American Shared Hospital Services — Q2 2011 Form 10-Q
Business context and period: The company provides Gamma Knife radiosurgery and other radiation-therapy equipment and services. This filing covers the quarter and six months ended June 30, 2011; financial statements are unaudited. It had 20 Gamma Knife units operating at quarter-end, versus 19 a year earlier. Two new operations began in Q2, and two more were expected to begin in the second half of 2011.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Medical services revenue | $4.206 million | $4.155 million | $8.573 million | $8.243 million |
| Gross margin | $1.836 million (43.7%) | $1.750 million (42.1%) | $3.760 million (43.8%) | $3.449 million (41.8%) |
| Operating income, as reported | $225,000 | $164,000 | $451,000 | $321,000 |
| Net income attributable to company | $21,000 | $3,000 | $42,000 | $11,000 |
| Diluted earnings per share | $0.00 | $0.00 | $0.01 | $0.00 |
| Net cash from operating activities | Not separately presented by quarter | $3.079 million | $2.781 million |
Consolidated net income, before non-controlling interests, was $271,000 for Q2 and $490,000 for the first half, versus $174,000 and $351,000 in the comparable 2010 periods. Q2 interest expense was $570,000 (up from $503,000); first-half expense was $1.146 million (up from $984,000). Q2 interest and other income included a $53,000 gain on equipment sale.
Liquidity, debt and balance sheet
- At June 30, cash and cash equivalents were $818,000, down from $1.438 million at year-end; the company also held a $9 million certificate of deposit earning 0.7%, maturing in August 2012, and $50,000 of restricted cash.
- Working capital was $4.534 million; total assets were $68.109 million and shareholders’ equity was $23.954 million.
- Operating cash flow of $3.079 million was offset by $3.583 million of financing outflows; investing cash outflow was $116,000. The company received $1.654 million toward equipment held for sale and spent $1.770 million on property and equipment.
- Borrowings included $7.7 million drawn on a $9 million bank line of credit, secured by cash held at the bank. The company reported compliance with all debt covenants. Balance-sheet debt was $10.573 million, and capital-lease obligations totaled $19.016 million, including current portions.
- Scheduled payments over the next 12 months were approximately $4.235 million for debt principal and interest and $4.778 million for capital leases. Management said operating cash flow and cash resources should be adequate to meet them.
Material changes and management commentary
- First-half revenue rose 4.0%; procedures increased to 939 from 902. Q2 procedures fell to 450 from 464, partly because a site’s existing lease was terminated ahead of a planned Perfexion-unit sale. Procedure volume at Perfexion sites rose 16% for the first half.
- Gross margin improved as maintenance and depreciation costs declined, partly offset by higher direct operating costs, including costs at retail sites and property taxes. New Perfexion financing increased interest expense.
- Customer deposits/deferred revenue rose to $2.139 million from $382,000. A $2 million deposit received in Q1 relates to a customer’s planned purchase of a Perfexion unit, expected to be delivered and installed later in 2011.
- Equipment purchase commitments were approximately $64 million, with $6.560 million in deposits already paid toward specified equipment. Management intended to finance remaining purchases but warned that financing had become harder to obtain and might not be available on acceptable terms.
- The company carried its Still River Systems preferred-stock investment at $2.617 million and estimated an unrealized impairment of approximately $1.5 million, but concluded it was not other-than-temporary and recorded no impairment. Still River’s proton-beam system remained under development and required FDA approval; the company identified delays, funding needs and uncertain approval timing as risks.
- No financial guidance was provided. Management’s outlook included planned equipment installations and continued expansion; an August 2011 subsequent event was a contract for a new Perfexion unit at a Jacksonville site. Legal proceedings were reported as none, and management said disclosure controls were effective.
Important facts for investors to verify
- Whether the company can secure financing for its approximately $64 million of equipment commitments while meeting scheduled debt and lease payments.
- Progress, timing, FDA approval prospects and funding needs for Still River’s Monarch250 system, and whether the investment’s estimated impairment changes.
- Delivery, installation and customer-purchase timing for the Perfexion and other committed equipment, including the planned Peru and Turkey projects.
- Whether procedure volumes, particularly at newer and Perfexion sites, support revenue growth and offset rising operating and financing costs.
- The effect of the $2 million customer deposit and related lease termination and unit sale on future revenue, cash flows and deferred revenue.