What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-04-06 compared with 2020-04-03 · 94 added, 189 removed, 100 unchanged (74% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The World Health Organization has declared the recent COVID-19 outbreak a public health emergency.

The extent of the impact of the COVID-19 outbreak on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and its impact on our customers, which are uncertain and cannot be fully predicted at this time.

We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees, customers and stockholders.

At this point, the extent to which the COVID-19 outbreak may impact our financial condition or results of operations is uncertain.

The effect of the COVID-19 outbreak will not be fully reflected in our results of operations until future periods.

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.

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

10 unchanged sentences

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 Gamma Knife units, one PBRT system and one IGRT machine in operation as of December 31, 2019.

Three 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 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.

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

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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, 2019, the Company recognized revenues of approximately $19,396,000 under ASC 842.

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.

1 unchanged sentence

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.

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.

1 unchanged sentence

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.

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 as of December 31, 2019.

As of December 31, 2019, the Company recognized revenues of approximately $1,209,000 under ASC 606.

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.

For the year ended December 31, 2018, 69% of the Company’s revenue was derived from its Gamma Knife business, 26% was derived from the PBRT system, and the remaining 5% from its IGRT business.

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.

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.

1 unchanged sentence

(in thousands) 2020 Increase

2018 Increase

Total revenue $ 17,837 (13.4) % $ 20,605

Total revenue in 2019 increased 4.5% compared to 2018 primarily due to increased PBRT volumes.

Total revenue in 2018 was generally consistent with 2017.

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

2020 Increase

2018 Increase

Revenue from Gamma Knife (in thousands) $ 11,670 (13.9) % $ 13,551

2 unchanged sentences

Gamma Knife revenue for 2020 was $11,670,000 compared to $13,551,000 in 2019.

Gamma Knife revenue for 2018 was $13,578,000 compared to $14,848,000 in 2017.

Gamma Knife revenue for 2019 decreased $27,000 compared to 2018 due to a lower average reimbursement at the Company's retail sites.

Gamma Knife revenue for 2018 decreased $1,270,000 compared to 2017 due to three customer contracts that expired in April 2017, August 2017 and April 2018, respectively.

The number of Gamma Knife procedures performed in 2019 increased 38 compared to 2018 due to the Company's new site in Merrillville, Indiana which began treating patients in January 2019 and the Company's stand-alone facility in Lima, Peru.

The number of Gamma Knife procedures performed in 2018 decreased 171 compared to 2017, due to three customer contracts that expired in April 2017, August 2017, and April 2018, respectively.

Revenue per procedure decreased by $254 and increased by $196 in 2019 and 2018 compared to 2018 and 2017, respectively.

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.

For 2018, the increase was primarily due to the expiration of a high volume, low reimbursement rate customer contract in April 2017.

Proton Therapy Revenue

2020 Increase

2018 Increase

Revenue from PBRT (in thousands) $ 6,167 (0.8) % $ 6,214

1 unchanged sentence

Average revenue per fraction $ 1,051 1.7 % $ 1,033

PBRT revenue for 2019 was $6,214,000 compared to $5,042,000 and $4,120,000 in 2018 and 2017, respectively.

The number of PBRT fractions performed in 2019 was 6,018 compared to 5,141 and 4,554 in 2018 and 2017.

Revenue per fraction in 2019 was $1,033 compared to $981 and $905 in 2018 and 2017, respectively.

The Company’s first MEVION S250 system was placed at Orlando Health and treated its first patient in April 2016 and revenues and volumes have continued to increase since its first year of operations.

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.

(in thousands) 2020 Increase

2018 Increase

Revenue from IGRT $ — (100.0) % $ 840

IGRT revenue for 2019 was $840,000 compared to $1,094,000 and $588,000 in 2018 and 2017, respectively.

IGRT revenue decreased for 2019 due to the site preparing for the unit to come offline.

IGRT revenue increased for 2018 due to increased volumes at the Company’s existing site.

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

2018 Increase

Total costs of revenue $ 13,371 (2.3) % $ 13,685

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) increased by $1,457,000 in 2019 and $1,335,000 in 2018 compared to 2018 and 2017, respectively.

Maintenance and supplies costs as a percentage of total revenue were 12.7%, 12.2%, and 6.9% in 2019, 2018, and 2017, respectively.

