American Shared Hospital Services — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; filed August 14, 2013. The company provides Gamma Knife radiosurgery and radiation therapy equipment and services. It operated 19 Gamma Knife units at period-end.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Medical services revenue | $4.583 million | $4.284 million | $9.251 million | $8.687 million |
| Gross margin dollars | $1.893 million | $1.873 million | $4.011 million | $3.710 million |
| Gross margin percentage | 41.3% | 43.7% | 43.4% | 42.7% |
| Operating income | $284,000 | $225,000 | $696,000 | $464,000 |
| Net income (loss), consolidated | ($103,000) | $226,000 | $130,000 | $455,000 |
| Net income (loss) attributable to ASHS | ($122,000) | $15,000 | ($97,000) | $24,000 |
| EPS attributable to ASHS, diluted | ($0.03) | $0.00 | ($0.02) | $0.01 |
For the first half, cash from operations was $3.591 million, compared with $2.759 million a year earlier. Capital expenditures were $3.178 million; cash and cash equivalents declined $219,000 to $1.345 million. The company also held $9.0 million in a certificate of deposit and $50,000 of restricted cash. Working capital was $5.628 million.
At June 30, current and long-term debt totaled $19.283 million; capital lease obligations totaled $14.985 million; and line-of-credit borrowings were $8.7 million. The $9.0 million line was secured by cash held at the bank, had a $300,000 undrawn balance, and matured August 1, 2014. The company reported compliance with debt covenants. Scheduled debt principal and interest payments of approximately $5.398 million and capital lease payments of approximately $5.018 million were due over the next 12 months; management said available cash resources and operating cash flow were adequate to meet them.
Changes and management commentary
- Revenue grew 7.0% in Q2 and 6.5% for the first half, primarily from two newer Gamma Knife contracts and higher procedure volume at existing sites. Procedures increased to 665 in Q2 from 527, and to 1,255 for the first half from 1,041. Radiation therapy revenue declined $101,000 in Q2 and $229,000 year to date.
- Despite higher revenue, Q2 gross margin percentage fell to 41.3% from 43.7%, reflecting higher maintenance costs and depreciation. First-half gross margin percentage rose to 43.4% from 42.7%.
- Operating income improved, but unfavorable foreign-currency transactions materially affected results: the statements report losses of $393,000 for Q2 and $534,000 for the first half. Interest expense declined to $456,000 for Q2 and $927,000 for the first half, mainly as principal on mature-unit loans was repaid.
- Management attributed the lower results to foreign-exchange losses. Selling and administrative expense increased, including a $115,000 rent accrual related to subleasing office space below the company’s lease rate.
Outlook, risks and unusual items
- In July 2013, CMS proposed a $8,576 payment effective January 1, 2014 for a complete single-session SRS treatment, including Gamma Knife. This was subject to comment and revision. The filing compares it with Gamma Knife reimbursement of $3,300 effective April 1, 2013 and $7,910 from January 1 through March 31, 2013; final rates were expected in fall 2013.
- The company had approximately $40 million in remaining equipment purchase commitments, including three MEVION S250 proton therapy systems and Gamma Knife units. It had obtained financing commitments for the first MEVION system and the Peru unit, but cautioned that financing for other projects was not assured or might not be available on acceptable terms. Non-refundable deposits included $3.0 million toward the MEVION systems and $5.147 million toward Gamma Knife equipment.
- The first MEVION system was anticipated for delivery in the first half of 2014. The Peru Gamma Knife operation was expected to begin in the latter part of 2014; the filing said the Long Beach proton therapy project was not expected to begin operations in 2013.
- The company held a $2.701 million cost-method investment in Mevion, approximately 0.77% ownership. Management estimated an unrealized loss of approximately $2.4 million but judged it temporary and did not record an impairment. Mevion’s development, financing needs and delays in treating its first clinical patient remain risks.
- The filing provides no formal earnings or revenue guidance. Management cited risks in Gamma Knife and radiation therapy businesses, the OR21 program, international operations, foreign currency, and investment in a development-stage company. It reported no material changes to the risk factors in its 2012 Form 10-K.
Most important facts for investors to verify
- Whether the proposed CMS reimbursement rate became final and how it affected Gamma Knife demand and revenue.
- Foreign-currency exposure and the source and potential recurrence of the $534,000 first-half transaction loss.
- Mevion’s progress, financing and clinical milestones, and whether the investment’s estimated impairment warrants recognition.
- Availability and terms of financing for the approximately $40 million equipment commitments, alongside scheduled debt and lease payments.
- Whether new-site procedure growth and operating cash flow can offset lower radiation therapy revenue and rising operating costs.