American Shared Hospital Services — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The company provides Gamma Knife radiosurgery, proton beam radiation therapy (PBRT), and other radiation therapy equipment and services to hospitals, and operates a Gamma Knife facility in Lima, Peru. At quarter-end it reported 16 Gamma Knife units, one PBRT system, and one IGRT machine in operation.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $5.301 million | $4.470 million | $15.819 million | $14.944 million |
| Gross margin | $1.813 million (34.2%) | $1.634 million (36.6%) | $5.479 million (34.6%) | $5.921 million (39.6%) |
| Net income attributable to company | $165,000 | $168,000 | $466,000 | $845,000 |
| Diluted EPS | $0.03 | $0.03 | $0.08 | $0.14 |
| Operating cash flow | — | $6.127 million | $6.225 million |
Revenue rose 18.6% for the quarter and 5.9% year to date, but nine-month gross margin declined by $442,000 and attributable net income fell by $379,000. Reported operating income was $446,000 for Q3 and $1.263 million for nine months, versus $185,000 and $1.624 million, respectively, in 2018. The filing presents interest expense before this “operating income” line.
Liquidity, debt and cash flow
- At September 30, cash and cash equivalents were $1.297 million, plus $350,000 restricted cash; combined cash was $1.647 million, down $145,000 from year-end 2018. Working capital was $1.466 million.
- Operating cash flow was $6.127 million. Investing activities used $729,000, including $889,000 of property and equipment purchases; financing activities used $5.543 million.
- Balance-sheet long-term debt was $3.896 million and capital lease obligations were $12.853 million. Operating lease liabilities were $1.173 million following adoption of the new lease standard.
- Management said cash on hand, operations, and other cash resources should cover scheduled debt and capital-lease obligations over the next 12 months. It estimated next-12-month principal and interest payments of approximately $1.853 million and capital-lease payments of approximately $5.033 million.
Changes and management commentary
- PBRT revenue increased to $1.677 million in Q3 and $4.728 million year to date. Higher treatment volume and reimbursement contributed to the year-to-date increase; the prior-year comparison was also affected by two weeks of downtime in 2018.
- Gamma Knife revenue rose in Q3 to $3.310 million but declined year to date to $10.320 million. Year-to-date procedures fell to 1,084 from 1,106, reflecting a resolved labor dispute, a site outage for a Cobalt-60 reload and upgrade, and two expired customer contracts. Excluding a contractual Medicare adjustment, Gamma Knife revenue declined $556,000 year to date.
- Higher maintenance costs reflected a $250,000 annual increase under the PBRT service agreement. Depreciation and other direct operating costs also increased, including costs at the Merrillville site and Peru facility. Lower average debt balances reduced interest expense.
- The company adopted ASC 842 on January 1, 2019, recognizing operating lease right-of-use assets and liabilities of approximately $1.362 million, with no material initial income-statement effect.
Outlook, commitments and risks
No numerical earnings or revenue guidance was provided. The company is seeking sites and financing for two additional MEVION S250i PBRT systems; as of September 30, it had $34 million in purchase commitments after $2.25 million of non-refundable deposits. Failure to place the systems on time or obtain an extension could result in forfeited deposits. Additional commitments included $6.96 million for Gamma Knife reloads, Icon upgrades, and a LINAC system. Total contractual obligations in the filing’s schedule were $71.258 million, including debt, leases, equipment purchases, and service contracts. The company intends to finance equipment commitments but cautioned that financing may not be available on acceptable terms.
CMS proposed a mandatory Radiation Oncology Alternative Payment Model that could change radiation therapy reimbursement; the company commented on the proposal, and its final form and impact were uncertain. Management also identified risks from quarterly variability, its Gamma Knife and radiation therapy businesses, and development of The Operating Room for the 21st Century. The filing noted no legal proceedings, no changes to previously disclosed risk factors, and effective disclosure controls.
As an unusual comparison item, 2018 other income included approximately $185,000 of business-interruption insurance reimbursement relating to PBRT downtime; the company reported receiving reimbursement in 2019.
Investor verification points
- Confirm placement, timing, and financing plans for the two PBRT systems and the potential exposure of the $2.25 million deposits.
- Track CMS’s final radiation oncology payment rules and any effects on reimbursement, treatment volumes, and revenue.
- Assess whether PBRT growth can offset Gamma Knife revenue and procedure declines, contract expirations, and site interruptions.
- Review the funding and cash-flow implications of the $71.258 million contractual-obligation schedule alongside the company’s stated 12-month liquidity assessment.
- Monitor margin pressure from service, depreciation, and site operating costs, as well as the effect of the 2018 insurance-related comparison.