American Shared Hospital Services — Q1 2016 Form 10-Q
Business context and period. The company provides Gamma Knife and other radiation-therapy equipment and services to healthcare providers. This unaudited report covers the three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. It operated 17 Gamma Knife units at quarter-end, versus 18 a year earlier, after a customer contract expired following Q1 2015.
Financial performance and position
- Revenue: $4.238 million, up 2.9% from $4.117 million. Excluding the expired contract, Gamma Knife revenue rose $374,000; radiation-therapy revenue declined $6,000 to $113,000.
- Profit and margins: Gross margin was $1.733 million, or 40.9% of revenue, versus $1.597 million, or 38.8%. Reported operating income was $499,000 versus $456,000. Consolidated net income was $332,000 in both periods; income attributable to American Shared Hospital Services fell to $51,000 from $128,000. EPS was $0.01 versus $0.02.
- Cash flow: Operating cash flow was $1.720 million, up from $1.329 million. Investing used $333,000; financing used $1.456 million. Cash declined $69,000 during the quarter to $2.140 million.
- Liquidity: Current assets were $6.366 million and current liabilities $9.185 million, resulting in negative working capital of $2.819 million. Management said cash on hand, operating cash flow, and other resources should cover scheduled debt and lease obligations over the next 12 months.
- Debt and leases: Balance-sheet debt was $8.204 million, including current and long-term portions. Capital-lease obligations totaled $20.464 million. Scheduled interest and principal on debt over the next 12 months were approximately $3.124 million; scheduled capital-lease payments were approximately $6.076 million.
Material changes and management commentary
- Gamma Knife procedures increased to 481 from 479; excluding the expired contract, procedures rose 28, or 6.2%, reflecting increased volume at existing sites and two sites that were partly inactive in Q1 2015. Management also cited favorable payor mix at retail sites.
- Costs of revenue declined $15,000. Lower maintenance and supplies costs were partly offset by higher depreciation. Selling and administrative expense increased $128,000 to $949,000, primarily due to accounting and consulting fees and payroll.
- Interest expense decreased $35,000 to $285,000, attributed to a lower average principal balance. A $108,000 loss on early extinguishment of debt arose when proceeds from MEVION equipment lease financing were used to repay $1 million of notes held by four directors. Excluding this loss, net of tax, management reported parent-attributable net income of $115,000, down $13,000 year over year.
- The company had commitments to purchase two MEVION S250 proton-beam systems for $25.8 million, with timing of payments uncertain and no sites or related financing yet arranged for the second and third units. Total equipment commitments were $30.05 million, including $3.65 million for Gamma Knife equipment. Management stated that required payments for the additional proton units should not begin until sites and financing are available.
- The first MEVION S250 treated its first patient in April 2016. Orlando treated its first patient that month; GKPeru was expected to begin operations in mid-2016. Management gave no quantified earnings or revenue guidance.
Risks, contingencies, and other disclosures
- Management identified risks in the Gamma Knife and radiation-therapy businesses, development of the OR21 concept, and investment in Mevion. CMS reimbursement for a Medicare Gamma Knife treatment was approximately $8,800 in 2016, down from approximately $9,700 in 2015.
- The company held a 0.46% interest in Mevion carried at $579,000 after a $2.140 million impairment in 2015. It recorded no further impairment in Q1 2016, but noted Mevion’s ongoing need to raise cash.
- The filing reported no legal proceedings, defaults on senior securities, or changes to previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether operating cash flow can support scheduled debt and lease payments amid negative working capital and substantial capital commitments.
- Timing, sites, and financing for the remaining MEVION purchase commitments, and whether additional payments become due before placements are secured.
- Whether procedure growth and favorable payor mix continue, particularly given the smaller active Gamma Knife site base and Medicare reimbursement changes.
- Assumptions supporting the $579,000 carrying value of the Mevion investment and the company’s assessment of further impairment risk.