2020, the Company held equipment under operating lease contracts with customers with an original cost of $75,241,000 and accumulated depreciation of $45,416,000. At December 31, 2019, the Company held equipment under operating lease contracts with customers with an original cost of $92,135,000 and accumulated depreciation of $55,148,000.
As of December 31, 2020, the Company recognized a loss on the write down of impaired assets of $8,264,000. The impaired assets included six (6) Gamma Knife units and the Company's deposits towards purchase of proton beam systems and related capitalized interest. See further discussion under Note 2 - Long-lived asset impairment and Note 3 - Property and Equipment for further discussion.
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 December 31, 2020 and 2019 were as follows (in thousands):
Level 1 Level 2 Level 3 Total Carrying Value
Assets:
Cash, cash equivalents, restricted cash $ 4,325 $ — $ — $ 4,325 $ 4,325
Liabilities
Assets:
Cash, cash equivalents, restricted cash $ 1,779 $ — $ — $ 1,779 $ 1,779
Liabilities
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AMERICAN SHARED HOSPITAL SERVICESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – ACCOUNTING POLICIES (CONTINUED)
Revenue recognition - The Company recognizes revenues under ASC 842 Leases (“ASC 842”) and ASC 606 Revenue from Contracts with Customers (“ASC 606”).
Rental income from medical services – The Company recognizes revenues under ASC 842 when services have been rendered and collectability is reasonably assured, on either a fee per use or revenue sharing basis. The terms of the contracts do not contain any guaranteed minimum payments. The Company’s contracts are typically for a 10-year term and are classified as either fee per use or retail. Retail arrangements are further classified as either turn-key or revenue sharing. Revenues from fee per use contracts is determined by each hospital’s contracted rate. Revenues are recognized at the time the procedures are performed, based on each hospital’s contracted rate and the number of procedures performed. Under revenue sharing arrangements, the Company receives a contracted percentage of the reimbursement received by the hospital. The amount the Company expects to receive is recorded as revenue and estimated based on historical experience. Revenue estimates are reviewed periodically and adjusted as necessary. Under turn-key arrangements, the Company receives payment from the hospital in the amount of the hospital’s reimbursement from third party payors, and the Company is responsible for paying all the operating costs of the equipment. Operating costs are determined primarily based on historical treatment protocols and cost schedules with the hospital. The Company records an estimate of operating costs which are reviewed on a regular basis and adjusted as necessary to more accurately reflect the actual operating costs. For turn-key sites, the Company also shares a percentage of net operating profit. The Company records an estimate of net operating profit based on estimated revenues, less estimated operating costs. The operating costs and estimated net operating profit are recorded as other direct operating costs in the consolidated statement of operations. As of December 31, 2020 and 2019, the Company recognized revenues of approximately $16,204,000 and $19,396,000 under ASC 842, respectively.
Patient income – The Company has stand-alone facilities in Lima, Peru and Guayaquil, Ecuador, where a contract exists between the Company’s facilities and the individual patient treated at the facility. Under ASC 606, the Company acts as the principal in this transaction and provides, at a point in time, a single performance obligation, in the form of a Gamma Knife treatment. Revenue related to a Gamma Knife treatment is recognized on a gross basis at the time when the patient receives treatment. There is no variable consideration present in the Company’s performance obligation and the transaction price is agreed upon per the stated contractual rate. GKPeru's payment terms are typically prepaid for self-pay patients and insurance provider payments are paid net 30 days. GKCE's patient population is primarily covered by a government payor and payments are paid approximately 30 to 60 days upon invoice. The Company did not capitalize any incremental costs related to the fulfillment of its customer contracts. Accounts receivable earned by GKPeru were not significant for the year ended December 31, 2020 and 2019. GKCE's accounts receivable were $467,000 for the year ended December 31, 2020. As of December 31, 2020 and 2019, the Company recognized revenues of approximately $1,633,000 and $1,209,000 under ASC 606, respectively.
Stock-based compensation – The Company measures all stock-based compensation awards at fair value and records such expense in its consolidated financial statements over the requisite service period of the related award. See Note 9 for additional information on the Company’s stock-based compensation programs.
Costs of revenue – The Company's costs of revenue consist primarily of maintenance and supplies, depreciation and amortization, and other operating expenses (such as insurance, property taxes, sales taxes, marketing costs and operating costs from the Company’s retail sites). Costs of revenues are recognized as incurred.
Sales and Marketing – The Company markets its services through its preferred provider status with Elekta and a direct sales effort led by its Senior Vice President of Sales and Business Development, its President and Chief Financial and Operating Officer and its Chief Executive Officer (“CEO”).
The Company typically provides the equipment, as well as planning, installation, reimbursement and marketing support services.
