ams-20201231
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
________________________________
FORM 10-K
(Mark One)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2020
or
Commission file number 1-08789
________________________________
American Shared Hospital Services
(Exact name of registrant as specified in its charter)
Two Embarcadero Center Suite 410, San Francisco, California 94111-4107
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (415) 788-5300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock No Par Value AMS NYSEAMER
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐No☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐No☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer ☐ Accelerated Filer ☐Non-Accelerated Filer☒ Smaller reporting company ☒
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ̈
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by registered public accounting firm that prepared or issued its audit report.Yes ☐ No ☒
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2020, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $8,188,000.
Number of shares of common stock of the registrant outstanding as of March 22, 2021: 5,801,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the 2021 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.
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FORWARD-LOOKING STATEMENTS
PART I:
Item 1 Business 4
Item 1A Risk Factors 12
Item 1B Unresolved Staff Comments 16
Item 2 Properties 16
Item 3 Legal Proceedings 16
Item 4 Mine Safety Disclosures 16
PART II:
Item 6 Selected Financial Data 17
Item 8 Financial Statements and Supplementary Data 23
Item 9A Controls and Procedures 23
Item 9B Other Information 24
PART III:
Item 10 Directors, Executive Officers and Corporate Governance 24
Item 11 Executive Compensation 24
Item 14 Principal Accountant Fees and Services 24
PART IV:
Item 15 Exhibits and Financial Statement Schedules 24
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FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Annual Report on Form 10-K other than statements of historical information are “forward-looking statements.” The Private Securities Litigation Reform Act of 1995 has established that these statements qualify for safe harbors from liability. Forward-looking statements may include words like we “believe”, “anticipate”, “target”, “expect”, “pro forma”, “estimate”, “intend”, “will”, “is designed to”, “plan” and words of similar meaning. Forward-looking statements describe our future plans, objectives, expectations or goals. Such statements address future events and conditions concerning and include, but are not limited to, such things as:
•capital expenditures
•earnings
•liquidity and capital resources
•financing of our business
•government programs and regulations
•legislation affecting the health care industry
•the expansion of our proton beam radiation therapy business
•accounting matters
•compliance with debt covenants
•competition
•customer concentration
•contractual obligations
•timing of payments
•technology
•interest rates
These forward-looking statements involve known and unknown risks that may cause our actual results in future periods to differ materially from those expressed in any forward-looking statement. Factors that could cause or contribute to such differences include, but are not limited to, such things as:
•our high level of debt
•the limited market for our capital-intensive services
•the impact of lowered federal reimbursement rates
•the impact of recent U.S. health care reform legislation
•competition and alternatives to our services
•technological advances and the risk of equipment obsolescence
•our significant investment in the proton beam radiation therapy business
•the small and illiquid market for our stock
•effects of public health crises, pandemics and epidemics, such as COVID-19
These lists are not all-inclusive because it is not possible to predict all factors. A discussion of some of these factors is included in this document under the headings “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” “–Application of Critical Accounting Policies” and “–Liquidity and Capital Resources.” This report should be read in its entirety. No one section of this report deals with all aspects of the subject matter. Any forward-looking statement speaks only as of the date such statement was made, and we are not obligated to update any forward-looking statement to reflect events or circumstances after the date on which such statement was made, except as required by applicable laws or regulations.
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PART I
ITEM 1. BUSINESS
GENERAL
American Shared Hospital Services (“ASHS” and, together with its subsidiaries, the “Company”) provides stereotactic radiosurgery equipment and advanced radiation therapy and related equipment. The Company currently provides Gamma Knife units to thirteen 13 medical centers in twelve (12) states in the United States and Gamma Knife units at stand-alone facilities in Lima, Peru and Guayaquil, Ecuador as of March 1, 2021. The Company provides Gamma Knife services through its 81% indirect interest in GK Financing, LLC, a California limited liability company (“GKF”). The remaining 19% of GKF is owned by GKV Investments, Inc., a wholly-owned U.S. subsidiary of Elekta AG, a Swedish company (“Elekta”). Elekta is the manufacturer of the Leksell Gamma Knife® (the “Gamma Knife”). GKF is a non-exclusive provider of alternative financing services for Leksell Gamma Knife units.
The Company wholly-owns the subsidiaries American Shared Radiosurgery Services (“ASRS”), OR21, Inc. and MedLeader.com, Inc. (“MedLeader”). ASRS is the majority-owner of GKF.
GKF has established the wholly-owned subsidiaries Instituto de Gamma Knife del Pacifico S.A.C. (“GKPeru”) and HoldCo GKC S.A (“HoldCo”) for the purpose of providing similar Gamma Knife services in Peru and Ecuador, respectively.
GKF also owns a 51% interest in Albuquerque GK Equipment, LLC (“AGKE”) and Jacksonville GK Equipment, LLC (“JGKE”). The remaining 49% in each of these two companies is owned by radiation oncologists.
The Company is also the sole owner of PBRT Orlando, LLC (“Orlando”) and the majority owner of Long Beach Equipment, LLC (“LBE”) which were formed to provide proton beam radiation therapy services in Orlando, Florida and Long Beach, California. A 40% minority ownership in LBE is owned by radiation oncologists.
On June 12, 2020, GKF, through HoldCo, purchased approximately 98% of the total outstanding shares of Gamma Knife Center Ecuador S.A. (“GKCE”), from GKCE’s majority shareholders (the “Acquisition”). As of December 31, 2020, the Company acquired additional shares that increased its ownership to 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.
The Company continues to develop its design and business model for “The Operating Room for the 21st Century”SM through its 50% owned OR21, LLC (“OR21”). 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.
The Company was incorporated in the State of California in 1983 and its predecessor, Ernest A. Bates, M.D., Ltd. (d/b/a American Shared Hospital Services), a California limited partnership, was formed in June 1980.
