Business Context and Reporting Period
Company: American Shared Hospital Services (ASHS)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: ASHS provides Gamma Knife stereotactic radiosurgery and Image Guided Radiation Therapy (IGRT) equipment and services to medical centers. As of March 5, 2010, the company operated 19 Gamma Knife units across 17 states and one IGRT site. Gamma Knife revenue accounted for 92.5% of total revenue in 2009. 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 | 2009 | 2008 |
|---|---|---|
| Total Revenue | $16,768,000 | $19,099,000 |
| Net Income (Consolidated) | $466,000 | $1,332,000 |
| Net Loss Attributable to ASHS | $(188,000) | $477,000 |
| Net Loss Per Share (Basic/Diluted) | $(0.04) | $0.10 |
| Operating Cash Flow | $7,704,000 | $8,947,000 |
| Cash and Cash Equivalents | $833,000 | $10,286,000 |
| Working Capital | $6,497,000 | $(205,000) |
| Total Debt & Capital Leases | $25,774,000 | $28,686,000 |
| Line of Credit Utilized | $7,900,000 | $6,500,000 |
Note: The decrease in cash equivalents was primarily due to a $9,000,000 investment in a certificate of deposit maturing in August 2010.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 12.2% to $16.8 million, driven by a 12.5% drop in Gamma Knife revenue. This was caused by a 4.5% decline in procedure volume (1,785 procedures in 2009 vs. 1,869 in 2008) and lower average revenue per procedure ($8,692 vs. $9,477). Factors included low volume at one site due to competing technology, physician turnover at another site, and equipment upgrades taking units offline.
- Profitability Shift: While consolidated net income was positive ($466,000), ASHS shareholders recorded a net loss of $188,000, a reversal from the $477,000 profit in 2008. This was largely due to the allocation of income to the non-controlling interest (Elekta's 19% share of GKF) and the incurrence of $342,000 in transaction costs related to a terminated sale of the GKF interest.
- Cost Management: Costs of revenue decreased 10.1% to $9.8 million, and selling/administrative expenses dropped 9.1% to $3.9 million, reflecting lower payroll, travel, and marketing costs.
- Liquidity Position: Working capital improved significantly from a deficit of $205,000 in 2008 to a surplus of $6.5 million in 2009, primarily due to the reclassification of the line of credit from current to long-term debt upon renewal.
Outlook, Risks, and Contingencies
- Proton Beam Investment: The company has invested $2.6 million in Still River Systems, Inc., and deposited $2.25 million toward three Monarch250 proton beam radiation therapy (PBRT) systems. These systems are not yet FDA approved, with anticipated delivery beginning in 2012. Management views the investment as temporarily impaired but intends to hold it for recovery.
- Reimbursement Risk: Revenue is sensitive to government reimbursement rates. Medicare reimbursement for Gamma Knife services is projected to decrease by approximately 3% in 2010. Six of the company's contracts are revenue-sharing arrangements directly tied to these reimbursement rates.
- Debt and Financing: The company carries significant debt ($25.8 million) collateralized by equipment. It has a $9 million line of credit, of which $7.9 million is drawn. The company relies on non-recourse financing for its Gamma Knife units.
- Market Saturation: The Gamma Knife market is considered mature with limited growth potential. The company has not secured a new Gamma Knife contract since 2004, though it recently signed a contract for a new site in Peru in February 2010.
- Transaction Costs: The company incurred $342,000 in transaction costs in 2009 after failing to reach an agreement to sell its 81% interest in GKF.
Investor Verification Checklist
- Procedure Volume Trends: Verify the stability of procedure volumes at the two sites identified as having low volume or physician turnover issues.
- Reimbursement Rate Impact: Assess the financial impact of the projected 3% Medicare reimbursement decrease in 2010 on the six revenue-sharing contracts.
- PBRT Development Status: Monitor FDA approval progress for Still River Systems' Monarch250 units, as revenue from this segment is contingent on approval and delivery (expected 2012+).
- Debt Covenants: Confirm continued compliance with debt covenants given the high leverage and reliance on equipment collateral.
- Contract Renewals: Review the status of existing contracts nearing expiration, as the company has no minimum volume guarantees and relies on renewals for long-term stability.