Income taxes – The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
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AMERICAN SHARED HOSPITAL SERVICESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – ACCOUNTING POLICIES (CONTINUED)
The Company accounts for uncertainty in income taxes as required by the provisions of ASC 740 Income taxes (“ASC 740”), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to estimate and measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires the Company to determine the probability of various possible outcomes. The Company considers many factors when evaluating and estimating the Company’s tax positions and tax benefits, which may require periodic adjustments and may not accurately anticipate actual outcomes.
See Note 8 for further discussion on income taxes.
Functional currency – Based on guidance provided in accordance with ASC 830, Foreign Currency Matters (“ASC 830”), the Company analyzes its operations outside the United States to determine the functional currency of each operation. Management has determined that these operations are initially accounted for in U.S. dollars since the primary transactions incurred are in U.S. dollars and the Company provides significant funding towards the startup of the operation. When Management determines that an operation has become predominantly self-sufficient, the Company will change its accounting for the operation to the local currency from the U.S. dollar. The Company analyzed it’s Gamma Knife site in Peru under ASC 830 as of December 31, 2020 and 2019 and concluded the functional currency was the U.S. dollar. As facts and circumstances change, the Company will revisit this conclusion.
Asset Retirement Obligations – Based on the guidance provided in ASC 410 Asset Retirement Obligations (“ASC 410”), the Company analyzed its existing lease agreements and determined an asset retirement obligation (“ARO”) exists to remove the respective units at the end of the lease terms. As of December 31, 2020, four (4) of the Company's Gamma Knife customers notified the Company of their intent to terminate their contracts at the contract lease term. The Company recorded an ARO liability for these four (4) sites, using estimates from Elekta. No liability has been recorded as of December 31, 2020 for the remaining Gamma Knife sites, or as of December 31, 2019, because it is uncertain these units will be removed and the Company historically has not removed the Gamma Knife equipment at the end of the lease term. The Company will re-evaluate the need to record additional ARO liabilities on a periodic basis when facts and circumstances change that could affect this conclusion.
Earnings per share – Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the year. The fully vested restricted stock units not issued and outstanding, are also included therein. Diluted earnings per share reflect the potential dilution that could occur if common shares were issued pursuant to the exercise of options or warrants.
Because the Company reported a loss for the year ended December 31, 2020, the potentially dilutive effects of approximately 13,000, of the Company's unvested restricted stock awards were not considered for the reporting periods.
On March 31, 2020, the Company’s Award Agreements (as defined below) expired and the unvested performance share awards were returned to the Company’s stock incentive plan - see Note 9 for further discussion. Based on the guidance provided in accordance with ASC 260, the weighted average common shares for basic earnings per share, for the year ended December 31, 2019 excluded the weighted average impact of the unvested performance share awards. These awards were legally outstanding but not deemed participating securities and therefore were excluded from the calculation of basic earnings per share. The unvested shares were also excluded from the denominator for diluted earnings per share because they were considered contingent shares not deemed probable as of December 31, 2019.
The following table illustrates the computations of basic and diluted earnings per share for the years ended December 31, 2020 and 2019.
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AMERICAN SHARED HOSPITAL SERVICESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – ACCOUNTING POLICIES (CONTINUED)
Denominator:
(Loss) earnings per common share- basic $ (1.14) $ 0.11
(Loss) earnings per common share- diluted $ (1.14) $ 0.11
In 2020, options outstanding to purchase 406,000 shares of common stock at an exercise price range of $2.25 - $3.90 per share and 13,000 restricted stock units were not included in the calculation of diluted earnings per share because they would be anti-dilutive.
In 2019, options outstanding to purchase 387,000 shares of common stock at an exercise price range of $2.68 - $3.90 per share and 3,000 restricted stock units were not included in the calculation of diluted earnings per share because they would be anti-dilutive.
Business segment information - Based on the guidance provided in accordance with ASC 280 Segment Reporting (“ASC 280”), the Company analyzed its subsidiaries which are all in the business of leasing radiosurgery and radiation therapy equipment to healthcare providers, and concluded there are two reportable segments, domestic and foreign. The Company provides Gamma Knife and PBRT equipment to fifteen hospitals in the United States and owns and operates two single-unit facilities in Lima, Peru and Guayaquil, Ecuador as of December 31, 2020. The Company determined two reportable segments existed due to similarities in economics of business operations and geographic location. The operating results of the two reportable segments are reviewed by the Company’s CEO and President, Chief Operating and Financial Officer, who are also deemed the Company’s Chief Operating Decision Makers (“CODMs”). As of December 31, 2019, the Company had one reportable segment. Following the Company's acquisition of GKCE in June 2020, the Company concluded it had two reportable segments.