OPERATIONS
Gamma Knife Operations
Gamma Knife stereotactic radiosurgery, a non-invasive procedure, is an alternative to conventional brain surgery and/or radiation therapy. It can be an adjunct to conventional brain surgery, radiation therapy, or chemotherapy. Compared to conventional surgery, Gamma Knife radiosurgery usually is an out-patient procedure with lower risk of complications and can be provided at a lower cost. Typically, Gamma Knife patients resume their pre-surgical activities one or two days after treatment. The Gamma Knife Perfexion unit, which was introduced by Elekta in 2006, treats patients with 192 single doses of gamma rays that are focused with great precision on small and medium sized, well circumscribed and critically located structures in the brain. The Cobalt-60 sources converge at the target area and deliver a dose that is high enough to destroy the diseased tissue without damaging the surrounding healthy tissue. In 2015, Elekta introduced an upgrade to the Gamma Knife Perfexion unit called Icon. As of March 1, 2021, all of the Company’s thirteen (13) Gamma Knife units in the United States are Gamma Knife Perfexion units and two (2) of these Perfexion units have the Icon upgrade.
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The Gamma Knife treats selected malignant and benign brain tumors, arteriovenous malformations, and functional disorders including trigeminal neuralgia (facial pain). Research is being conducted to determine whether the Gamma Knife can be effective in the treatment of epilepsy, tremors, and other functional disorders.
As of December 31, 2020, there were approximately 116 Gamma Knife sites in the United States and 345 units in operation worldwide. Based on 2019 case mix data, an estimated percentage breakdown of Gamma Knife procedures performed in the U.S. by indications treated is as follows: malignant (65%) and benign (21%) brain tumors, vascular disorders (4%), and functional disorders (10%).
The Company, as of March 1, 2021, had thirteen (13) operating Gamma Knife units located in the United States and two (2) in South America in Lima, Peru and Guayaquil, Ecuador, respectively. The Company’s first Gamma Knife commenced operation in September 1991. The Company’s Gamma Knife units performed 1,530 procedures in 2020 for a cumulative total of approximately 43,500 procedures from commencement through December 31, 2020.
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, 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.
Gamma Knife treatment was included in the Radiation Oncology Alternative Payment Model (“RO APM”). However, for the Company's customers included in the RO APM, there does not appear to be a significant reimbursement impact.
Revenue from Gamma Knife services for the Company during each of the last two (2) years ended December 31, and the percentage of total revenue of the Company represented by the Gamma Knife for each of the last two years, are set forth below:
The Company conducts its Gamma Knife business through its 81% indirect interest in GKF. The remaining 19% interest is indirectly owned by Elekta. GKF, formed in October 1995, is managed by its policy committee. The policy committee is composed of one representative from the Company, Craig Tagawa, ASHS’s President, Chief Operating and Financial Officer, and one representative from Elekta. The policy committee sets the operating policy for GKF. The policy committee may act only with the unanimous approval of both of its members. The policy committee selects a manager to handle GKF’s daily operations. Craig K. Tagawa, Chief Executive Officer of GKF and President, Chief Operating and Financial Officer of ASHS, serves as GKF’s manager.
GKF’s profits and/or losses and any cash distributions are allocated based on membership interests. GKF’s operating agreement requires that it have a cash reserve of at least $50,000 before cash distributions are made to its members. From inception to December 31, 2020, GKF has distributed $50,005,000 to the Company and $11,730,000 to Elekta.
Advanced Radiation Therapy Equipment and Services
The Company is continuing its efforts to contract new radiation therapy customers both domestically and internationally. The Company has increased its product offerings from standard linear accelerators to more advanced linear accelerators that incorporate Magnetic Resonance Imaging (“MRI”) and potentially Positron Emission Tomography (“PET”) imaging technologies. The Company believes that these more advanced technologies, with a higher capital cost component, may be potentially a more receptive market segment for its business model.
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The Company’s radiation therapy business consisted of one Image Guided Radiation Therapy (“IGRT”) system that began operation in September 2007 at an existing Gamma Knife customer site. This contract terminated in July 2020 and did not generate any revenue in 2020.
Additional information on our operations can be found in Item 7– “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 1 of our consolidated financial statements.
Proton Beam Radiation Therapy Operations (“PBRT”)
PBRT is an alternative to traditional external beam, photon-based radiation delivered by linear accelerators. PBRT, first clinically introduced in the 1950s, has physics advantages compared to photon-based systems which allow PBRT to deliver higher radiation doses to the tumor with less radiation to healthy tissue. PBRT currently treats prostate, brain, spine, head and neck, lung, breast, gastrointestinal tract and pediatric tumors. More than 200,000 patients have been treated with protons worldwide.
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 of and other charges of $1,613,000 were other-than temporarily impaired. Total impairment related to the proton therapy business was $3,863,000.
Introduction of PBRT in the United States, until recently, has been limited due to the high capital costs of these projects. The Company believes that the current development of one and two treatment room PBRT systems at lower capital costs and the level of reimbursement for PBRT from the Centers for Medicare & Medicaid Services (“CMS”) will help make this technology available to a larger segment of the market. However, the introduction of the RO APM and the inclusion of PBRT in this model potentially limits the adoption of PBRT by medical centers.
Additional information on our operations can be found in Item 6– “Selected Financial Data”, Item 7– “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 1 of our consolidated financial statements.
