American Shared Hospital Services — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual report, not a standalone fourth-quarter filing. Amounts below are U.S. dollars; financial figures are in millions unless otherwise noted.
Business context
The company provides medical centers with Gamma Knife radiosurgery and radiation therapy equipment, generally under fee-per-use or revenue-sharing arrangements. Gamma Knife operations generated 97.2% of 2015 revenue; the remaining revenue came from one IGRT site. At year-end, the company reported 17 operating Gamma Knife units and approximately 1,947 procedures during 2015. It operates its Gamma Knife business through an 81% indirect interest in GK Financing, LLC.
Key financial results and liquidity
| Metric | 2015 | 2014 | Change/comment |
|---|---|---|---|
| Revenue | $16.548 | $15.417 | Up 7.3% |
| Gross profit | $6.715 | $5.279 | Gross margin 40.6%, versus 34.2% |
| Operating income (loss) | $1.980 | $(0.050) | Improved by $2.030 |
| Net loss | $(0.576) | $(0.562) | Consolidated result |
| Net loss attributable to ASHS | $(1.522) | $(0.952) | $(0.28) per diluted share, versus $(0.19) |
| Net cash from operating activities | $8.548 | $6.773 | Up $1.775 |
| Cash and cash equivalents | $2.209 | $1.059 | Restricted cash of $0.050 additionally reported |
| Working capital | $(2.691) | $(2.004) | Deficit widened by $0.687 |
| Long-term debt and capital leases | $23.118 | $26.884 | Excludes the line of credit, repaid in January 2015 |
Operating cash flow included substantial noncash depreciation and amortization ($6.190 million) and a $2.140 million noncash Mevion impairment. Investing activities used $1.926 million; financing activities used $5.472 million. The company said cash on hand, operating cash flow and other resources were adequate for scheduled obligations over the next 12 months, while noting that future financing availability was not assured. No dividends were paid in 2015.
Material changes versus comparable periods
- Gamma Knife revenue increased 10.7% to $16.077 million. Revenue per procedure rose 16.3% to $8,257, reflecting improved reimbursement and payor mix; procedures were 1,947, down 4.8% year over year. Excluding Turkey procedures in 2014, procedure volume increased 7%.
- IGRT revenue fell 47.4% to $0.471 million, due to the Turkey sale and lower volume at the remaining site.
- Costs of revenue declined 3.0% to $9.833 million, and selling and administrative expense declined 3.7% to $3.496 million. Interest expense decreased 27.1% to $1.239 million.
- Despite higher operating income, ASHS-attributable net loss widened primarily because of the $2.140 million impairment of its Mevion investment. The investment’s year-end carrying value was approximately $0.579 million.
- Medicare’s outpatient Gamma Knife reimbursement rate increased to approximately $9,700 in 2015 from $5,600 in 2014, but CMS set the 2016 rate at approximately $8,800. The earlier 2013 reduction in reimbursement had weighed on revenue.
Outlook, risks, contingencies and unusual items
- Proton beam expansion: The company expected its first MEVION S250 system at UF Health Cancer Center at Orlando Health to treat its first patient in the second quarter of 2016. In January 2016 it obtained approximately $8.4 million of lease financing for the system. Its second and third PBRT systems have no identified sites or delivery dates; the company is discussing financing for them.
- Large purchase commitments: At December 31, 2015, total equipment commitments were $37.850 million: $34.2 million for three proton systems and $3.650 million for Gamma Knife equipment and a Cobalt-60 reload. The filing estimated $12.050 million of equipment commitments in 2016 and $25.8 million thereafter. The timing and financing of later PBRT commitments depend on future site selection and lender availability.
- Customer and market concentration: Six customers accounted for more than half of 2015 revenue; one exceeded 10%. Three customers each represented more than 10% of year-end receivables. Contracts generally have no minimum procedure guarantees, and the filing describes the U.S. Gamma Knife market as potentially mature. Two idle Gamma Knife units had a combined net book value of $1.5 million.
- Debt and liquidity: Debt and lease obligations are substantial, and the company had negative working capital. Its prior $9 million line of credit was paid off using a certificate of deposit in January 2015 after a prior covenant waiver; the filing states it met lender covenants at year-end. Debt and lease collateral includes equipment, customer contracts and receivables.
- Reimbursement, regulation and technology: Revenue-sharing contracts expose the company to government and third-party reimbursement changes. Other cited risks include competition, equipment obsolescence, capital-intensive projects, the ability to place new units, and healthcare regulation. Management provided no specific revenue or earnings guidance.
- Unusual item and tax: The Mevion impairment followed cancellation of the planned IPO and was treated as a capital loss; the filing recorded a full valuation allowance against its tax benefit. The company reported $0.434 million of income tax expense despite a pretax loss.
- Other disclosures: The company reported no material pending legal proceedings. Management concluded disclosure controls and internal control over financial reporting were effective; the independent auditor gave an unqualified opinion on the financial statements.
Most important facts for investors to verify
- Whether the Orlando proton system began treating patients on schedule and generated sustainable utilization and cash flow.
- How the remaining PBRT purchase commitments will be financed, and whether suitable sites and customers are secured before additional spending.
- Whether Gamma Knife procedure volumes and reimbursement rates can support returns as Medicare reimbursement changes and customer contracts expire.
- The company’s capacity to meet debt, lease and equipment commitments given its working-capital deficit, customer concentration and limited cash balance.
- The assumptions supporting Mevion’s $0.579 million carrying value and the recoverability of its equipment, idle units and other capital investments.