In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary for the fair presentation of American Shared Hospital Services’ consolidated financial position as of June 30, 2019,March 31, 2020, the results of its operations for the three and six-monththree-month periods ended June 30,March 31, 2020 and 2019, and 2018, and the cash flows for the three and six-monththree-month periods ended June 30, 2019March 31, 2020 and 2018.2019. The results of operations for the three and six-monthsthree-months ended June 30, 2019March 31, 2020 are not necessarily indicative of results on an annualized basis. Consolidated balance sheet amounts as of December 31, 20182019 have been derived from audited consolidated financial statements.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 20182019 included in American Shared Hospital Services’ Annual Report on Form 10-K filed with the Securities and Exchange Commission.
The Company (through ASRS) and Elekta AB, the manufacturer of the Gamma Knife (through its wholly-owned United States subsidiary, GKV Investments, Inc.), entered into an operating agreement and formed GKF. As of June 30, 2019,March 31, 2020, GKF providedprovides Gamma Knife units to fifteen medical centers in the United States in the states of Arkansas, California, Florida, Illinois, Indiana, Massachusetts, Mississippi, Nebraska, New Mexico, New York, Ohio, Oregon, Tennessee, and Texas. GKF also owns and operates a single-unit Gamma Knife facility in Lima, Peru.
The Company through its wholly-owned subsidiary, Orlando, provided proton beam radiation therapy (“PBRT”) and related equipment to a customer in the United States. The Company also directly provides radiation therapy and related equipment, including Intensity Modulated Radiation Therapy, Image Guided Radiation Therapy (“IGRT”) and a CT Simulator to the radiation therapy department at an existing Gamma Knife site in Massachusetts.
The Company formed the subsidiaries GKPeru for the purposes of expanding its business internationally; Orlando and LBE to provide proton beam therapy equipment and services in Orlando, Florida and Long Beach, California, respectively; and AGKE and JGKE to provide Gamma Knife equipment and services in Albuquerque, New Mexico and Jacksonville, Florida, respectively. AGKE began operations in the second quarter of 2011 and JGKE began operations in the fourth quarter of 2011. Orlando treated its first patient in April 2016. GKPeru treated its first patient in July 2017. LBE is not expected to generate revenue within the next two years.
MedLeader was formed to provide continuing medical education online and through videos for doctors, nurses, and other healthcare workers. This subsidiary is not operational at this time.
All significant intercompany accounts and transactions have been eliminated in consolidation.
The Company’s Gamma Knife, PBRT, and IGRT contracts with hospitals are classified as operating leases under ASC 842. The related equipment is included in medical equipment and facilities on the Company’s condensed consolidated balance sheets (see further discussion at Note 2).sheets. As all income from the Company’s lessor arrangements is solely based on procedure volume, all income is considered variable payments not dependent on an index or a rate. As such, the Company does not measure future operating lease receivable.
The Company’s lessee operating leases are accounted for as right-of-use (“ROU”) assets, other current liabilities, and lease liabilities on the condensed consolidated balance sheets. Operating lease ROU assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The Company’s operating lease contracts do not provide an implicit rate for calculating the present value of future lease payments, so the Company determined its incremental borrowing rate of approximately 6.0% by using available market rates and expected lease terms. The operating lease ROU assets and liabilities also include any lease payments made and excludes lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
The Company’s lessee operating lease agreements are for administrative office space and related equipment, and the agreement to lease clinic space for its stand-alone facility in Lima, Peru. These leases have remaining lease terms between 3 and 54 years, some of which include options to renew or extend the lease. As of June 30, 2019,March 31, 2020, operating ROU assets and liabilities were $1,238,000.$972,000.
Per share information has been computed based on the weighted average number of common shares and dilutive common share equivalents outstanding. The computation for the three and six-monththree-month periods ended June 30,March 31, 2020 and 2019 excluded approximately 181,000430,000 and 513,000,547,000, respectively, of the Company’s stock options because the exercise price of the options was higher than the average market price during those periods. The computation
The following table sets forth the computation of basic and diluted earnings per share for the three and six-monththree-month periods ended June 30, 2019March 31, 2020 and 2018:2019:
| |
Note 7. | Stock-based Compensation |
Note 7.Stock-based Compensation
In June 2010, the Company’s shareholders approved an amendment and restatement of the Company’s stock incentive plan, renaming it the Incentive Compensation Plan (the “Plan”), and among other things, increasing the number of shares of the Company’s common stock reserved for issuance under the Plan to 1,630,000. The Plan provides that the shares reserved under the Plan are available for issuance to officers of the Company, other key employees, non-employee directors, and advisors. The Plan is a successor to the Company’s previous plans, and any shares awarded and outstanding under those plans were transferred to the Plan. No further grants or share issuances will be made under the previous plans. On June 21, 2019, the Company’s shareholders approved an amendment and restatement of the Plan in order to extend the term of the Plan by two years to February 22, 2022.
