American Shared Hospital Services — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing; it does not provide a separate Q4-only financial summary.
Business context
The company provides medical centers with radiosurgery and radiation-therapy equipment, principally Gamma Knife systems, through equipment leasing and fee-per-use or revenue-sharing arrangements. It also began commercial proton beam radiation therapy (PBRT) operations at Orlando Health in April 2016. Gamma Knife generated 86% of 2016 revenue; PBRT generated 12%, and IGRT 2%.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $18.700 million | $16.548 million |
| Gross margin | $8.795 million (47.0%) | $6.715 million (40.6%) |
| Operating income | $3.286 million | $1.980 million |
| Interest expense | $1.707 million | $1.239 million |
| Net income (loss) attributable to ASHS | $930,000 | $(1.522) million |
| Diluted earnings (loss) per share | $0.17 | $(0.28) |
| Cash from operating activities | $8.378 million | $8.548 million |
| Cash and cash equivalents at year-end | $2.871 million | $2.209 million |
| Working capital | $(293,000) | $(2.691) million |
| Debt and capital leases, including current portions | $27.036 million | $23.118 million |
Revenue rose 13.0%, primarily because the new PBRT site began generating revenue. Gross margin improved as costs of revenue grew only 0.7%. Operating cash flow remained strong, though slightly below 2015. Year-end trade receivables increased to $4.085 million from $3.038 million, and days sales outstanding rose to 80 from 67. Management stated that cash, operating cash flow and other resources were adequate for scheduled debt and lease obligations over the next 12 months.
Material changes versus 2015
- PBRT contributed $2.149 million in revenue from 2,330 treatment fractions; there was no PBRT revenue in 2015.
- Gamma Knife revenue was essentially flat at $16.076 million. Procedures declined 1.3% to 1,922, while average revenue per procedure increased 1.3% to $8,364.
- Interest expense increased 37.8%, mainly due to financing for the PBRT system.
- ASHS moved from a $1.522 million attributable net loss to $930,000 of attributable net income. The 2015 result included a $2.140 million impairment of its Mevion investment; 2016 included a $108,000 loss on early debt extinguishment.
- Long-term capital leases increased to $19.725 million from $13.521 million, largely reflecting equipment financing.
Outlook, risks and unusual items
- Expansion plans: The company expected a new Gamma Knife site in the second half of 2017 and planned to install a Gamma Knife in Peru in the third quarter of 2017. It was seeking placement sites and financing for two additional PBRT systems; no placement or related financing agreements had been reached by year-end.
- Major commitments: The company disclosed $25.8 million of remaining purchase commitments for two PBRT systems, in addition to $2.0 million of non-refundable deposits, and $3.16 million of Gamma Knife commitments. Timing of the PBRT payments was uncertain. Total disclosed contractual obligations were $63.329 million, including debt, leases, equipment purchases and operating leases.
- Customer concentration: Seven customers accounted for more than half of revenue. One customer had given notice that it intended to purchase its Gamma Knife at lease-end in April 2017, which would end the related contract.
- Reimbursement exposure: Revenue-sharing arrangements are exposed to changes in government and third-party reimbursement. Medicare Gamma Knife reimbursement was approximately $8,800 in 2016 and was scheduled to rise to approximately $9,000 in 2017; future rates are uncertain.
- Other key risks: Management cited substantial debt, capital-intensive operations, limited and competitive markets, equipment obsolescence, customer concentration, and dependence on financing and successful PBRT placements. The company reported two idle Gamma Knife units with a combined net book value of $1.483 million.
- Investment and contingencies: The Mevion equity investment remained carried at $579,000 after the 2015 impairment; no further impairment was recorded in 2016. The company disclosed a PBRT equipment-removal obligation but said its fair value could not reasonably be estimated and recorded no liability. It reported no material pending legal proceedings.
- Guidance: The filing does not provide quantified earnings or revenue guidance. Management said OR21 was not expected to generate significant revenue within two years and Long Beach PBRT was not expected to generate revenue within two years.
Important facts for investors to verify
- Whether the two additional PBRT systems obtain placement sites and financing, and the resulting payment schedule for the $25.8 million commitment.
- Actual utilization, collections and profitability of the Orlando PBRT system, including the effect of rising receivables and 80-day DSO.
- The revenue and cash-flow impact of the customer’s planned April 2017 Gamma Knife purchase and any replacement placements.
- Debt and lease repayment capacity, financing availability, and compliance with applicable loan terms.
- Future Medicare reimbursement levels, customer concentration, and the recoverability of the Mevion investment and idle equipment.