American Shared Hospital Services — Q3 2013 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2013, compared with the same periods in 2012. The company provides Gamma Knife and other radiation-therapy equipment and services; it reported 19 Gamma Knife units in operation, versus 18 a year earlier.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Medical services revenue | $4.396 million | $4.236 million | $13.647 million | $12.923 million |
| Gross margin dollars | $1.581 million | $1.695 million | $5.592 million | $5.405 million |
| Gross margin percentage | 36.0% | 40.0% | 41.0% | 41.8% |
| Operating income | $162,000 | $210,000 | $858,000 | $674,000 |
| Net income (loss) attributable to company | $(134,000) | $9,000 | $(230,000) | $33,000 |
| Basic and diluted earnings (loss) per share | $(0.03) | $0.00 | $(0.05) | $0.01 |
- Revenue increased 4% in Q3 and 6% for the nine-month period. Gamma Knife procedure volumes rose to 632 from 523 in Q3 and to 1,918 from 1,564 year to date.
- Operating costs rose faster than Q3 revenue, reducing gross margin dollars and percentage. Nine-month gross margin dollars increased modestly, while the margin percentage declined.
- Foreign-currency transaction losses were $306,000 in Q3 and $840,000 year to date, versus none in the comparable 2012 periods. These losses were the principal reason for the decline in company-attributable earnings.
- Consolidated net loss was $133,000 for Q3 and $3,000 for nine months; net income attributable to non-controlling interests was $1,000 and $227,000, respectively, resulting in larger losses attributable to the company.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $6.285 million, up from $4.396 million. Investing cash outflow was $3.168 million and financing cash outflow was $2.681 million. Cash and equivalents increased $391,000 to $1.955 million.
- At September 30, cash and equivalents were $1.955 million, restricted cash $50,000, and a bank certificate of deposit $9.0 million. Working capital was $5.330 million; current assets were $16.949 million and current liabilities $11.619 million.
- Debt, capital-lease obligations and line-of-credit borrowings totaled approximately $41.0 million, including $8.740 million drawn on a $9.0 million bank line. The line is secured by the company’s cash invested with the bank; its maturity is August 2015. The company reported compliance with debt covenants.
- Scheduled payments over the next 12 months were approximately $5.290 million for debt principal and interest and $4.790 million for capital leases. Management said operating cash flow and cash resources should be adequate to meet these obligations.
Material developments, outlook and risks
- Revenue growth reflected two newer Gamma Knife sites and increased volume at existing sites; lower radiation-therapy volume partially offset the gains. Radiation-therapy revenue fell $89,000 in Q3 and $318,000 year to date.
- CMS revised its proposed 2014 payment for a single-session stereotactic radiosurgery course to $5,615, from an earlier proposed $8,576. The filing said the rate remained subject to comment and change, with final rates expected in late November 2013. For comparison, the filing cited a Gamma Knife rate of $3,300 effective April 1, 2013, and $7,910 for January–March 2013.
- The company had approximately $40 million of remaining equipment-purchase commitments, including three MEVION S250 proton-therapy systems, three Perfexion units and a Gamma Knife unit for Peru. It had paid $3.0 million in non-refundable deposits toward the MEVION systems and $1.945 million toward other equipment. Management intended to finance the commitments but cautioned financing might not be available on acceptable terms.
- The first MEVION system was expected to be delivered in the first half of 2014. The company’s Peru operation was expected to begin in the latter part of 2014; its Long Beach proton-therapy subsidiary was not expected to begin operating in 2013.
- The company held a $2.701 million cost-method investment in Mevion, representing about 0.77%. Management estimated an unrealized impairment of approximately $2.4 million but concluded it was temporary and recorded no impairment. The company cited delays in Mevion’s first clinical treatment and ongoing funding needs as risks.
- Other notable items included a $115,000 rent accrual related to subleasing office space below the company’s lease rate. Management said no reliable annual effective tax-rate estimate could be made for 2013. The filing reported no legal proceedings, no changes to the previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Whether CMS finalized the 2014 SRS reimbursement rate and how the rate affected customer economics, procedure volumes and revenue.
- Whether the company secured financing for its approximately $40 million equipment commitments, and the resulting debt, lease and liquidity burden.
- Progress, delivery timing and commercial deployment of the MEVION S250 systems, and whether the Mevion investment’s estimated impairment remains temporary.
- Whether Gamma Knife volume growth offsets lower radiation-therapy revenue and rising maintenance, depreciation and operating costs.
- Further foreign-exchange exposure and losses, particularly from the Turkish operation.