Business context and reporting period
American Shared Hospital Services filed this Form 10-K for the fiscal year ended December 31, 2013. The company finances and leases Gamma Knife radiosurgery equipment and provides related services, primarily through its 81% indirect interest in GK Financing, LLC. It also operates two Image Guided Radiation Therapy (IGRT) sites. Gamma Knife generated about 92% of 2013 revenue and IGRT about 8%.
At year-end, the company reported 19 Gamma Knife units in operation. It reported approximately 2,482 Gamma Knife procedures during 2013. The filing was signed March 31, 2014.
Financial and operating highlights
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $17.584 million | $17.048 million |
| Gross margin | $6.944 million; about 39.5% of revenue | $6.930 million; about 40.6% |
| Income from operations, as presented in the filing | $1.120 million | $0.730 million |
| Consolidated net income (loss) | $(0.113) million | $0.813 million |
| Net income (loss) attributable to ASHS | $(0.312) million; $(0.07) per share | $0.038 million; $0.01 per share |
| Cash from operating activities | $8.076 million | $6.869 million |
| Cash and cash equivalents | $1.909 million | $1.564 million |
| Working capital | $(4.079) million | $(2.697) million |
The filing reports $32.461 million of long-term debt and capital leases, including current portions, plus $8.840 million drawn on a $9.0 million secured line of credit. The certificate of deposit securing the line was $9.0 million. Total contractual obligations were $96.770 million, including $50.309 million of future equipment purchases.
Material changes versus the prior comparable period
- Revenue increased 3.1%, mainly as Gamma Knife revenue rose 6.4% to $16.127 million. Procedures increased 18.6%, while average revenue per procedure fell 10.3% to $6,498.
- IGRT revenue fell 23.1% to $1.457 million, attributed to lower volume at existing sites.
- Costs of revenue rose 5.2% to $10.640 million; gross margin as a share of revenue declined about 1.1 percentage points. Higher maintenance and depreciation costs included costs associated with equipment upgrades and Turkey operations.
- Interest expense declined 16.5% to $1.799 million, partly reflecting debt amortization and a contract payoff. However, foreign currency results swung from a $132,000 gain to a $1.174 million loss, primarily due to Turkish lira movements. This contributed to the net loss attributable to ASHS.
- Operating cash flow rose to $8.076 million, but investing and financing activities used $1.724 million and $6.019 million, respectively. Receivables increased to $4.522 million and days sales outstanding rose to 109 from 83.
- The prior-year comparisons are affected by a $4.984 million equipment sale in 2011; there were no equipment sales in 2012 or 2013.
Outlook, commentary, risks and unusual items
- Management said available cash was adequate for 2014 needs and expected to renew the $9.0 million line of credit at its August 2015 maturity. The company reported compliance with debt covenants. No formal earnings or revenue guidance is provided.
- Medicare reimbursement for the Gamma Knife delivery code fell from $7,910 to $3,300 per treatment effective April 1, 2013, affecting six reimbursement-linked contracts and prompting revisions to three fixed-fee contracts. The code reimbursement increased approximately 9% effective January 1, 2014.
- The company has committed to purchase three proton beam systems from Mevion, along with three Gamma Knife Perfexion systems and one Model 4C unit. Equipment commitments totaled $50.309 million; $5.884 million had been deposited or paid. Financing was not yet obtained for all committed equipment, and delivery and installation timing depends on financing and construction milestones.
- The company carries its 0.77% Mevion equity investment at a cost of $2.701 million. Management estimated an unrealized impairment of approximately $2.4 million but concluded it was temporary and recorded no write-down. Mevion’s first system treated a patient in December 2013; recovery of the investment remains uncertain.
- Management said proton beam expansion and the OR21 project were developmental; neither was expected to generate significant revenue within the next two years. The company also reported that it was liquidating its Brazil subsidiaries.
- Key risks include substantial debt and capital needs, negative working capital, customer and service concentration, reimbursement changes, foreign currency exposure, limited market growth, equipment obsolescence, competition, and the execution and funding risks of the Mevion business. Six customers accounted for more than half of 2013 revenue, according to the risk-factor disclosure.
- The company reported no material pending legal proceedings. Its independent auditor issued an unqualified opinion on the financial statements; management stated that disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Whether procedure volume and per-procedure revenue recover or remain pressured after the Medicare reimbursement reduction, and how the January 2014 rate change and contract revisions affect results.
- Whether receivables and days sales outstanding improve, and whether the reported operating cash generation is sustainable given the working-capital deficit.
- Debt repayment needs, the renewal and terms of the secured credit line, covenant compliance, and access to financing for committed equipment purchases.
- Installation schedules, total funding needs, and expected economics for the three Mevion systems and other equipment commitments.
- Mevion’s commercial performance and financing position, and whether an impairment of the company’s investment or equipment deposits becomes necessary.
- Customer concentration, utilization trends at individual sites, and further reimbursement or foreign-exchange impacts.