American Shared Hospital Services — Q3 2016 Form 10-Q
Business and period: The company provides Gamma Knife radiosurgery and other radiation therapy services and equipment to hospitals. This unaudited filing covers the three and nine months ended September 30, 2016; balance-sheet comparisons are with December 31, 2015.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Medical services revenue | $4.884 million | $3.875 million | $13.640 million | $12.386 million |
| Gross margin | $2.396 million (49.1%) | $1.454 million (37.5%) | $5.968 million (43.8%) | $4.853 million (39.2%) |
| Operating income | $896,000 | $315,000 | $1.838 million | $1.249 million |
| Net income (loss), attributable to company | $334,000 | $43,000 | $478,000 | ($1.799 million) |
| Diluted EPS | $0.06 | $0.01 | $0.09 | ($0.33) |
- Orlando Health’s proton beam radiation therapy (PBRT) system began treating patients in April 2016 and generated revenue of $800,000 in Q3 and $1.246 million year to date. Management attributed improved earnings primarily to PBRT operations.
- Gamma Knife procedures were 483 in Q3, up 2 year over year, and 1,446 year to date, down 32. Excluding a contract that expired after Q1 2015, year-to-date procedures were down 6. PBRT volume was 869 fractions in Q3 and 1,311 year to date.
- Interest expense rose to $501,000 in Q3 and $1.219 million year to date, mainly reflecting PBRT lease financing. Selling and administrative expense also increased, including higher rent costs.
Cash, debt, and liquidity
- Nine-month operating cash flow was $5.694 million, versus $6.157 million in 2015. Capital spending was $1.050 million; financing cash outflow was $5.007 million. Cash and cash equivalents declined $363,000 to $1.846 million; restricted cash was $250,000.
- At September 30, current assets were $7.255 million and current liabilities $9.310 million, resulting in negative working capital of $2.055 million. Total shareholders’ equity was $26.151 million.
- Current and long-term debt totaled $6.472 million; capital lease obligations totaled $20.733 million. Together these amounted to $27.205 million, compared with $23.118 million at year-end 2015. The increase largely reflects PBRT lease financing.
- The company reported scheduled debt interest and principal payments of approximately $2.244 million and capital lease payments of approximately $6.659 million over the next 12 months. Management said cash on hand, operating cash flow, and other resources should cover scheduled obligations.
Changes, outlook, and material items
- Revenue increased 26% in Q3 and 10% year to date. Q3 Gamma Knife revenue increased $162,000, partly due to favorable payor mix; year-to-date Gamma Knife revenue decreased $30,000. Cost of revenue rose modestly, while gross margin improved.
- The 2015 year-to-date comparison includes a $2.114 million Mevion investment impairment. In 2016, the company recorded a $108,000 loss on early extinguishment of debt after repaying $1 million in director notes using PBRT lease-financing proceeds. Management stated that, excluding these items and estimated taxes, year-to-date net income increased $227,000.
- At September 30, commitments included $25.8 million for two additional MEVION S250 PBRT systems and $3.95 million for Gamma Knife equipment, or $29.75 million in total. The company had not agreed on delivery timetables or secured sites and financing for the additional PBRT systems; payment timing remained uncertain. Management said it was seeking sites and expected remaining PBRT payments to follow site availability and financing.
- A Gamma Knife customer gave notice it plans to purchase its unit when its lease ends in April 2017. The company expects to depreciate the unit to the contracted purchase price; it was not classified as held for sale.
- Management cited 2017 Medicare reimbursement of approximately $9,000 per Gamma Knife treatment, compared with approximately $8,800 in 2016. It also reported lower 2017 Medicare PBRT rates for the listed treatment categories than in 2016. The filing provides no formal earnings or revenue guidance.
- Risks include securing acceptable financing and locations for committed equipment, operating and utilization variability, reimbursement changes, and Mevion’s funding needs. The company determined the Mevion investment required no further impairment at September 30; it remained carried at $579,000. The filing also says the fair value of a PBRT asset-retirement obligation could not be reasonably estimated, so no liability was recorded.
- The company reported no legal proceedings or changes to its previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress in placing and financing the $25.8 million PBRT commitments, and how payment timing develops.
- Whether Orlando Health PBRT treatments and revenue grow enough to support lease costs and improve cash generation.
- Cash conversion and working-capital needs, given negative working capital and substantial scheduled debt and lease payments.
- Gamma Knife procedure trends, hospital payor mix, and changes in Medicare reimbursement.
- Future Mevion funding or valuation developments, and any estimate of the PBRT asset-removal obligation.