Maintenance and supplies costs increased by $219,000 and $1,040,000 in 2019 and 2018 compared to 2018 and 2017, respectively.

The increase in 2019 and 2018 compared to 2018 and 2017, respectively, was due to the Company’s PBRT maintenance contract which began September 2017.

The PBRT maintenance contract renews annually every September and is for a five (5) year period.

On December 20, 2018, the Company signed a Second Amendment to the Mevion Service Agreement (defined below), where the Company agreed to increase the annual service payment by $250,000, effective for the second service year, and for each year thereafter.

Depreciation and amortization costs as a percentage of total revenue were 35.6%, 34.2%, and 33.8% in 2019, 2018 and 2017, respectively.

Depreciation and amortization costs increased $596,000 and $144,000 in 2019 and 2018 compared to 2018 and 2017, respectively.

The increase in 2019 compared to 2018 was due to depreciation incurred on the Company's Gamma Knife and IGRT equipment at its location in Boston, Massachusetts.

These contracts are set to expire in the second quarter of 2020.

The increase in 2018 compared to 2017 was due to depreciation incurred on the Company’s Gamma Knife in Peru, which began operations in July 2017, and depreciation incurred on the PBRT system.

Other direct operating costs as a percentage of total revenue were 18.1%, 15.6%, and 15.0% in 2019, 2018 and 2017, respectively.

Other direct operating costs increased by $642,000 and $151,000 in 2019 and 2018 compared to 2018 and 2017, respectively.

The increase in 2019 and 2018 is due to operating costs incurred by the Company’s PBRT system and operating costs for the Company’s Gamma Knife site in Peru, which began treating patients in July 2017.

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

2018 Increase

Selling and administrative costs $ 4,608 13.5 % $ 4,060

Percentage of total revenue 25.8 % 19.7 %

The Company's selling and administrative costs increased $66,000 and decreased $329,000 in 2019 and 2018 compared to 2018 and 2017, respectively.

The increase in 2019 was due to salaries and wages.

The decrease in 2018 was driven by legal fees, severance expense incurred in 2017, and stock-based compensation incurred in 2017, related to performance awards.

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

2018 Increase

Interest expense $ 1,057 (19.8) % $ 1,318

Percentage of total revenue 5.9 % 6.4 %

The Company's interest expense decreased $313,000 and $296,000 in 2019 and 2018 compared to 2018 and 2017, respectively.

The decrease in 2019 and 2018 compared to 2018 and 2017 is primarily due to a lower average principal base for the Company’s lease and debt portfolio, effectively reducing interest expense.

PROCEEDS RECEIVED FROM INVESTMENT IN EQUITY SECURITIES

(In thousands) 2019 Increase

2018 Increase

Proceeds received from investment in equity securities $ 0 * $ 22 * $ 0

Percentage of total revenue 0.0 % 0.1 % 0.0 %

*Not meaningful

Proceeds received from the Company’s investment in equity securities was $0 in 2019 compared to $22,000 in 2018 and $0 in 2017.

As of December 31, 2017, the Company adjusted the carrying value of its investment in equity securities to the determined fair value of $0 and recorded a $579,000 impairment loss.

Following a round of financing in the second quarter 2018, the Company’s investment in equity securities (preferred and common shares) was cancelled.

The Company’s investment in common and preferred shares were valued at $0 and $22,000, respectively, resulting in cash proceeds of $22,000 from its investment in equity securities.

The Company no longer has any ownership interest in the entity in which it previously held an equity investment.

(LOSS) ON WRITE DOWN INVESTMENT IN EQUITY SECURITIES

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

2018 Increase

(Loss) on write down investment in equity securities $ 0 * $ 0 * $ (579)

(Loss) on write down of impaired assets $ 8,264 * $ 0

Percentage of total revenue 46.3 % 0.0 %

*Not meaningful

(Loss) on the write down of the Company’s investment in equity securities was $0 in 2019 and 2018 compared to $579,000 in 2017.

For 2017, the (loss) on the write down of investment in equity securities is due to the other-than-temporary assessment performed at December 31, 2017.

The Company adjusted the carrying value of its investment in Mevion to the determined fair value of $0 and recorded a $579,000 impairment loss during the year ended December 31, 2017.

