American Shared Hospital Services — Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The company provides Gamma Knife and other radiation therapy equipment and services; it had 17 Gamma Knife units operating at quarter-end, compared with 19 a year earlier.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Medical services revenue | $3.982m | $4.396m | $11.425m | $13.647m |
| Gross margin | $1.603m (40.3%) | $1.581m (36.0%) | $3.737m (32.7%) | $5.592m (41.0%) |
| Operating income (loss), as presented | $274,000 | $162,000 | $(431,000) | $858,000 |
| Net income (loss) attributable to company | $13,000 | $(134,000) | $(1.010)m | $(230,000) |
| Basic and diluted EPS | $0.00 | $(0.03) | $(0.21) | $(0.05) |
- Revenue declined 9% in Q3 and 16% for the nine-month period. Gamma Knife procedures fell to 496 from 632 in Q3 and to 1,569 from 1,918 year to date.
- Nine-month net cash from operating activities was $4.413m, down from $6.285m. Capital expenditures were $338,000; cash and cash equivalents decreased by $494,000 to $1.415m.
- At September 30, cash was $1.415m, restricted cash $50,000, and a $9.0m certificate of deposit was classified as current and pledged to secure the bank line of credit. Current assets were $15.131m versus current liabilities of $17.151m, or negative working capital of $2.020m.
- Balance-sheet debt included $7.905m of long-term debt, $16.410m of capital lease obligations, and $8.280m drawn on the line of credit. The line’s $9m facility was scheduled to terminate December 31, 2014; its maturity was extended after the bank waived a 2013 profitability-covenant default. The company reported no missed principal or interest payments.
Changes, outlook, and risks
- Management attributed lower revenue and procedures to the Turkey business sale, reduced activity at existing sites, lower revenue per procedure and payor mix, site downtime, weather, and a radiation therapy contract decline. Turkey’s sale also reduced interest expense through associated debt repayment.
- The June 2014 sale of EWRS Turkey generated $768,000 in cash after debt-related payments and resulted in a reported $572,000 loss, including release of $779,000 of accumulated currency translation adjustments. The sale was not classified as a discontinued operation. The company recorded a $165,000 deferred tax asset write-off related to Turkey.
- For nine months, foreign-currency transactions produced a $161,000 gain versus an $840,000 loss in 2013. There was no such gain or loss in Q3 2014 after the Turkey sale.
- On October 22, 2014, the company raised $1.0m through 15% notes due in 2017 and warrants, plus $220,000 from a director share placement. The $1.220m gross proceeds, together with cash on hand, funded two $1m Mevion milestone payments. Lease financing for the first proton therapy system was under commitment, subject to final documentation and conditions; treatment at Orlando Health was expected to begin in Q1 2016.
- At September 30, remaining equipment purchase commitments were approximately $47m, with $3.1m in deposits made. Financing was secured for $6.3m of specified Gamma Knife equipment and a $9m lease-financing commitment had been obtained for the first proton system. The filing warns that other financing may not be available on acceptable terms, risking deposits and related costs.
- The company held a $2.705m cost-method investment in Mevion and estimated an unrealized loss of approximately $2.4m, but considered it temporary and did not record an impairment. Mevion’s potential IPO was uncertain.
- CMS set a comprehensive 2015 outpatient payment rate of approximately $9,768 for Gamma Knife and LINAC one-session cranial radiosurgery, versus the company’s cited current average of approximately $5,600, an estimated $4,168 increase per Medicare Gamma Knife treatment effective January 1, 2015. Actual company benefit depends on treatment volumes and applicable reimbursement.
- Management said operating cash flow and cash resources were adequate for operating requirements over the next 12 months, while noting the need to replace the expiring credit facility. Scheduled next-12-month interest and principal payments were approximately $2.028m, with capital lease payments of approximately $4.475m. No specific financial guidance was provided.
Important facts for investors to verify
- Whether the company refinanced or replaced the $9m line of credit before its December 31, 2014 termination, and whether the pledged certificate of deposit remained available for other liquidity needs.
- Actual procedure volumes, reimbursement rates, and operating performance at existing sites, including the effect of downtime and the reduced number of operating units.
- Financing, construction progress, milestone obligations, and the expected launch timing for the Orlando proton therapy system and other committed equipment.
- Whether Mevion’s valuation or prospects changed enough to require impairment of the investment, and whether any anticipated earn-out from the Turkey sale was ultimately realized.
- Whether the 2015 CMS payment changes translated into higher company revenue and cash flow; the filing’s estimate is per Medicare treatment, not a forecast of total company results.