CUSTOMERS
The Company’s current business is the outsourcing of stereotactic radiosurgery services and radiation therapy services. The Company typically provides the equipment, as well as planning, installation, reimbursement and marketing support services. The majority of the Company’s customers pay the Company on a revenue sharing basis. The market for these services primarily consists of large and medium sized medical centers. The business is capital intensive; the total cost of a Gamma Knife facility usually ranges from $3.0 million to $5.5 million, including equipment, site construction and installation; the total cost of a single room PBRT system usually ranges from $30.0M to $40.0M, inclusive of equipment, site construction and installation. The Company pays for the equipment and the medical center generally pays for site and installation costs. The following is a listing of the Company’s sites as of March 1, 2021:
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Southwest Texas Methodist Hospital San Antonio, Texas 10 years 1998 Fee per use
Kettering Medical Center Kettering, Ohio 10 years 1999 Revenue sharing
OSF Saint Francis Medical Center Peoria, Illinois 10 years 2001 Fee per use
Northern Westchester Hospital Mt. Kisco, New York 10 years 2005 Fee per use
USC University Hospital Los Angeles, California 10 years 2008 Fee per use
St. Vincent’s Medical Center Jacksonville, Florida 10 years 2011 Revenue Sharing
Sacred Heart Medical Center Pensacola, Florida 10 years 2013 Revenue Sharing
Bryan Medical Center Lincoln, Nebraska 10 years 2017 Revenue Sharing
Methodist Hospital Merrillville, Indiana 10 years 2019 Revenue Sharing
The Company’s typical fee per use agreement is for a ten-year term. The fixed fee per use reimbursement amount that the Company receives from the customer is based on the Company’s cost to provide the service and the anticipated volume of the customer. The Gamma Knife contracts signed by the Company typically call for a fee ranging from $6,000 to $9,300 per procedure. There are no minimum volume guarantees required of the customer. In most cases, GKF is responsible for providing the Gamma Knife and related ongoing Gamma Knife equipment expenses (i.e., personal property taxes, insurance, and equipment maintenance) and helps fund the customer’s Gamma Knife marketing. The customer generally is obligated to pay site and installation costs and the costs of operating the Gamma Knife. The customer can either renew the agreement or terminate the agreement at the end of the contractual term. If the customer chooses to terminate the agreement, then GKF removes the equipment from the medical center for possible placement at another site.
The Company’s typical revenue sharing agreements (“retail”) are for a period of ten years. Instead of receiving a fixed fee, the Company receives all or a percentage of the reimbursement (exclusive of physician fees) received by the customer. The Company is at risk for any reimbursement rate changes for radiosurgery or radiation therapy services by the government or other third-party payors. There are no minimum volume guarantees required of the customer.
One customer accounted for approximately 35% and 30% of the Company’s total revenue in 2020 and 2019, respectively. 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.
MARKETING
The Company markets its Gamma Knife services through its preferred provider status with Elekta and a direct sales effort led by its Senior Vice President, its President, Chief Operating and Financial Officer, and its Chief Executive Officer. The Company markets its PBRT service through a direct sales effort led by its Senior Vice President, its President, Chief Operating and Financial Officer, and its Chief Executive Officer. The major advantages to a health care provider in contracting with the Company for its services include:
▪The medical center avoids the high cost of owning the equipment. By not acquiring the equipment supplied by the Company, the medical center is able to allocate the funds otherwise required to purchase and/or finance the equipment to other projects.
▪The Company does not have minimum volume requirements, so the medical center avoids the risk of equipment under-utilization. The medical center pays the Company only for each procedure performed on a patient.
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▪For contracts under revenue sharing arrangements, the Company assumes all or a portion of the risk of reimbursement rate changes. The medical center pays the Company only the contracted portion of revenue received from each procedure.
▪The medical center transfers the risk of technological obsolescence to the Company. The medical center and its physicians are not under any obligation to utilize technologically obsolete equipment.
▪The Company provides planning, installation, operating and marketing assistance and support to its customers.
FINANCING
The Company’s Gamma Knife business is operated through GKF. GKF generally finances its U.S. Gamma Knife units, upgrades and additions with loans or finance leases from various finance companies for typically 100% of the cost of each Gamma Knife, plus any sales tax, customs, and duties. The financing is predominantly fully amortized over an 84-month period and is collateralized by the equipment, customer contracts and accounts receivable, and is generally without recourse to the Company and Elekta. The lease financing obtained by Orlando is guaranteed by the Company and collateralized by the equipment, customer contract and accounts receivable related to this project.
COMPETITION
Conventional neurosurgery, radiation therapy and other radiosurgery devices are the primary competitors of Gamma Knife radiosurgery. Gamma Knife radiosurgery has gained acceptance as an alternative and/or adjunct to conventional surgery due to its more favorable morbidity outcomes for certain procedures as well as its non-invasiveness. Utilization of the Company’s Gamma Knife units is contingent on the acceptance of Gamma Knife radiosurgery by the customer’s neurosurgeons, radiation oncologists and referring physicians. In addition, the utilization of the Company’s Gamma Knife units is impacted by the proximity of competing Gamma Knife centers and providers using other radiosurgery devices.
Conventional linear accelerator-based radiation therapy is the primary competitor of the Company’s proton therapy system at Orlando Health. Although proton beam radiation therapy has been available for many years, it is only recently emerging as a more clinically beneficial alternative to conventional linear accelerators for certain tumors. Utilization of the Company’s proton therapy system is dependent on the acceptance of this technology by Orlando Health’s radiation oncologists and referring physicians, as well as patient self-referrals. There are currently no competing proton therapy facilities near the Company’s site.
There are several competing manufacturers of PBRT systems, including Mevion, IBA Particle Therapy Inc., Varian Medical Systems, Inc., Hitachi Ltd., ProNova Solutions, LLC, Sumitomo Heavy Industries, ProTom International, Inc. and Mitsubishi Electric. The Company has purchased one MEVION S250 and has made deposits towards the purchase of two additional MEVION S250i systems. The Mevion system, as well as single room proton therapy systems from other manufacturers, potentially provides cancer centers the opportunity to introduce single treatment room PBRT services with a cost in the range of approximately $30 to $40 million versus four and five PBRT treatment room programs costing in excess of $120 million. The MEVION S250 system received FDA approval in the second quarter of 2012 and the first clinical treatment occurred in December 2013 at Barnes-Jewish Hospital. The MEVION S250i (Hyperscan) unit, which includes pencil beam scanning, was FDA approved in December 2017. The Company’s first MEVION S250 system in operation at Orlando Health treated its first patient in April 2016. The Company currently does not have customer contracts for its second and third PBRT units.
The Company believes the business model it has developed for use in its stereotactic radiosurgery equipment and advanced radiation therapy placements can be tailored for the PBRT market segment. The Company is targeting large, hospital-based cancer programs. The Company’s ability to develop a successful PBRT financing entity depends on the decision of cancer centers to self-fund or to fund the PBRT through conventional financing vehicles, the Company’s ability to capture market share from competing alternative PBRT financing entities, and the Company’s ability to raise capital to fund PBRT projects.