This transaction is treated as a capital loss for tax purposes which may be deducted only to the extent the Company has capital gains.

The Company is not aware of any event or transaction planned where the Company would generate a capital gain.

Therefore, a full valuation allowance was recorded against the income tax benefit from the impairment loss, and the net impact to the income tax provision is $0 for the year ended December 31, 2017.

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

2018 Increase

Interest and other income $ 10 (37.5) % $ 16

Percentage of total revenue 0.1 % 0.1 %

Interest and other income decreased $182,000 and increased $195,000 in 2019 and 2018 compared to 2018 and 2017, respectively.

The decrease in 2019 and increase in 2018 was due to an insurance reimbursement received from the Company’s business interruption coverage.

In the third quarter of 2018, the PBRT unit at Orlando Health sustained water damage resulting from the facility’s water evacuation system.

The PBRT system was down for two weeks as a result.

The Company received approximately $185,000.

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.

1 unchanged sentence

(In thousands) 2020 Increase

2018 Increase

Income tax expense (benefit) $ 128 (71.6) % $ 451 140.9 % $ (1,103)

Income tax (benefit) expense $ (1,737) * $ 128

Percentage of total revenue (9.7) % 0.6 %

Percentage of income, after net income attributable to non-controlling interests, and before income taxes 19.7 % 16.3 %

Income tax expense decreased $323,000 and increased $1,554,000 in 2019 and 2018 compared to 2018 and 2017, respectively.

During the year ended December 31, 2019, the Company released the valuation allowance related to GKPeru deferred tax assets, which resulted in an income tax benefit of $104,000.

The Company concluded, based upon the preponderance of positive evidence (i.e.

cumulative profit before tax adjusted for permanent items over the previous twelve quarters, a history of taxable income in recent periods, and the current forecast of income before taxes for GKPeru going forward) over negative evidence and the anticipated ability to use the deferred tax assets, that it was more likely than not that the deferred tax assets will be realized.

If there are unfavorable changes to actual operating results or to projections of future income, the Company may determine that it is more likely than not such deferred tax assets may not be realizable.

On December 22, 2017, the U.S.

government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).

The Tax Act makes broad and complex changes to the U.S.

tax code that affect fiscal 2017, including, but not limited to requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years.

The Tax Act also establishes new tax laws that will affect 2018 and later years, including, but not limited to, a reduction of the U.S.

federal corporate tax rate from 34% to 21%, a general elimination of U.S.

federal income taxes on dividends from foreign subsidiaries, net operating loss deduction limitations, a base erosion, anti-tax abuse tax and a deduction for foreign-derived intangible income and a new provision designed to tax global intangible low-taxed income.

As a result of the Tax Act, the Company revalued its federal and state deferred tax liabilities based on a 21% tax rate as opposed to a 34% tax rate.

The net effect of this change on the Company’s income tax provision for the year ended December 31, 2017 was a tax benefit of $1,546,000.

The increase for the year ended December 31, 2018 was due to the provision benefit recorded in 2017.

*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.

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(In thousands) 2020 Increase

2018 Increase

Net income attributable to non-controlling interests $ 771 27.0 % $ 607 (40.3) % $ 1,017

Net (loss) income attributable to non-controlling interests $ (658) (185.3) % $ 771

Percentage of total revenue (3.7) % 3.7 %

Net income attributable to non-controlling interests increased $164,000 and decreased $410,000 in 2019 and 2018 compared to 2018 and 2017, respectively.

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 increase in 2019 compared to 2018 was primarily driven by one of GKF's subsidiares of which GKF owns 51%.

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

2 unchanged sentences

2020 Increase

2018 Increase

Net income attributable to ASHS $ 659 (35.6) % $ 1,023 (46.8) % $ 1,923

Net income per share attributable to ASHS, diluted $ 0.11 (35.3) % $ 0.17 (48.5) % $ 0.33

Net income attributable to American Shared Hospital Services was $659,000 in 2019 compared to $1,023,000 in 2018, and $1,923,000 in 2017.

Net income decreased $364,000 in 2019 compared to 2018 due to increased operating costs associated with the Company's stand-alone facility in Lima, Peru and depreciation expense incurred at one of the Company's Gamma Knife and the Company's IGRT site.

