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Item 7. Management’s Discussion and Analysis

2023-03-31 compared with 2022-03-30 · 124 added, 105 removed, 152 unchanged (60% of the section changed)

12 unchanged sentences

Total Gamma Knife

The Company had one customer contract expire in the fourth quarter of 2020 and one that expired in the first quarter of 2021.

The Company removed a third Gamma Knife unit in January 2022 and a fourth unit under contract through the second quarter of 2022 is currently in negotiation. The next customer contract expirations are in the first and fourth quarters of 2023.

A summary of the Company’s procedure volumes for fiscal years 2021 and 2020 are set forth in the table below.

The Company removed one Gamma Knife unit in January 2022, whose contract expired in the fourth quarter of 2021. 

Another Gamma Knife contract expired in the second quarter of 2022 is currently leased on a month-to-month basis and the Company is in negotiations with this site to renew the lease. The next customer contract expirations are in the first and fourth quarters of 2023. 

The Company is in active negotiations with both of these sites as well. 

A summary of the Company’s procedure volumes for fiscal years 2022 and 2021 are set forth in the table below.

Total Procedures

1 unchanged sentence

PBRT Procedures

The decrease in Gamma Knife volume during 2021 was due to the expiration of two contracts in the fourth quarter of 2020 and the first quarter of 2021.

The decrease in PBRT volume was due to the continued impact from the COVID-19 pandemic and down-time for repair of system components.

The decrease in Gamma Knife volume during 2022 was primarily due to the expiration of two contracts in the first and fourth quarters of 2021.

Same center procedures decreased 5% compared to 2021 due to temporary staffing shortages at several of the Company’s domestic customers and normal, cyclical fluctuations . 

The increase in PBRT volume was due to lower volumes during 2021 driven by the continued impact from the COVID-19 pandemic and down-time for repair of system components.

Reimbursement

CMS established a 2022 delivery code reimbursement rate of approximately $7,943 ($7,773 in 2021) for a Medicare Gamma Knife treatment.

The approximate CMS reimbursement rates for delivery of PBRT for a simple treatment without compensation for 2022 is $554 ($543 in 2021) and $1,321 ($1,298 in 2021) 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 is scheduled to commence January 1, 2023 and will be in effect for a five 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 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.

Three of the Company's Gamma Knife centers are 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.

Medicare reimbursement in 2022 for the most commonly used PBRT delivery codes increased by approximately 1.8% and increased by approximately 2.2% for Gamma Knife. 

CMS established a 

2023 delivery code reimbursement rate of approximately $7,691 ($7,943 in 2022 ) for a Medicare Gamma Knife treatment.

The approximate CMS reimbursement rates for delivery of PBRT for a simple treatment without compensation for 2023  is $572 ($554 in 2022 ) and $1,323 ($1,321 in 2022 ) for simple with compensation, intermediate and complex treatments, respectively.

On September 18, 2020, CMS issued the final rule that would have implemented a new mandatory payment model for radiation oncology services:

the Radiation Oncology Alternative Payment Method (“RO APM”).

The RO APM, which was to be in effect for a five year period, has been delayed indefinitely.

If the RO APM had not been delayed, it would have significantly altered 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 would have been required to participate in the model based on whether the radiation therapy provider is located within a randomly selected core-based statistical area.

CMS projects that providers treating approximately 30% of radiation oncology patients would have been selected to participate in the RO APM.

The remaining providers not included in the RO APM would have continued to receive reimbursement based on a fee-for-service methodology.

The RO APM would have included, but would not have been limited to, PBRT and Gamma Knife services.

Three of the Company's Gamma Knife centers were expected to be included in the RO APM.

It was not anticipated that inclusion in the RO APM would 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. Medicare reimbursement in 2023 for the most commonly used PBRT delivery codes increased by approximately 3.2% and 0.2% and decreased by approximately 3.2% for Gamma Knife.