The revenues, profit or loss, and net property and equipment allocations for the Company's two reportable segments as of December 31, 2020 consists of the following:
Revenues
Profit or (loss)
Property and equipment, net
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AMERICAN SHARED HOSPITAL SERVICESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – ACCOUNTING POLICIES (CONTINUED)
Long lived asset impairment – The Company assesses the recoverability of its long-lived assets when events or changes in circumstances indicate their carrying value may not be recoverable. Such events or changes in circumstances may include: a significant adverse change in the extent or manner in which a long-lived asset is being used, significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development of a long-lived asset, current or future operating or cash flow losses that demonstrate continuing losses associated with the use of a long-lived asset, or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The Company performs impairment testing at the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The Company assesses recoverability of a long-lived asset by determining whether the carrying value of the asset group can be recovered through projected undiscounted cash flows over their remaining lives. If the carrying value of the asset group exceeds the forecasted undiscounted cash flows, an impairment loss is recognized, measured as the amount by which the carrying amount exceeds estimated fair value. An impairment loss is charged to the consolidated statement of operations in the period in which management determines such impairment. As of December 31, 2020, the Company determined circumstances existed indicating its assets could be impaired, concluded an impairment existed, and recognized a loss on the write down of impaired assets of $8,264,000. No such impairment has been noted as of December 31, 2019. See Note 3 - Property and Equipment for further discussion.
Goodwill and intangible assets - The Company recorded goodwill of $1,265,000 and an intangible asset with a fair value of $78,000 as part of the Acquisition in June 2020. The intangible asset identified was GKCE's trade name and the Company assigned an indefinite useful life to the asset. Based on the guidance provided in accordance with ASC 350 Intangibles-Goodwill and Other (“ASC 350”), the Company does not amortize the intangible asset because it has an indefinite life. The Company assesses goodwill at the reporting unit level, which has been determined to be GKCE. Each reporting period, the Company assesses whether events or circumstances continue to support an indefinite useful life for the intangible asset. Per ASC 350, the Company tests goodwill and intangibles for impairment annually or as events or circumstances change that indicate the fair value may be below the carrying amount. As of December 31, 2020, there has been no change to the Company's assessment of the value of intangible assets or goodwill.
Acquisitions - The Company records acquisitions according to ASC 805 Business Combinations (“ASC 805”) using the acquisition method of accounting. Under the acquisition method of accounting, all assets acquired, including goodwill and other intangible assets, should be stated at fair value at the time of acquisition. The allocation of purchase price consideration is preliminary, pending the completion of the fair value of certain tangible, intangible assets, and residual goodwill. During the measurement period, which can be no more than one year from the Closing Date, the Company expects to continue to obtain information to assist in determining the final fair value of assets acquired. See Note 4 - GKCE Acquisition for further discussion on acquisitions.
Accounting pronouncement issued and 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 2016-1. 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 adopted ASU 2018-03 and ASU 2018-13 on January 1, 2020. There was no significant impact on its consolidated financial statements and related disclosures.
Accounting pronouncement issued and not yet adopted – In December 2019, the FASB issued ASU 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”) which removes specific exceptions to the general principles in Topic 740 and eliminates the need for an organization to analyze whether the following apply in a given period: exception to the incremental approach for intraperiod tax allocation; exceptions to accounting for basis differences when there are ownership changes in foreign investments; exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The new guidance is effective for fiscal years and interim periods beginning after December 15, 2020. The Company is currently evaluating ASU 2019-12 to determine the impact it may have on its consolidated financial statements.
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AMERICAN SHARED HOSPITAL SERVICESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – PROPERTYAND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
Deposits towards purchase of proton beam systems — 2,250,000
As of December 31, 2020, approximately $3,195,000 of the net property and equipment balance is outside of the United States. As December 31, 2020, the Company recognized a loss on the write down of impaired assets of $8,264,000. The impaired assets included six (6) Gamma Knife units and related removal costs, and two (2) deposits towards the purchase of proton beam systems and related capitalized interest. The six (6) Gamma Knife units that were impaired consisted of two (2) units that had been taken out of service in prior years, one (1) unit that was taken out of service in 2020 and three (3) units that have already been, or the Company anticipates will be, taken out of service in 2021, totaling $3,051,000. In addition to this impairment write-off of $3,051,000 were estimated costs of de-install and removal (ARO) of four (4) of the Gamma Knife units of $1,350,000 (of which, the Company has paid $80,000) as of December 31, 2020. Total impairment related to the Gamma Knife business was $4,401,000 for the year ended December 31, 2020.
The Company reviews the carrying value of its long-lived assets for impairment on a quarterly basis, or as events or circumstances might indicate that the carrying value may not be recoverable. The Company has reviewed its Gamma Knife equipment, in light of available information as of December 31, 2020 and based on current customer prospects, the probability of future contract extensions or renewals, and the high turnover rate in contract terminations compared to the Company's historical contract termination rate, the Company determined that these six (6) Gamma Knife units were more-than temporarily impaired.
