AMS

Business Context and Reporting Period

Company: American Shared Hospital Services (ASHS)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: ASHS operates nineteen Gamma Knife units across the U.S. and provides radiation therapy equipment services. The company is expanding into international markets (U.K., Peru, Turkey) and investing in proton beam therapy technology through its subsidiary, GK Financing, and its investment in Still River Systems, Inc.

Key Financial Metrics

Note: Total Debt includes $3,542,000 current long-term debt, $7,891,000 long-term debt, $3,026,000 current capital leases, $13,603,000 long-term capital leases, and $7,900,000 advances on line of credit.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased by $279,000 (6.8%) driven by a 51-procedure increase in Gamma Knife volume (489 vs. 438). Upgrades to Perfexion units contributed to higher volume at several sites, partially offset by lower volume at three other locations.
• Cost Structure: Total costs of revenue rose slightly by $54,000. Maintenance costs decreased due to warranty coverage on new units, while other direct operating costs increased by $136,000 due to retail site operations and taxes.
• Profitability: Operating income improved by $69,000. However, interest expense increased by $95,000 due to financing for new Perfexion units.
• Liquidity: Cash from operating activities surged to $3,397,000 (from $1,236,000 in Q1 2010), primarily due to a $1,922,000 increase in customer deposits related to a contract amendment for a Perfexion unit purchase.
• Non-Controlling Interest: Net income attributable to non-controlling interest increased to $198,000, reflecting higher profitability in the GK Financing subsidiary.

Outlook, Risks, and Contingencies

• Investment Impairment: ASHS holds a $2,617,000 investment in Still River Systems, Inc. (proton beam technology). Management estimates an unrealized loss of approximately $1.5 million based on recent financing rounds but deems the impairment "temporary" due to Still River's progress toward FDA approval and installation of its first unit.
• Capital Commitments: The company has approximately $53,000,000 in remaining commitments to purchase equipment, including three Monarch250 proton beam systems, two Perfexion units, and two LGK Model 4 Gamma Knife units. Financing for these projects is contingent on market conditions and FDA approval for the Still River system.
• Debt Obligations: Scheduled debt and capital lease payments for the next 12 months total approximately $8.6 million. Management believes cash flow from operations is adequate to meet these obligations.
• Legal Proceedings: No legal proceedings were reported for ASHS. However, its investee, Still River, is facing patent infringement lawsuits from MIT, which Still River disputes.

Key Facts for Investor Verification

• Still River Viability: Verify the timeline for Still River's FDA 510(k) submission (anticipated mid-2011) and the status of the MIT patent litigation, as these directly impact the valuation of ASHS's $2.6M investment and future revenue from proton beam therapy.
• Financing Availability: Confirm ASHS's ability to secure financing for its $53M in equipment commitments, given management's note that credit market conditions have made financing difficult.
• Customer Concentration: Review the specific terms of the $2M customer deposit received in Q1 2011 to ensure the conversion to a sale is not contingent on factors outside ASHS's control.
• Debt Covenants: Verify continued compliance with debt covenants, particularly regarding the $9M line of credit secured by cash investments.