American Shared Hospital Services — Q1 2017 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2017, the company reported one segment: medical services, primarily leasing and providing radiosurgery and radiation-therapy equipment to hospitals. At quarter-end, it had 17 Gamma Knife units, one proton beam radiation therapy (PBRT) system, and one image-guided radiation therapy machine in operation. The PBRT system at Orlando Health began treating patients in April 2016.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 or comparison |
|---|---|---|
| Medical services revenue | $4.914 million | $4.238 million |
| Gross margin | $2.346 million; 47.7% of revenue | $1.733 million; 40.9% of revenue |
| Income before taxes | $758,000 | $396,000 |
| Net income | $542,000 | $332,000 |
| Net income attributable to American Shared Hospital Services | $293,000; $0.05 basic and diluted EPS | $51,000; $0.01 basic and diluted EPS |
| Net cash from operating activities | $1.649 million | $1.720 million |
| Capital expenditures | $1.106 million | $333,000 |
Cash and cash equivalents were $2.403 million at March 31, down $468,000 from year-end; restricted cash was $250,000. Working capital was $327,000 and total assets were $60.433 million. Current assets were $8.765 million against current liabilities of $8.438 million.
At quarter-end, balance-sheet debt was $7.812 million, comprising current and long-term debt; capital-lease obligations totaled $18.181 million. Scheduled debt and capital-lease payments over the next 12 months were approximately $2.696 million and $6.068 million, respectively. Management stated cash on hand, operations, and other cash resources should cover these obligations. The filing does not provide a separate operating-cash-flow margin.
Material changes and management commentary
- Revenue rose $676,000. PBRT contributed $1.155 million, while Gamma Knife revenue fell $506,000 to $3.619 million. Gamma Knife procedures declined to 456 from 481, mainly because two sites had downtime for Cobalt-60 reloads; management also cited lower volumes and a greater share of procedures at lower-reimbursement sites.
- Revenue from the radiation-therapy contract increased $27,000 to $140,000. Total cost of revenue rose $63,000 to $2.568 million, including higher PBRT-related depreciation and marketing costs.
- Selling and administrative expense increased $190,000 to $1.139 million, primarily due to legal fees, severance, and higher rent. Interest expense rose $168,000 to $453,000, mainly reflecting PBRT lease financing.
- Attributable net income improved from $51,000 to $293,000, primarily due to PBRT operations, partly offset by higher selling and administrative costs. Q1 2016 included a $108,000 loss on early extinguishment of debt; Q1 2017 had none.
- Operating cash flow was $1.649 million, with the cash decline primarily associated with a $755,000 increase in receivables. Investing cash outflow was $1.106 million; financing cash outflow was $1.011 million.
Outlook, commitments, and risks
No earnings or revenue guidance was provided. The company expected its Gamma Knife site in Peru to begin treatments in Q3 2017 and a new Perfexion site to begin treating patients in the latter half of 2017. The Model 4C unit for Peru was installed; the company estimated approximately $200,000 of related cash requirements in the next 12 months.
Commitments totaled $28.150 million: $25.800 million for two PBRT systems and $2.350 million for Gamma Knife units. The company had paid $2.000 million in non-refundable PBRT deposits. Construction and delivery schedules for the two remaining PBRT units were not agreed; the company was seeking sites and had no placement or related financing agreements. Timing of the remaining PBRT payments was uncertain, and management said it believed payments should begin only after a site and financing were in place. The company warned that financing for current or future projects may not be available on acceptable terms.
Management identified risks related to Gamma Knife and radiation-therapy operations, developing its Operating Room for the 21st Century business, and its Mevion investment; it reported no changes to the risk factors in its 2016 Form 10-K. GKPeru was expected to start operations in Q3 2017; certain other subsidiaries and initiatives were inactive or not expected to generate significant revenue within the next two years. No legal proceedings were reported. Disclosure controls were deemed effective, with no material change in internal control over financial reporting.
Other notable items: 100,000 warrants were exercised in Q1, leaving no warrants outstanding at March 31. The company recorded no compensation expense for 161,766 executive performance-share awards because achievement of the vesting metrics was not considered probable; approximately $542,000 of related compensation cost remained unrecognized. The company adopted stock-compensation guidance effective January 1, 2017, with no material financial-statement impact.
Important facts for investors to verify
- Whether PBRT operations can sustain revenue and profitability as Gamma Knife volumes and reimbursement mix fluctuate.
- Timing, site placement, financing, and payment obligations for the $25.8 million PBRT commitments.
- Ability to meet scheduled debt and lease payments with only $327,000 of working capital and $2.403 million in cash and cash equivalents.
- Progress and financing for the Peru and new Gamma Knife sites, and whether they begin operations on the expected schedule.
- Receivables growth, performance-based award vesting assumptions, and the eventual impact of new accounting standards under evaluation.