The Company’s ability to secure additional customers for stereotactic radiosurgery equipment, advanced radiation therapy equipment and services and other proton beam radiation therapy services, or other equipment, is dependent on its ability to effectively compete against the manufacturers of these systems selling directly to potential customers and other companies that outsource these services. The Company does not have an exclusive relationship with any manufacturer and has previously lost sales to customers that chose to purchase equipment directly from manufacturers. The Company may continue to lose future sales to such customers and to the Company’s competitors.
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GOVERNMENT PROGRAMS
The Medicare program is administered by CMS of the U.S. Department of Health and Human Services. Medicare is a health insurance program primarily for individuals 65 years of age and older, certain younger people with disabilities, and people with end-stage renal disease, and is provided without regard to income or assets.
The Medicare program is subject to statutory and regulatory changes, administrative rulings, interpretations and determinations, requirements for utilization review, and federal and state funding restrictions, all of which could materially increase or decrease payments from these government programs in the future, as well as affect the cost of providing services to patients and the timing of payments to our client hospitals.
The Company’s Gamma Knife and PBRT customers receive payments for patient care from federal government and private insurer reimbursement programs. Currently in the United States, Gamma Knife and proton therapy services are performed primarily on an out-patient basis. Gamma Knife patients with Medicare as their primary insurer, treated on either an in-patient or out-patient basis, comprise an estimated 35%-45% of the total Gamma Knife patients treated nationwide. PBRT patients with Medicare as their primary insurer are treated primarily on an out-patient basis and comprise an estimated 45% to 50% of the total radiation therapy patients treated.
On September 18, 2020, CMS issued the final rule that would implement a new mandatory payment model for radiation oncology services: the RO APM. The RO APM is scheduled to commence January 1, 2022 and will be in effect for a five (5) year period. The RO APM significantly alters CMS' payment methodology from a fee for service paradigm to a set reimbursement by cancer type methodology for radiation services provided within a 90 day episode of care. Under the RO APM, hospital based and free-standing radiation therapy providers are mandatorily required to participate in the model based on whether the radiation therapy provider is located within a randomly selected Core Based Statistical Area ("CBSA"). CMS projects that providers treating approximately 30% of radiation oncology patients have been selected to participate in the RO APM. The remaining providers not included in the RO APM will continue to receive reimbursement based on a fee-for-service methodology. The RO APM includes but is not limited to PBRT and Gamma Knife services. Four (4) of the Company's Gamma Knife centers are scheduled to be included in the RO APM. It is not anticipated that inclusion in the RO APM will have a significant impact on the Company's Gamma Knife revenues. The Company's PBRT center was not selected for inclusion in the RO APM. For centers not included in the RO APM proposed model, Medicare reimbursement in 2021 for the most commonly used PBRT delivery codes increases by approximately 4.1% and decreases by approximately 1.7% for Gamma Knife. See additional discussion under “Item 1A Risk Factors.”
The average Medicare reimbursement rate trends from 2019 to 2021 are outlined below:
Average Medicare Reimbursement Rate Trends - Gamma Knife
The average Medicare reimbursement rate trends for PBRT from 2019 to 2021 are outlined below. Patients typically undergo 25-40 delivery sessions.
Average Medicare Reimbursement Rate Trends - PBRT
Simple with Compensation, Intermediate, or Complex $ 1,079 $ 1,246 $ 1,298
We are unable to predict the effect of future government health care funding policy changes on operations. If the rates paid by governmental payers are reduced, if the scope of services covered by governmental payers is limited, or if one or more of our hospital clients are excluded from participation in the Medicare program or any other government health care program, there could be a material adverse effect on our business.
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Affordable Care Act and Subsequent Regulation
In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, (“Affordable Care Act”), which has resulted in significant changes to the health care industry. The primary goal of the legislation was to extend health care coverage to uninsured legal U.S. residents through both an expansion of public programs and reforms to private sector health insurance. The expansion of insurance coverage was expected to be funded in part by measures designed to promote quality and cost efficiency in health care delivery and by budgetary savings in the Medicare and Medicaid programs. Because the Company is not a health care provider, we were not directly affected by the law, but we could be indirectly affected principally as follows:
•An increase in the number of insured residents could potentially increase the number of patients seeking Gamma Knife or radiation therapy treatment.
•The Company’s retail contracts are subject to reimbursement rate changes for radiosurgery or radiation therapy services by the government or other third-party payors. Any changes to Medicare or Medicaid reimbursement through the repeal or modification of the Affordable Care Act could affect revenue generated from these sites.
Some of the provisions of the Affordable Care Act have yet to be fully implemented, while certain provisions have been subject to judicial and Congressional challenges. While Congress has not passed comprehensive repeal legislation, it has enacted laws that modify certain provisions of the Affordable Care Act such as removing penalties, starting January 1, 2019, for not complying with the Affordable Care Act’s individual mandate to carry health insurance and delaying the implementation of certain Affordable Care Act-mandated fees. On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas, or Texas District Court Judge, ruled that the individual mandate is a critical and inseverable feature of the Affordable Care Act, and therefore, because it was repealed as part of the Tax Cuts and Jobs Act, the remaining provisions of the Affordable Care Act are invalid as well. While the Texas District Court Judge and CMS, have stated that the ruling will have no immediate effect, it is unclear how this decision, subsequent appeals, and other efforts to repeal and replace the Affordable Care Act will impact the Affordable Care Act.
In addition, other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted. On August 2, 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, started in April 2013, and, due to subsequent legislative amendments, will stay in effect through 2027 unless additional Congressional action is taken. On January 2, 2013, the then-U.S. President signed into law the American Taxpayer Relief Act of 2012, which, among other things, also reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. It is unclear what effect, if any, the shifting legislative and other governmental proposals would have on our business.