Excluding the adjustment to the Company’s income tax provision, because of the Tax Act of $1,546,000, and the write-down of the Company’s investment in Mevion of $579,000 in 2017, net income in 2018 increased $45,000 compared to 2017.

IMPAIRMENT ANALYSIS OF INVESTMENT IN EQUITY SECURITIES

As of December 31, 2019, and 2018 the Company had a $0 investment in the common stock of Mevion.

The Company previously accounted for this investment under the cost method.

The Company previously carried its investment in Mevion at cost and reviewed it for impairment on a quarterly basis, or as events or circumstances might have indicated that the carrying value of the investment may not be recoverable.

Based on guidance provided in ASC 320 Investments–Debt and Equity Securities (“ASC 320”) and Staff Accounting Bulletins (“SAB”) Topic 5M Other Than Temporary Impairment (“OTTI”) of Certain Investments in Equity Securities (“SAB Topic 5M”), the Company analyzed the related events of Mevion, that occurred in the second and third quarters of 2015 and its impact on the Company’s investment.

The Company determined that these circumstances indicated a decline in value of its Mevion investment that was other-than-temporary and concluded that a write-down of the carrying value should be recognized.

As of June 30, 2015, the Company adjusted its investment in Mevion to the estimated fair value of $600,000 and recorded a $2,114,000 impairment loss.

The $2,114,000 other than temporary impairment of its investment in Mevion is recorded in other income (loss) on the Company’s Consolidated Statement of Operations.

During the period ended December 31, 2015, the Company engaged a third-party expert to review and corroborate its assessment of the fair value of the Mevion investment.

Based on the third-party analysis, an additional impairment loss of $26,000 was recognized by the Company during the three months ended December 31, 2015.

The fair value of the Company’s investment in Mevion, as of December 31, 2015 was approximately $579,000.

The impairment loss for the year ended December 31, 2015 was $2,140,000.

During the year ended December 31, 2017, the Company reviewed its investment in Mevion and determined the fair value of its investment was $0.

Based on the Company’s assessment of its investment in Mevion, the Company recognized an impairment loss for the year then ended December 31, 2017 of $579,000.

During 2018, Mevion entered into a merger transaction with Mevion Medical Technology Group Limited, and the Company’s common shares in Mevion were cancelled.

Net (loss) income attributable to ASHS $ (7,058) * $ 659

Net (loss) income per share attributable to ASHS, diluted $(1.14)

*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 $1,429,000 at December 31, 2019 compared to $1,442,000 at December 31, 2018, a decrease of $13,000.

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 $8,047,000 in 2019, which was driven by net income of $1,430,000, non-cash charges for depreciation and amortization of $7,411,000, net accrued interest on lease financing of $29,000, stock-based compensation expense of $230,000, non-cash lease expense of $256,000, interest expense associated with lease liabilities of $76,000, changes in prepaid and other assets of $260,000, changes in other accrued liabilities and deferred revenue of $28,000, net insurance proceeds of $160,000 and income taxes payable of $130,000.

These were partially offset by an income tax benefit of $444,000, changes in receivables of $1,187,000, and net lease liabilities of $332,000.

The Company’s trade accounts receivable increased by $1,392,000 to $6,894,000 at December 31, 2019 from $5,502,000 at December 31, 2018, primarily due to accounts receivable related to the ramping up of revenues for the PBRT system which began operations in April 2016 and an outstanding payment related to a contractual Medicare adjustment for one of the Company's Gamma Knife contracts, which was collected in January 2020.

The number of days revenue (sales) outstanding (“DSO”) in accounts receivable as of December 31, 2019 increased to 122 days compared to 102 days at December 31, 2018.

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 $990,000 of cash in 2019 due to payments made towards the purchase of property and equipment.

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 proceeds from options exercised of $42,000.

The Company had working capital at December 31, 2019 of $2,528,000 compared to working capital of $472,000 at December 31, 2018.

The $2,056,000 increase in net working capital was due to an increase in accounts receivable and other receivables of $1,322,000, increases in prepaid and other assets of $624,000, decrease in accrued liabilities of $25,000, decreases in finance leases of $698,000, and decreases in long term debt of $593,000.

This was offset by a decrease in cash of $13,000, net decrease in insurance receivable of $160,000, increase in accounts payable of $122,000, income taxes payable of $130,000, increase in short-term financing of $475,000, increase in lease liabilities of $279,000, and an increase in employee compensation and benefits of $27,000.