Stock-based compensation expense associated with the Company’s stock options to employees is calculated using the Black-Scholes valuation model. The Company’s stock awards have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimates. The estimated fair value of the Company’s option grants is estimated using assumptions for expected life, volatility, dividend yield, and risk-free interest rate which are specific to each award. The estimated fair value of the Company’s options is amortized over the period during which an employee is required to provide service in exchange for the award (requisite service period), usually the vesting period. Accordingly, stock-based compensation cost before income tax effect for the Company’s options and restricted stock unitsawards in the amount of $53,000$56,000 and $108,000$55,000 is reflected in net income for the three and six-monththree-month periods ended June 30,March 31, 2020 and 2019, compared to $57,000 and $112,000 in the same periods of the prior year, respectively. At June 30, 2019,March 31, 2020, there was approximately $118,000$18,000 of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan, excluding unrecognized compensation cost associated with the performance share awards, discussed below. This cost is expected to be recognized over a period of approximately fivetwo years.
On January 4, 2017, the Company entered into a Performance Share Award Agreement with three executive officers of the Company (the “Award Agreements”) for 161,766 restricted stock awards which vest upon the achievement of certain performance metrics. The Award Agreements expireexpired on March 31, 2020. Based on the guidance in ASC 718 Stock Compensation (“ASC 718”), the Company concluded these were performance-based awards with vesting criteria tied to performance metrics. As of December 31, 2017,2018, the Company achieved one of those certain performance metrics under the Award Agreements and recognized stock compensation expense of approximately $108,000 related to these awards. As of June 30, 2019, it is not probable that any of the remaining required metrics for vesting will be achieved. The unrecognized stock-based compensation expense for these awards was approximately $434,000 and the unvested awards wereof approximately 129,000 shares were returned to the Plan as of June 30, 2019. If and when the Company determines that the remaining performance metrics’ achievement becomes probable, the Company will record a cumulative catch-up stock-based compensation amount and the remaining unrecognized amount will be recorded over the remaining requisite service period of the awards.March 31, 2020.
The following table summarizes stock option activity for the six-monththree-month periods ended June 30, 2019March 31, 2020 and 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Stock Options | | Grant Date Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Life (in Years) | | Intrinsic Value |
Outstanding at January 1, 2020 | | 450,000 | | | $ | 2.78 | | | 2.44 | | $ | 27,000 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Outstanding at March 31, 2020 | | 450,000 | | | $ | 2.78 | | | 2.20 | | $ | — | |
Exercisable at March 31, 2020 | | 425,000 | | | $ | 2.79 | | | 2.00 | | $ | — | |
| | | | | | | | |
Outstanding at January 1, 2019 | | 613,000 | | | $ | 2.85 | | | 3.14 | | $ | — | |
| | | | | | | | |
| | | | | | | | |
Outstanding at March 31, 2019 | | 613,000 | | | $ | 2.85 | | | 2.43 | | $ | 34,000 | |
Exercisable at March 31, 2019 | | 489,000 | | | $ | 2.87 | | | 2.31 | | $ | — | |
|
| | | | | | | | | | | | | | |
| | Stock Options | | Grant Date Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Life (in Years) | | Intrinsic Value |
Outstanding at January 1, 2019 | | 613,000 |
| | $ | 2.85 |
| | 3.18 |
| | $ | — |
|
Granted | | 18,000 |
| | $ | 2.91 |
| | 7.00 |
| | $ | — |
|
Exercised | | (16,000 | ) | | $ | 2.59 |
| | — |
| | $ | — |
|
Forfeited | | (12,000 | ) | | $ | 3.05 |
| | — |
| | $ | — |
|
Outstanding at June 30, 2019 | | 603,000 |
| | $ | 2.86 |
| | 2.34 |
| | $ | 57,000 |
|
Exercisable at June 30, 2019 | | 477,000 |
| | $ | 2.87 |
| | 2.22 |
| | $ | — |
|
| | | | | | | | |
Outstanding at January 1, 2018 | | 615,000 |
| | $ | 2.87 |
| | 3.48 |
| | $ | — |
|
Granted | | 16,000 |
| | $ | 2.68 |
| | 6.96 |
| | $ | — |
|
Forfeited | | (18,000 | ) | | $ | 3.15 |
| | 0 |
| | $ | — |
|
Outstanding at June 30, 2018 | | 613,000 |
| | $ | 2.85 |
| | 3.18 |
| | $ | 32,000 |
|
Exercisable at June 30, 2018 | | 382,000 |
| | $ | 2.86 |
| | 3.04 |
| | $ | — |
|
Note 8. Income Taxes
