AMERICAN SHARED HOSPITAL SERVICES 10-Q

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 treatment growth of the Company's MEVION S250 system, the expansion of the Company’s PBRT business, the timing and expansion of treatments by new Gamma Knife systems, the Company's expansion into new markets and the Company's acquisitions and potential market segments for its services, which involve risks and uncertainties including, but not limited to, the risks of economic and market conditions, the risks of variability of financial results between quarters, the risks of the Gamma Knife and radiation therapy businesses, the risks of developing The Operating Room for the 21st Century program, the risks of changes to CMS reimbursement rates or reimbursement methodology, the risks of the timing, financing, and operations of the Company’s PBRT business, the risks of the COVID-19 pandemic and its effect on the Company’s business operations and financial condition, the risk of expanding within or into new markets, and the risk that the integration or continued operation of acquired businesses could adversely affect financial results and the risk that current and future acquisitions may negatively affect the Company's financial position. 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, 2020 and the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 25, 2021. The Company recognizes revenues under ASC 842 and ASC 606 Revenue from Contracts with Customers (“ASC 606”). The Company had thirteen Gamma Knife units and one PBRT system, and fifteen Gamma Knife units, one PBRT system and one IGRT machine in operation in the United States as of March 31, 2021 and 2020, respectively. Three of the Company’s customer contracts are through subsidiaries where GKF or its subsidiary is the majority owner and managing partner. Six of the Company’s fifteen current Gamma Knife customers are under fee-per-use contracts, and seven customers are under retail arrangements. The Company, through GKF, also owns and operates two single-unit, international Gamma Knife facilities in Lima, Peru and Guayaquil, Ecuador. These two units economically function similarly 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. The Company’s contract for IGRT equipment and related equipment services expired in April 2020 and the Company agreed to sell the equipment to its existing customer for $150,000, which is equal to the equipment's salvage value. 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 at an agreed upon percentage share 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-month periods ended March 31, 2021 and 2020, the Company recognized revenues of approximately $3,699,000 and $4,339,000, respectively, under ASC 842. 14 Patient income – The Company has stand-alone facilities in Lima, Peru and Guayaquil, Ecuador, where a contract exists between the Company’s facilities and the individual patient treated at the facility. Under ASC 606, the Company acts as the principal in this transaction and provides, at a point in time, a single performance obligation, in the form of a Gamma Knife treatment. Revenue related to a Gamma Knife treatment is recognized on a gross basis at the time when the patient receives treatment. There is no variable consideration present in the Company’s performance obligation and the transaction price is agreed upon per the stated contractual rate. GKPeru’s payment terms are typically prepaid for self-pay patients and insurance provider payments are paid net 30 days. GKCE’s patient population is primarily covered by a government payor and payments are paid approximately 30 to 60 days upon invoice. The Company did not capitalize any incremental costs related to the fulfillment of its customer contracts. Accounts receivable earned by GKPeru were not significant for the three-month periods ended March 31, 2021 and 2020. GKCE’s accounts receivable were $478,000 for the three-month period ended March 31, 2021. For the three-month periods ended March 31, 2021 and 2020, the Company recognized revenues of approximately $665,000 and $229,000, respectively, under ASC 606. The Centers for Medicare and Medicaid (“CMS”) have established a 2021 total reimbursement rate of approximately $9,600 ($9,600 in 2020) for a Medicare Gamma Knife treatment. The approximate CMS reimbursement rates for delivery of PBRT for a simple treatment without compensation for 2021 is $543 ($539 in 2020) and $1,298 ($1,246 in 2020) for simple with compensation, intermediate and complex treatments, respectively. On September 18, 2020, CMS issued the final rule that would implement a new mandatory payment model for radiation oncology services: the RO APM. The RO APM is scheduled to commence January 1, 2022 and will be in effect for a five (5) year period. The RO APM significantly alters CMS' payment methodology from a fee for service paradigm to a set reimbursement by cancer type methodology for radiation services provided within a 90 day episode of care. Under the RO APM, hospital based and free-standing radiation therapy providers are mandatorily required to participate in the model based on whether the radiation therapy provider is located within a randomly selected Core Based Statistical Area (“CBSA”). CMS projects that providers treating approximately 30% of radiation oncology patients have been selected to participate in the RO APM. The remaining providers not included in the RO APM will continue to receive reimbursement based on a fee-for-service methodology. The RO APM includes but is not limited to PBRT and Gamma Knife services. Four (4) of the Company's Gamma Knife centers are scheduled to be included in the RO APM. It is not anticipated that inclusion in the RO APM will have a significant impact on the Company's Gamma Knife revenues. The Company's PBRT center was not selected for inclusion in the RO APM. For centers not included in the RO APM proposed model, Medicare reimbursement in 2021 for the most commonly used PBRT delivery codes increases by approximately 4.1% and decreases by approximately 1.7% for Gamma Knife. 