On August 29, 2022, CMS published a final rule that delayed the start date of the RO APM to a date to be determined through future rulemaking and amended the definition of “model performance period”

to provide that the start and end dates of the five-year model performance period will be established by CMS through future rulemaking.

At this time, it is not clear if the RO APM will be implemented and, if it is implemented, the timing for implementation and in what form it will be implemented. 

If a start date for the RO APM is proposed, CMS will provide at least six months’

notice in advance of the proposed start date, and the proposed start date will be subject to public comment.

Impact of the COVID-19 Pandemic

In 2020, the COVID-19 pandemic, the resulting recession in the United States and its follow-on effects impacted 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 were disrupted as customers turned their focus to dealing with the impact of the COVID-19 pandemic on their operations and restricted access to their sites in efforts to contain the spread of the virus.

The global nature of the pandemic 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 prioritization of COVID-19 treatment and containment 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.

In 2021, following the dissemination of the vaccine for the COVID-19 virus in the United States, there was a scale back of the safety measures put into place throughout 2020.

Some of the Company’s customers still experienced some delays and restrictions in providing service, but not to the same degree that occurred during 2020. Procedure volumes for the Company’s domestic Gamma Knife business for the twelve-month period ended December 31, 2021, are rebounding to pre-pandemic lev els. The Company’s PBRT business was impacted by COVID-19, and other factors, during 2021 as treatment volumes continued to lag from pre-pandemic levels.

T he Company’s business has been impacted differently at each of the Company’s various locations as a result of the pandemic and related governmental actions. However, as the COVID-19 pandemic evolves and new strains of the virus develop, additional impacts may arise which may have a material impact on the Company’s business. 

The impact of the COVID-19 pandemic for the year ended December 31, 2021 has varied by location based on the stage of containment and actions by government agencies.

The impact on treatments and costs in the year ended December 31, 2021 did not appear material for the Gamma Knife.

The COVID-19 pandemic appears to have had a greater impact on PBRT fractions for the years ended December 31, 2021 and 2020.

Some of the Company’s customers still experienced some delays and restrictions in providing service, but not to the same degree that occurred during 2020. Procedure volumes for the Company’s domestic Gamma Knife business for the year ended December 31, 2021, began to rebound to pre-pandemic levels. The Company’s PBRT business was impacted by COVID-19, and other factors, during 2021 as treatment volumes continued to lag from pre-pandemic levels.

The Company’s business has been impacted differently at each of the Company’s various locations as a result of the COVID-19 pandemic and related governmental actions. 

Despite a decrease in volumes for the year ended December 31, 2022 compared to the same period in the prior year, domestic Gamma Knife volumes for existing customers rebounded to pre-pandemic levels. 

This decrease in volume was due to normal, cyclical fluctuations and the Company does not anticipate a significant impact on domestic Gamma Knife volumes from the COVID-19 pandemic going forward. The Company’s stand-alone facilities in Peru and Ecuador have also begun to return to pre-pandemic levels for the year ended December 31, 2022 and the Company expects this trend to continue through 2023. The Company’s PBRT business was impacted by COVID-19, and other factors, during 2021 as treatment volumes continued to lag from pre-pandemic levels.

However, for the year ended December 31, 2022, the Company’s PBRT site also returned to pre-pandemic levels.

As the COVID-19 pandemic evolves and new strains of the virus develop, additional impacts may arise which may have a material impact on the Company’s future business. 

The COVID-19 pandemic has led to supply chain disruptions for many of the Company’s suppliers. 

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The Company’s consolidated financial statements are prepared in accordance with generally accepted accounting principles and follow general practices within the industry in which it operates.

Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes.

These estimates, assumptions and judgments are based on information available as of the date of the financial statements;

accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments.

Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes.

These estimates, assumptions and judgments are based on information available as of the date of the consolidated financial statements;

accordingly, as this information changes, consolidated the financial statements could reflect different estimates, assumptions and judgments.

Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.

The most significant accounting policies followed by the Company are presented in Note 2 to the consolidated financial statements.