The Company generally calculates its effective income tax rate at the end of an interim period using an estimate of the annualized effective income tax rate expected to be applicable for the full fiscal year. However, when a reliable estimate of the annualized effective income tax rate cannot be made, the Company computes its provision for income taxes using the actual effective income tax rate for the results of operations reported within the year-to-date periods. The Company’s effective income tax rate is highly influenced by relative income or losses reported and the amount of the nondeductible stock-based compensation associated with grants of its common stock options and from the results of foreign operations. A small change in estimated annual pretax income (loss) can produce a significant variance in the annualized effective income tax rate given the expected amount of these items. As a result, the Company has computed its provision for income taxes for the three and six-month periodsthree-month period ended June 30, 2019March 31, 2020 by applying the actual effective tax rates to income or (loss) reported within the condensed consolidated financial statements through those periods.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. Under ASC 740, the effects of new legislation are recognized upon enactment. Accordingly, the effects of the CARES Act are effective for the three-month period ending March 31, 2020. The CARES Act did not have a material impact on the financial statements. | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This quarterly report to the Securities and Exchange Commission may be deemed to contain certain forward-looking statements with respect to the financial condition, results of operations and future plans of American Shared Hospital Services (including statements regarding the expected continued expansiontreatment growth of the Company's MEVION S250 systems,system, the expansion of the Company’s proton therapy business and the timing and expansion of treatments by new Gamma Knife systems),systems, which involve risks and uncertainties including, but not limited to, the riskrisks of variability of financial results between quarters, the riskrisks of the Gamma Knife and radiation therapy businesses, and the risks of developing The Operating Room for the 21st21st CenturySM program. program, the risks of changes to CMS reimbursement rates or reimbursement methodology, the risks of the timing, financing, and operations of the Company’s proton therapy business, the risks of the COVID-19 outbreak and its effect on the Company’s business operations and financial condition, and the risk that the Company will be unable to identify and attract a permanent successor to the Company’s former President and Chief Executive Officer. Further information on potential factors that could affect the financial condition, results of operations and future plans of American Shared Hospital Services is included in the filings of the Company with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the year ended December 31, 20182019 and the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 21, 2019.26, 2020.
The Company recognizes revenues under ASC 842 and ASC 606 Revenue from Contracts with Customers (“ASC 606”). The Company had sixteen (16) Gamma Knife units, one (1) PBRT system and one (1) IGRT machine in operation as of June 30, 2019March 31, 2020 and 2018.2019. Three (3) of the Company’s customer contracts are through subsidiaries where GKF or its subsidiary is the majority owner and managing partner. Seven (7) 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 a single-unit Gamma Knife facility in Lima, Peru. This unit economically functions similarly to the Company’s turn-key retail arrangements. The Company’s contracts to provide radiation therapy and related equipment services to an existing Gamma Knife customer and the Company’s PBRT system at Orlando Health – UF Health Cancer Center (“Orlando Health”), are also considered retail arrangements.
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 condensed consolidated statement of operations. For the three and six-monththree-month periods ended June 30,March 31, 2020 and 2019, the Company recognized revenues of approximately $4,904,000$4,339,000 and $10,011,000,$5,107,000, respectively, under ASC 842.
Patient income – The Company has a stand-alone facility in Lima, Peru, where a contract exists between GKPeru 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. Payment terms are typically prepaid for self-pay patients and insurance provider payments are paid net 30 days. 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 three and six-monththree-month periods ended June 30,March 31, 2020 and 2019. For the three and six-monththree-month periods ended June 30,March 31, 2020 and 2019, the Company recognized revenues of approximately $293,000$229,000 and $507,000,$214,000, respectively, under ASC 606.
Effective January 1, 2015, the Centers for Medicare and Medicaid (“CMS”) established a Comprehensive Ambulatory Payment Classification for single session radiosurgery treatments. CMS has established a 20192020 total reimbursement rate of approximately $9,300$9,600 ($9,1009,300 in 2018)2019) for a Medicare Gamma Knife treatment. The approximate CMS reimbursement rates for delivery of proton therapy for a simple treatment without compensation for 2019 will be $5202020 is $539 ($522520 in 2018)2019) and $1,079$1,246 ($1,0531,079 in 2018)2019) for simple with compensation, intermediate and complex treatments, respectively.
