Business context and reporting period
American Shared Hospital Services’ Form 10-K covers the fiscal year ended December 31, 2017. The company finances and provides Gamma Knife radiosurgery, proton beam radiation therapy (PBRT) and image-guided radiation therapy equipment and related services to hospitals. It had 17 operating Gamma Knife units in the U.S. and one in Peru; its first PBRT system, at Orlando Health, began treating patients in April 2016.
Financial performance and liquidity
| Metric | 2017 | 2016 | Change or context |
|---|---|---|---|
| Revenue | $19.556 million | $18.700 million | Up 4.6% |
| Gross margin | $8.663 million (44.3%) | $8.795 million (47.0%) | Margin declined as costs of revenue rose 10.0% |
| Reported operating income | $2.413 million | $3.286 million | Down 26.6%; the filing’s presentation includes interest expense in arriving at this figure |
| Net income | $2.940 million | $2.250 million | Consolidated, before non-controlling interests |
| Net income attributable to ASHS | $1.923 million ($0.33 per diluted share) | $0.930 million ($0.17 per diluted share) | 2017 included a $1.546 million tax benefit from U.S. tax reform and a $579,000 Mevion impairment charge |
| Cash from operating activities | $7.853 million | $8.378 million | Down $525,000 |
| Cash and cash equivalents | $2.152 million | $2.871 million | Restricted cash was an additional $350,000 |
| Working capital | $(114,000) | $(815,000) | Deficit narrowed |
| Long-term debt and capital leases | $23.143 million | $27.036 million | Combined balance-sheet amounts, including current and non-current portions |
Investing activities used $653,000 of cash and financing activities used $7.919 million. Interest expense increased to $1.927 million from $1.707 million, primarily reflecting PBRT lease financing. The company reported that available cash, operating cash flow and other resources should cover scheduled debt and lease obligations for the next 12 months.
Material changes versus the prior year
- PBRT revenue increased 91.7% to $4.120 million, accounting for 21% of 2017 revenue, as the Orlando system treated more patients. PBRT fractions rose to 4,554 from 2,330.
- Gamma Knife revenue fell 7.6% to $14.848 million. Procedures declined 15.1% to 1,631, mainly after two customer contracts expired; average revenue per procedure rose 8.8% to $9,104.
- IGRT revenue increased 23.8% to $588,000, attributed to higher volume at the existing site.
- Costs of revenue increased to $10.893 million, including higher PBRT maintenance, depreciation and operating costs. Selling and administrative expense rose 13.7% to $4.323 million.
- Cash declined by $719,000, while accounts receivable increased to $5.019 million and days sales outstanding rose to 94 from 80.
Outlook, risks, contingencies and unusual items
- PBRT commitments: The company committed to buy two additional MEVION S250 systems for $25.8 million, with expected delivery no later than 2019 and 2020. It had paid $2.0 million in non-refundable deposits, but had no customer placement or related financing agreements for either unit. Deposits could be forfeited if it cannot secure placements on time or obtain an extension.
- Other commitments: The company had $1.5 million of Cobalt-60 reload commitments scheduled for the first half of 2018 and intended to finance them. Total disclosed contractual obligations, including debt and lease payments, equipment purchases and operating leases, were $56.098 million.
- Customer and reimbursement risk: Five customers represented more than half of 2017 revenue, and one customer represented approximately 21%. Revenue-sharing arrangements expose the company to changes in government and other payer reimbursement. Medicare Gamma Knife reimbursement was approximately $9,000 per treatment in 2017; the filing cites approximately $9,100 for 2018.
- Debt and financing: The company cautioned that its debt burden could limit access to future credit. Financing for new projects may not be available on acceptable terms. Some equipment, customer contracts and receivables secure debt or lease obligations; the Orlando PBRT financing is guaranteed by the company.
- Mevion impairment: The company wrote down its remaining $579,000 Mevion equity investment to zero in 2017. It also recorded a $2.140 million impairment in 2015.
- Tax item: The Tax Cuts and Jobs Act generated a $1.546 million benefit from remeasuring deferred tax balances. The company said it was still evaluating certain provisions and that the final tax accounting could change.
- Other risks: The filing highlights a potentially mature Gamma Knife market, competing treatment technologies, equipment obsolescence, fluctuating reimbursement rates, international operating risks and low trading volume. One Gamma Knife unit was idle, with no 2018 placement plan disclosed.
- The company provided no specific revenue or earnings guidance. It reported no material pending legal proceedings. Management assessed disclosure controls and internal control over financial reporting as effective; the auditor issued an unqualified opinion on the financial statements and did not audit internal control effectiveness.
Important facts for investors to verify
- Whether the company can secure customer sites and financing for the two additional PBRT systems before delivery deadlines, and the resulting funding needs.
- Whether PBRT utilization and collections improve enough to support the system’s maintenance, depreciation and lease costs; track receivables and days sales outstanding.
- The impact of expired Gamma Knife contracts, customer concentration and any further contract renewals or losses on procedure volume and revenue.
- Future Medicare and other payer reimbursement rates, including the effect of any changes on revenue-sharing arrangements.
- Debt and lease payment schedules, covenant compliance, financing availability and the company’s ability to manage its working-capital deficit.
- Final tax effects of the Tax Cuts and Jobs Act and any updates to the company’s provisional accounting.