These policies along with the disclosures presented in the other financial statement notes and, in this discussion, and analysis, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

Based on the valuation techniques used and the sensitivity of financial statement amounts, and the methods, assumptions and estimates underlying those amounts, management has identified revenue recognition and costs of sales for turn-key and revenue sharing arrangements, and the carrying value of fixed assets and useful lives, and as such the aforementioned could be most subject to revision as new information becomes available.

The following are our critical accounting policies in which management’s estimates, assumptions and judgments most directly and materially affect the financial statements:

The most significant accounting policies followed by the Company are presented in Note 2 –

Accounting Policies to the consolidated financial statements.

These policies along with the disclosures presented in the other consolidated financial statement notes and, in this discussion, and analysis, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined.

Based on the valuation techniques used and the sensitivity of the consolidated financial statement amounts, and the methods, assumptions and estimates underlying those amounts, management has identified revenue recognition and costs of sales for turn-key and revenue sharing arrangements, and the carrying value of fixed assets and useful lives, and as such the aforementioned could be most subject to revision as new information becomes available.

The following are our critical accounting policies in which management’s estimates, assumptions and judgments most directly and materially affect the consolidated financial statements:

Revenue Recognition

The Company recognizes revenues under Accounting Standards Codification (“ASC”) 842 Leases (“ASC 842”) and ASC 606 Revenue from Contracts with Customers (“ASC 606”).

The Company had thirteen domestic Gamma Knife units, two international Gamma Knife units, and one PBRT system i n operation as of December 31, 2021.

The Company had twelve domestic Gamma Knife units, two international Gamma Knife units, and one PBRT system i n operation as of December 31, 2022.

Four 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 thirteen domestic Gamma Knife customers are under fee-per-use contracts, and seven customers are under retail arrangements.

Six of the Company’s twelve domestic Gamma Knife customers are under fee-per-use contracts, and six customers are under retail arrangements.

The Company, through GKF, also owns and operates two single-unit Gamma Knife facilities in Lima, Peru and Guayaquil, Ecuador.

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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.

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.

3 unchanged sentences

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, 2021 and 2020, the Company recognized revenues of approximately $14,719,000 and $16,204,000 under ASC 842, respectively.

As of December 31, 2022 and 2021, the Company recognized revenues of approximately $16,655,000 and $14,719,000 under ASC 842, respectively, of which approximately $8,952,000 and $6,058,000 were for PBRT services, respectively.

Revenue from retail arrangements amounted to approximately 67% and 60% of total revenue for the years ended December 31, 2022 and 2021, respectively.

Because the revenue estimates are reviewed on a quarterly basis, any adjustments required for past revenue estimates would result in an increase or reduction in revenue during the current quarterly period.

Payor mix is a significant variable in the Company’s estimate for retail revenues.

Fluctuations in payor mix that may result in a 5% to 10% change in the estimate could increase or decrease revenues as of December 31, 2022, by approximately $114,000 to $227,000.  

Patient Income

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The Company did not capitalize any incremental costs related to the fulfillment of its customer contracts.

Accounts receivable earned by GKPeru were not significant for the year ended December 31, 2021 and 2020.

GKCE's accounts receivable were $435,000 and $467,000 for the years ended December 31, 2021 and 2020.

Accounts receivable earned by GKPeru were not significant for the years ended December 31, 2022 and 2021.

GKCE’s accounts receivable were $862,000 and $435,000 for the years ended December 31, 2022 and 2021.

As of December 31, 2022 and 2021, the Company recognized revenues of approximately $3,091,000 and $2,909,000 under ASC 606, respectively.

2 unchanged sentences

The Company determines salvage value based on the estimated fair value of the equipment at the end of its useful life.

There is no active resale market of Gamma Knife or PBRT equipment, but the Company believes its salvage value estimates were a reasonable assessment of the economic value of the equipment when the contract ends. There is no salvage value assigned to the two Gamma Knife units in Peru or Ecuador because these are Model 4(C) units. 