Revenues increasedOn July 10, 2019, CMS issued a proposed rule that would implement a new mandatory payment model for radiation oncology services: the Radiation Oncology Alternative Payment Model (“RO APM”). The proposed RO APM would treat prospective episode payments to hospital outpatient departments and freestanding radiation therapy centers for radiation therapy as episodes of care. The RO APM would significantly alter CMS’ payment methodology for radiation oncology services. Under the RO APM, payment would be determined by $28,000the patient’s cancer type, as opposed to a traditional volume-based fee-for-service model, and $44,000would include select radiation therapy services provided within a 90-day episode. If the RO APM is finalized as proposed, radiation therapy providers and suppliers may be mandatorily required to $5,197,000participate in the model based on whether the radiation therapy is provided within selected geographic areas. CMS projects that approximately 40% of the radiation oncology providers within randomly selected Core Based Statistical Areas (CBSAs) will be included in the model and $10,518,000approximately 60% will continue to receive reimbursement based on fee-for-service methodology. The Company, along with other interested parties, submitted comments to CMS on the proposed rule as part of the notice-and-comment rulemaking process. The comment period concluded on September 16, 2019. It is uncertain whether CMS will finalize the rule as proposed. As a result, the Company cannot estimate the potential impact of adoption of the proposed rule. However, reductions in the reimbursement rates or changes in reimbursement methodology or administration for radiosurgery and radiation therapy could adversely affect the Company’s revenues and financial results. For centers not included in the proposed model, Medicare reimbursement in 2020 for the most commonly used proton therapy delivery codes has recently been established by CMS and is expected to increase by approximately 15.5% and by approximately 3.6% for Gamma Knife.
The COVID-19 pandemic, the likely resulting recession and its follow-on effects have impacted and will likely continue to impact business activity across industries, including the Company’s. 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 has 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. The impact of the COVID-19 pandemic on the global economy is significant, and the Company’s ability to conduct its business and to access financing could be materially impacted. As a result of the pandemic and related governmental actions, Gamma Knife procedures and PBRT treatments, which make up the majority of our revenue, may take longer to recover than other areas of the economy, which may have a material impact on the Company’s business. The COVID-19 pandemic continues to develop rapidly, and additional impacts may arise that we are not aware of currently.
The impact of the COVID-19 pandemic for the three-month period ended March 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 will potentially be greater over the entire three and six-month periods(3) month period in the second quarter of 2020.
Revenues decreased by $753,000 to $4,568,000 for the three-month period ended June 30, 2019March 31, 2020 compared to $5,169,000 and $10,474,000$5,321,000 for the same periodsperiod in the prior year, respectively.year.
Revenues generated from the Company’s PBRT system increased by $46,000 and $469,000$34,000 to $1,409,000 and $3,051,000$1,676,000 for the three and six-month periodsthree-month period ended June 30, 2019March 31, 2020 compared to $1,363,000 and $2,582,000$1,642,000 for the same periodsperiod in the prior year, respectively.year. The increase in PBRT revenues for the three-month period ended March 31, 2020 was due to higher volumes for the three and six-month periods ended June 30, 2019.volumes.
The number of PBRT fractions increased by 111 and 439130 to 1,409 and 2,9551,676 for the three and six-month periodsthree-month period ended June 30, 2019March 31, 2020 compared to 1,298 and 2,5161,546 for the same periodsperiod in the prior year, respectively.year. The increase in PBRT volume for the three-month period ended March 31, 2020 was the result of the continuing increased awareness of the benefits of proton therapy treatment.
Gamma Knife revenue increased $6,000 andrevenues decreased $271,000by $519,000 to $3,600,000 and $7,011,000$2,892,000 for the three and six-month periodsthree-month period ended June 30, 2019March 31, 2020 compared to $3,594,000 and $7,282,000$3,411,000 for the same periodsperiod in the prior year, respectively. Excluding a contractual adjustment related to Medicare reimbursement at one of the Company's existing sites, Gamma Knife revenue decreased $394,000 and $671,000 for the three and six-month periods ended June 30, 2019 compared to the same periods in the prior year, respectively.year. The decrease in Gamma Knife revenuerevenues for the three and six-month periodsthree-month period ended June 30, 2019March 31, 2020, was due to a contract labor dispute at one of the Company's existing sites resulting in no procedures performed during the second quarter. This issue was resolved and the site began treating patients in July 2019. The expiration of two customer contracts in April 2018 and January 2019 and an unfavorable payor mixlower average reimbursement at the Company'sCompany’s retail sites also contributed to the decline in revenues for the three and six-month periods ended June 30, 2019.
sites. The number of Gamma Knife procedures decreasedincreased by 16 and 331 to 361 and 736376 for the three and six-month periodsthree-month period ended June 30, 2019March 31, 2020 compared to 377 and 769375 for the same periods in the prior year, respectively. Excluding the two customer sites whose contracts expired April 2018 and January 2019 and the site that reported no procedures, Gamma Knife procedures increased 17 and 30 compared to the same periodsperiod in the prior year.
