AMS

Business Context and Reporting Period

Company: American Shared Hospital Services (ASHS)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2012
Business Overview: ASHS provides radiation therapy and related equipment services, primarily through Gamma Knife units and Intensity Modulated Radiation Therapy (IMRT). As of June 30, 2012, the company operated 19 Gamma Knife units across the U.S. and Turkey. The company also holds a significant investment in Mevion Medical Systems, Inc., a developer of proton beam radiation therapy systems.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Medical services revenue increased by $78,000 (1.9%) for the quarter and $114,000 (1.3%) for the six-month period compared to 2011. Growth was driven by new radiation therapy contracts and increased volume at existing sites, partially offset by a decrease in Gamma Knife revenue due to a unit sale in late 2011 and a contract expiration.
• Procedure Volume: Gamma Knife procedures increased by 77 (17.1%) for the quarter and 102 (10.9%) for the six-month period, primarily due to a new unit in Turkey and a 4% volume increase at sites with Perfexion units.
• Costs: Total costs of revenue increased slightly ($41,000 for the quarter; $164,000 for six months). Depreciation and amortization rose due to four new sites coming online, while maintenance costs fluctuated based on warranty expirations.
• Profitability: Net income attributable to ASHS shareholders decreased to $15,000 for the quarter (from $21,000) and $24,000 for the six months (from $42,000). This decline was driven by higher selling/administrative costs and reduced interest income, despite a higher gross margin.
• Liquidity: Cash and cash equivalents decreased by $1,583,000 to $997,000, primarily due to capital expenditures ($3.7M) and debt principal payments, partially offset by operating cash flow and new debt financing.

Outlook, Risks, and Contingencies

• Capital Commitments: The company has approximately $46,000,000 in remaining commitments to purchase equipment, including three MEVION S250 proton beam systems, three Perfexion Gamma Knife units, and other radiation therapy units. Delivery is anticipated to begin in mid-2013.
• Financing Risks: Management intends to finance these commitments as needed. While financing has been secured for units in Florida and Peru, the company notes that current economic conditions make obtaining financing for other projects more difficult. There is no assurance that acceptable financing will be available.
• Investment Impairment: ASHS holds a $2,687,000 investment in Mevion Medical Systems. The company estimates an unrealized loss (impairment) of approximately $1.3 million but believes this is temporary due to market conditions and Mevion's recent FDA 510(k) clearance for its S250 system.
• Debt Obligations: The company has scheduled interest and principal payments of approximately $5.2 million and capital lease payments of $5.1 million due in the next 12 months. Management believes cash flow from operations is adequate to meet these obligations.

Key Facts for Investor Verification

• Shareholder Earnings: Verify the impact of non-controlling interests, which absorbed the majority of net income ($211,000 for the quarter), leaving only $15,000 attributable to ASHS common shareholders.
• Financing Availability: Confirm the status of financing for the $46 million in equipment commitments, particularly for the Mevion systems and remaining Perfexion units, given the stated difficulty in the current credit market.
• Mevion Investment: Monitor the valuation of the Mevion Medical Systems investment ($2.687M cost vs. $1.383M estimated fair value) and the timeline for the recovery of the carrying value.
• Cash Position: Note the significant reduction in cash reserves ($2.58M to $0.997M) and the reliance on a $9M line of credit, of which $7.6M is currently drawn.
• Contract Expirations: Track the impact of contract expirations (one site ended in Q2 2012) on future revenue stability.