American Shared Hospital Services: Form 10-Q for the period ended Jun 30, 2024

This quarterly report to the SEC may be deemed to contain certain forward-looking statements. The Private Securities Litigation Reform Act of 1995 has established that these statements qualify for safe harbors from liability. Forward-looking statements may include words like we “believe”, “anticipate”, “target”, “expect”, “pro forma”, “estimate”, “intend”, “will”, “is designed to”, “plan” and words of similar meaning. Forward-looking statements describe our future plans, objectives, expectations or goals. Such statements address future events and conditions and include, but are not limited to, such things as capital expenditures, earnings, liquidity and capital resources, financing of our business, government programs and regulations, legislation affecting the health care industry, the expansion of our proton beam radiation therapy business, accounting matters, compliance with debt covenants, completed and pending acquisitions, competition, customer concentration, contractual obligations, timing of payments, technology and interest rates. These forward-looking statements involve known and unknown risks that may cause our actual results in future periods to differ materially from those expressed in any forward-looking statement. Factors that could cause or contribute to such differences include, but are not limited to, such things as our level of debt, the limited market for our capital-intensive services, the impact of lowered federal reimbursement rates, the impact of U.S. health care reform legislation, competition and alternatives to our services, technological advances and the risk of equipment obsolescence, our significant investment in the proton beam radiation therapy business, restrictions in our debt agreements that limit our flexibility to operate our business, our ability to repay our indebtedness, our ability to integrate the RI Companies with our existing business, breaches in security of our information technology, the small and illiquid market for our stock. These lists are not all-inclusive because it is not possible to predict all factors. 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 SEC, including the Annual Report on Form 10-K for the year ended December 31, 2023 and the definitive Proxy Statement for the Annual Meeting of Shareholders held on June 25, 2024. Any forward-looking statement speaks only as of the date such statement was made, and we are not obligated to update any forward-looking statement to reflect events or circumstances after the date on which such statement was made, except as required by applicable laws or regulations.

Overview

American Shared Hospital Services is a leading provider of turn-key technology solutions for stereotactic radiosurgery and advanced radiation therapy equipment and services. The main drivers of the Company’s revenue are numbers of sites, procedure volume, and reimbursement. The Company delivers radiation therapy through medical equipment leasing and direct patient services, its two reportable segments. The medical equipment leasing segment, which we also refer to as the Company’s leasing segment, operates by fee-per-use contracts or revenue sharing contracts where the Company shares in the revenue and operating costs of the equipment. The Company leases ten Gamma Knife systems and one PBRT system as of June 30, 2024, where a contract exists between the hospital and the Company. On May 7, 2024, the Company acquired 60% of the equity interests of the RI Companies, which operate three single-unit radiation therapy facilities in Rhode Island. The Company, through GKF, also owns and operates two single-unit Gamma Knife facilities in Lima, Peru and Guayaquil, Ecuador. The Company’s facilities in Rhode Island, Peru, and Ecuador are considered direct patient services, which we also refer to as the Company’s retail segment, where a contract exists between the Company’s facilities and the individual treated at the facility.

Based on the guidance provided in accordance with ASC 280, the Company determined it has two reportable segments, leasing and retail. See Note 1 - Basis of Presentation to the condensed consolidated financial statements for additional information. The Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations reflects activity for both segments and specifically addresses a segment when appropriate to the discussion.

Reimbursement

The Centers for Medicare and Medicaid (“CMS”) has established a 2024 delivery code reimbursement rate of approximately $7,420 ($7,691 in 2023) for a Medicare Gamma Knife treatment. The approximate CMS reimbursement rates for delivery of PBRT for a simple treatment without compensation for 2024 is $561 ($572 in 2023) and $1,362 ($1,323 in 2023) for simple with compensation, intermediate and complex treatments, respectively.

On September 29, 2020, CMS published a final rule that would have implemented a new mandatory payment model for radiation oncology services delivered to certain Medicare beneficiaries: the Radiation Oncology Alternative Payment Method (“RO APM”). 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. 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. 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.