Prior to December 31, 2020, the Company had $2,250,000 in deposits toward the purchase of two MEVION S250i PBRT systems from Mevion. The Company reviews the carrying value of its deposits for impairment on a quarterly basis, or as events or circumstances might indicate that the carrying value may not be recoverable. The Company has reviewed the deposits, in light of available information, as of December 31, 2020 and based on its current customer prospects, the impact that the COVID-19 pandemic has had on medical centers undertaking large capital expenditure projects for a limited patient base, and the length of time required to negotiate and implement a proton therapy project, the Company determined that its deposits of $2,250,000, related capitalized interest and other charges of $1,613,000 were other-than temporarily impaired. Total impairment related to the proton therapy business was $3,863,000.
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AMERICAN SHARED HOSPITAL SERVICESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - GKCE ACQUISITION
On June 18, 2019, the Company entered into a Stock Purchase Agreement to acquire Gamma Knife Center Ecuador S.A. (“GKCE”) from GKCE’s selling majority shareholders. GKCE is a well-established Gamma Knife operation founded in 2009 as a private clinic to introduce advanced stereotactic radiosurgery into Ecuador and continues to operate the only Gamma Knife unit in the country. The Company acquired GKCE for the continued expansion of its business internationally.
On June 12, 2020 (the “Closing Date”), the Company acquired approximately 98% of the total outstanding shares of GKCE. As of December 31, 2020, the Company acquired approximately 99.3% of the total outstanding shares of GKCE and intends to acquire the remaining 0.7% at a later date. The fair value of the non-controlling interests (“NCI”) on the Closing Date was approximately $58,000, which was consistent with the purchase price in the executed NCI agreements. The total purchase consideration for 100% of the outstanding shares of GKCE was $2,883,000, including $2,000,000 of base purchase price, subject to certain price adjustments for current assets and liabilities and tax withholding.
The base purchase price of $2,000,000 was paid with $575,000 of cash and a $1,425,000 loan from the United States International Development Finance Corporation (“DFC”). The DFC loan is denominated in U.S. dollars, which is also the currency of Ecuador. The price adjustments will be paid by the Company in the post-closing period with the adjustments related to the amount of working capital that GKCE had as of the Closing Date. The first price adjustment for working capital as of the Closing Date was approximately $515,000, which was paid by the Company in August 2020. As of December 31, 2020, the Company owed the withholding taxes related to this payment totaling approximately $43,000. The Company estimates an additional contingent consideration of approximately $368,000 will be remitted to the seller based on the collection of Closing Date accounts receivable balances, net of related costs, during the three-month, six-month and twelve-month periods after the Closing Date. As of December 31, 2020, $214,000 of the contingent considerations had been paid and $154,000 is estimated to be paid for the twelve-month period after the Closing Date. The Company reviewed historical patient treatments, invoice, and collection data from GKCE to determine an appropriate estimate of the contingent consideration at the Closing Date.
The acquisition has been accounted for according to ASC 805 using the acquisition method of accounting. Under the acquisition method of accounting, all assets acquired, including goodwill and other intangible assets, should be stated at fair value at the time of acquisition. The allocation of purchase price consideration is preliminary, pending the completion of the fair value of certain tangible, intangible assets, and residual goodwill. During the measurement period, which can be no more than one year from the Closing Date, the Company expects to continue to obtain information to assist in determining the final fair value of assets acquired. The assets acquired were recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. Thus, the provisional measurements of fair value discussed below are subject to change.
As of December 31, 2020, accounting for the Closing Date accounts receivable balances, allowance on the uncollected accounts receivable balances, and related liabilities, was not complete. The accounting for these amounts will be complete following the twelve-month period after the Closing Date, per the terms of the Stock Purchase Agreement. The Company expects to finalize the valuation as soon as practicable, but no later than one year from the Closing Date. While the Company believes its estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired, and the resulting amount of goodwill.
After the Acquisition date, the Company received additional information regarding the amounts recorded as accounts receivable as of June 12, 2020. After reviewing the information obtained, the Company booked an additional $27,000 of accounts receivable as of December 31, 2020. As a result, related liabilities were increased by $13,000 and the contingent consideration increased by $14,000. There was no impact to goodwill or net loss as of December 31, 2020.
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AMERICAN SHARED HOSPITAL SERVICESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - GKCE ACQUISITION (CONTINUED)
The fair value of assets acquired and liabilities assumed were as follows:
Cash and cash equivalents $ 432,000
Prepaid expense and other 22,000
Purchased intangible assets 78,000
Deferred income taxes (66,000)
Employee compensation and benefits (91,000)
Total liabilities assumed (491,000)
Consideration allocated to assets acquired and liabilities assumed $ 2,883,000
First working capital payment $ (515,000)
Estimated subsequent working capital payment (368,000)
Base purchase consideration $ 2,000,000
The Company has allocated the purchase price of GKCE to the tangible assets, liabilities, and intangible asset acquired, based on their estimated fair values. Goodwill represents the excess of the purchase price consideration over the fair value of the identifiable tangible and intangible assets assumed. The Company believes the amount of goodwill resulting from the acquisition is primarily attributable to expected synergies from an assembled and trained workforce and enhanced opportunities for growth and innovation. The goodwill resulting from the acquisition is not tax deductible.
