Business Context and Reporting Period
Company: American Shared Hospital Services (ASHS)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: ASHS provides Gamma Knife stereotactic radiosurgery and Image Guided Radiation Therapy (IGRT) equipment to medical centers. As of March 1, 2011, the Company operated 19 Gamma Knife units across 17 states and one IGRT unit in Massachusetts. Gamma Knife revenue accounted for 94% of total revenue in 2010. The Company operates its Gamma Knife business through GK Financing, LLC (GKF), in which it holds an 81% interest, with the remaining 19% owned by Elekta AG.
Key Financial Metrics
| Metric | 2010 | 2009 | 2008 |
|---|---|---|---|
| Total Revenue | $16,675,000 | $16,768,000 | $19,099,000 |
| Net Income (Consolidated) | $806,000 | $466,000 | $1,332,000 |
| Net Income Attributable to ASHS | $57,000 | $(188,000) | $477,000 |
| Earnings Per Share (Diluted) | $0.01 | $(0.04) | $0.10 |
| Gross Margin | $7,209,000 (43.2%) | $6,987,000 (41.7%) | $8,222,000 (43.1%) |
| Operating Income | $865,000 | $653,000 | $1,462,000 |
| Cash and Cash Equivalents | $1,438,000 | $833,000 | $10,286,000 |
| Working Capital | $7,631,000 | $6,497,000 | $(205,000) |
| Total Debt & Capital Leases | $29,243,000 | $25,774,000 | $28,686,000 |
| Line of Credit Utilized | $8,500,000 | $7,900,000 | $6,500,000 |
Material Changes vs. Prior Period
- Revenue Stability: Total revenue decreased slightly by 0.6% to $16.7 million in 2010 compared to 2009. This was driven by a 14.9% decline in IGRT revenue, partially offset by a 0.6% increase in Gamma Knife revenue due to a 4.4% rise in procedure volume.
- Profitability Improvement: Net income attributable to ASHS turned positive at $57,000 in 2010, recovering from a net loss of $188,000 in 2009. This improvement was primarily due to increased Gamma Knife revenue, lower depreciation, the absence of transaction costs (which totaled $342,000 in 2009), and lower income tax expense.
- Cost Management: Costs of revenue decreased 3.2% to $9.5 million, largely due to reduced depreciation as three Gamma Knife units reached salvage value. Selling and administrative expenses increased 7.9% to $4.2 million, driven by higher legal fees and business development costs.
- Liquidity: Cash and cash equivalents increased by $605,000 to $1.4 million. Operating cash flow was strong at $7.2 million, while financing activities used $6.3 million primarily for debt principal payments.
Outlook, Risks, and Contingencies
- Proton Beam Radiation Therapy (PBRT) Investment: The Company has invested $2.6 million in Still River Systems, Inc., and deposited $2.5 million toward the purchase of three Monarch250 PBRT systems. The systems are not yet FDA approved, with anticipated delivery beginning in 2012. Management views the investment as temporarily impaired but not other-than-temporarily impaired, citing ongoing development progress and recent financing rounds by Still River.
- Reimbursement Risk: A significant portion of revenue is tied to government reimbursement rates (Medicare/Medicaid). The Company notes that reimbursement rates for Gamma Knife services decreased in 2008, 2009, and 2010, though a 4% increase was effective January 1, 2011. Future reductions in reimbursement rates could materially adversely affect revenue.
- Debt and Liquidity: The Company carries a high level of debt ($29.2 million) secured by equipment and contracts. It has a $9 million line of credit, of which $8.5 million was drawn as of year-end. The line of credit matures in August 2012.
- Market Competition: The market for Gamma Knife units is limited and potentially mature. The Company faces competition from Elekta (the manufacturer) and other financing providers. There is no assurance that existing contracts will be renewed upon expiration.
- Legal Proceedings: There are no material pending legal proceedings involving the Company. However, Still River Systems is facing patent infringement lawsuits from MIT, which the Company believes will not have a significant long-term impact.
Key Facts for Investor Verification
- Revenue Concentration: In 2010, one customer accounted for approximately 13% of total revenue. The Company relies on 19 customers for all revenue.
- Still River Investment Status: Verify the progress of FDA approval for the Monarch250 system and the financial stability of Still River Systems, given the $2.6 million equity investment and $2.5 million equipment deposits.
- Debt Covenants: Confirm continued compliance with debt covenants, particularly given the high leverage and the maturity of the $8.5 million line of credit in 2012.
- Reimbursement Trends: Monitor future Medicare and Medicaid reimbursement rate changes for radiosurgery, as six contracts are directly tied to these rates.
- Contract Renewals: Assess the renewal status of existing 10-year contracts, as the Company has not secured new Gamma Knife sites in the U.S. since 2004.