Recent Developments

Rhode Island Acquisition

On November 10, 2023, the Company entered into the IPA with GenesisCare and GC Holdings, pursuant to which GenesisCare agreed to sell to the Company its entire equity interest in each of SNERCC and RWRT, (collectively, the “RI Companies”) and to assign certain payor contacts to the Company for a purchase price of $2,850,000 (such transaction, the “RI Acquisition”). The equity interests acquired by the Company under the IPA equates to a 60% interest in each RI Company. The RI Companies operate three functional radiation therapy cancer centers in Rhode Island which use linear accelerators. The parties completed the remaining closing conditions pursuant to the IPA and closed the RI Acquisition on May 7, 2024. See Note 11 - Rhode Island Acquisition to the condensed consolidated financial statements for further information.

Joint Venture Agreement

On June 28, 2024, ASHS-Mexico, S.A.P.I. de C.V. signed a Joint Venture Agreement with Hospital San Javier, S.A. de C.V. (“HSJ”) to establish Newco to treat public- and private-paying cancer patients and provide radiosurgery services in Guadalajara, Mexico. The Company and HSJ hold 70% and 30% ownership interests, respectively, in Newco. Under the agreement, the Company is responsible for upgrading HSJ’s existing Gamma Knife Perfexion system to a Gamma Knife Esprit and paying 50% of all site modification costs required to install the Esprit. The Company does not expect that Newco will begin treating patients until the first half of 2025.

Application of Critical Accounting Policies and Estimates

The Company’s condensed 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 condensed consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the condensed consolidated financial statements; accordingly, as this information changes, the condensed consolidated 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 in the Company’s annual report on Form 10-K for the year ended December 31, 2023. These policies along with the disclosures presented in the other condensed consolidated financial statement notes and, in this discussion, and analysis, provide information on how significant assets and liabilities are valued in the condensed consolidated 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, accounting for business combinations, and the carrying value of property and equipment 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 condensed consolidated financial statements:

Revenue Recognition

The Company recognizes revenues under ASC 842 and ASC 606. The Company had ten domestic Gamma Knife units, two international Gamma Knife units, three domestic LINAC units, and one PBRT system in operation in the United States as of June 30, 2024 and twelve domestic Gamma Knife units, two international Gamma Knife units, and one PBRT system in operation in the United States as of June 30, 2023. Five of the Company’s ten domestic Gamma Knife customers are under fee-per-use contracts, and five customers are under revenue sharing arrangements. The ten domestic Gamma Knife contracts operate under the Company’s leasing segment. The Company’s PBRT system at Orlando Health is considered a revenue share contract operating under the leasing segment. The Company’s three single-unit facilities, acquired in Rhode Island in May 2024, operate under the Company’s retail segment. 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 operate under the Company’s retail segment.

Rental revenue from medical equipment leasing (“leasing”) – 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 lease contracts typically have a ten-year term and are classified as either fee per use or revenue sharing. Fee per use 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. Some of the Company’s revenue sharing arrangements also have a cost sharing component and net profit share for the operating costs of the center. 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 and profit. The operating costs and estimated net operating profit are recorded as other direct operating costs in the condensed consolidated statements of operations. For the three and six-month periods ended June 30, 2024, the Company recognized leasing revenue of approximately $3,899,000 and $8,152,000 compared to $4,812,000 and $9,041,000 for the same periods in the prior year, respectively. Of the ASC 842 revenue, for the three and six-month periods ended June 30, 2024, approximately $2,420,000 and $5,069,000 were for PBRT services compared to $2,545,000 and $4,859,000 for the same periods in the prior year, respectively.

Direct patient services income (“retail”) – The Company has stand-alone facilities in Lima, Peru and Guayaquil, Ecuador, where contracts exist between the Company’s facilities and the individual patients treated at the facility. Under ASC 606, the Company acts as the principal in these transactions 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 between three and six months following issuance of an invoice. The Company did not capitalize any incremental costs related to the fulfillment of its customer contracts.