GOVERNMENT REGULATION
The payment of remuneration to induce the referral of health care business has been a subject of increasing governmental and regulatory focus in recent years. Section 1128B(b) of the Social Security Act (sometimes referred to as the “federal anti-kickback statute”) provides criminal penalties for individuals or entities that offer, pay, solicit or receive remuneration in order to induce referrals for items or services for which payment may be made under the Medicare and Medicaid programs and certain other government funded programs. The Affordable Care Act amended the anti-kickback statute to eliminate the requirement of actual knowledge, or specific intent to commit a violation, of the anti-kickback statute. The Social Security Act authorizes the Office of Inspector General through civil proceedings to exclude an individual or entity from participation in the Medicare and state health programs if it is determined any such party has violated Section 1128B(b) of the Social Security Act. However, the federal anti-kickback statute is subject to evolving interpretations. In the past, the government has enforced the federal anti-kickback statute to reach large settlements with healthcare companies based on sham consulting and other financial arrangements with physicians. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. In addition, the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the False Claims Act. The Company believes that it is in compliance with the federal anti-kickback statute. Additionally, the majority of states also have anti-kickback laws, which establish similar prohibitions and, in some cases, may apply to items or services reimbursed by any third-party payor, including commercial insurers.
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Additionally, the Omnibus Budget Reconciliation Act of 1993, often referred to as “Stark II”, bans physician self-referrals to providers of designated health services with which the physician has a financial relationship. On September 5, 2007, the third and final phase of the Stark regulations (Phase III) was published. The term “designated health services” includes, among others, radiation therapy services and in-patient and out-patient hospital services. On January 1, 1995, the Physician Ownership and Referral Act of 1993 became effective in California. This legislation prohibits physician self-referrals for covered goods and services, including radiation oncology, if the physician (or the physician's immediate family) concurrently has a financial interest in the entity receiving the referral. The Company believes that it is in compliance with these rules and regulations.
On August 19, 2008, the CMS published a final rule relating to inpatient hospital services paid under the Inpatient Prospective Payment System for discharges in the Fiscal Year 2009 (the “Final Rule”). Among other things, the Final Rule prohibits “per-click payments” to certain physician lessors for services rendered to patients who were referred by the physician lessor. This prohibition on per-click payments for leased equipment used in the treatment of a patient referred to a hospital lessee by a physician lessor applies regardless of whether the physician himself or herself is the lessor or whether the lessor is an entity in which the referring physician has an ownership or investment interest. The effective date of this prohibition was October 1, 2009. However, referrals made by a radiation oncologist for radiation therapy or ancillary services necessary for, and integral to, the provision of radiation therapy (such as Gamma Knife services) are not subject to this prohibition so long as certain conditions are met. GK Financing’s majority owned subsidiaries, AGKE and JGKE have minority ownership interests that are held solely by radiation oncologists, who are otherwise exempt from the referral prohibition under the Final Rule. The Company believes it is in compliance with the Final Rule.
A range of federal civil and criminal laws target false claims and fraudulent billing activities. One of the most significant is the Federal False Claims Act, which prohibits the submission of a false claim or the making of a false record or statement in order to secure a reimbursement from a government-sponsored program. In recent years, the federal government has launched several initiatives aimed at uncovering practices which violate false claims or fraudulent billing laws. Claims under these laws may be brought either by the government or by private individuals on behalf of the government, through a “whistleblower” or “qui tam” action. The Company believes that it is in compliance with the Federal False Claims Act; however, because such actions are filed under seal and may remain secret for years, there can be no assurance that the Company or one of its affiliates is not named in a material qui tam action.
Legislation in various jurisdictions requires that health facilities obtain a Certificate of Need (“CON”) prior to making expenditures for medical technology in excess of specified amounts. Four of the Company’s existing customers were required to obtain a CON or its equivalent. The CON procedure can be expensive and time consuming and may impact the length of time before Gamma Knife services commence. CON requirements vary from state to state in their application to the operations of both the Company and its customers. In some jurisdictions the Company is required to comply with CON procedures to provide its services and in other jurisdictions customers must comply with CON procedures before using the Company's services. The Company is unable to predict if any jurisdiction will eliminate or alter its CON requirements in a manner that will increase competition and, thereby, affect the Company's competitive position.
The Company's Gamma Knife units contain Cobalt 60 radioactive sources. The medical centers that house the Company's Gamma Knife units are responsible for obtaining possession and user's licenses for the Cobalt 60 source from the Nuclear Regulatory Commission. The Company’s Gamma Knife center in Peru was responsible for obtaining possession and user’s licenses for the Cobalt-60 sources from the Peruvian Regulatory Agencies.
Standard linear accelerator equipment utilized to treat patients is regulated by the FDA. The licensing is obtained by the individual medical center operating the equipment.
The Company believes it is in substantial compliance with the various rules and regulations that affect its businesses.
INSURANCE AND INDEMNIFICATION
The Company's contracts with equipment vendors generally do not contain indemnification provisions. The Company maintains a comprehensive insurance program covering the value of its property and equipment, subject to deductibles, which the Company believes are reasonable.
The Company's customer contracts generally contain mutual indemnification provisions. The Company maintains general and professional liability insurance in the United States. The Company is not involved in the practice of medicine and therefore believes its present insurance coverage and indemnification agreements are adequate for its business. The Company’s Peruvian and Ecuadorian Gamma Knife centers are free-standing facilities operated by GKPeru and GKCE, respectively. The treating physicians and clinical staff are these facilities are independent contractors. The Company maintains general and professional liability insurance consistent with the operations of these facilities and believes its present coverage is adequate for its business.
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EMPLOYEES
At December 31, 2020, the Company employed ten (10) people on a full-time basis in the United States, five (5) people on a full-time basis in Lima, Peru, and six (6) people on a full-time basis in Guayaquil, Ecuador. None of these employees are subject to a collective bargaining agreement and there is no union representation within the Company. The Company maintains various employee benefit plans and believes that its employee relations are good.
EXECUTIVE OFFICERS OF THE COMPANY
The following table provides current information concerning those persons who serve as executive officers of the Company. The executive officers were appointed by the Board of Directors and serve at the discretion of the Board of Directors.