There is no salvage value assigned to the two Gamma Knife units in Peru or Ecuador because these are Model 4(C) units. 

The Company has not assigned salvage value to its PBRT equipment.  

As of  April 1, 2021, the Company reduced its estimate for salvage value for nine of its domestic Gamma Knife Perfexion units.

The net effect of this change in estimate for the year ended December 31, 2021, was a decrease in net income of approximately $342,000 or $0.06 per diluted share.

This change in estimate will also impact future periods. 

As of April 1, 2021, the Company reduced its estimate for salvage value for nine of its domestic Gamma Knife Perfexion units.

As of October 1, 2022, the Company further reduced its estimate for salvage value for one of its domestic Gamma Knife Perfexion units.

The net effect of the change in estimate made October 1, 2022, for the year ended December 31, 2022, was a decrease in net income of approximately $17,000 or $0.00 per diluted share. This change in estimate will also impact future periods. 

See Note 3 - Property and Equipment to the consolidated financial statements for further discussion on salvage value. 

As of December 31, 2022, the Company has seven domestic Gamma Knife units with salvage value ranging from $140,000 to $300,000.

A further change in estimate for salvage value could have an impact on future earnings of the Company. 

For example, if the Company determined the salvage value of the existing seven domestic Gamma Knife units should be $0, there could be an annual increase to depreciation expense of approximately $514,000.  

2022 Results

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Total revenue

Total revenue in 2021 decreased 1.2% compared to 2020 primarily due to the expiration of two Gamma Knife contracts in the fourth quarter of 2020 and the first quarter of 2021, and a decrease in PBRT fractions.

The decrease in PBRT volume was primarily due to the continued impact from the COVID-19 pandemic and down-time for repair of system components.

Total revenue in 2022 increased 12.0% compared to 2021 primarily due an increase in PBRT revenues, offset by a decrease in domestic Gamma Knife revenue. 

Domestic Gamma Knife volumes were down compared to the prior year, offset by an increase in average reimbursement. Revenues from the Company’s domestic segment increased $1,936,000 in 2022 compared to 2021 due to an increase in PBRT volumes and PBRT and Gamma Knife average reimbursement, offset by lower Gamma Knife volumes. 

Revenues from the Company’s international segment increased by $182,000 in 2022 compared to 2021 due to an increase in volume and average reimbursement.  

Gamma Knife Revenue

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Gamma Knife revenue for 2022 decreased $835,000 compared to 2021 due to a decrease in procedures, offset by an increase in average reimbursement. 

The number of Gamma Knife procedures performed in 2021 decreased 94 compared to 2020 primarily due to the expiration of one contract in the fourth quarter of 2020 and another contract in the first quarter of 2021, offset by the acquisition of GKCE in June 2020. Excluding the two Gamma Knife contracts that expired and GKCE procedures, Gamma Knife procedures for existing sites increased 7% in 2021 compared to the prior year.

The number of Gamma Knife procedures performed by GKPeru and GKCE increased 70% and 116% in 2021 compared to 2020, respectively. 

GKPeru’s procedures increased in 2021 because the Company executed a contract with Peru’s national health program, Es Salud. 

These procedures are reimbursed at a lower rate than GKPeru’s historical average. 

The Company acquired GKCE in June 2020, driving the increase in volume in 2021. 

The COVID-19 pandemic has more strongly impacted procedure volumes in Peru and Ecuador compared to the US in 2021. 

The number of Gamma Knife procedures performed in 2022 decreased 150 compared to 2021 primarily due to the expiration of two contracts in the first and fourth quarters of 2021. Excluding the two Gamma Knife contracts that expired, Gamma Knife procedures for existing sites decreased 5% in 2022 compared to the prior year. The decrease in Gamma Knife procedures for existing customer sites was due to normal, cyclical fluctuations. The number of international Gamma Knife procedures increased 2% in 2022 compared to 2021.  

Revenue per procedure increased by $295 in 2022 compared to 2021.