RevenueIn April 2020, an existing Gamma Knife customer contract expired. The site is currently operating on a month-to-month basis and will continue to do so until the customer notifies the Company in writing of their intent to terminate. The Company expects the lease to end sometime in mid-2020.
Revenues generated from the Company’s IGRT contract decreased $24,000 and $154,000by $268,000 to $188,000 and $456,000$0 for the three and six-month periodsthree-month period ended June 30, 2019March 31, 2020 compared to $212,000 and $610,000$268,000 for the same periodsperiod in the prior year, respectively.year. The decrease in IGRT revenuerevenues for the three-month period ended March 31, 2020 was duethe 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 lower volumes.sell the equipment to it's existing customer for $150,000, which was equal to the equipment's salvage value.
Total costs of revenue increaseddecreased by $380,000 and $665,000$210,000 to $3,468,000 and $6,852,000$3,174,000 for the three and six-month periodsthree-month period ended June 30, 2019March 31, 2020 compared to $3,088,000 and $6,187,000$3,384,000 for the same periodsperiod in the prior year, respectively.year.
Maintenance and supplies increaseddecreased by $25,000 and $67,000$35,000 to $652,000 and $1,320,000$633,000 for the three and six-month periodsthree-month period ended June 30, 2019March 31, 2020 compared to $627,000 and $1,253,000$668,000 for the same periodsperiod in the prior year, respectively.year. The increasedecrease in maintenance and supplies for the three-month period ended March 31, 2020 was due to a decrease in time and materials costs at the annual increase from the renewal of the Mevion Service Agreement (see further discussion below under the heading “Commitments”) which began September 2017.
Company’s existing customer sites.
Depreciation and amortization increaseddecreased by $344,000 and $581,000$247,000 to $2,008,000 and $3,902,000$1,647,000 for the three and six-month periodsthree-month period ended June 30, 2019March 31, 2020 compared to $1,664,000 and $3,321,000$1,894,000 for the same periodsperiod in the prior year, respectively.year. The increasedecrease in depreciation and amortization for the three-month period ended March 31, 2020 was primarily due to depreciation incurredrecognized on the Company’s new Gamma Knife site in Merrillville, Indiana, the PBRT system, and the Company’s IGRT equipment offset partially byof $220,000 in the two Gamma Knife contracts which expiredprior year. The related equipment became fully depreciated in April 2018 and Januarythe fourth quarter of 2019. The Company also recognized additional fixed asset value in connection to the contractual adjustment related to Medicare reimbursement at an existing customer site, causing an increase in depreciation expense.
Other direct operating costs increased by $11,000 and $17,000$72,000 to $808,000 and $1,630,000$894,000 for the three and six-month periodsthree-month period ended June 30, 2019March 31, 2020 compared to $797,000 and $1,613,000$822,000 for the same periodsperiod in the prior year, respectively.year. The increase in other direct operating costs for the three-month period ended March 31, 2020 was due to increased operating costs incurred at the Company’s newnewest Gamma Knife site in Merrillville, Indiana.Indiana and the Company’s stand-alone facility in Lima, Peru, as these sites continue to ramp up volumes.
Selling and administrative costs increased by $49,000 and $119,000$156,000 to $1,081,000 and $2,136,000$1,211,000 for the three and six-month periodsthree-month period ended June 30, 2019March 31, 2020 compared to $1,032,000 and $2,017,000$1,055,000 for the same periodsperiod in the prior year, respectively.year. The increase for the three-month period ended March 31, 2020, was primarily due to legal and other consulting fees.fees, including, but not limited to the COVID-19 pandemic and the transition in senior management.
Interest expense decreased by $60,000 and $118,000$85,000 to $346,000 and $713,000$282,000 for the three and six-month periodsthree-month period ended June 30, 2019March 31, 2020 compared to $406,000 and $831,000$367,000 for the same periodsperiod in the prior year, respectively.year. The decrease for the three-month period ended March 31, 2020 was due to a lower average principal base on the Company’s debt and leases in the first halfquarter of 20192020 compared to the same period in the prior year, effectively reducing interest expense.
