Business Context and Reporting Period
Company: American Shared Hospital Services (ASHS)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2006
Business Overview: ASHS operates Gamma Knife units for medical centers. As of June 30, 2006, the company operated 21 units across 16 states. Revenue models include fee-per-use, turn-key retail, and net revenue sharing arrangements.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2006 |
Six Months Ended June 30, 2006 |
Six Months Ended June 30, 2005 |
|---|---|---|---|
| Revenue | $5,309,000 | $10,354,000 | $9,179,000 |
| Gross Margin | $2,634,000 (49.6%) | $5,057,000 (48.8%) | $4,590,000 (50.0%) |
| Operating Income | $996,000 | $1,942,000 | $1,690,000 |
| Net Income | $448,000 | $884,000 | $786,000 |
| Diluted EPS | $0.09 | $0.18 | $0.15 |
| Cash from Operations | N/A | $3,952,000 | $4,958,000 |
| Cash & Equivalents (End of Period) | $2,143,000 | $2,143,000 | $7,509,000 |
| Working Capital | $1,984,000 | $1,984,000 | N/A |
| Total Debt (Current + Long-term) | $18,110,000 | $18,110,000 | N/A |
Note: Total Debt includes $3,250,000 line of credit, $5,188,000 current long-term debt, $12,922,000 long-term debt, and $5,211,000 capital leases.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 12.2% for the six months ended June 30, 2006, compared to the prior year. This was driven by two new Gamma Knife units added in late 2005 and increased revenue at turn-key retail sites. However, revenue at mature centers (operating >1 year) declined by 2%.
- Procedure Volume: Procedures increased 8% (1,303) for the six-month period but decreased slightly (634 vs 636) for the three-month period due to a 7% decline at mature units.
- Expenses: Costs of revenue rose due to higher maintenance contracts for newer units and increased operating costs at turn-key sites. Selling and administrative expenses increased due to higher payroll/incentive accruals and legal fees.
- Investment Activity: The company invested $2,000,000 in convertible preferred stock of Still River Systems, Inc. (a proton beam therapy developer) and purchased a $1,000,000 option for two Clinatron-250 systems.
- Liquidity: Cash and cash equivalents increased by $845,000 during the six-month period, primarily due to the maturity of marketable securities and a $3,250,000 draw on the line of credit, offset by the Still River investment and dividend payments.
Guidance, Outlook, and Risks
- Outlook: Management believes cash flow from operations and existing resources are adequate to meet scheduled debt and capital lease obligations for the next 12 months.
- Dividends: The company declared a quarterly dividend of $0.0475 per share on June 28, 2006, payable July 14, 2006.
- Risks:
- Development Stage Investment: Significant risk associated with the investment in Still River Systems, Inc., which has no proven product and whose PBRT systems are not yet FDA approved.
- Revenue Concentration: Reliance on Gamma Knife units; revenue at mature centers is declining.
- Debt Obligations: Approximately $6.5 million in debt principal/interest and $1.35 million in capital lease payments are due in the next 12 months.
- Accounting Changes: The company adopted FASB Statement No. 123R in 2006, beginning to expense the fair value of stock options. This resulted in a $16,000 expense for the six-month period.
Investor Verification Checklist
- Still River Investment: Verify the status of Still River Systems' FDA approval process for proton beam therapy and the viability of the $3 million total investment (stock + option).
- Mature Unit Performance: Investigate the causes of the 2% revenue decline and 7% procedure decline at Gamma Knife centers operating for more than one year.
- Debt Covenants: Review the terms of the $6 million line of credit and long-term debt to ensure compliance with covenants given the current leverage.
- Turn-Key Site Economics: Assess the profitability of the new turn-key retail sites, as the company assumes full operating costs and reimbursement risk for these locations.
- Stock-Based Compensation: Monitor the impact of the new 2006 Stock Incentive Plan on future earnings as option expensing continues under FASB 123R.