The preliminary value of the acquired tangible assets acquired are as follows:
Fair Value Useful Life (in Years)
Total tangible assets $ 723,000
The Company also acquired intangible assets with a fair value of $78,000. The intangible asset identified was GKCE's trade name and the Company assigned an indefinite useful life to the asset.
The Company incurred costs related to the acquisition of approximately $93,000 for the three-month period ended June 30, 2020 and $69,000 for the three-month period ended September 30, 2020. All acquisition related costs were expensed as incurred and have been recorded in selling and administrative expense in the Company's consolidated statement of operations.
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AMERICAN SHARED HOSPITAL SERVICESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - GKCE ACQUISITION (CONTINUED)
The revenue and earnings of GKCE have been included in the Company’s consolidated results since the Closing Date and are not material to the Company’s consolidated financial results. Historical financial statements and pro forma results of the operations of GKCE as if the Acquisition occurred earlier than the Closing Date have not been presented, as the applicable significance thresholds are not exceeded by the Acquisition and the corresponding requirements to provide historical financial statements and corresponding pro forma financial information are not applicable to the Acquisition. In addition, the Company believes that the financial impact of the Acquisition to the Company’s consolidated financial statements is not material and such historical financial information and pro forma financial information would not be meaningful for investors and financial statement users.
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AMERICAN SHARED HOSPITAL SERVICESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LONG TERM DEBT
Long-term debt consists primarily of seven notes with three financing companies collateralized by the Gamma Knife equipment having an aggregate net book value of $11,023,000, the individual customer contracts, and related accounts receivable of $1,718,000 at December 31, 2020. These notes are predominantly payable in 36 to 84 fully amortizing monthly installments, mature between January 2021 and September 2027. The notes accrue interest at fixed annual rates between 3.67% and 6.90%.
As of December 31, 2019, the Company had six notes with two financing companies collateralized by the Gamma Knife equipment having an aggregate net book value of $13,130,000, the individual customer contracts, and related accounts receivable of $1,848,000.
The following are contractual maturities of long-term debt by year at December 31, 2020, excluding debt issuance costs of $27,000:
Year ending December 31, Principal
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AMERICAN SHARED HOSPITAL SERVICESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - FINANCE LEASES
The Company has six finance lease obligations with two financing companies, collateralized by Gamma Knife and PBRT equipment having an aggregate net book value of $18,093,000, the individual customer contracts, and related accounts receivable of $1,892,000 at December 31, 2020. These obligations have imputed interest rates ranging between 4.73% and 13.00%, are predominantly payable in 36 to 84 monthly installments, and mature between November 2021 and September 2024.
As of December 31, 2019, the Company had ten finance lease obligations with three financing companies, collateralized by Gamma Knife and PBRT equipment, having an aggregate net book value of $22,860,000, the individual customer contracts, and related accounts receivable of $4,600,000.
At the end of each lease term, the Company has a bargain purchase option to purchase the equipment.
Future minimum lease payments, together with the present value of the net minimum lease payments under finance leases at December 31, 2020, are summarized as follows:
Net Present Valueof MinimumLease Payments
Year ending December 31,
Total finance lease payments 9,771,000
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AMERICAN SHARED HOSPITAL SERVICESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LEASES
The Company determines if a contract is a lease at inception. Under 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 it 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 and PBRT 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 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 receivables.
The Company’s lessee operating leases are accounted for as right-of-use (“ROU”) assets, other current liabilities, and lease liabilities on the 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 to be in the range of approximately 4.0% and 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 2 and 3 years, some of which include options to renew or extend the lease. As of December 31, 2020, operating ROU assets and liabilities were $886,000.
During the year ended December 31, 2020, the Company elected to not renew its lease for a satellite office in Fairfield, California. The Company previously included the renewal term in its assessment of the lease term for the ROU asset and liability. The Company accounted for this change as a lease reassessment under ASC 842. At the reassessment date, the remaining lease balance was not material to the Company's consolidated balance sheets and the Company wrote off the related ROU assets and liabilities of $67,000. Also during the year ended December 31, 2020, the Company agreed to a rent increase for its clinic space for its stand-alone facility in Lima, Peru. The rent increase was effective as of January 1, 2020 and the Company increased the related ROU assets and liabilities by $135,000.
The following table summarizes maturities of lessee operating lease ROU assets and liabilities as of December 31, 2020:
Year ending December 31, Operating Leases
Less imputed interest (69,000)
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NOTE 8 – INCOME TAXES
As of December 31, 2020 and 2019 the Company recorded an income tax benefit of $1,737,000 and income tax expense of $128,000, respectively. The decrease in the Company’s provision for income taxes as of December 31, 2020 is due to a loss on the write down of impaired assets.