On May 7, 2024, the Company acquired 60% of the interests of the RI Companies. The RI Companies operate three, existing, stand-alone radiation therapy cancer centers in Woonsocket, Warwick and Providence, Rhode Island, where contracts exist between the Company’s facilities and the individual patients treated at the facility. Under ASC 606, the Company acts as the principal in these transactions and provides, at a point in time, a single performance obligation, in the form of radiation therapy treatment. Revenue related to radiation therapy is recognized at the expected amount to be received, based on insurance contracts and payor mix, 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. Payment terms at these facilities are typically prepaid for self-pay patients and insurance providers are paid net 30 to 60 days. The Company expects to capitalize customer acquisition costs, incremental costs related to its customer contracts. The Company did not capitalize any incremental costs related to the fulfillment of its customer contracts. The Company also concluded the three radiation therapy facilities are part of its retail segment, see further discussion at Note 1 - Basis of Presentation to the condensed consolidated financial statements.

Accounts receivable balances under ASC 606 at June 30, 2024 and January 1, 2024 were $4,558,000 and $1,626,000, respectively. Accounts receivable balances under ASC 606 at June 30, 2023 and January 1, 2023 were $980,000 and $1,118,000, respectively. For the three and six-month periods ended June 30, 2024, the Company recognized retail revenues of approximately $3,157,000 and $4,120,000 compared to $756,000 and $1,452,000 for the same periods in the prior year, respectively.

Salvage Value on Equipment

Salvage value is based on the estimated fair value of the equipment at the end of its useful life. 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 international Gamma Knife units as of June 30, 2024. The Company has not assigned salvage value to its PBRT equipment.

Business Combinations

Business combinations are accounted for under ASC 805 *Business Combinations (“*ASC 805”) using the acquisition method of accounting. Under the acquisition method of accounting, all assets acquired, identifiable intangible assets, liabilities assumed and applicable non-controlling interests are recognized at fair value as of the acquisition date. Costs incurred associated with the acquisition of a business are expensed as incurred. The allocation of purchase price requires management to make significant estimates and assumptions, especially with respect to tangible assets, any intangible assets identified and non-controlling interests. These estimates includes, but are not limited to, a market participant’s expectation of future cash flows from acquired customers, acquired trade names, useful lives of acquired assets, and discount rates. See Note 11 - Rhode Island Acquisition to the condensed consolidated financial statements for further discussion on acquisitions.

Accounting Pronouncements Issued and Not Yet Adopted

In November 2023, the FASB issued ASU 2023-07 *Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“*ASU 2023-07”) which enhances the disclosure requirements for segment reporting, primarily disclosures around significant segment expenses. The key provisions of the amendments require disclosure of significant segment expense reviewed by the CODM, require disclosure of an “other” segment category, require disclosure of segment profit or loss and assets for interim periods, clarify and require disclosure of other measurements used by the CODM in assessing segment performance and allocating resources, and require disclosure of the CODM's title and position and explanation of how the CODM assesses segment performance. ASU 2023-07 is effective for annual periods beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. The Company is currently evaluating ASU 2023-07 to determine the impact it may have on its consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09 *Income Taxes (Topic 740) Improvements to Income Tax Disclosures (“*ASU 2023-09”) which requires entities, on an annual basis, to disclose: specific categories in the rate reconciliation, additional information for reconciling items that meet a quantitative threshold, the amount of income taxes paid, net of refunds, disaggregated by jurisdiction, income or loss from continuing operations before income tax, income tax expense from continuing operations disaggregated between foreign and domestic, and income tax expense from continuing operations disaggregated by federal, state and foreign. ASU 2023-09 is effective for annual periods beginning after December 15, 2024. The Company is currently evaluating ASU 2023-09 to determine the impact it may have on its consolidated financial statements.