Name: Age: Position:
Raymond C. Stachowiak 62 Chief Executive Officer
Craig K. Tagawa 67 President, Chief Operating and Financial Officer
Ernest R. Bates 54 Senior Vice President
Raymond C. Stachowiak has served as Chief Executive Officer of the Company since October 1, 2020. Mr. Stachowiak served as Interim President and Chief Executive Officer effective as of May 4, 2020 through September 30, 2020. Mr. Stachowiak joined the Board in 2009. Mr. Stachowiak previously served as President and Chief Executive Officer of Shared Imaging, a preferred independent provider of CT, MRI and PET/CT equipment and services, from its inception in December 1991 until his retirement in March 2013. In 2008, Mr. Stachowiak sold 50% of his interest in Shared Imaging to Lubar Equity Fund and remains a 50% owner of Shared Imaging. Mr. Stachowiak is the sole owner of RCS Investments, Inc., and owner-manager of Stachowiak Equity Fund, both of which are private equity funds. Mr. Stachowiak received a B.S. in Business and an M.B.A. from Indiana University. He is a Certified Public Accountant (inactive), Certified Internal Auditor (inactive) and holds a Certification in Production and Inventory Management.
Craig K. Tagawa assumed the title of President on October 1, 2020 along with his duties as Chief Operating Officer since February 1999 and Chief Financial Officer since May 1996. Mr. Tagawa also served as Chief Financial Officer from January 1992 through October 1995. Previously a Vice President in such capacity, Mr. Tagawa became a Senior Vice President on February 28, 1993 and President on September 16, 2020. He is also the Chief Executive Officer and policy committee member of GKF. From September 1988 through January 1992, Mr. Tagawa served in various positions with the Company. Mr. Tagawa currently serves as Chief Financial Officer and Secretary of the Ernest Bates Foundation. He received his undergraduate degree from the University of California at Berkeley and his M.B.A. from Cornell University.
Ernest R. Bates joined the Company in January 2007 as Vice President of Sales and Business Development, and assumed the title of Senior Vice President of Sales and Business Development, International Operations on October 1, 2020. In October 2020, he was appointed to and currently serves as a member of AHMC Seton Medical Community Advisory Board. He was on the Board of Directors of the Company from 2004 through February 2007. Prior to joining the Company, he had been Managing Director, Institutional Fixed Income Sales of HSBC Securities (USA), Inc. since 2003. Mr. Bates has also served as Managing Director, Head of Asian Product for HSBC Securities (USA) Inc. from 1999 to 2003. From 1993 through 1999, Mr. Bates held various positions with Merrill Lynch, last serving as Vice President, European Syndicate for Merrill Lynch International. He received his undergraduate degree from Brown University and a M.B.A. degree from The Wharton Business School. Ernest R. Bates is the son of Chairman of the Board Dr. Ernest A. Bates, founder of the Company.
AVAILABLE INFORMATION
Our Internet address is www.ashs.com. We make available free of charge, through our Internet website under the “Investor Center” tab in the “Corporate” section, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, annual proxy reports, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information contained on our Internet website is not part of this document.
ITEM 1A. RISK FACTORS
In addition to the other information in this report, the following factors could affect our future business, results of operations, cash flows or financial position, and could cause future results to differ materially from those expressed in any of the forward-looking statements contained in this report.
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Company, Industry and Economic Risk
The Impact of the COVID-19 pandemic and associated economic disruptions may continue to adversely affect the company’s business operations and financial condition.
The ongoing novel coronavirus COVID-19 has spread across the globe, has been declared a national emergency in the United States and, during 2020, shut down many business operations around the globe. Many states and municipalities in the United States, including California, have recommended or mandated aggressive and unprecedented actions to reduce the spread of the disease, including limiting non-essential gatherings of people, ceasing all non-essential travel, ordering certain businesses and government agencies to cease non-essential operations at physical locations and issuing shelter-in-place” orders, which direct individuals to shelter at their places of residence (subject to limited exceptions). Across our operations, although most governmental restrictions on certain medical procedures have been lifted, the pandemic adversely impacted our business, as healthcare resources were being prioritized for the treatment and management of the outbreak in some cases. Consequently, there were and continue to be delays in delivering certain Gamma Knife and PBRT treatments and significant volatility or reductions in demand for such treatments may continue. The COVID-19 pandemic poses the risk that the Company or its employees, contractors, customers, government and third party payors and others may be prevented from conducting business activities at full capacity for an indefinite period of time, including due to spread of the disease within these groups or due to shutdowns that have been and may continue to be recommended or mandated by governmental authorities.
A broad, sustained continuation of the COVID-19 pandemic could continue to negatively impact the Company for the following reasons:
•operations at certain medical facilities, including medical professionals and other medical facility employees, may be subject to prolonged closure or shut down and may impact our ability to market and deliver Gamma Knife and PBRT treatments;
•medical facilities may defer certain Gamma Knife and PBRT treatments for non-urgent patient cases in order to allocate resources to the care of patients with COVID-19;
•patients may continue to defer certain Gamma Knife and PBRT treatments due to real or perceived concerns about the potential spread of COVID-19 in a medical facility setting;
•certain deferred Gamma Knife and PBRT treatments may not be rescheduled for a later date;
•there may be significant volatility or continued reductions in demand for Gamma Knife and PBRT treatments due to limitations on operations at medical facilities, including in geographies that continue to experience severe impacts of the pandemic;
•the pandemic may materially impact the Company’s operations for a sustained period of time due to the current travel bans and restrictions, quarantines, shelter-in-place orders and shutdowns, including at our corporate headquarters in San Francisco, California;
•and/or members of the board, management or employee team, some of whom are particularly at risk for the severe symptoms of COVID-19, or of our small number of other employees, may become ill or have family members who are ill and are absent as a result, or they may elect not to come to work due to the illness affecting others in our office or facilities.
The occurrence of any of the foregoing events could have a material adverse effect on our business, results of operations, financial condition, liquidity and cash flows. The COVID-19 pandemic and mitigation measures have had and may continue to have an adverse impact on global economic conditions and healthcare activity, which could have an adverse effect on the Company’s business and financial condition. The full impact of the COVID-19 pandemic remains unknown, including the impact on the global economy and the healthcare industry. The extent to which the COVID-19 outbreak impacts the Company’s results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus, the effectiveness and implementation of vaccinations to counter the virus, actions to contain its impact, the efficacy of the current governmental orders in slowing down the pandemic, the governments’ changing calculations on the economic impact and the health implications of maintaining these orders, the progress in the healthcare industry’s ability to effectively combat the virus, and potential increase or decrease in healthcare demand, volatility and uncertainty resulting from COVID-19 responses, all of which are highly unpredictable. Likewise, the financial market as a whole has experienced extreme volatility as a result of the global economic impact of the COVID-19 pandemic, which has impacted, and may continue to impact, the Company’s stock price.