Excluding the two Gamma Knife contracts that expired and GKCE procedures for 2021, the average rate increased 4%.

This increase was due to higher reimbursement at the Company’s retail sites, driven by several large reimbursements from commercial payors, offset by the expiration of a fee-per-use contract in the fourth quarter of 2020, which was reimbursed at a lower rate.

This increase was due to higher reimbursement at the Company’s retail sites, driven by several large reimbursements from commercial payors at a few of the customer sites.

Proton Therapy Revenue

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Revenue per fraction in 2022 was $1,690 compared to $1,369 in 2021.

The decrease in PBRT volume was primarily due to the continued impact from the COVID-19 pandemic and down-time for repair of system components. 

This decrease was offset by an increase in average reimbursement. The average reimbursement increased due to a shift in payor mix from Medicare to commerical or other payors, which are reimbursed at a higher amount.

(in thousands)

Revenue from IGRT

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.

The increase in PBRT volume was due to lower volumes in the prior year driven by the continued impact from the COVID-19 pandemic and down-time for repair of system components. 

The average reimbursement increased due to a shift in payor mix from Medicare to commercial or other payors, which are reimbursed at a higher amount.

COSTS OF REVENUE

2 unchanged sentences

Percentage of total revenue

The Company's costs of revenue, consisting of maintenance and supplies, depreciation and amortization, and other operating expenses (such as insurance, property taxes, sales taxes, marketing costs and operating costs from the Company’s retail sites) decreased by $2,469,000 in 2021 compared to 2020.

Maintenance and supplies costs as a percentage of total revenue were 14.1% and 13.4% in 2021 and 2020 , respectively. Maintenance and supplies costs increased by $105,000 in 2021 compared to 2020 .

The increase in 2021 compared to 2020was primarily due to a maintenance contract for one of the Company’s Gamma Knife Icon upgrades which commenced in the fourth quarter of 2020 .

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 $462,000 in 2022 compared to 2021.

Maintenance and supplies and other direct operating costs, related party as a percentage of total revenue were 15.1% and 14.1% in 2022 and 2021 , respectively. Maintenance and supplies and other direct operating costs, related party increased by $482,000 in 2022 compared to 2021 .

The increase in 2022 compared to 2021was primarily due to a maintenance contract for one of the Company’s Gamma Knife Icon upgrades, which commenced in the fourth quarter of 2021 and maintenance contracts for existing domestic customers, which commenced in September 2021 and January 2022 .

Depreciation and amortization costs as a percentage of total revenue were 23.9% and 27.5% in 2022 and 2021 .

Depreciation and amortization costs decreased $130,000 in 2022 compared to 2021 .

The decrease in 2021 compared to 2020was primarily due to the expiration o f one contract in t he fourth quarter of 2020 and another contract 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. Therefore, there was no depreciation expense incurred on this equipment for the twelve-month period ended December 31, 2021. These decreases were offset by a change in estimate for salvage value for nine of the Company’s Gamma Knife units effective in the second quarter of 2021.

The net effect of this change in estimate for the twelve-month period ended December 31, 2021, was a decrease in net income of approximately $342,000 or $0.06 per diluted share. Salvage value is based on the estimated fair value of the equipment at the end of its useful life. This change in estimate also impacts future periods.

Other direct operating costs as a percentage of total revenue were 20.2% and 23.5% in 2021 and 2020 , respectively. Other direct operating costs decreased by $641,000 in 2021 compared to 2020 .

The decrease in 2021  was 

primarily due to the expiration of one retail contract in the first quarter of 2021 and a decrease in operating costs for the Company’s existing retail sites .

The decrease in 2022 compared to 2021was due to the expiration of one contract in each of the first and fourth quarters of 2021, offset by the Company’s change in estimate for salvage value.

As of  April 1, 2021, the Company reduced its estimate for salvage value for nine of its Gamma Knife units. As of October 1, 2022, the Company further reduced its estimate for salvage value for one of its domestic Gamma Knife Perfexion units.