Second Quarter 2024 Results

Revenues increased by $1,488,000 and $1,779,000 to $7,056,000 and $12,272,000 for the three and six-month periods ended June 30, 2024 compared to $5,568,000 and $10,493,000 for the same periods in the prior year, respectively. Revenues from the Company’s leasing segment decreased by $913,000 and $889,000 to $3,899,000 and $8,152,000 for the three and six-month periods ended June 30, 2024 compared to $4,812,000 and $9,041,000 for the same periods in the prior year, respectively. The decrease in leasing revenue was driven by lower Gamma Knife and PBRT volumes. Revenues from the Company’s retail segment increased by $2,401,000 and $2,668,000 to $3,157,000 and $4,120,000 for the three and six-month periods ended June 30, 2024 compared to $756,000 and $1,452,000 for the same periods in the prior year, respectively. The increase in retail revenue was due to higher volumes at the Company’s international locations and the inclusion of revenue generated by the RI Companies following the closing of the RI Acquisition on May 7, 2024.

Revenues generated from the Company’s PBRT system decreased by $125,000 and increased by $210,000 to $2,420,000 and $5,069,000 for the three and six-month periods ended June 30, 2024 compared to $2,545,000 and $4,859,000 for the same periods in the prior year, respectively. The decrease for the three-month period ended June 30, 2024, was driven by lower volumes. The increase for the six-month period ended June 30, 2024 was due to an increase in average reimbursement due to a shift in payor mix from Medicare to commercial or other payors, which are reimbursed at a higher rate. This increase was offset by lower volumes.

The number of PBRT fractions decreased by 134 and 394 to 1,236 and 2,512 for the three and six-month periods ended June 30, 2024 compared to 1,370 and 2,906 for the same periods in the prior year, respectively. The decrease in PBRT volumes for the three and six-month periods ended June 30, 2024 was due to normal, cyclical fluctuations.

Gamma Knife revenue decreased by $279,000 and $323,000 to $2,744,000 and $5,311,000 for the three and six-month periods ended June 30, 2024 compared to $3,023,000 and $5,634,000 for the same periods in the prior year, respectively. The decrease in Gamma Knife revenue for the three and six-month periods ended June 30, 2024 was due to a decrease in average reimbursement at the Company’s revenue sharing locations, offset by higher procedure volume at the Company’s international retail locations.

The number of Gamma Knife procedures increased by 31 and 11 to 340 and 613 for the three and six-month periods ended June 30, 2024 compared to 309 and 602 for the same periods in the prior year, respectively. The increase in Gamma Knife procedures for the three and six-month periods ended June 30, 2024 was driven by the Company’s international retail locations, offset by the expiration of two leasing customer contracts in the second and third quarters of 2023. Excluding the two customer contracts that expired, Gamma Knife procedures increased by 65 and 75 for the three and six-month periods ended June 30, 2024.

Gamma Knife procedures for the Company’s leasing segment decreased by 31 and 84 for the three and six-month periods ended June 30, 2024, compared to the same periods in the prior year, due to the expiration of two customer contracts. Gamma Knife procedures for the Company’s retail segment increased by 62 and 95 for the three and six-month periods ended June 30, 2024, compared to the same periods in the prior year, due to improved marketing and physician outreach at the Company’s international locations. The Company also performed a Cobalt-60 reload and upgrade of the equipment at its site in Ecuador in the fourth quarter of 2023. The replacement of the Cobalt-60 provides for faster treatment times.

The Company acquired the RI Companies on May 7, 2024 and included the financial results from their operations from May 7, 2024, the closing date of the transaction, through June 30, 2024. Radiation therapy revenues generated from the three stand-alone facilities acquired through the RI Acquisition were $1,892,000 for the three and six-month periods ended June 30, 2024. Radiation therapy procedures were 1,464 for the three and six-month periods ended June 30, 2024.

Total costs of revenue increased by $1,538,000 and $1,594,000 to $4,588,000 and $7,661,000 for the three and six-month periods ended June 30, 2024 compared to $3,050,000 and $6,067,000 for the same periods in the prior year, respectively.