The components of the provision (benefit) for income taxes as of December 31, 2020 and 2019 consist of the following:
YEARS ENDED DECEMBER 31,
Current:
Deferred:
Significant components of the Company’s deferred tax liabilities and assets as of December 31, 2020 and 2019 are as follows:
DECEMBER 31,
Deferred tax liabilities:
Deferred tax assets:
Deferred tax assets net of valuation allowance 146,000 598,000
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AMERICAN SHARED HOSPITAL SERVICESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – INCOME TAXES (CONTINUED)
These amounts are presented in the financial statements as follows:
DECEMBER 31,
The (benefit) provision for income taxes differs from the amount computed by applying the U.S. federal statutory tax rate (21% in 2020 and 2019) to income before taxes as follows:
YEARS ENDED DECEMBER 31,
State income taxes, net of federal benefit (199,000) (80,000)
Capital loss carryforward expiration 246,000 —
At December 31, 2020, the Company exhausted the remainder of its net operating loss carryforward for federal income tax return purposes. The Company has net operating loss carryforwards for state income tax purposes of approximately $2,219,000 that begin to expire in 2029. The Company has net operating loss carryforwards for its international subsidiaries of approximately $32,000.
Utilization of the net operating loss and credit carryforwards may be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended (the “Code”), and similar state provisions. Any annual limitation may result in the expiration of net operating losses and credits before utilization.
At December 31, 2020, the Company has a capital loss carryforward for federal income tax return purposes of approximately $2,586,000 which starts to expire in 2021. The Company has capital loss carryforwards for state income tax purposes of approximately $129,000 which starts to expire in 2021.
Due to uncertainty surrounding the realization of impairment losses, capital losses and foreign operating losses in future years, the Company has placed a valuation allowance against a portion of its net domestic and foreign deferred tax assets. The net valuation allowance decreased by $243,000 and $175,000 for the tax years ended December 31, 2020 and 2019, respectively.
During the year ended December 31, 2019, the Company released the valuation allowance related to GKPeru deferred tax assets, which resulted in an income tax benefit of $104,000. The Company concluded, based upon the preponderance of positive evidence (i.e. cumulative profit before tax adjusted for permanent items over the previous twelve quarters, a history of taxable income in recent periods, and the current forecast of income before taxes for GKPeru going forward) over negative evidence and the anticipated ability to use the deferred tax assets, that it was more likely than not that the deferred tax assets will be realized. If there are unfavorable changes to actual operating results or to projections of future income, the Company may determine that it is more likely than not such deferred tax assets may not be realizable.
The tax return years 2016 through 2019 remain open to examination by the major domestic taxing jurisdictions to which the Company is subject. In 2019, the Company settled a New York State examination for tax years 2015 through 2017 with no material adjustments. Net operating losses generated on a tax return basis by the Company for calendar years 1999 through 2004, 2009, 2010, 2012, 2014, 2015, 2016, 2017 and 2018 remain open to examination by the major domestic taxing jurisdictions.
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AMERICAN SHARED HOSPITAL SERVICESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – INCOME TAXES (CONTINUED)
The Company has adopted accounting standards which prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company's income tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Additionally, these accounting standards specify that tax positions for which the timing of the ultimate resolution is uncertain should be recognized as long-term liabilities. The Company has made no reclassifications between current taxes payable and long term taxes payable under this guidance.
As of December 31, 2020, the unrecognized tax benefit was $275,000 which, if recognized, will not affect the annual effective tax rate as these unrecognized tax benefits would increase deferred tax assets which would be subject to a full valuation allowance. A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:
YEARS ENDED DECEMBER 31,
Additions based on tax positions of prior years 16,000 172,000
The Company's policy for deducting interest and penalties is to treat interest as interest expense and penalties as taxes. As of December 31, 2020, the Company had $15,000 accrued for the payment of penalties and zero interest related to unrecognized tax benefits. The Company does not expect any material changes to our uncertain tax positions within the next 12 months.
NOTE 9 – STOCK-BASED COMPENSATION EXPENSE
Incentive Compensation Plan
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 21, 2019, the Company’s shareholders approved an amendment and restatement of the Plan in order to extend the term of the Plan by two years to February 22, 2022. As of December 31, 2020, approximately 437,000 shares remain available for grant under the Plan.
Under the Plan, a total of 456,000 restricted stock units have been granted, consisting of 43,000 of annual automatic grants to non-employee directors and the corporate secretary, 293,000 of deferred retainer fees to non-employee members of the Board, 20,000 grants issued in lieu of commission, to two (2) employees of the Company and 100,000 restricted stock units issued to the CEO during 2020, see further discussion below. Of the total restricted stock units granted under the Plan 210,000 of them are fully vested but not yet deemed issued and outstanding, 233,000 are fully vested and outstanding, and 13,000 are outstanding as of December 31, 2020.
