AMS

Business Context and Reporting Period

Company: American Shared Hospital Services (ASHS)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: ASHS provides Gamma Knife stereotactic radiosurgery and Image Guided Radiation Therapy (IGRT) equipment and services to medical centers. As of March 6, 2009, the company operated 19 Gamma Knife units across 17 states and one IGRT unit in Massachusetts. Gamma Knife revenue accounted for 93% of total revenue in 2008. 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

Note: 2007 revenue included $3.2 million in one-time equipment sales revenue, which was absent in 2008.

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 15.6% to $19.1 million in 2008 compared to 2007. This was primarily due to the absence of the $3.2 million equipment sale recorded in 2007 and a 1.7% decrease in medical services revenue.
• Profitability Drop: Net income fell 49.8% to $477,000. This decline was driven by reduced medical services revenue from the termination of two Gamma Knife contracts in 2008 and one in late 2007, partially offset by the addition of a new Gamma Knife site and full-year IGRT operations.
• Cost Structure: Costs of operations decreased 18.5% to $10.9 million, largely because 2007 included $3.4 million in cost of equipment sales. However, depreciation and amortization increased by $596,000 due to new Perfexion unit installations and cobalt reloads.
• Liquidity Position: Cash and cash equivalents increased significantly to $10.3 million, driven by the conversion of marketable securities to cash and strong operating cash flow. However, the company moved from a positive working capital position in 2007 to a deficit of $205,000 in 2008, primarily due to increased borrowings on its line of credit.

Guidance, Outlook, Risks, and Unusual Items

• Dividend Suspension: The Board suspended dividends in 2008 to preserve cash for the development of its Proton Beam Radiation Therapy (PBRT) business.
• PBRT Investment Risk: The company has invested $2.6 million in Still River Systems, Inc., and committed to purchasing three Monarch250 PBRT systems. The systems are not yet FDA approved, and the company noted a potential unrealized loss of approximately $1.2 million on its investment following a Series D funding round in early 2009 at a lower valuation. Management considers this impairment temporary.
• Contractual Commitments: The company has significant future equipment purchase commitments totaling approximately $45.5 million, including three PBRT systems and Gamma Knife upgrades, with deposits of $4.4 million already paid.
• Reimbursement Risk: Revenue is sensitive to Medicare and third-party payer reimbursement rates. The company noted a 5% reduction in Medicare outpatient reimbursement rates for Gamma Knife procedures in 2008 compared to 2007.
• Debt Covenants: The company maintains a high level of debt ($28.7 million) collateralized by equipment. It met all debt covenants as of year-end but noted that default could lead to equipment seizure.

Key Facts for Investor Verification

• Contract Renewals: Verify the status of contract renewals for the 19 Gamma Knife sites, as several contracts have fixed terms and no minimum volume guarantees.
• PBRT FDA Approval: Monitor the FDA approval timeline for the Still River Monarch250 systems, as revenue generation is contingent on this approval (anticipated 2010-2011).
• Reimbursement Rates: Track changes in Medicare Ambulatory Payment Classification (APC) rates, as five contracts are directly tied to reimbursement amounts.
• Debt Refinancing: Assess the company's ability to refinance its $6.5 million line of credit and long-term debt obligations maturing in 2009 and beyond.
• Customer Concentration: Note that three customers accounted for approximately 39% of total revenue in 2008 (14%, 13%, and 12% respectively).