Maintenance and supplies and other direct operating costs, related party, decreased by $85,000 and $183,000 to $715,000 and $1,398,000 for the three and six-month periods ended June 30, 2024 compared to $800,000 and $1,581,000 for the same periods in the prior year, respectively. The decrease in maintenance and supplies and other direct operating costs, related party, was primarily due to the expiration of two service contracts that expired in the second and third quarters of 2023, with the related customer contracts.

Depreciation and amortization increased by $228,000 and $168,000 to $1,455,000 and $2,752,000 for the three and six-month periods ended June 30, 2024 compared to $1,227,000 and $2,584,000 for the same periods in the prior year, respectively. The increase in depreciation and amortization for the three and six-month periods ended June 30, 2024 was due higher depreciation for upgraded equipment at three of the Company’s operating locations and depreciation incurred for the equipment acquired in the RI Acquisition. These increases were offset by depreciation from the Company’s contract that expired in the third quarter of 2023.

Other direct operating costs increased by $1,395,000 and $1,609,000 to $2,418,000 and $3,511,000 for the three and six-month periods ended June 30, 2024 compared to $1,023,000 and $1,902,000 for the same periods in the prior year, respectively. The increase in other direct operating costs for the three and six-month periods ended June 30, 2024 was due to operating costs from the Company’s recently acquired facilities in Rhode Island and higher volumes, and therefore higher operating costs from the Company’s existing retail locations.

Selling and administrative expense decreased by $92,000 and increased by $248,000 to $1,896,000 and $3,775,000 for the three and six-month periods ended June 30, 2024 compared to $1,988,000 and $3,527,000 for the same periods in the prior year, respectively. The decrease for the three-month period ended June 30, 2024 was primarily due to lower rent expense driven by the expiration of the Company’s corporate office space lease, offset by related sublease income. The increase in selling and administrative expense for the six-month period ended June 30, 2024 was due to expenses associated with new business opportunities, including the Company’s RI Acquisition, offset by lower rent expense.

Interest expense increased by $108,000 and $186,000 to $385,000 and $734,000 for the three and six-month periods ended June 30, 2024 compared to $277,000 and $548,000 for the same periods in the prior year, respectively. The debt under the Credit Agreement carries a floating interest rate of SOFR plus 3%. The increase for the six-month period ended June 30, 2024 was due to an increase in SOFR and borrowings, including the Supplemental Term Loan received in January 2024, compared to the same period of the prior year.

The Company recorded a $3,679,000 net bargain purchase gain related to the RI Acquisition that closed on May 7, 2024. The Company acquired 60% of the equity interests of the RI Companies, which operate three radiation therapy facilities for $2,850,000. The assets acquired exceeded the total purchase price by the bargain purchase amount and the Company recorded this difference as a gain for the three and six-month periods ended June 30, 2024.

Interest and other income, net, decreased by $54,000 and $18,000 to $59,000 and $165,000 for the three and six-month periods ended June 30, 2024 compared to $113,000 and $183,000 for the same periods in the prior year, respectively. The decrease for the three and six-month periods ended June 30, 2024 was due to decreases in the interest received on the Company’s cash, due to lower average cash balances, compared to the same periods in the prior year, respectively.

Income tax expense increased by $4,000 and $108,000 to an income tax benefit of $31,000 and $75,000 for the three and six-month periods ended June 30, 2024 compared to an income tax benefit of $35,000 and income tax expense of $33,000 for the same periods in the prior year, respectively. The increase in income tax expense for the three and six-month periods ended June 30, 2024 was primarily due to higher earnings at the Company’s existing operations.

Net (income) loss attributable to non-controlling interests increased by $232,000 and $266,000 to $166,000 and $112,000 for the three and six-month periods ended June 30, 2024 compared to a loss of $66,000 and $154,000 for the same periods in the prior year, respectively. Net income or loss attributable to non-controlling interests represents net income or loss earned by the 40% non-controlling interest in the Rhode Island facilities, the 19% non-controlling interest in GKF, and net income or loss of the non-controlling interests in various subsidiaries controlled by GKF. The decrease or increase in net income or loss attributable to non-controlling interests reflects the relative profitability of the three Rhode Island locations and GKF.