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AMERICAN SHARED HOSPITAL SERVICESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – STOCK-BASED COMPENSATION EXPENSE (CONTINUED)
Changes in restricted stock units, consisting primarily of annual automatic grants, deferred compensation to non-employee directors, and restricted stock units awards to the CEO, under the Incentive Compensation Plans during 2020 and 2019 are as follows:
Restricted StockUnits Grant DateWeighted-Average FairValue IntrinsicValue
For the year ended December 31, 2020, total compensation expense recorded in the consolidated statements of operations related to restricted stock units in lieu of retainer fees was $80,000. For the year ended December 31, 2020, total compensation expense recorded in the consolidated statements of income for annual restricted stock units awarded was $7,000, with an offsetting tax benefit of $1,000, as this expense is deductible for income tax purposes. As of December 31, 2020, there was $2,000 of total unrecognized compensation cost related to annual restricted stock units which is expected to be recognized over a period of 0.5 years. During 2020 and 2019, shares of restricted stock units totaling 3,000 and 4,000 each, respectively, with a fair value of approximately $9,000 and $11,000, respectively, vested and became unrestricted.
Certain Executive Equity Awards
Effective May 4, 2020, the Company appointed Raymond C. Stachowiak as Interim President and Chief Executive Officer (“Interim CEO”). As part of his Offer Letter, the Interim CEO was granted 50,000 restricted stock awards that vested in full on August 3, 2020. The Interim CEO was granted additional restricted stock awards totaling 10,000 common shares per month, which vest in full at the end of each 30-day period following issuance. On October 1, 2020 the Interim CEO was appointed the CEO. For the year ended December 31, 2020, 100,000 restricted stock awards were issued to the CEO and 90,000 became fully vested. Additionally, Ernest R. Bates, Senior Vice President, Sales and Business Development, International Operations, was awarded 10,000 restricted stock awards, which vested in full on December 31, 2020. For the year ended December 31, 2020, total compensation expense recorded in the consolidated financial statements of operations related to executive equity awards was $195,000.
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 expired 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 the certain performance metrics under the Award Agreements and recognized stock compensation expense of approximately $108,000 related to these awards. The unrecognized stock-based compensation expense for these awards was approximately $421,000 and unvested restricted stock awards of approximately 129,000 were returned to the plan as of March 31, 2020.
As of December 31, 2020, stock compensation expense recorded in the consolidated financial statements is summarized as follows:
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NOTE 9 – STOCK-BASED COMPENSATION EXPENSE (CONTINUED)
Stock-Based
Awards Issued Compensation
Award Type and Vested Expense
RSUs Issued in Lieu of Retainer Fees — 80,000
Stock Options
Changes in stock options outstanding under the Incentive Compensation Plans during 2020 and 2019 are as follows:
The weighted average grant-date fair value of the options granted during the years 2020 and 2019 was $0.78 and $1.54, respectively. There were no options exercised and accordingly, no intrinsic value of options exercised during the year ended December 31, 2020. There were 16,000 options exercised during the year ended December 31, 2019. Total stock-based compensation expense recognized for stock options for the years ended December 2020 and 2019 was $17,000 and $141,000, respectively.
There was no cash received from options exercised under any share-based payment arrangements for the year ended December 31, 2020, and as a result, there was no actual tax benefit realized for tax deductions from option exercises in that year. The Company received approximately $42,000 from the exercise of 16,000 options under the share-based arrangements for the year ended December 31, 2019.
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AMERICAN SHARED HOSPITAL SERVICESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – STOCK-BASED COMPENSATION EXPENSE (CONTINUED)
A summary of the status of the Company’s non-vested stock options as of December 31, 2020 and 2019, and changes during the years ended December 31, 2020 and 2019 is presented below:
Nonvested Options Numberof Options WeightedAverageGrant-DateFair Value
At December 31, 2020, there was approximately $12,000 of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. This cost is expected to be recognized over a period of approximately three years.
The Company’s stock-based awards to employees are calculated using the Black-Scholes options valuation model. The Black-Scholes model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. 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 present value estimates. For these reasons, management believes that the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees.
The fair value of the Company’s option grants issued during 2020 and 2019 were estimated using assumptions for expected life, volatility, dividend yield, forfeiture rate, and risk-free interest rate which are specific to each award as summarized in the following table. The estimated fair value of the Company’s options is amortized over the period during which the optionee is required to provide service in exchange for the award, usually the vesting period.
The fair value of the Company’s option grants under the Plan in 2020 and 2019 was estimated using the following assumptions:
Expected life (years) 7.0 7.0
Expected forfeiture rate 0.0 % 0.0 %
Expected volatility 40 % 50 %
Dividend yield 0 % 0 %
Risk-free interest rate 0.4 % 1.9 %
Repurchase of Common Stock, Common Stock Warrants and Stock Options
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 of the Company repurchased during 2020 or 2019. There are approximately 72,000 shares remaining under this repurchase authorization.