We refer you to “Management’s Discussion and Analysis of Financial Position and Results of Operations” for a more detailed discussions of the potential impact of the COVID-19 pandemic and associated economic disruptions, and the actual operational and financial impacts that we have experienced to date.
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If the Company is not successful at diversifying its business model, its revenues and profitability may decline.
The Company has historically relied on Gamma Knife unit placement and a PBRT system to provide its revenues. Currently, there is a limited market for Gamma Knife equipment and there are few prospects for PBRT systems. As a result, we plan to adapt our business model to place other types of stereotactic radiosurgery and advanced radiation therapy equipment in addition to Gamma Knife units and PBRT systems. This will constitute a reorientation for the Company and there can be no assurance that we can successfully adapt our historical business model to these new product offerings. If we are not successful, our revenues and profitability could decline substantially as existing contracts expire and are not renewed.
The Federal reimbursement rate for Gamma Knife treatments may not provide the Company with an adequate return on its investment.
Congress enacted legislation in 2013 that significantly reduced the Medicare reimbursement rate for outpatient Gamma Knife treatment by setting it at the same amount paid for linear accelerator-based radiosurgery treatment. Gamma Knife treatment has been relatively stable during the last five years. There can be no assurance that CMS reimbursement levels will be maintained at levels providing the Company an adequate return on its investment. Any future reductions in the reimbursement rate would adversely affect the Company’s revenues and financial results.
Introduction of the RO APM Reimbursement Model.
On September 18, 2020, CMS issued the final rule that would implement a new mandatory payment model for radiation oncology services: the Radiation Oncology Alternative Payment Model (“RO APM”). The RO APM is scheduled to commence January 1, 2022 and will be in effect for a five (5) year period. The RO APM significantly alters CMS' payment methodology from a fee for service paradigm to a set reimbursement by cancer type methodology for radiation services provided within a 90 day episode of care. Under the RO APM, hospital based and free-standing radiation therapy providers are mandatorily required to participate in the model based on whether the radiation therapy provider is located within a randomly selected Core Based Statistical Area ("CBSA"). CMS projects that providers treating approximately 30% of radiation oncology patients have been selected to participate in the RO APM. The remaining providers not included in the RO APM will continue to receive reimbursement based on a fee-for-service methodology. The RO APM includes but is not limited to PBRT and Gamma Knife services. Four (4) of the Company's Gamma Knife centers are scheduled to be included in the RO APM. It is not anticipated that inclusion in the RO APM will have a significant impact on the Company's Gamma Knife revenues. The Company's PBRT center was not selected for inclusion in the RO APM. For centers not included in the RO APM proposed model, Medicare reimbursement in 2021 for the most commonly used PBRT delivery codes will increase by approximately 4.1% and decrease by approximately 1.7% for Gamma Knife.
The Company’s capital investment at each site is substantial and the Company may not be able to fully recover its costs or capital investment which could have a material negative impact on its revenues and financial results.
Each Gamma Knife, PBRT or advanced LINEAR accelerator device requires a substantial capital investment. In some cases, we contribute additional funds for capital costs and/or annual operating and equipment related costs such as marketing, maintenance, insurance and property taxes. Due to the structure of our contracts with medical centers, there can be no assurance that these costs will be fully recovered or that we will earn a satisfactory return on our investment, which could have a material negative impact on our revenues and financial results.
The market for the Gamma Knife is limited and the Company may not be able to place additional Gamma Knife units which could negatively impact the Company's revenue and financial results.
There is a limited market for the Gamma Knife, and the market in the United States may be mature. The Company has begun and continued operation at only seven (7) new Gamma Knife sites in the United States since 2011. Due to the substantial costs of acquiring a Gamma Knife unit, we must identify medical centers that possess neurosurgery and radiation oncology departments capable of performing a large number of Gamma Knife procedures. As of December 31, 2020, there were approximately 116 operating Gamma Knife units in the United States, of which fourteen (14) units were owned by the Company. There can be no assurance that we will be successful in placing additional units at any sites in the future. The Company’s existing contracts with its customers are fixed in length and there can be no assurance that the customers will wish to extend the contract beyond the end of the term.
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The Company has a high level of debt and may incur additional debt to finance its operations and if the Company is unable to secure additional credit in the future its operations and profits will be negatively impacted.
The Company’s business is capital intensive. The Company finances its Gamma Knife units through its GKF subsidiary. The amounts financed through GKF have been generally non-recourse to ASHS. The Company financed its first proton therapy unit through its wholly-owned subsidiary, Orlando, and guaranteed the lease financing. The Company’s combined long-term debt and finance leases totaled $13,516,000 as of December 31, 2020 and is collateralized by its Gamma Knife, MEVION S250 and other assets, including accounts receivable and future proceeds from any contract between the Company and any end user of the financed equipment. Depending on the Company’s financing requirements and market conditions, the Company may seek to finance its operations by incurring additional long-term debt in the future. The Company’s current level of debt may adversely affect the Company’s ability to secure additional credit in the future, and as a result may affect operations and profitability. If a default on debt occurs in the future, the Company’s creditors would have the ability to accelerate the defaulted loan, to seize the Gamma Knife or MEVION S250 units or other equipment with respect to which default has occurred, and to apply any collateral they may have at the time to cure the default.
A small number of customers account for a major portion of our revenues and the loss of any one of theses significant customers could have a material adverse effect on the Company's business and results of operations.
A limited number of customers have historically accounted for a substantial portion of the Company’s total revenue, and the Company expects such customer concentration to continue for the foreseeable future. For example, in 2020, four (4) customers in total accounted for approximately 50% of the Company’s revenue. The loss of a significant customer or a significant decline in the business from the Company’s largest customers could have a material adverse effect on the Company’s business and results of operations.
The market for the company’s services is competitive and if the Company is not able to compete its business and results of operations could be negatively impacted.