Net income attributable to American Shared Hospital Services increased by $3,713,000 and $3,644,000 to $3,602,000, or $0.55 per diluted share and $3,721,000 or $0.57 for the three and six-month periods ended June 30, 2024 compared to a net loss of $111,000, or $0.02 per diluted share and net income of $77,000 or $0.01 per diluted share for the same periods in the prior year, respectively. Net income increased for the three and six-month periods ended June 30, 2024 primarily due to the bargain purchase gain generated from the RI Acquisition and net income earned from the Rhode Island facilities acquired, partially offset by increased total costs of revenue.

Liquidity and Capital Resources

The Company’s primary liquidity needs are to fund capital expenditures as well as support working capital requirements. In general, the Company’s principal sources of liquidity are cash and cash equivalents on hand and the $7,000,000 Revolving Line. As of June 30, 2024, the Company borrowed $3,950,000 on its Revolving Line, which was repaid in July 2024. The Company had cash, cash equivalents and restricted cash of $14,486,000 at June 30, 2024 compared to $13,808,000 at December 31, 2023. The Company’s cash position increased by $678,000 during the first six months of 2024 due to net advances on the Revolving Line of $1,450,000, net cash received from the RI Acquisition of $363,000, and long-term debt financing of $2,700,000. These increases were offset by cash use by operating activities of $579,000, payment for the purchase of property and equipment of $2,399,000, payments on long-term debt of $703,000, debt issuance costs of $97,000 and distributions to non-controlling interests of $95,000. 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. The Company has scheduled interest and principal payments under its debt obligations of approximately $4,260,000 during the next 12 months.

Working Capital

The Company had working capital at June 30, 2024 of $12,303,000 compared to $9,677,000 at December 31, 2023. The $2,626,000 increase in working capital was primarily due to increases in accounts receivable offset by increases in advances on the Revolving Line and an increase in current portion of long-term debt. 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 in the “Commitments” section below. The Company, in the past, has secured financing for its Gamma Knife and radiation therapy units. The Company has secured financing for its projects from several lenders and anticipates that it will be able to secure financing on future projects from these or other lending sources, but there can be no assurance that financing will continue to be available on acceptable terms.

Long-Term Debt

On April 9, 2021, the Company and certain of its domestic subsidiaries entered into a five year $22,000,000 credit agreement with Fifth Third Bank, N.A., which refinanced its existing domestic Gamma Knife portfolio. The lease financing previously obtained by Orlando was also refinanced as long-term debt by the Credit Agreement. The Credit Agreement includes three loan facilities: (1) a $9,500,000 term loan (the “Term Loan”), which was used to refinance the domestic Gamma Knife debt and finance leases and the associated closing costs; (2) a $5,500,000 delayed draw term loan (the “DDTL”), which was used to refinance the Company’s PBRT finance leases and associated closing costs and to provide additional working capital for the Company; and (3) a $7,000,000 revolving line of credit (the “Revolving Line”), which is available for the Company’s future projects and general corporate purposes. The Company borrowed $3,950,000 under the Revolving Line as of June 30, 2024, which the Company repaid in July 2024. 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 Revolving Loan, the Term Loan, and the DDTL will mature on April 9, 2026 unless accelerated due to the occurrence of certain events specified in the Credit Agreement. The Revolving Line is charged an unused line fee of 0.25% per annum. The Term Loan and DDTL have interest and principal payments due quarterly. Principal amortization on an annual basis for the Term Loan and DDTL equates to 48% of the original principal loan commitments in years one through five and an end of term payment of the remaining principal balance.