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. 15 The impact of the COVID-19 pandemic for the three-month periods ended March 31, 2021 and 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 periods ended March 31, 2021 and 2020 did not appear material for the Gamma Knife. The COVID-19 pandemic appears to have had a greater impact on PBRT fractions for the three-month period ended March 31, 2021. Revenues decreased by $204,000 to $4,364,000 for the three-month period ended March 31, 2021 compared to $4,568,000 for the same period in the prior year. Revenues generated from the Company’s PBRT system decreased by $145,000 to $1,531,000 for the three-month period ended March 31, 2021 compared to $1,676,000 for the same period in the prior year. The decrease in PBRT revenues for the three-month period ended March 31, 2021 was due to lower fractions primarily due to the continued impact of the COVID-19 pandemic, offset by a higher average reimbursement for the period. The number of PBRT fractions decreased by 445 to 1,231 for the three-month period ended March 31, 2021 compared to 1,676 for the same period in the prior year. The decrease in PBRT volume for the three-month period ended March 31, 2021 was primarily due to the continued impact from the COVID-19 pandemic. The Company's PBRT system also experienced some down-time for maintenance during the three-month period ended March 31, 2021. Gamma Knife revenues were $2,892,000 for the three-month periods ended March 31, 2021 and 2020. For the three-month period ended March 31, 2021, Gamma Knife procedures decreased, but this decrease was offset by an increase in average reimbursement. The increase in average reimbursement was partially driven by the Company’s contract that expired in the fourth quarter of 2020, which was reimbursed at a lower rate, and an increase in the average rate at the Company’s retail sites. The number of Gamma Knife procedures decreased by 21 to 355 for the three-month period ended March 31, 2021 compared to 376 for the same period in the prior year. The decrease in Gamma Knife procedures for the three-month period ended March 31, 2021 was primarily due to the expiration of a contract in the fourth quarter of 2020 and in the first quarter of 2021. This decrease was offset by the Company’s acquisition of GKCE in the second quarter of 2020. The Company’s contract for IGRT equipment and related equipment services expired in April 2020. As of March 31, 2021, the Company reviewed its estimate of related revenues and accounts receivable and determined the amount should be $0 and wrote off the balance of $59,000. Total costs of revenue decreased by $244,000 to $2,930,000 for the three-month period ended March 31, 2021 compared to $3,174,000 for the same period in the prior year. Maintenance and supplies increased by $39,000 to $672,000 for the three-month period ended March 31, 2021 compared to $633,000 for the same period in the prior year. The increase in maintenance and supplies for the three-month period ended March 31, 2021 was due to a maintenance contract for one of the Company's Gamma Knife Icon upgrades which commenced in the fourth quarter of 2020. Depreciation and amortization decreased by $449,000 to $1,198,000 for the three-month period ended March 31, 2021 compared to $1,647,000 for the same period in the prior year. The decrease in depreciation and amortization for the three-month period ended March 31, 2021 was primarily due to the expiration of a contract in the fourth quarter of 2020 and in the first quarter of 2021. In addition, the Company determined some of its Gamma Knife equipment was impaired as of December, 31, 2020 and the related equipment values were written off for the year-ended, therefore, there was no depreciation expense incurred on this equipment for the three-month period ended March 31, 2021. Other direct operating costs increased by $166,000 to $1,060,000 for the three-month period ended March 31, 2021 compared to $894,000 for the same period in the prior year. The increase in other direct operating costs for the three-month period ended March 31, 2021 was driven by the operating costs of GKCE which was acquired in June 2020. Selling and administrative costs decreased by $127,000 to $1,084,000 for the three-month period ended March 31, 2021 compared to $1,211,000 for the same period in the prior year. The decrease for the three-month period ended March 31, 2021, was due to lower legal and other fees. 16 Interest expense decreased by $22,000 to $260,000 for the three-month period ended March 31, 2021 compared to $282,000 for the same period in the prior year. The decrease for the three-month period ended March 31, 2021 was due to a lower average principal base on the Company’s debt and leases compared to the same periods in the prior year, respectively, effectively reducing interest expense. Interest and other income was $3,000 for the three-month period ended March 31, 2021 compared to $3,000 for the same period in the prior year. Interest and other income is comprised of interest expense and interest earned. Income tax expense increased by $34,000 to $6,000 for the three-month period ended March 31, 2021 compared to an income tax benefit of $28,000 for the same period in the prior year. The increase in income tax expense for the three-month period ended March 31, 2021 was due to higher taxable income attributable to GKF and the acquisition of GKCE. Net income attributable to non-controlling interest decreased by $9,000 to $58,000 for the three-month period ended March 31, 2021 compared to $67,000 for the same period in the prior 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 increased by $164,000 to $29,000, or $0.00 per diluted share for the three-month period ended March 31, 2021 compared to a net loss of $135,000, or $0.02 per diluted share for the same period in the prior year. The increase in net income for the three-month period ended March 31, 2021 was due to a decrease in depreciation expense and selling and administrative costs. 17 Liquidity and Capital Resources The Company had cash, cash equivalents and restricted cash of $5,013,000 at March 31, 2021 compared to $4,325,000 at December 31, 2020. The Company’s cash position increased by $688,000 primarily due to cash from operating activities of $2,783,000. This increase was offset by payment for the purchase of property and equipment of $1,065,000, payments on long-term debt and finance leases of $914,000 and payments on short-term financing of $116,000. The Company has scheduled interest and principal payments under its debt obligations of approximately $1,209,000 during the next 12 months. The Company believes that its cash on hand, cash flow from operations, and other cash resources are adequate to meet its scheduled debt obligations and working capital requirements during the next 12 months. See additional discussion below related to commitments. The Company as of March 31, 2021 had shareholders’ equity of $23,844,000, working capital of $4,163,000 and total assets of $44,047,000. 18 Commitments On December 20, 2018, the Company signed Second Amendments to two System Build Agreements for the Company’s second and third Mevion PBRT units. The Company and Mevion have agreed to upgrade the second and third PBRT units for which the Company has purchase commitments. The Company is actively seeking sites for these units but, to date, has not entered into agreements with any party for either placement of a PBRT unit or the related financing. The Company projects that it will be required to commence delivery of the second and third PBRT units no later than 2023. In the event the Company is unable to enter into customer agreements within the requisite time frame or receive an extension from Mevion, the Company could forfeit its deposits. As of March 31, 2021, the Company had commitments, after deposits, to purchase two MEVION S250i PBRT systems for $34,000,000. As of March 31, 2021, the Company had commitments to perform one Cobalt-60 reload and install four Leksell Gamma Knife Icon Systems (“Icon”) at existing customer sites, and purchase two Linear Accelerator (“LINAC”) systems, one to be placed at an existing customer site and one at a new customer site. The Company also has a commitment to upgrade the Gamma Knife unit at it's stand-alone facility in Ecuador to a Perfexion. The Cobalt-60 reload, Icon upgrades, and LINAC purchases are scheduled to occur between 2022 and 2023. The Company expects to upgrade the equipment in Ecuador in the third quarter of 2021. The Company has a commitment from DFC to finance this upgrade. Total Gamma Knife and LINAC commitments as of March 31, 2021 were $10,860,000. 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. On July 21, 2017, the Company entered into a Maintenance and Support Agreement (the “Mevion Service Agreement”) with Mevion, which provides for maintenance and support of the Company’s PBRT unit at Orlando Health. The Mevion Service Agreement began September 5, 2017, was amended in 2018, and renews annually over a five year period. The agreement requires an annual prepayment of $1,572,000 for the current contractual period. This payment portion was recorded as a prepaid contract and will be amortized over the one-year service period. As of March 31, 2021, the Company had commitments to service and maintain its Gamma Knife and PBRT equipment. The service commitments are carried out via contracts with Mevion, Elekta and Mobius Imaging, LLC. In addition, in April 2019, the Company signed agreements to service the Icon upgrades which will be installed at various dates between 2021 and 2022. The Company’s commitments to purchase two LINAC systems also include a 9-year and 5-year agreement to service the equipment, respectively. Total service commitments as of March 31, 2021 were $10,272,000. 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. 19