Interest and other income was consistent with and decreased by $1,000 to $4,000 and $8,000$3,000 for the three and six-month periodsthree-month period ended June 30, 2019March 31, 2020 compared to $4,000 and $9,000 for the same periodsperiod in the prior year, respectively.year. Interest and other income is comprised of interest expense and interest earned.
Income tax expense decreased by $142,000 and $168,000$152,000 to $27,000 and $151,000a benefit of $28,000 for the three and six-month periodsthree-month period ended June 30, 2019March 31, 2020 compared to $169,000 and $319,000expense of $124,000 for the same periodsperiod in the prior year, respectively.year. The decrease in income tax expense for the three and six-monththree-month period ended June 30, 2019 isMarch 31, 2020 was due to lower taxable income attributable to the Company.GKF and its subsidiaries.
Net income attributable to non-controlling interest increased by $35,000 and decreased by $101,000 to $248,000 and $373,000$58,000 for the three and six-month periodsthree-month period ended June 30, 2019March 31, 2020 to $67,000 compared to $213,000 and $474,000$125,000 for the same periodsperiod in the prior year, respectively.year. Net income attributable to non-controlling interests represents net income earned by the 19% non-controlling interest in GKF, and net income 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.
Net income decreased $256,000 and $376,000by $405,000 to $31,000,a loss of $135,000, or $0.01$0.02 per diluted share and $301,000,for the three-month period ended March 31, 2020 compared to net income of $270,000, or $0.05 per diluted share for the three and six-month periods ended June 30, 2019 compared to net income of $287,000, or $0.05 per diluted share, and $677,000 or $0.12 per diluted share, for the same periodsperiod in the prior year, respectively.year. The decrease in net income for the three and six-month periodsthree-month period ended June 30, 2019March 31, 2020 was primarily due to increased operating expenselegal and sellingother professional fees and administrative costs.a decrease in the average reimbursement rate at the Company’s retail sites.
Liquidity and Capital Resources
The Company had cash, cash equivalents and restricted cash of $2,256,000$3,023,000 at June 30, 2019March 31, 2020 compared to $1,792,000$1,779,000 at December 31, 2018.2019. The Company’s cash position increased by $464,000$1,244,000 primarily due to cash from operating activities of $4,213,000 and proceeds from insurance of $160,000. These increases were$3,389,000. This increase was offset by payment for the purchase of property and equipment of $746,000,$195,000, payments on long-term debt and capitalfinance leases of $3,087,000,$1,466,000, payments on short-term financing of $158,000 and distributions to non-controlling interests of $76,000.$326,000.
The Company has scheduled interest and principal payments under its debt obligations of approximately $2,165,000$1,670,000 and scheduled capitalfinance lease payments of approximately $5,275,000$4,053,000 during the next 12 months. The Company believes that its cash flow from cash on hand, operations, and other cash resources are adequate to meet its scheduled debt and capitalfinance lease obligations during the next 12 months. See additional discussion below related to commitments.
The Company as of June 30, 2019March 31, 2020 had shareholders’ equity of $31,754,000,$31,473,000, working capital of $1,349,000$2,809,000 and total assets of $55,567,000.
$53,191,000.
Commitments
On December 20, 2018, the Company signed Second Amendments to two System Build Agreements (the “Amendments”) for the Company’s second and third Mevion PBRT units fromunits. The Company and Mevion Medical Systems, Inc. (“Mevion”). The Company and Mevion have agreed to upgrade the second and third PBRT units for which the Company has purchase commitments. The Company is actively seeking sites for these units but, to date, has not entered into agreements with any party for either placement of a PBRT unit or the related financing. The Company projects that it will be required to commence delivery of the second and third PBRT units no later than 2023. In the event the Company is unable to enter into customer agreements within the requisite time frame or receive an extension from Mevion, the Company could forfeit its deposits.deposits, which are described below.
As of June 30, 2019,March 31, 2020, the Company had commitments, after deposits, to purchase two MEVION S250i PBRT systems for $34,000,000 and the Company had $2,250,000 in non-refundable deposits toward the purchase of these two PBRT systems from Mevion. The non-refundable deposits are recorded in the Condensed Consolidated Balance Sheets as deposits and construction in progress.
As of June 30, 2019,March 31, 2020, the Company had commitments to perform sixthree Cobalt-60 reloads and install sixfive Leksell Gamma Knife Icon Systems ("Icon"(“Icon”) at existing customer sites, and purchase one LINAC system, to be placed at a new customer site. ThreeOne of the five Icon upgrades is scheduled to occur in mid-2020. The Cobalt-60 reloads, remaining Icon upgrades, and LINAC purchase are scheduled to occur in the second half of 2019between 2021 and three are scheduled to occur in 2020. One of the Icon upgrades will occur in 2019 and the remaining upgrades will occur in 2020.2022. Total Gamma Knife and LINAC commitments as of June 30, 2019March 31, 2020 were $8,110,000.$5,560,000. It is the Company’s intent to finance these commitments. There are no significant cash requirements, pending financing, for these commitments in the next 12 months. There can be no assurance that financing will be available for the Company’s current or future projects, or at terms that are acceptable to the Company.
