American Shared Hospital Services — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; balance-sheet comparisons are with December 31, 2014. The company provides Gamma Knife and other radiation therapy equipment and services. It operated 17 Gamma Knife units and served one radiation therapy site.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Medical services revenue | $4.394 million | $3.379 million | $8.511 million | $7.443 million |
| Gross margin | $1.802 million (41.0%) | $0.845 million (25.0%) | $3.399 million (39.9%) | $2.134 million (28.7%) |
| Operating income (loss), as reported | $0.478 million | ($0.602 million) | $0.934 million | ($0.705 million) |
| Net loss attributable to ASHS | ($1.970 million) | ($0.927 million) | ($1.842 million) | ($1.023 million) |
| Loss per share, diluted | ($0.36) | ($0.20) | ($0.34) | ($0.22) |
- Revenue increased 30% in Q2 and 14% year to date. Management attributed the increase mainly to higher Gamma Knife procedure volumes at existing sites and improved Medicare reimbursement; lower volume at the radiation therapy site partly offset growth.
- Cash from operating activities was $3.869 million for the first six months, versus $2.392 million in 2014. Capital expenditures were $1.344 million; cash and cash equivalents ended June at $1.798 million, up $0.739 million from year-end.
- At June 30, cash was $1.798 million, restricted cash $0.050 million, current assets $6.431 million, and current liabilities $8.902 million, yielding negative working capital of $2.471 million. Total assets were $56.928 million and shareholders’ equity was $24.602 million.
- Balance-sheet debt was $10.659 million, including current and long-term portions; capital lease obligations were $15.649 million. The $8.780 million bank line of credit was repaid in January 2015 using the certificate of deposit.
Material changes and unusual items
- A $2.114 million other-than-temporary impairment of the Mevion investment drove the reported loss. The investment was written down to $0.600 million; the filing says the impairment tax benefit was fully offset by a valuation allowance.
- Gamma Knife reimbursement improved in 2015: CMS’s rate was $9,768 for single-session radiosurgery, compared with about $5,600 after the 2013 reduction. CMS proposed approximately $8,830 for 2016; that proposal was not final.
- Gamma Knife procedures were 518 in Q2 versus 480 a year earlier, but 997 for the first half versus 1,073. Excluding procedures from EWRS Turkey, which was sold in 2014, management reported increases of 112 for Q2 and 148 year to date. One existing customer did not renew its contract during Q2 2015.
- Interest expense declined to $0.345 million in Q2 and $0.665 million for the first half, mainly reflecting repayment of the line of credit and a debt paydown.
- The company had $43.534 million of equipment purchase commitments: $38.600 million for three proton beam systems and $4.934 million for Gamma Knife units. It reported $5.000 million in deposits and $11.784 million in financing commitments. Approximately $26.750 million was not expected to become due until late 2016; the company was discussing financing for additional proton systems and expected to seek financing for the unfunded Perfexion unit.
Outlook, risks, and contingencies
- Management said cash on hand, operating cash flow, and other resources should cover scheduled obligations over the next 12 months. Those scheduled payments were approximately $3.417 million for debt and $5.111 million for capital leases.
- Near-term project cash needs include approximately $0.600 million for the Peru Gamma Knife commitment. The first proton system had a $9.000 million lease-financing commitment, pending definitive documents; timing of payments for two other proton projects depended on future events and could be delayed.
- GKPeru was expected to begin operations in late 2015 or early 2016. The first proton system had been delivered in November 2014, with patient treatment anticipated in Q1 2016. Timing and financing of the proton business, reimbursement levels, procedure volumes, and customer retention are key risks.
- After quarter-end, Mevion cancelled its planned IPO and announced an investment agreement involving up to $200 million. ASHS stated that its holding would represent approximately 0.56% of Mevion on a fully diluted basis after the transaction; the company reported no current plan to sell the investment.
- The filing gives no formal earnings or revenue guidance. Management identified no change to the risk factors in its 2014 Form 10-K. It reported effective disclosure controls, no material control changes, and no legal proceedings.
Important facts for investors to verify
- Whether operating cash generation can support the substantial debt, lease, and equipment commitments despite negative working capital.
- Whether the disclosed financing commitments are finalized and sufficient for the proton beam and Gamma Knife projects.
- Whether the CMS 2016 reimbursement proposal becomes final, and how reimbursement and customer procedure volumes develop.
- Whether Mevion’s financing and commercial prospects support the remaining $0.600 million investment value and the company’s $5.000 million in non-refundable system deposits.
- The timing and economics of the Peru site, first proton system launch, and non-renewed customer contract’s effect on revenue.