On January 25, 2024, the, the Company entered into a First Amendment to Credit Agreement with Fifth Third which amended the Credit Agreement to add the Supplemental Term Loan, a new term loan in the aggregate principal amount of $2,700,000. The proceeds of the Supplemental Term Loan were advanced in a single borrowing on January 25, 2024, and were used to finance capital expenditures that the Company paid cash for during 2023 for its operations in Puebla, Mexico and other related transaction costs. The Supplemental Term Loan will mature on January 25, 2030 (the “Maturity Date”), unless accelerated due to the occurrence of certain events specified in the Credit Agreement. Interest on the Supplemental Term Loan is payable monthly during the initial twelve month period following the First Amendment Effective Date. Following such twelve month period, the Company is required to make equal monthly payments of principal and interest to fully amortize the amount outstanding under the Supplemental Term Loan by the Maturity Date. The Supplemental Term Loan is secured by a lien on substantially all of the assets of the Company and certain of its domestic subsidiaries. The First Amendment also replaces the LIBOR-based rates in the Credit Agreement with SOFR-based rates. Pursuant to the First Amendment, advances under the Credit Agreement bear interest at a floating rate per annum equal to SOFR plus 3.00%, subject to a SOFR floor of 0.00%.

As of June 30, 2024, the Company was subject to customary covenants under the Credit Agreement which included, among other covenants and obligations, a minimum fixed charge coverage ratio of 1.25 to 1.0 and a total funded debt to EBITDA ratio of 3.0 to 1.0 (tested on a trailing twelve-month basis at the end of each fiscal quarter), along with an annual clean-up covenant that requires the Company to cause the outstanding principal balance under the Revolving Loan to be less than $3,500,000 for at least 30 consecutive days during each calendar year (the “Credit Agreement Covenants”). The Company was in compliance with the Credit Agreement Covenants as of June 30, 2024.

The Company’s acquisition of GKCE and the Gamma Knife Esprit in Ecuador is financed with DFC. The loan entered into with DFC in June 2020 was obtained through the Company's wholly-owned subsidiary, HoldCo, and is guaranteed by GKF. The DFC Loan is secured by a lien on GKCE’s assets. The first tranche of the DFC Loan was funded in June 2020. In October 2023, the second tranche of the DFC Loan was funded in the amount of $1,750,000 to finance its equipment upgrade in Ecuador. The amount outstanding under the first tranche of the DFC Loan is payable in 29 quarterly installments with a fixed interest rate of 3.67%. The amount outstanding under the second tranche of the DFC Loan is payable in 16 quarterly installments with a fixed interest rate of 7.49%.

The DFC Loan contains customary covenants including without limitation, requirements that HoldCo maintain certain financial ratios related to liquidity and cash flow as well as depository requirements. On March 28, 2024, HoldCo received a waiver and amendment from DFC for certain covenants as of December 31, 2023 and through December 31, 2024 and amended other covenants and definitions permanently. HoldCo was in compliance with all debt covenants pursuant to the DFC Loan as amended and waived at June 30, 2024.

The Company’s combined long-term debt, net of deferred issuance costs, totaled $15,083,000 as of June 30, 2024. See Note 3 - Long Term Debt to the condensed consolidated financial statements for additional information.

Commitments

As of June 30, 2024, the Company had commitments to purchase and install five Leksell Gamma Knife Esprit Systems (“Esprit”), one Gamma Plan workstation, and three Linear Accelerator (“LINAC”) systems. One LINAC and one Esprit will be placed at future customer sites. The remaining Esprit upgrades and LINACs are scheduled to occur in the later half of 2024 and 2025 at existing customer sites. Total Gamma Knife and LINAC commitments as of June 30, 2024 were $15,651,000. There are no deposits on the condensed consolidated balance sheets related to these commitments as of June 30, 2024. It is the Company’s intent to finance substantially all of these commitments. 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. However, the Company currently has cash on hand of $14,486,000 and its Revolving Line of $7,000,000 and is actively engaged with financing resources to fund these projects. The Company borrowed $3,950,000 on the Revolving Line as of June 30, 2024, which was paid off in July 2024.