These decreases were offset by long-term debt financing of the Acquisition of $1,425,000.

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.

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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.

IMPACT OF INFLATION AND CHANGING PRICES

The Company does not believe that inflation has had a significant impact on operations because a substantial majority of the costs that it incurs under its customer contracts are fixed through the term of the contract.

CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET ARRANGEMENTS

The following table presents, as of December 31, 2019, the Company’s significant fixed and determinable contractual obligations by payment date.

The payment amounts represent those amounts contractually due to the recipient and do not include any unamortized premiums or discounts, hedge basis adjustments, or other similar carrying value adjustments.

Further discussion of the nature of each obligation is included in the notes to the consolidated financial statements referenced below.

For purposes of this table, these commitments are listed in the less than 1 year and 1-3-year categories.

Payments Due by Period

Contractual Obligations Total amounts

1-3 years 4-5 years After

Long-term debt (includes interest) $ 3,922,000 1,689,000 1,480,000 335,000 418,000

Finance leases (includes interest) 13,580,000 4,610,000 8,449,000 521,000 —

Future equipment purchases 40,910,000 1,750,000 39,160,000 — —

Equipment service contracts 10,096,000 1,847,000 4,655,000 1,734,000 1,860,000

Operating leases 1,180,000 319,000 856,000 5,000 —

Total contractual obligations $ 69,688,000 $ 10,215,000 $ 54,600,000 $ 2,595,000 $ 2,278,000

Further discussion of the long-term debt commitment is included in Note 5, finance leases in Note 6, and operating leases in Note 11 of the consolidated financial statements.

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.

The Company and Mevion have agreed to upgrade the second and third PBRT units for which the Company has purchase commitments.

The Company is actively seeking sites for these units but, to date, has not entered into agreements with any party for either placement of a PBRT unit or the related financing.

The Company projects that it will be required to commence delivery of the second and third PBRT units no later than 2023.

In the event the Company is unable to enter into customer agreements within the requisite time frame or receive an extension from Mevion, the Company could forfeit its deposits, which are described below.

As of December 31, 2019, 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 Medical Systems, Inc.

The non-refundable deposits are recorded in the Consolidated Balance Sheets as deposits and construction in progress.

As of December 31, 2019, the Company had commitments to perform five Cobalt-60 reloads and install five Leksell Gamma Knife Icon Systems (“Icon”) at existing customer sites, and purchase one LINAC system, to be placed at a new customer site.

The Cobalt-60 reloads, Icon upgrades, and LINAC purchase are scheduled to occur between 2020 and 2022.

Total Gamma Knife and LINAC commitments as of December 31, 2019 were $6,910,000.

Two of the five Cobalt-60 reloads were completed and financed during the first quarter of 2020.

It is the Company’s intent to finance the remaining 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.

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 and renews annually.

The agreement requires an annual prepayment of $1,562,000 which was made on September 6, 2019 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.

The Company paid the additional $250,000 owed for the second service year on September 6, 2019.

As of December 31, 2019, the Company had commitments to service and maintain its Gamma Knife and PBRT equipment.

The service commitments are carried out via contracts with Mevion, Elekta and Mobius Imaging, LLC.

In addition, in April 2019, the Company signed agreements to service the Icon upgrades which will be installed at various dates between 2020 and 2022.

The Company’s commitment to purchase a LINAC system also includes a 9-year agreement to service the equipment.

Total service commitments as of December 31, 2019 were $10,096,000.

The Gamma Knife and certain other service contracts are paid monthly, as service is performed.

The Company believes that cash flow from cash on hand and operations will be sufficient to cover these payments.

The Company estimates the following commitments for each of the equipment systems, with expected timing of payments as follows as of December 31, 2019:

2020 Thereafter Total

Proton Beam Units $ — $ 34,000,000 $ 34,000,000

Gamma Knife & LINAC Units 1,750,000 5,160,000 6,910,000

Service Contracts 1,847,000 8,249,000 10,096,000

Total Commitments $ 3,597,000 $ 47,409,000 $ 51,006,000

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See the Index to Consolidated Financial Statements and Financial Statement Schedules included at page F-1 of this report.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis