American Shared Hospital Services — Q2 2020 Form 10-Q
Business context and period. The company provides Gamma Knife radiosurgery and proton beam radiation therapy (PBRT) equipment and services, with operations in the United States, Peru and Ecuador. This filing reports the quarter and six months ended June 30, 2020, compared with the same 2019 periods. COVID-19 materially disrupted treatment volumes, particularly in Q2.
Financial performance
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 |
|---|---|---|---|---|
| Revenue | $3.991 million | $5.197 million | $8.559 million | $10.518 million |
| Gross margin | $0.907 million (22.7%) | $1.729 million (33.3%) | $2.301 million (26.9%) | $3.666 million (34.8%) |
| Operating loss (income, 2019) | $(0.570) million | $0.302 million | $(0.669) million | $0.817 million |
| Net loss attributable to ASHS | $(0.483) million | $0.031 million | $(0.618) million | $0.301 million |
| Diluted loss (earnings) per share | $(0.08) | $0.01 | $(0.10) | $0.05 |
| Cash provided by operations | Not separately stated here | $6.841 million | $4.373 million |
Q2 revenue fell 23.2%; six-month revenue fell 18.6%. Gamma Knife revenue declined 28.1% in Q2 and 21.8% for the six months; PBRT revenue was nearly flat in Q2 and up modestly for the six months. Q2 Gamma Knife procedures decreased to 350 from 361, and PBRT fractions to 1,351 from 1,409. The filing attributes declines primarily to pandemic-related delays and lower retail-site reimbursement, with six-month PBRT volume growth in Q1 partly offsetting Q2 weakness.
At June 30, cash and cash equivalents were $4.045 million and restricted cash was $0.364 million, compared with combined cash and restricted cash of $1.779 million at December 31, 2019. Working capital was $2.144 million. Total long-term debt was $5.291 million and finance lease obligations were $9.641 million. The company reported $6.841 million of operating cash flow for the first half, including favorable working-capital movements. Cash and restricted cash at the end of the period was $4.409 million.
Material changes and notable events
- On June 12, 2020, the company acquired approximately 98% of Gamma Knife Center Ecuador (GKCE); it entered agreements for another 1.3% and intends to acquire the remaining 0.7%. The $2.0 million base purchase price was funded with $575,000 cash and a $1.425 million DFC loan. The purchase-price allocation is preliminary; reported goodwill was $1.265 million. GKCE results were included only from the closing date and were not material to consolidated results.
- Q2 selling and administrative expense rose to $1.210 million from $1.081 million, reflecting professional fees, including acquisition-related costs. Interest expense declined to $267,000 from $346,000, primarily due to lower average debt and lease balances.
- The IGRT contract expired in April 2020. The company agreed to sell the equipment for $150,000, its salvage value, and completed the sale in July.
- The company reported 17 Gamma Knife units and one PBRT system in operation at June 30, 2020. A Gamma Knife customer contract that expired in April continued month-to-month; the company expected the lease to end in fall 2020.
Liquidity, commitments, outlook and risks
Management said cash on hand, operating cash flows and other resources should cover scheduled debt and finance lease obligations over the next 12 months. It cited approximately $1.694 million of scheduled debt principal and interest and $3.603 million of finance lease payments during that period. Total contractual obligations were $76.139 million, including $45.110 million of future equipment purchases and $12.151 million of equipment service contracts. The company intends to finance major equipment commitments; financing availability and acceptable terms are not assured.
The company has commitments, after deposits, of $34.0 million for two MEVION S250i PBRT systems. It had not secured placement or financing agreements for those units and projected delivery would need to begin by 2023; failure to place the systems or obtain an extension could put its $2.25 million in non-refundable deposits at risk. Additional Gamma Knife, LINAC and service commitments are disclosed in the filing.
COVID-19 caused delays, reduced treatment demand and disrupted customer access and commercial activity. Management warned that further effects could materially harm revenue, results, liquidity and cash flows, and that duration and recovery remain uncertain. Other risks include reimbursement-rate or methodology changes, international operating and regulatory risks, acquisition integration, and uncertainty in appointing a permanent CEO. No formal financial guidance is provided. The filing identifies an Interim President and CEO appointed during Q2.
Important facts for investors to verify
- Whether treatment volumes and revenues recover from the COVID-19-related Q2 declines, including at Latin American sites.
- Cash generation and working-capital trends, given the first-half operating cash flow benefit from changes in receivables and other operating balances.
- Financing capacity and timing for the $34.0 million PBRT system commitments and other equipment obligations, as well as the risk to non-refundable deposits.
- Final GKCE purchase-price adjustments and valuation, collection of acquired receivables, and payment of the estimated $354,000 subsequent working-capital amount.
- Contract status and treatment activity at the customer site operating month-to-month, and the effect of reimbursement changes on future revenue.