On September 4, 2022, the Company entered into a Maintenance and Support Agreement with Mevion, which provides for maintenance and support of the Company’s PBRT unit at Orlando Health from September 2022 through April 2026. The agreement requires the Company to make an annual prepayment of $1,865,000 for the current contractual period (one year). This payment portion was recorded as a prepaid contract and is being amortized over the one-year service period.

As of June 30, 2024, 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. The Company’s commitment to purchase one LINAC system also includes a 5-year agreement to service the equipment, respectively. Total service commitments as of June 30, 2024 were $14,375,000. 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.

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 table summarizes related party activity for the three and six-month periods ended June 30, 2024 and 2023:

The Company also had commitments to purchase and install five Esprit units, purchase two LINACs and service the related equipment of $21,479,000 as of June 30, 2024.

Related party liabilities on the condensed consolidated balance sheets consist of the following as of June 30, 2024 and December 31, 2023

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The Company does not hold or issue derivative instruments for trading purposes and is not a party to any instruments with leverage or prepayment features. The Company does not have affiliation with partnerships, trusts or other entities whose purpose is to facilitate off-balance sheet financial transactions or similar arrangements, and therefore has no exposure to the financing, liquidity, market or credit risks associated with such entities. At June 30, 2024, the Company had no significant long-term, market-sensitive investments.

Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934. These controls and procedures are designed to ensure that material information relating to the Company and its subsidiaries is communicated to the principal executive officer and our principal financial officer. Based on that evaluation, our principal executive officer and our principal financial officer concluded that, as of June 30, 2024, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to the principal executive officer and our principal financial officer, and recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

The Company completed an acquisition on May 7, 2024. Many of the financial cycles are consistent with the Company’s current reporting cycles and, therefore, the related existing controls. The Company implemented new controls related to the revenue cycle for the RI Companies and will continue to assess the need for additional controls and resources through the year as it relates to the acquired operations. There were no other changes in our internal control over financial reporting during the six-month period ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Except as set forth below, there were no material changes during the period covered in this report to the risk factors previously disclosed in Part 1, Item 1A, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 and Part II, Item 1A of the Company's Quarterly Report on Form 10-Q for the three-month period ended March 31, 2024.

The Company’s failure to file certain financial statements in connection with the RI Acquisition pursuant to Rules 8-04 and 8-05 of Regulation S-X and Item 9.01 of Form 8-K will limit the Company’s ability to raise capital.

On May 7, 2024, the Company filed a Current Report on Form 8-K to report the completion of the Company’s acquisition of 60% of the equity interests in each of the RI Companies from GenesisCare. Based on information available to the Company, the Company believes that the acquisition would qualify as a “significant” acquisition under Rule 1-02(w) of Regulation S-X and as a result, under Rules 8-04 and 8-05 of Regulation S-X, the Company would be required to provide (i) audited financial statements for the RI Companies as of and for the period ended June 30, 2023 and unaudited interim financial statements to the extent applicable (the “8-04 financial information”), and (ii) pro forma historical financial information combined to reflect the RI Companies’ financial information for the most recent fiscal year and interim period (the “8-05 financial information” and, together with the 8-04 financial information, the “S-X financial information”).

The Company purchased the RI Companies as part of the sale of certain of GenesisCare’s assets in its bankruptcy proceedings which were initiated in early June 2023. Due to the lack of reliable financial information for the RI Companies following the protracted bankruptcy proceedings, the Company is not able to obtain financial information sufficient to be able to provide the S-X financial information. The Company, therefore, is not in compliance with Rules 8-04 and 8-05 of Regulation S-X. Unless the Company files the S-X financial information, the Securities and Exchange Commission will not declare effective registration statements or post-effective amendments filed by the Company until twelve months following the date on which the Company has filed a periodic report with the Securities and Exchange Commission that meets the requirements of Regulation S-X, and affiliates will be not be permitted to make sales of securities pursuant to Rule 144 pursuant to the Securities Act of 1933, as amended.