The Company estimates that there are two other companies that actively provide alternative, non-conventional Gamma Knife financing to potential customers. The Company’s relationship with Elekta, the manufacturer of the Leksell Gamma Knife unit, is non-exclusive, and in the past the Company has lost sales to customers that chose to purchase a Gamma Knife unit directly from Elekta. The Company also has several competitors in the financing of proton therapy projects. The Company’s business model differs from its competitors, but there can be no assurances that the Company will not lose placements to its competitors. In addition, the Company may continue to lose future sales to customers purchasing equipment directly from manufacturers. There can be no assurance that the Company will be able to successfully compete against others in placing future units and if the Company is not able to compete its business and results of operations could be negatively impacted.
There are alternatives to the Gamma Knife and medical centers could choose to use other radiosurgery devices instead of the Gamma Knife.
Other radiosurgery devices and conventional neurosurgery compete against the Gamma Knife. Each of the medical centers targeted by the Company could decide to acquire another radiosurgery device instead of a Gamma Knife to perform cranial radiosurgery. In addition, neurosurgeons who are responsible for referring patients for Gamma Knife surgery may not be willing to make such referrals for various reasons, instead opting for invasive surgery. Because of these competing technologies, there can be no assurance that the Company will be able to secure a sufficient number of future sites or Gamma Knife procedures to sustain its profitability and growth and accordingly there may be a material negative impact on the business and results of operations of the Company.
International Operations make the Company vulnerable to risks associated with doing business in foreign countries that can affect its business, financial condition, results of operations and cash flows.
The Company installed a Gamma Knife unit in Lima, Peru in 2017 and acquired a Gamma Knife unit operation in Guayaquil, Ecuador in 2020. International operations can be subject to exchange rate volatility, which could have an adverse effect on our financial results and cash flows. In addition, international operations can be subject to legal and regulatory uncertainty and political and economic instability, which could result in problems asserting property or contractual rights, potential tariffs, increased compliance costs, increased regulatory scrutiny, potential adverse tax consequences, the inability to repatriate funds to the United States, and the Company’s inability to operate in those locations.
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New technology and products could result in making the Company's equipment obsolete which could have a material adverse impact on its business and results of operations.
There is constant change and innovation in the market for highly sophisticated medical equipment. New and improved medical equipment can be introduced that could make the Gamma Knife technology obsolete and that would make it uneconomical to operate. In 2006 Elekta introduced a new model of the Gamma Knife, the Perfexion, which the Company has implemented at all of its domestic sites. The Perfexion can perform procedures faster than previous Gamma Knife models and it involves less health care personnel intervention. In 2015, Elekta introduced the Leksell Gamma Knife Icon TM. The Perfexion is upgradeable to the Icon platforms which has enhanced imaging capabilities allowing for treatment without a head frame and the treatment of larger tumors. Existing model 4Cs of the Gamma Knife are not upgradeable to the Perfexion model. As of March 1, 2021, all the Company’s Gamma Knife units in the United States are Perfexion models and two (2) of these Perfexion units have the Icon upgrade. The Company's two (2) South American sites utilize the Model 4(C). The failure to acquire or use new technology and products could have a material adverse effect on our business and results of operations.
The Company has invested in a Proton Beam business and is obligated to fund two additional proton beams systems; there is no assurance that the Company will be able to fund these additional proton systems and if the Company is unable to do so the may be a negative impact on the Company’s business and results of operations.
We have committed a substantial amount of our financial resources to next-generation proton beam technology. The first MEVION S250 system began treating patients in December 2013. The Company’s first MEVION S250 system began treating patients in April 2016. The Company has committed to purchase two (2) additional MEVION S250i systems and has already made deposits of $2,250,000 towards this commitment. There can be no assurance that we will be able to obtain additional customers or be able to finance the two additional systems. If we are unable to obtain additional customers or are unable to finance the two additional systems, the Company will lose its deposits and there may be a negative impact on the Company’s business and results of operations.
Stock Ownership Risk
The Trading Volume of Our Common Stock is Low
Although our common stock is listed on the NYSE American, our common stock has historically experienced low trading volume. Reported average daily trading volume in our common stock for the three-month period ended December 31, 2020 was approximately 105,000 shares. There is no reason to think that a further increase in an active trading market in our common stock will develop in the future. Limited trading volume subjects our common stock to greater price volatility and may make it difficult for you to sell your shares in a quantity or at a price that is attractive to you.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company's corporate offices are located at Two Embarcadero Center, Suite 410, San Francisco, California, where it leases approximately 3,253 square feet for $20,747 per month with a lease expiration date in August 2023. The Company 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. The Company also owns and operates a stand-alone Gamma Knife facility in Guayaquil, Ecuador where it owns 864 square feet of condominium space in an office building and approximately 10,135 of related land and parking spaces.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings involving the Company or any of its property. The Company knows of no legal or administrative proceedings against the Company contemplated by governmental authorities.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Dividend Policy
The Company's common shares, no par value (the “Common Shares”), are currently traded on the NYSE American. At December 31, 2020, the Company had 5,791,000 issued and outstanding common shares, 417,000 common shares reserved for options, 13,000 unvested restricted stock units issued, and 210,000 vested restricted stock units.
The Company estimates that there were approximately 1,100 beneficial holders of its Common Shares at December 31, 2020.
There were no dividends declared or paid during 2020 and 2019.
Stock Repurchase Program
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 common stock on the open market from time to time at prevailing prices, and in 2008 the Board of Directors reaffirmed these authorizations. In 2020 and 2019 there were no shares repurchased by the Company. A total of approximately 928,000 shares have been repurchased in the open market pursuant to these authorizations at a cost of approximately $1,957,000. As of December 31, 2020, there were approximately 72,000 shares remaining under the repurchase authorizations.
Equity Compensation Plans
During 2020, 3,000 restricted stock units, 31,000 restricted stock units for deferred compensation, 100,000 shares for executive compensation, and 10,000 options were granted. Additional information regarding our equity compensation plans is incorporated herein by reference from the 2021 Proxy Statement. Also, see Note 9 - “Shareholders’ Equity” to the Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting company, as defined in Rule 10(f)(1) of Regulation S-K under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company is not required to provide the information required by this item.
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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Table of Contents
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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