American Shared Hospital Services — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are with the same 2016 periods. The company leases and operates Gamma Knife, proton beam radiation therapy (PBRT), and other radiation therapy equipment for healthcare providers. It reported one operating segment.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Rental income | $4.613 million | $4.884 million | $14.472 million | $13.640 million |
| Gross margin | $1.882 million | $2.396 million | $6.479 million | $5.968 million |
| Income before taxes | $439,000 | $899,000 | $1.861 million | $1.741 million |
| Net income | $275,000 | $632,000 | $1.261 million | $1.317 million |
| Net income attributable to ASHS | $99,000 | $334,000 | $505,000 | $478,000 |
| Diluted EPS | $0.02 | $0.06 | $0.09 | $0.09 |
| Cash from operating activities | Not provided for the quarter | $4.976 million | $5.694 million |
Q3 gross margin was approximately 40.8% of revenue, versus 49.1% a year earlier; nine-month gross margin was approximately 44.8%, versus 43.8%. These percentages are calculated from reported revenue and gross margin.
Material changes and operating performance
- Q3 revenue declined $271,000 year over year, while nine-month revenue increased $832,000. PBRT revenue at Orlando Health grew to $935,000 for Q3 and $2.953 million year to date as treatment volume ramped up.
- Gamma Knife revenue fell $369,000 in Q3 and $869,000 year to date. The company attributed the decline primarily to a unit purchased by a customer in April and another customer contract that expired in August. Excluding those sites, Gamma Knife revenue rose $142,000 in Q3 but declined $51,000 year to date. Two new Gamma Knife sites began operations in Q3, with minimal initial volume.
- Q3 company net income attributable to ASHS fell to $99,000 from $334,000. Management cited lower Gamma Knife volumes, PBRT maintenance costs, and higher selling and administrative expense. Nine-month attributable income increased to $505,000 from $478,000; 2016 included a $108,000 debt extinguishment loss.
- Nine-month selling and administrative expense increased $392,000 to $3.303 million, reflecting Peru start-up costs, legal and consulting fees, travel, severance, and rent. Maintenance and supplies rose, primarily due to a Mevion service agreement.
Cash, liquidity, and obligations
- At September 30, cash and cash equivalents were $1.315 million, with $350,000 of restricted cash; combined cash and restricted cash was $1.665 million, down from $3.121 million at December 31, 2016. Working capital was $267,000 and total assets were $59.976 million.
- Operating cash flow was $4.976 million; investing activities used $610,000 and financing activities used $5.922 million. Cash declined $1.556 million over the nine months. The company cited a $1 million upfront Mevion service payment and $760,000 of equipment purchases as uses of cash.
- Balance-sheet debt was $6.716 million, including current and long-term debt. Capital lease obligations totaled $18.076 million. The company reported scheduled interest and principal payments of approximately $2.933 million and capital lease payments of approximately $5.942 million over the next 12 months. Management said available cash, operating cash flow, and other resources should cover scheduled obligations during that period.
- Commitments totaled $27.3 million: $25.8 million for two additional PBRT systems and $1.5 million for two Gamma Knife cobalt-60 reloads. The PBRT delivery timetable depends on FDA clearance of Mevion’s treatment nozzle; the company had not secured placement agreements or related financing for either system. Deliveries were expected no later than 2019 and 2020.
Outlook, risks, and unusual items
- No quantified earnings or revenue guidance was provided. The company was seeking sites for the two committed PBRT systems and said financing availability and terms for current or future projects were not assured.
- The Mevion maintenance agreement is for five years; it began September 5, 2017. The company paid $1 million upfront, recorded it as a prepaid contract, and was required to make further payments over the following 11 months.
- The company opened its standalone Gamma Knife facility in Lima, Peru, in July 2017. Management noted that it was evaluating the accounting impact of revenue-standard adoption for that facility. Other cited risks include its Gamma Knife, proton therapy, and radiation therapy businesses, the OR21 development effort, and its Mevion investment.
- The company reported no legal proceedings, defaults, or changes to the risk factors in its 2016 Form 10-K. Management concluded disclosure controls were effective at September 30, 2017; no material quarterly change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether new Gamma Knife sites and the Peru facility can generate sufficient volume to offset expired or purchased-site contracts.
- PBRT utilization, maintenance costs, FDA clearance timing, and the company’s ability to secure sites and financing for its two committed systems.
- Liquidity relative to scheduled debt and lease payments, particularly given $267,000 of working capital and declining cash.
- Execution and funding of the $27.3 million equipment commitments, including the timing and financing of the planned cobalt-60 reloads.
- The effect of Peru operations and future accounting-standard adoption on reported revenue, taxes, and earnings.