American Shared Hospital Services — Q3 2015 Form 10-Q
Business context and period. The company provides Gamma Knife and other radiation-therapy equipment and services. It operated 17 Gamma Knife units at September 30, 2015. This filing covers the three and nine months ended September 30, 2015; balance-sheet comparisons are with December 31, 2014.
Financial performance and position
- Revenue: Q3 medical-services revenue was $3.875 million, down 2.7% from $3.982 million. Nine-month revenue was $12.386 million, up 8.4% from $11.425 million.
- Gross margin: Q3 gross margin was $1.454 million (37.5% of revenue), versus $1.603 million (40.3%) a year earlier. Nine-month gross margin was $4.853 million (39.2%), versus $3.737 million (32.7%).
- Profit and EPS: Q3 net income attributable to the company was $43,000, or $0.01 per diluted share, versus $13,000, or $0.00. The nine-month attributable loss was $1.799 million, or $0.33 per diluted share, compared with a $1.010 million loss, or $0.21 per share. Reported nine-month operating income was $1.249 million, versus an operating loss of $431,000.
- Cash flow: Nine-month cash from operations was $6.157 million, up from $4.413 million. Capital expenditures were $1.517 million. Cash and cash equivalents increased by $1.125 million to $2.184 million.
- Debt and leases: At September 30, debt was $10.246 million, including current and long-term portions; capital-lease obligations were $14.564 million. The $8.780 million bank line of credit was repaid in January 2015.
- Liquidity: Current assets were $6.588 million and current liabilities were $9.015 million, resulting in negative working capital of $2.427 million. Total assets were $55.886 million and shareholders’ equity, including non-controlling interests, was $24.766 million.
Material changes versus prior comparable periods
- Nine-month revenue rose despite fewer reported procedures overall: 1,478 versus 1,569. Excluding Turkey procedures in 2014, procedures increased by 133, supported by higher volume at existing sites and a new site that began treating patients in December 2014. Q3 procedures fell 15 to 481, partly because a customer site was offline for a Cobalt-60 reload.
- The nine-month revenue comparison includes EWRS Turkey in 2014, but not in 2015. Excluding Turkey revenue, Gamma Knife revenue increased $1.492 million year over year.
- Interest expense declined to $900,000 for nine months from $1.376 million, reflecting repayment of the credit line and other debt paydowns, among other factors.
- The nine-month loss included a $2.114 million other-than-temporary impairment of the Mevion investment. Its reported carrying value fell from $2.709 million at December 2014 to $605,000 at September 2015; management estimated fair value at approximately $600,000.
Outlook, commitments, and risks
- No specific earnings or revenue guidance is provided. Management stated that cash on hand, operating cash flow, and other cash resources should cover scheduled debt and lease obligations over the next 12 months.
- Scheduled debt interest and principal payments over the next 12 months were approximately $3.345 million; scheduled capital-lease payments were approximately $5.122 million.
- Equipment purchase commitments totaled $36.350 million: $33.600 million for three proton-beam systems and $2.750 million for Gamma Knife systems. A $7.8 million payment for the first proton system was due in January 2016; management expected it to be financed with $9.0 million of lease financing, subject to definitive documents. Approximately $25.8 million of proton commitments were expected to begin coming due in 2017 or later, with financing discussions ongoing. A further approximately $600,000 was due for the Peru Gamma Knife project within 12 months.
- The company had paid $5.0 million in non-refundable deposits toward the proton systems. Its first system was delivered in November 2014; the company anticipated patient treatments in Orlando in Q1 2016. The Peru Gamma Knife site was scheduled for installation in early 2016.
- Management cited risks involving Gamma Knife and radiation-therapy operations, development-stage investment in Mevion, and the timing, financing, and operation of the proton-therapy business. It cautioned that financing for current or future projects may not be available on acceptable terms.
- Medicare Gamma Knife reimbursement increased to $9,768 effective January 1, 2015. CMS proposed approximately $8,830 for 2016; the proposal remained subject to change before final adoption.
- The company reported no legal proceedings, no defaults upon senior securities, and no changes to the risk factors in its 2014 Form 10-K. Management said disclosure controls were effective at September 30, 2015.
Important facts for investors to verify
- Whether the anticipated $9.0 million lease financing for the first proton system was finalized in time to meet the January 2016 payment, and how the remaining proton systems will be financed.
- Whether the proposed 2016 Medicare reimbursement rate was finalized, and the resulting effect on treatment volume and revenue per procedure.
- Whether Mevion’s financing and commercial prospects support the company’s estimated investment value, and how the $5.0 million deposits and system commitments affect returns and liquidity.
- Whether procedure growth at existing and new sites can continue, particularly given quarterly procedure declines and customer-site downtime.
- How the company will manage negative working capital and scheduled debt, lease, and equipment payments while maintaining adequate liquidity.