The net effect of the change in estimate made October 1, 2022, for the year ended December 31, 2022, was a decrease in net income of approximately $17,000 or $0.00 per diluted share. Salvage value is based on the estimated fair value of the equipment at the end of its useful life. This change in estimate also impacts future periods.

Other direct operating costs as a percentage of total revenue were 18.6% and 20.2% in 2022 and 2021 , respectively. Other direct operating costs increased by $110,000 in 2022 compared to 2021 .

The increase in 2022  was primarily due to increased operating costs at the Company’s international sites.

SELLING AND ADMINISTRATIVE EXPENSE

(In thousands)

Selling and administrative costs

Selling and administrative expense

Percentage of total revenue

The Company's selling and administrative costs increased $77,000 in 2021 compared to 2020.

The increase in 2021 was due to legal and related fees associated with new business opportunites.

The Company’s selling and administrative costs increased $614,000 in 2022 compared to 2021.

The increase in 2022 was due to higher sales and related fees associated with new business opportunities.

INTEREST EXPENSE

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Percentage of total revenue

The Company's interest expense decreased $318,000 in 2021 compared to 2020. On April 9, 2021, the Company refinanced predominantly all of its existing debt and finance lease portfolio at a lower effective interest rate compared to the Company's historic portfolio rate, reducing interest expense.

The Company's interest expense increased $67,000 in 2022 compared to 2021. On April 9, 2021, the Company refinanced predominantly all of its existing debt and finance lease portfolio. 

The term loan (the “Term Loan”) and delayed draw term loan (the “DDTL”) carry a floating interest rate of LIBOR plus 3%. 

The increase for the year ended December 31, 2022 was due to an increase in LIBOR compared to the same period of the prior year.

(LOSS) ON WRITE DOWN OF IMPAIRED ASSETS AND ASSOCIATED REMOVAL COSTS

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As of December 31, 2022 and 2021, the Company recognized a loss on the write down of impaired assets of $0 and $105,000, respectively.

The Company reviewed its Gamma Knife and PBRT equipment, in light of available information as of December 31, 2020, and concluded events and circumstances existed that indicated the value of these assets was more-than temporarily impaired.

The impaired assets included six Gamma Knife units and related removal costs, and two deposits towards the purchase of proton beam systems and related capitalized interest.

The six Gamma Knife units that were impaired consisted of two units that had been taken out of service in prior years, one unit that was taken out of service in 2020, one unit that was taken out of service in 2021, one that was taken out of service in January 2022, and a fourth that the Company anticipates will be removed later in 2022. The Company reviewed its Gamma Knife and PBRT equipment, in light of available information as of December 31, 2021 and concluded no additional impairment exists. 

As of December 31, 2021, the Company recognized an additional $105,000 related to the removal costs of one of the unit that was removed in January 2022.  

The Company reviewed its Gamma Knife and PBRT equipment, in light of available information as of December 31, 2022 and 2021 and concluded no additional impairment exists. 

As of December 31, 2021, the Company recognized an additional $105,000 related to the removal costs of one of the unit that was impaired in 2020 and removed in January 2022.  

(LOSS) ON EARLY EXTINGUISHMENT OF DEBT

(In thousands)

(Loss) on extinguishment of debt

Percentage of total revenue

The Company recorded a loss on the extinguishment of debt of $401,000 for the year ended December 31, 2021.

On April 9, 2021, the Company refinanced the majority of its existing debt and finance lease portfolio with a new lender. 

The prepayment penalties charged by the existing lenders of $401,000 was recorded as a loss on extinguishment during the year ended December 31, 2021.

INCOME TAX EXPENSE

(In thousands)

Income tax expense (benefit)

Income tax expense

Percentage of total revenue

1 unchanged sentence

Income tax expense increased $694,000 in 2022 compared to 2021.

The increase in income tax expense in 2021 was due to the loss on write-down of impaired assets recorded during the year ended December 31, 2020.