In April 2020, the Company signed a commitment to purchase a second LINAC system to potentially place at an existing customer site. This purchase commitment also includes a 5-year agreement to service the equipment. The total commitment for this LINAC system and service was $7,725,000.
On July 21, 2017, the Company entered into a Maintenance and Support Agreement (the “Mevion Service Agreement”) with Mevion, which provides for maintenance and support of the Company’s PBRT unit at Orlando Health. The Mevion Service Agreement began September 5, 2017, was amended in 2018, and renews annually. The agreement requires an annual prepayment of $1,285,000$1,562,000 which was made on AugustSeptember 6, 20182019 for the current contractual period. This payment portion was recorded as a prepaid contract and will be amortized over the one-year service period. The Mevion Service Agreement is for a five (5) year period. On December 20, 2018, the Company signed a Second Amendment to the Mevion Service Agreement, where the Company agreed to increase the annual service payment by $250,000, effective for the second service year, and for each year thereafter, if a second Mevion PBRT unit is not placed at Orlando Health prior to September 2019. The Company has accrued the pro-rata portion of this additional maintenance expense for the three and six-month periods ended June 30, 2019.
As of June 30, 2019,March 31, 2020, the Company had commitments to service and maintain its Gamma Knife and PBRT equipment. The service commitments are carried out via contracts with Mevion, Elekta and Elekta AB.Mobius Imaging, LLC. In addition, in April 2019, the Company signed agreements to service the Icon upgrades which will be installed at various dates between 20192020 and 2020. 2022.The Company’s commitment to purchase a LINAC in 2019system also includes a 9-year agreement to service the equipment. Total service commitments as of June 30, 2019March 31, 2020 were $11,068,000.$10,036,000. The Gamma Knife and certain other service contracts are paid monthly, as service is performed. The Company believes that cash flow from cash on hand and operations will be sufficient to cover these payments.
The Company estimates the following commitments for each of the equipment commitments,purchases, service contracts, long-term debt, and capitalfinance lease financing,obligations, and operating leases with expected timing of payments as follows as of June 30, 2019:March 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period | | | | | | | | |
Contractual Obligations | | Total amounts committed | | 2020 | | 2021-2023 | | 2024 | | After 5 years |
| | | | | | | | | | |
Long-term debt (includes interest) | | $ | 4,970,000 | | | $ | 1,346,000 | | | $ | 2,482,000 | | | $ | 668,000 | | | $ | 474,000 | |
Finance leases (includes interest) | | 12,149,000 | | | 3,179,000 | | | 8,449,000 | | | 521,000 | | | — | |
Future equipment purchases | | 39,560,000 | | | 400,000 | | | 39,160,000 | | | — | | | — | |
Equipment service contracts | | 10,036,000 | | | 1,787,000 | | | 4,655,000 | | | 1,734,000 | | | 1,860,000 | |
Operating leases | | 1,094,000 | | | 233,000 | | | 856,000 | | | 5,000 | | | — | |
| | | | | | | | | | |
Total contractual obligations | | $ | 67,809,000 | | | $ | 6,945,000 | | | $ | 55,602,000 | | | $ | 2,928,000 | | | $ | 2,334,000 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
Contractual Obligations | | Total amounts committed | | 2019 | | 2020-2022 | | 2023 | | After 5 years |
| | | | | | | | | | |
Long-term debt (includes interest) | | $ | 5,029,000 |
| | $ | 1,257,000 |
| | $ | 2,686,000 |
| | $ | 334,000 |
| | $ | 752,000 |
|
Capital leases (includes interest) | | 14,627,000 |
| | 2,817,000 |
| | 10,978,000 |
| | 524,000 |
| | 308,000 |
|
Future equipment purchases | | 42,110,000 |
| | 4,635,000 |
| | 37,475,000 |
| | — |
| | — |
|
Equipment service contracts | | 11,068,000 |
| | 1,469,000 |
| | 7,154,000 |
| | 345,000 |
| | 2,100,000 |
|
Operating leases | | 1,309,000 |
| | 171,000 |
| | 962,000 |
| | 176,000 |
| | — |
|
| | | | | | | | | | |
Total contractual obligations | | $ | 74,143,000 |
| | $ | 10,349,000 |
| | $ | 59,255,000 |
| | $ | 1,379,000 |
| | $ | 3,160,000 |
|
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Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company does not hold or issue derivative instruments for trading purposes and is not a party to any instruments with leverage or prepayment features. The Company does not have affiliation with partnerships, trusts or other entities whose purpose is to facilitate off-balance sheet financial transactions or similar arrangements, and therefore has no exposure to the financing, liquidity, market or credit risks associated with such entities. At June 30, 2019,March 31, 2020, the Company had no significant long-term, market-sensitive investments.
