Business context and reporting period
American Shared Hospital Services filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The company provides Gamma Knife radiosurgery, proton beam radiation therapy (PBRT), and other radiation therapy equipment and services. It operated 16 Gamma Knife units, one PBRT system, and one IGRT unit at quarter-end.
Financial performance and liquidity
| Metric | Three months ended June 30, 2017 | Six months ended June 30, 2017 |
|---|---|---|
| Medical services revenue | $4.945 million | $9.859 million |
| Gross margin | $2.251 million; 45.5% of revenue | $4.597 million; 46.6% of revenue |
| Operating income, as reported | $669,000 | $1.423 million |
| Net income | $444,000 | $986,000 |
| Net income attributable to the company | $113,000; $0.02 per diluted share | $406,000; $0.07 per diluted share |
| Net cash from operating activities | Not provided for the quarter | $4.038 million |
For the six months, investing activities used $1.319 million and financing activities used $2.989 million; cash and cash equivalents declined $270,000 to $2.601 million. Restricted cash was $250,000, bringing cash and restricted cash to $2.851 million. Working capital was $398,000 at June 30.
At June 30, current and long-term debt totaled $7.149 million, and capital lease obligations totaled $17.030 million. The filing reports approximately $2.836 million in scheduled debt principal and interest and $5.982 million in capital lease payments due over the next 12 months. Management said cash on hand, operating cash flow, and other resources should be adequate to meet those obligations.
Material changes versus prior comparable periods
- Revenue increased 9% in the quarter and 13% for the six months year over year. PBRT revenue was $862,000 for the quarter and $2.017 million for the half-year as the Orlando system ramped up; PBRT treatment fractions rose to 1,189 and 2,409, respectively.
- Gamma Knife revenue was nearly flat in the quarter but declined $500,000 for the half-year to $7.586 million. Procedure volumes fell 64 in the quarter and 89 for the half-year. The company attributed the six-month decline primarily to lower volume and downtime at two sites for cobalt-60 reloads. One customer purchased its Gamma Knife unit in April 2017.
- Gross margin improved from 40.7% to 45.5% for the quarter and from 40.8% to 46.6% for the half-year. Higher revenue drove the improvement; cost of revenue rose only modestly.
- Selling and administrative expense rose $175,000 for the quarter and $365,000 for the half-year, with Peru start-up costs and, for the half-year, legal, consulting, travel, severance, and rent costs cited. Six-month interest expense increased $179,000, primarily due to PBRT lease financing.
- Attributable net income increased to $406,000 for the half-year from $144,000 in 2016. The prior-year period included a $108,000 loss on early extinguishment of debt; excluding that loss after estimated taxes, management said the year-over-year increase was $198,000.
Outlook, risks, commitments, and unusual items
- No numerical earnings or revenue guidance was provided. Management cited risks in Gamma Knife, proton therapy, the OR21 development effort, and its investment in Mevion; it reported no changes to the risk factors in the 2016 Form 10-K.
- The company had commitments of $25.8 million for two additional Mevion PBRT systems and $2.15 million for a Gamma Knife Perfexion system. It had paid $2 million in non-refundable deposits toward the PBRT systems. The PBRT delivery schedule depends on FDA clearance of a treatment nozzle; the company had not secured placement agreements or related financing for either system and expected delivery to begin no later than 2019 and 2020.
- The company said it had secured financing for the new Gamma Knife unit and expected the site to begin treating patients in the latter half of 2017. GKPeru treated its first patient in July 2017.
- After quarter-end, the company entered a five-year Mevion maintenance agreement for its Orlando PBRT system. It paid $1 million upfront on August 4, 2017, with further payments due over 11 months; the upfront amount is to be recorded as a prepaid contract and amortized over one year.
- Management reported effective disclosure controls as of June 30, 2017 and no material changes to internal control over financial reporting. The filing reported no legal proceedings, defaults, or other material changes in risk factors.
Important facts for investors to verify
- Whether PBRT treatment volume and revenue continue to grow, and whether that growth offsets Gamma Knife volume weakness and the effect of the customer equipment purchase.
- Whether operating cash flow and available resources can cover scheduled debt and lease payments, equipment commitments, and the PBRT maintenance agreement.
- Whether the company secures placement agreements and acceptable financing for the two committed PBRT systems, and whether FDA clearance supports the expected delivery timetable.
- How Peru start-up costs and other higher administrative expenses affect profitability, and whether the stated cash-flow and liquidity outlook changes.
- The filing does not provide clear numerical forward guidance; investors should distinguish management’s liquidity assessment from a guarantee of future funding or results.