The increase in income tax expense in 2022 was due to higher earnings during 2022, return-to-provision adjustments arising from foreign tax returns filed during 2022, as well as permanent domestic tax differences.

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)

Net income (loss) attributable to non-controlling interests

Net income attributable to non-controlling interests

Percentage of total revenue

Net income attributable to non-controlling interests increased $1,142,000 in 2021 compared to 2020.

Net income attributable to non-controlling interests decreased $257,000 in 2022 compared to 2021.

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 2021 compared to 2020 was due to the loss on write off of impaired assets recorded during the year ended December 31, 2020.

The decrease in 2022 compared to 2021 was due to lower pre-tax income for GKF stand-alone operations.

NET INCOME ATTRIBUTABLE TO AMERICAN SHARED HOSPITAL SERVICES

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except per share amounts)

Net income (loss) attributable to ASHS

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

Net income (loss) attributable to American Shared Hospital Services increased $7,252,000 in 2021 compared to 2020.

The increase in 2021 compared to 2020 was primarily due to the loss on write down of impaired assets recorded during the year ended December 31, 2020.

Net income attributable to ASHS

Net income per share attributable to ASHS, diluted

Net income attributable to American Shared Hospital Services increased $1,134,000 in 2022 compared to 2021.

The increase in 2022 compared to 2021 was primarily due to increased revenues in 2022 and the loss on extinguishment of debt recorded in 2021.

LIQUIDITY AND CAPITAL RESOURCES

2 unchanged sentences

As of December 31, 2022, the Company has not drawn on its line of credit.

The Company had cash and cash equivalents of $8,263,000 at December 31, 2021 compared to $4,325,000 at December 31, 2020, an increase of $3,938,000.

The Company had cash and cash equivalents, including restricted cash, of $12,453,000 at December 31, 2022 compared to $8,263,000 at December 31, 2021, an increase of $4,190,000.

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 $6,267,000 in 2021, which was driven by net income of $678,000, non-cash charges for depreciation and amortization of $4,972,000, stock-based compensation expense of $420,000, amortization of deferred issuance costs of $59,000, a loss on the write-down of impaired assets of $105,000, a loss on sublease impairment of $74,000, a loss on early extinguishment of debt of $401,000, deferred income taxes of $60,000, and changes in payables and other accrued liabilities of $851,000.

These were offset by changes in receivables of $519,000, changes in prepaids and other assets of $14,000, payment of asset retirement obligations of $618,000, and income taxes payable of $230,000.

The Company’s trade accounts receivable decreased by $92,000 to $4,211,000 at December 31, 2021 from $4,303,000 at December 31, 2020.

The number of days revenue (sales) outstanding (“DSO”) in accounts receivable as of December 31, 2021 was 87 days compared to 88 days at December 31, 2020.

Operating activities pr ovided $7,235,000 of cash in 2022, which was driven by net income of $1,555,000, non-cash charges for depreciation and amortization of $4,783,000, stock-based compensation expense of $399,000, amortization of deferred issuance costs of $84,000, deferred income taxes of $344,000, income taxes payable of $159,000 changes in payables and other accrued liabilities of $608,000, and changes in receivables of $696,000.

These were offset by net changes in Right-of-Use assets and lease liabilities of $40,000, changes in prepaids and other assets of $111,000, changes in related party liabilities of $845,000 and payment of asset retirement obligations of $397,000.

The Company’s trade accounts receivable decreased by $410,000 to $3,801,000 at December 31, 2022 from $4,211,000 at December 31, 2021.

The number of days revenue (sales) outstanding (“DSO”) in accounts receivable as of December 31, 2022 was 70 days compared to 87 days at December 31, 2021.

DSO can and does fluctuate depending on timing of customer payments received and the mix of fee per use versus retail customers.

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Investing activities used $388,000 of cash in 2022, due to payments made towards the purchase of property and equipment.

Financing activities used $655,000 of cash during 2021.

On April 9, 2021, the Company refinanced certain of its existing debt and finance leases and used proceeds of $13,897,000 to pay principal payments on long-term debt and finance leases of $12,846,000.

