American Shared Hospital Services — Q1 2019 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2019; comparisons are with the three months ended March 31, 2018. The company leases and operates Gamma Knife, proton beam radiation therapy (PBRT), and image-guided radiation therapy equipment for hospitals, and operates a Gamma Knife facility in Lima, Peru. It reported one segment: Medical Services Revenue.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $5.321 million | $5.305 million |
| Gross margin | $1.937 million (36.4% of revenue) | $2.206 million (41.6%) |
| Income before taxes | $519,000 | $800,000 |
| Net income | $395,000 | $650,000 |
| Net income attributable to ASHS | $270,000; $0.05 per basic and diluted share | $390,000; $0.07 per share |
| Cash from operating activities | $2.300 million | $2.617 million |
Cash, cash equivalents, and restricted cash totaled $2.399 million at quarter end, up $607,000 from year-end 2018. Working capital was $851,000. At March 31, total long-term debt was $4.937 million, capital lease obligations were $13.669 million, and operating lease liabilities were $1.300 million. Total shareholders’ equity was $31.479 million. The filing reports no standalone operating-margin measure; gross margin declined to 36.4% from 41.6%.
Material changes and management commentary
- Revenue was nearly flat: PBRT revenue rose $424,000 to $1.642 million as fractions increased to 1,546 from 1,218; Gamma Knife revenue fell $277,000 to $3.411 million, primarily after two customer contracts expired; IGRT revenue declined $131,000 to $268,000 on lower volume.
- Costs of revenue increased $285,000 to $3.384 million, including higher depreciation and maintenance. Selling and administrative expense increased $69,000 to $1.055 million. Lower interest expense ($367,000 versus $425,000) partly offset these pressures. Management attributed lower net income primarily to higher operating costs.
- Operating cash flow was $2.300 million. The company used $112,000 in investing activities and $1.581 million in financing activities, including $1.562 million of principal payments on debt and capital leases.
- The company adopted ASC 842 lease accounting on January 1, 2019, recognizing approximately $1.362 million of operating lease right-of-use assets and liabilities, with no material initial impact on results. ASU 2016-13 adoption had no significant financial-statement impact.
Outlook, commitments, and risks
No specific earnings or revenue guidance is provided. Management said cash on hand, operating cash flow, and other cash resources should cover scheduled debt and capital lease obligations over the next 12 months. It cited approximately $2.250 million of scheduled debt interest and principal payments and $5.164 million of capital lease payments during that period.
As of March 31, the company had commitments to purchase two PBRT systems for $34.0 million, with $2.250 million in non-refundable deposits. It had not secured placement agreements or financing for either system and expects delivery to commence no later than 2023; failure to place the systems or obtain an extension could put the deposits at risk. Other disclosed commitments included $4.235 million for Gamma Knife reloads and a LINAC system, and $7.426 million for equipment service contracts. Total contractual obligations were $68.613 million. After quarter end, on April 30, the company agreed to $7.615 million of additional Gamma Knife commitments; it intends to finance these equipment commitments, but financing availability and terms are not assured.
Forward-looking risks include quarter-to-quarter variability, risks in the Gamma Knife and radiation therapy businesses, and development of the Operating Room for the 21st Century program. The filing reports one idle Gamma Knife unit with a $729,000 net book value and no 2019 plan to place it into service or trade it. Management reported effective disclosure controls; no material change in internal control, legal proceedings, or changes to the prior annual report’s risk factors were reported.
Important facts for investors to verify
- Whether new hospital placements can offset expired Gamma Knife contracts and sustain PBRT volume growth.
- How the company will finance and place the two committed PBRT systems, and the risk to its non-refundable deposits.
- Liquidity and financing capacity in light of scheduled debt and lease payments and the substantial equipment and service commitments.
- Whether operating costs, including PBRT maintenance costs, continue to pressure gross margin and earnings.