Business context and reporting period
American Shared Hospital Services (NYSE American: AMS) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. It provides Gamma Knife, proton beam radiation therapy (PBRT), and image-guided radiation therapy equipment and services to hospitals, and operates a Gamma Knife facility in Lima, Peru. At quarter-end, it reported 16 Gamma Knife units, one PBRT system, and one IGRT machine in operation, in addition to the Peru facility.
Financial performance and position
| Metric | Three months ended June 30, 2019 | Six months ended June 30, 2019 |
|---|---|---|
| Revenue | $5.197 million | $10.518 million |
| Gross margin | $1.729 million; 33.3% of revenue | $3.666 million; 34.9% of revenue |
| Reported operating income | $302,000 | $817,000 |
| Net income | $279,000 | $674,000 |
| Net income attributable to AMS | $31,000; $0.01 per diluted share | $301,000; $0.05 per diluted share |
| Cash provided by operating activities | Not stated separately | $4.213 million |
At June 30, 2019, cash, cash equivalents, and restricted cash totaled $2.256 million; unrestricted cash and cash equivalents were $1.906 million. Working capital was $1.349 million, total assets $55.567 million, and shareholders’ equity $31.754 million. Long-term debt was $4.483 million and capital lease obligations were $12.605 million. The balance sheet also included $1.238 million of operating lease liabilities following adoption of the new lease standard.
Changes versus the prior comparable period
- Revenue rose 0.5% in the quarter and 0.4% for the first half. PBRT revenue increased 3.4% in the quarter and 18.2% year to date, with higher treatment volumes.
- Gamma Knife revenue was nearly flat in the quarter but fell 3.7% for the first half. Management cited expired customer contracts, unfavorable payor mix, and a contract labor dispute that stopped procedures at one site during Q2. The dispute was resolved, and the site resumed treatments in July 2019. Gamma Knife procedure counts fell 16 in Q2 and 33 in the first half year over year.
- IGRT revenue declined because of lower volumes. Total costs of revenue increased 12.3% in Q2 and 10.7% in the first half, including higher depreciation and maintenance costs. Selling and administrative expenses also increased, primarily due to legal and consulting fees.
- AMS-attributable net income declined from $287,000 to $31,000 in Q2 and from $677,000 to $301,000 for the first half. Management attributed the decline to higher operating and selling and administrative expenses. First-half operating cash flow fell from $5.554 million to $4.213 million.
- Cash, cash equivalents, and restricted cash increased $464,000 from December 31, 2018. The company generated $4.213 million from operations, while investing and financing activities used $586,000 and $3.163 million, respectively.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management said cash on hand, operations, and other cash resources should be adequate for scheduled debt and capital lease obligations over the next 12 months. It cited approximately $2.165 million of scheduled debt principal and interest and $5.275 million of capital lease payments during that period.
- Significant purchase commitments include two PBRT systems for $34.0 million, with $2.25 million of non-refundable deposits paid, and $8.11 million of Gamma Knife and LINAC commitments. The company is seeking sites and financing for the PBRT units; it had not entered into placement or financing agreements for either unit. Failure to secure a customer agreement or extension within the required timeframe could put the deposits at risk. The filing states delivery is projected to commence no later than 2023.
- Total contractual obligations were $74.143 million, including equipment purchases, service contracts, debt, capital leases, and operating leases. The company intends to finance equipment commitments but cautions that financing may not be available on acceptable terms.
- PBRT service costs may increase: an additional annual $250,000 service payment applies from the second service year if a second Mevion unit is not placed at Orlando Health before September 2019.
- The company reported one idle Gamma Knife unit with a $729,000 net book value and no plan to place it in service or trade it in during 2019. Forward-looking risks include quarterly variability, the Gamma Knife and radiation therapy businesses, expansion of proton therapy, and development of The Operating Room for the 21st Century program. The filing reported no changes to the risk factors in the 2018 Form 10-K and no legal proceedings.
- The company adopted ASC 842 on January 1, 2019, recognizing approximately $1.362 million in operating lease right-of-use assets and liabilities, with no material initial impact on earnings. Management stated disclosure controls were effective and there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the Gamma Knife site that resumed treatments in July maintains volumes, and whether expired contracts or payor mix continue to pressure revenue.
- Whether PBRT volume growth and the recovery in Gamma Knife activity can offset higher depreciation, service, and other operating costs.
- How the company will fund its substantial equipment commitments, including the two PBRT systems, and whether it can secure placements on schedule without jeopardizing deposits.
- Liquidity against scheduled debt and lease payments, and the sustainability of operating cash flow given the first-half decline and large contractual obligations.
- The effect of Mevion service-cost increases and other equipment service commitments on future margins.