The Company also incurred prepayment penalties of $401,000, and debt issuance costs of $325,000 from this transaction.

This was offset by $5,000 in proceeds from options exercised during 2021. The Company also made distributions to non-controlling interests of $514,000 and payments on short-term financing of insurance premiums of $471,000. 

Financing activities used $2,657,000 of cash during 2022, which was driven by payments on long-term debt of $2,032,000, distributions to non-controlling interests of $573,000, debt issuance costs of $9,000 and payments on short-term financing of insurance premiums of $48,000. This was offset by $5,000 in proceeds from options exercised during 2022. 

Working Capital

The Company had working capital at December 31, 2021 of $9,196,000 compared to a working capital deficit of $1,530,000 at December 31, 2020.

The $10,726,000 increase in net working capital was primarily due to the refinancing that occurred during the second quarter of 2021.

The refinancing decreased the Company's current debt and finance obligations in addition to providing excess working capital. 

The Company also secured a $7,000,000 as part of the refinancing. 

The Company had working capital at December 31, 2022 of $13,548,000 compared to working capital of $9,196,000 at December 31, 2021.

The $4,352,000 increase in net working capital was primarily due to increased cash generation from a lower DSO and the refinancing that occurred during the second quarter of 2021.

The refinancing decreased the Company’s current debt and finance obligations in addition to providing excess working capital. 

The Company also secured a $7,000,000 revolving line of credit as part of the refinancing. 

The Company has not drawn on the line as of December 31, 2022.

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The Credit Agreement includes a $7,000,000 revolving line of credit that the Company has not drawn on as of December 31, 2022.

The Credit Agreement is 48% amortized over a 58-month period and is secured by a lien on substantially all of the assets of the Company and certain of its domestic subsidiaries.

The Company’s Gamma Knife unit in Ecuador is financed with DFC.

The Credit Agreement is 48% amortized over a 58-month period with a balloon payment upon maturity and is secured by a lien on substantially all of the assets of the Company and certain of its domestic subsidiaries.

The Company’s Gamma Knife unit in Ecuador is financed with DFC. The DFC Loan is secured by a lien on GKCE’s assets.

The amount outstanding under the DFC Loan is payable in 29 quarterly installments with a fixed interest rate of 3.67%.

As of December 31, 2021, LIBOR will no longer be used to price new loans, but 1-month, 3-month, 6-month and 12-month maturities will continue to be published through 2023.

At that time, the Company will work with Fifth Third Bank to determine an alternative base rate. 

The Company is working with Fifth Third Bank to determine an alternative base rate. 

The Revolving Line is charged an unused line fee of 0.25% per annum.

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See Note 10 - Commitments and Contingencies to the consolidated financial statements for further discussion on commitments.

Related Party Transactions

The Company’s Gamma Knife business is operated through its 81% indirect interest in its GKF subsidiary.

The remaining 19% of GKF is owned by a wholly owned U.S.

subsidiary of Elekta, which is the manufacturer of the Gamma Knife.

Since the Company purchases its Gamma Knife units from Elekta, there are significant related party transactions with Elekta such as equipment purchases, commitments to purchase and service equipment, and costs to maintain the equipment . 

The following summarizes related party activity for the years ended December 31, 2022 and 2021:

Equipment purchases and de-install costs

Costs incurred to maintain equipment

Total related party transactions

The Company also had related party commitments to purchase one Icon, install four Icon upgrades, purchase two Gamma Plan workstations, purchase two LINACs, and service the related equipment of $17,407,000 as of December 31, 2022.

Related party liabilities on the consolidated balance sheets consist of the following as of December 31, 2022 and 2021:

Accounts payable and other accrued liabilities

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, as defined in Rule 10(f)(1) of Regulation S-K under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company is not required to provide the information required by this item.

As a smaller reporting company, as defined in Rule 10(f)(1) of Regulation S-K under the Exchange Act, the Company is not required to provide the information required by this item.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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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