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AMERICAN SHARED HOSPITAL SERVICESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – RETIREMENT PLAN
The Company has a defined-contribution retirement plan (the “Retirement Plan”) that allows for a matching safe harbor contribution. For 2020, the Board of Directors elected to match participant deferred salary contributions up to a maximum of 4% of the participant’s annual compensation. Discretionary profit sharing contributions are allowed under the Retirement Plan in years that the Board does not elect a safe harbor match. The Company has accrued approximately $37,000 for the estimated safe harbor matching contribution for the year ended December 31, 2020. The Company contributed $38,000 to the Retirement Plan for the safe harbor match for the year ended December 31, 2019.
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AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – OPERATING LEASES
The Company leases office space and equipment under operating leases expiring at various dates through 2021 and 2024. On August 13, 2016, the Company entered into a 7 year operating lease for an office space located in San Francisco, CA. The Company also owns and operates a stand-alone Gamma Knife facility in Lima, Peru where it leases approximately 1,600 square feet for approximately $7,800 per month with a lease expiration date in January 2024.
Future minimum payments under non-cancelable operating leases having initial terms of more than one year consisted of the following:
Year ending December 31,
Payments for repair and maintenance agreements incorporated in operating lease agreements are not included in the future minimum operating lease payments shown above.
Net rent expense was $404,000 and $380,000 for the years ended December 31, 2020 and 2019, respectively, and includes the above operating leases as well as month-to-month rental and certain executory costs.
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NOTE 12 – COMMITMENTSAND CONTINGENCIES
On December 20, 2018, the Company signed Second Amendments to two System Build Agreements for the Company’s second and third Mevion PBRT units. The Company and Mevion have agreed to upgrade the second and third PBRT units for which the Company has purchase commitments. The Company is actively seeking sites for these units but, to date, has not entered into agreements with any party for either placement of a PBRT unit or the related financing. The Company projects that it will be required to commence delivery of the second and third PBRT units no later than 2023. In the event the Company is unable to enter into customer agreements within the requisite time frame or receive an extension from Mevion, the Company could forfeit its deposits, which are described below.
As of December 31, 2020, the Company had commitments to perform three (3) Cobalt-60 reloads and install four (4) Leksell Gamma Knife Icon Systems (“Icon”) at existing customer sites, and purchase two (2) Linear Accelerator ("LINAC") systems, one to be placed at an existing customer site and one at a new customer site. The Company also has a commitment to upgrade the Gamma Knife unit at its stand-alone facility in Ecuador to a Perfexion. The Cobalt-60 reloads, Icon upgrades, and LINAC purchases are scheduled to occur between 2021 and 2022. The Company expects to upgrade the equipment in Ecuador in the second quarter of 2021. Total Gamma Knife and LINAC commitments as of December 31, 2020 were $12,210,000. There are no significant cash requirements, pending financing, for these commitments in the next 12 months. There can be no assurance that financing will be available for the Company’s current or future projects, or at terms that are acceptable to the Company.
On July 21, 2017, the Company entered into a Maintenance and Support Agreement (the “Mevion Service Agreement”) with Mevion, which provides for maintenance and support of the Company’s PBRT unit at Orlando Health. The Mevion Service Agreement began September 5, 2017, was amended in 2018, and renews annually over a five (5) year period. The agreement requires an annual prepayment of $1,572,000 for the current contractual period. This payment portion was recorded as a prepaid contract and will be amortized over the one-year service period.
As of December 31, 2020, the Company had commitments to service and maintain its Gamma Knife and PBRT equipment. The service commitments are carried out via contracts with Mevion, Elekta and Mobius Imaging, LLC. In addition, in April 2019, the Company signed agreements to service the Icon upgrades which will be installed at various dates between 2021 and 2022.The Company’s commitments to purchase two LINAC systems also include a 9-year and 5-year agreement to service the equipment, respectively. Total service commitments as of December 31, 2020 were $10,493,000. The Gamma Knife and certain other service contracts are paid monthly, as service is performed. The Company believes that cash flow from cash on hand and operations will be sufficient to cover these payments.
The Company estimates the following commitments for each of the equipment systems, with expected timing of payments as follows as of December 31, 2020:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – RELATED PARTY TRANSACTIONS
The Company’s Gamma Knife business is operated through its 81% indirect interest in its GKF subsidiary. The remaining 19% of GKF is owned by a wholly owned U.S. subsidiary of Elekta, which is the manufacturer of the Gamma Knife. Since the Company purchases its Gamma Knife units from Elekta, there are significant related party transactions with Elekta such as equipment purchases, commitments to purchase equipment, deposits for such equipment purchases, and costs to maintain the equipment. The Company believes that all its transactions with Elekta are arm’s-length transactions. At December 31, 2020, the Company had commitments to purchase three (3) Cobalt-60 reloads, one (1) Perfexion upgrade, and install four (4) Leksell Gamma Knife Icon Systems (“Icon”) and service the related equipment, as discussed in Note 12 – Commitments and Contingencies.
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