American Shared Hospital Services — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. The company provides Gamma Knife, proton beam radiation therapy (PBRT), and related radiation-treatment equipment and services. It reported one operating segment, Medical Services Revenue.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Medical services revenue | $4.518m | $4.394m | $8.756m | $8.511m |
| Gross margin | $1.839m (40.7%) | $1.802m (41.0%) | $3.572m (40.8%) | $3.399m (39.9%) |
| Reported operating income | $0.443m | $0.478m | $0.942m | $0.934m |
| Net income (loss), consolidated | $0.353m | $(1.737)m | $0.685m | $(1.405)m |
| Net income (loss) attributable to the company | $0.093m | $(1.970)m | $0.144m | $(1.842)m |
| Diluted earnings (loss) per share | $0.02 | $(0.36) | $0.03 | $(0.34) |
- Revenue grew 2.8% in Q2 and 2.9% year to date. Orlando Health’s PBRT system, which treated its first patient in April 2016, contributed $446,000 of revenue in both reported 2016 periods. This was partly offset by lower Gamma Knife revenue.
- Gamma Knife procedures fell to 482 in Q2 from 518 and to 963 year to date from 997. Management attributed the declines mainly to normal cyclical fluctuations; excluding a contract that expired in early 2015, six-month procedure volume declined by eight.
- Interest expense rose to $433,000 in Q2 and $718,000 year to date, principally reflecting financing of the Orlando PBRT system. The six-month results also include a $108,000 loss on early extinguishment of debt.
- Year-ago results included a $2.114m Mevion investment impairment. The company reported no further impairment in 2016; the investment remained carried at $579,000.
Cash, liquidity and debt
- Cash and cash equivalents were $1.764m at June 30, 2016, down $445,000 from year-end 2015. Six-month operating cash flow was $3.401m, versus $3.869m in the prior-year period.
- Cash used in investing activities was $575,000; cash used in financing activities was $3.271m, including $2.059m of long-term debt principal payments, $2.055m of capital-lease payments and $301,000 of distributions to non-controlling interests.
- Working capital was negative $3.050m. Current assets were $6.527m and current liabilities $9.577m.
- At quarter-end, long-term debt including current maturities totaled approximately $7.588m; capital-lease obligations including current maturities totaled approximately $19.926m. Total debt and lease obligations were therefore approximately $27.514m, compared with approximately $23.118m at December 31, 2015.
- Management said cash on hand, operations and other resources should cover scheduled payments over the next 12 months: approximately $2.244m of debt principal and interest and $6.499m of capital-lease payments.
Material changes, outlook and risks
- Medicare reimbursement for Gamma Knife treatment was approximately $8,800 in 2016, compared with approximately $9,700 in 2015. Management cited lower Gamma Knife volume and revenue as factors weighing on results; PBRT revenue partly offset the decline.
- The company had commitments totaling $30.850m for equipment purchases: $26.000m for PBRT systems and $4.850m for Gamma Knife equipment and reloads. Of this, $29.550m was expected thereafter. Timing of the remaining PBRT payments was uncertain: the company had not agreed delivery timetables or secured sites and related financing for two systems. Financing availability and acceptable terms are not assured.
- The company expected to install a previously financed Gamma Knife unit in Peru in the second half of 2016; GKPeru was expected to begin operations in that period. The filing provides no formal earnings or revenue guidance.
- The Orlando PBRT lease gives rise to a potential asset-retirement obligation to remove the equipment at lease end, but the company said its fair value could not reasonably be estimated and recorded no liability.
- Management identified risks in Gamma Knife and radiation-therapy businesses, developing its OR21 business model, and its Mevion investment. Risk factors were unchanged from the 2015 Form 10-K. No legal proceedings were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Key facts investors should verify
- Whether the new Orlando PBRT system can build treatment volume and revenue sufficient to offset Gamma Knife declines and its associated costs and lease obligations.
- How the company plans to finance or defer its $30.850m equipment commitments, particularly the $25.800m remaining PBRT purchase commitments with uncertain timing and no identified sites or financing.
- Whether operating cash flow and available liquidity can meet the stated next-12-month debt and lease payments despite negative working capital and quarter-end cash of $1.764m.
- Future Gamma Knife procedure trends and reimbursement rates, including the effect of the 2016 Medicare rate reduction from 2015 levels.
- Whether Mevion’s funding needs or other developments could require another impairment of the $579,000 investment.