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Item 4. | Controls and Procedures |
Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934. These controls and procedures are designed to ensure that material information relating to the company and its subsidiaries is communicated to the chief executive officer and the chief financial officer. Based on that evaluation, our chief executive officer and our chief financial officer concluded that, as of June 30, 2019,March 31, 2020, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to the chief executive officer and the chief financial officer, and recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting during the three and six-monthsthree-months ended June 30, 2019March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
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Item 1. | Legal Proceedings. |
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors
There arewere no material changes from those listedduring the period covered in this report to the risk factors previously disclosed in Part 1, Item 1A, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019, except as follows:
Impact of the COVID-19 Pandemic May Continue to Adversely Affect the Company’s Business Operations and Financial Condition The recent outbreak of the novel coronavirus COVID-19 is now a global pandemic as declared by the World
Health Organization. The COVID-19 pandemic has spread across the globe, has been declared a national emergency and has shut down many business operations around the globe. Many states and municipalities in the United States, including California, have announced 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 business, although some governmental restrictions on certain medical procedures have been lifted, healthcare resources are being prioritized for the treatment and management of the outbreak in many cases. Consequently, there are delays in delivering certain Gamma Knife and proton therapy treatments. 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 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 requested or mandated by governmental authorities.
A broad, sustained continuation of the COVID-19 pandemic could negatively impact the Company for the following reasons: (i) operations at certain medical facilities, including medical professionals and other medical facility employees, may continue to be subject to prolonged closure or shut down; (ii) medical facilities may continue to defer certain Gamma Knife and proton therapy treatments for non-urgent patient cases in order to allocate resources to the care of patients with COVID-19; (iii) patients may continue to defer certain Gamma Knife and proton therapy treatments due to real or perceived concerns about the potential spread of COVID-19 in a medical facility setting; (iv) certain deferred Gamma Knife and proton therapy treatments may not be rescheduled for a later date; (v) 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,which is currently subject to a shelter-in-place order that remains in force until May 31, 2020 and may be extended; and/or (vi) 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, financial condition and results of operations. The COVID-19 pandemic and mitigation measures have had and may continue to have an adverse impact on global economic conditions 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, 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 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.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
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Item 3. | Defaults Upon Senior Securities. |
Item 3. Defaults Upon Senior Securities.
None.
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Item 4. | Mine Safety Disclosures |
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibit Index
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Item 5. | Other Information. |
None.
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| | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by reference herein | | | | |
Exhibit Number | | Description | | Form | | Exhibit | | Date |
| •* | American Shared HospitalFourth Amendment to Purchased Services Incentive Compensation PlanAgreement (for a Gamma Knife Unit) dated as Amendedof May 1, 2019 between GK Financing, LLC and Restated Effective June 21, 2019Jackson HMA, LLC | | | | | | |
| * | Certification of Chief Executive Officer pursuant to Rule 13a-14a/15d-14a, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | |
| * | Certification of Chief Financial Officer pursuant to Rule 13a-14a/15d-14a, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | |
| ǂ | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | |
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 | | | | | | |
104 | * | Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline Instance XBRL | | | | | | |
| | | | | | | | |
| * | Filed herewith. | | | | | | |
| ǂ | Furnished herewith. | | | | | | |
| # | Portions of this exhibit (indicated therein by asterisks) have been omitted for confidential treatment. | | | | | | |
| • | Indicates management compensatory plan, contract, or arrangement. | | | | | | |
SIGNATURES
Pursuant to the requirements 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
| | | | | | | | |
Date: | May 11, 2020 | /s/ Ray Stachowiak |
| | Ray Stachowiak |
| | Interim President and CEO |
| | |
Date: | August 13, 2019 | /s/ Ernest A. Bates, M.D. |
| | Ernest A. Bates, M.D. |
| | Chairman of the Board and Chief Executive Officer |
| | |
Date: | August 13, 2019May 11, 2020 | /s/ Craig K. Tagawa |
| | Craig K. Tagawa |
| | Senior Vice President |
| | Chief Operating and Financial Officer |