American Shared Hospital Services — Q1 2018 Form 10-Q
Business and period: The company provides Gamma Knife, proton beam radiation therapy (PBRT), and other radiation therapy equipment and services to healthcare providers. It reported the three months ended March 31, 2018; income-statement and cash-flow comparisons are with Q1 2017. Balance-sheet comparisons are with December 31, 2017. Its operating footprint included 17 Gamma Knife units, one PBRT system, and one IGRT machine, plus a company-operated Gamma Knife facility in Lima, Peru.
Financial performance and liquidity
- Revenue: $5.305 million, up $391,000 (8.0%) from $4.914 million. PBRT revenue rose to $1.218 million from $1.155 million; Gamma Knife revenue rose to $3.688 million from $3.619 million; IGRT revenue rose to $399,000 from $140,000.
- Profit: Gross margin was $2.206 million versus $2.346 million; gross margin percentage declined to about 41.6% from 47.7%. Income before taxes was $800,000 versus $758,000. Net income was $650,000 versus $542,000; net income attributable to the company was $390,000 versus $293,000. Basic and diluted EPS were $0.07 versus $0.05.
- Costs and drivers: Costs of revenue increased $531,000 to $3.099 million, mainly reflecting Mevion PBRT maintenance, depreciation at new sites, and Peru and Nebraska operating costs. Selling and administrative expense fell $153,000 to $986,000. Interest expense decreased $28,000 to $425,000; income tax expense fell $66,000 to $150,000, which management attributed to the Tax Act.
- Cash flow: Operating cash flow was $2.617 million versus $1.649 million. Capital expenditures were $497,000 versus $114,000. Debt and capital-lease principal payments totaled $1.521 million versus $2.012 million. Cash, cash equivalents, and restricted cash increased $599,000 to $3.101 million; management said the increase was primarily due to higher accounts payable and accrued liabilities.
- Liquidity and obligations: March 31 cash and cash equivalents were $2.751 million, plus $350,000 restricted cash. Working capital was $450,000; current assets were $9.947 million and current liabilities $9.497 million. Long-term debt, including current portion, was $5.577 million; capital-lease obligations, including current portion, were $16.049 million. The company cited approximately $2.212 million of scheduled debt interest and principal and $5.586 million of scheduled capital-lease payments over the next 12 months, and said available cash and operating resources should be adequate to meet them.
Material changes, outlook, and risks
- Gamma Knife procedures fell to 392 from 456. Excluding a site that purchased its unit and a site whose contract expired, procedures increased by 39, which management linked to new Lima and Lincoln sites and growth at existing customers.
- Management reported no formal financial guidance. It stated that the company expected cash and operating resources to cover scheduled debt and lease payments for the next 12 months.
- The company had $25.8 million of purchase commitments for two additional Mevion PBRT systems and had paid $2.0 million in non-refundable deposits. It had not secured customer agreements or related financing for either unit; delivery was projected by 2019 and 2020. If it cannot secure placements in time or obtain an extension, deposits could be forfeited.
- As of March 31, 2018, Gamma Knife commitments totaled $1.5 million for two Cobalt-60 reloads, with financing obtained. On April 26, the company signed agreements for two further reloads and a Perfexion unit; total Gamma Knife commitments as of that date were $3.1 million. The company intended to finance these commitments, but stated financing may not be available or acceptable.
- Management identified risks relating to its Gamma Knife and radiation therapy businesses and development of its “Operating Room for the 21st Century” program. The filing said risk factors were unchanged from the 2017 Form 10-K. No legal proceedings were reported. Disclosure controls were deemed effective, with no material changes in internal control over financial reporting reported.
- The company adopted revenue-recognition guidance on January 1, 2018; adoption had no material impact on retained earnings. The company was evaluating the effect of the new lease standard scheduled to become effective in 2019.
Important facts for investors to verify
- Whether the two committed PBRT systems obtain FDA clearance, customer placements, and financing before required delivery—and the exposure of the $2.0 million deposits.
- Whether operating cash flow can sustain scheduled debt and lease payments alongside equipment commitments, particularly given the $450,000 working-capital balance.
- Whether higher maintenance and direct operating costs persist, and whether new-site procedure volumes and revenue improve gross margin.
- How the April 26 Gamma Knife commitments are financed and whether they generate expected returns.
- The effects of lease-standard adoption and any changes in tax estimates or performance-based compensation assumptions.