American Shared Hospital Services — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; unaudited. The company leases and operates Gamma Knife, proton beam radiation therapy (PBRT), and other radiation therapy equipment. At quarter-end it reported 16 Gamma Knife units, one PBRT system, and one IGRT unit in operation, plus a stand-alone Gamma Knife facility in Peru.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Medical services revenue | $4.470 million | $4.613 million | $14.944 million | $14.472 million |
| Gross margin | $1.634 million (36.6%) | $1.882 million (40.8%) | $5.921 million (39.6%) | $6.479 million (44.8%) |
| Reported operating income | $185,000 | $439,000 | $1.624 million | $1.862 million |
| Net income | $288,000 | $275,000 | $1.439 million | $1.261 million |
| Net income attributable to company | $168,000 | $99,000 | $845,000 | $505,000 |
| Diluted EPS | $0.03 | $0.02 | $0.14 | $0.09 |
- Revenue mix and volume: Q3 PBRT revenue rose 11% to $1.041 million, with treatments increasing to 1,081 fractions from 940. Gamma Knife revenue fell to $3.194 million from $3.564 million; procedures declined to 337 from 379. IGRT revenue increased to $235,000 from $114,000. For the nine months, PBRT and IGRT revenue increased, while Gamma Knife revenue decreased.
- Costs and earnings: Costs of revenue rose to $2.836 million in Q3 and $9.023 million year to date, chiefly reflecting maintenance and supplies, including the Mevion service agreement. Lower Q3 Gamma Knife revenue and higher operating costs reduced reported operating income. Higher net income attributable to the company reflected lower income tax expense, including the effect of the 2017 Tax Act; Q3 also included $185,000 of business-interruption insurance income.
- Cash flow: Nine-month operating cash flow was $6.225 million, versus $4.976 million. Investing used $1.187 million; financing used $5.351 million, including $4.881 million of principal payments on debt and capital leases and $470,000 of distributions to non-controlling interests. Cash, cash equivalents, and restricted cash declined $313,000 to $2.189 million.
- Liquidity and debt: September 30 cash and cash equivalents were $1.839 million, with $350,000 restricted cash. Working capital was $752,000. Long-term debt totaled $4.190 million and capital lease obligations $15.798 million. Total assets were $56.470 million and shareholders’ equity $31.023 million. Management said available cash and operating resources should cover scheduled obligations over the next 12 months.
Changes, outlook, and risks
- Nine-month revenue increased 3.3%, but gross margin declined from 44.8% to 39.6% as costs of revenue rose faster than sales. Company-attributable net income increased to $845,000 from $505,000.
- Management attributed PBRT volume growth to increased awareness of proton therapy. Gamma Knife declines reflected lower volume at existing sites, personnel issues at some sites in Q3, and three customer contract expirations between 2017 and April 2018. Management said nine-month Gamma Knife procedures, excluding specified departed sites, were consistent with the prior year.
- No formal financial guidance is provided. The filing identifies expected PBRT growth, expansion of the proton therapy business, and timing of treatments at new Gamma Knife systems as forward-looking matters, subject to operating, financing, and timing risks.
- The company had commitments of $25.8 million for two additional MEVION S250 PBRT systems, with $2.0 million in non-refundable deposits. It had not secured placement agreements or related financing and expected delivery by 2019 and 2020; deposits could be forfeited if it cannot meet the required timeline or obtain an extension. Additional Gamma Knife and LINAC commitments totaled $5.085 million at September 30; an October 31 reload commitment brought Gamma Knife commitments to $5.835 million. Financing availability is not assured.
- Total disclosed equipment and service commitments were $38.511 million, mostly due thereafter. Scheduled debt and interest payments for the next 12 months were approximately $2.281 million, with scheduled capital lease payments of approximately $5.453 million.
- A water-damage event temporarily took the Orlando PBRT system offline for two weeks. The company recorded $185,000 of expected business-interruption insurance reimbursement. An idle Gamma Knife unit had a $729,000 net book value, with no plan to place it in service or trade it during 2018. The equity investment that had been written down to zero was cancelled after a financing round; the company received $22,000 and retained no ownership interest.
- The company adopted the revenue standard in 2018 with no material cumulative effect. It was evaluating the new lease standard, effective for it January 1, 2019. The filing reported no legal proceedings, no changes to previously disclosed risk factors, and effective disclosure controls.
Investor facts to verify
- Whether the two PBRT systems obtain customer placements, financing, and required delivery extensions or approvals on schedule.
- Whether operating cash generation is sufficient for debt and lease payments alongside the sizable equipment and service commitments.
- Whether PBRT growth and Gamma Knife utilization can offset contract expirations, site-level volume weakness, and rising service costs.
- Whether the $185,000 insurance reimbursement is ultimately received and whether the idle Gamma Knife unit requires impairment or other action.