American Shared Hospital Services (AMS) 2008 Q3 法說會逐字稿

Good afternoon, everyone, and welcome to the 2008 third quarter conference call for American Shared Hospital Services. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Dr. Ernest Bates, Chairman and Chief Executive Officer; Craig Tagawa, Chief Operating and Financial Officer; Norman Houck, controller of American Shared Hospital Services. Mr. Tagawa, you may begin.

Thank you, Jamie, and thank you all joining us for AMS's 2008 third quarter earning conference call and webcast. The main point we want you to take away from this conference call is this; AMS has maintained modest profitability and generates strong cash flow, even as we transition our portfolio of radiosurgical and radiation therapy assets to next-generation devices. We are using our creative financing solutions to make proton beam radiation therapy systems, Leksell Gamma Knife Perfexion systems, IGRT systems and other next-generation devices for radiation oncology, delivery available and affordable to our clinical partners and their patients. Demand for our creative financing solutions appears to be rising as we are experiencing a high volume of financing requests for the entire range of radiation therapy equipment we offer. So we are increasingly confident that this is the right strategy for AMS to deliver growth and drive shareholder value in the years ahead.

Interest in affordable single-treatment room proton beam radiation therapy devices is especially high and AMS is well positioned to benefit. Just last month we announced an agreement with an illustrious group of radiation oncologists to provide a Monarch 250 proton beam facility at Long Beach Memorial Medical Center in Long Beach, California. Subject to approval by the board of directors of Long Beach Memorial and FDA clearance of the Still River proton beam device we and our partners hope to begin treating patients at the single-treatment room facility by 2011. Long Beach Memorial is our third announced single-treatment room PBRT site.

We previously announced contracts to place PBRT devices at Tufts Medical Center in Boston and Orlando Regional Healthcare with professional services to be provided exclusively by MD Anderson Cancer Center Orlando. Our fourth Gamma Knife Perfexion system began treating patients at USC University Hospital in July, as scheduled, backed by overwhelming clinical evidence that Perfexion Gamma Knife has established itself as a gold standard for treatment of center metastatic brain tumors of which approximately 170,000 new cases are diagnosed annually. I am pleased to note that AMS already owns more Perfexion Gamma Knife and Still River proton beam systems than any other company and we believe that additional contracts are on the horizon.

Now I'm going to turn the call over to Norm to review our financial results. Norm?

Thanks, Craig. Please note that various remarks that we may make on this conference call about future expectations, plans and prospects for the Company constitute forward-looking statements for the purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may vary materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Company's filings with the Securities and Exchange Commission, including the Company's annual report on Form 10-K for the year-ended December 31, 2007, the quarterly reports on Form 10-Q for the three months ended March 31, 2008, and June 30, 2008, and the definitive proxy statement for the annual meeting of shareholders held on June 20t 2008. The Company assumes no obligation to update this information contained in this conference call.

For the three months ended September 30, 2008, revenue decreased 2.6% to $4.532 million when compared to revenue of $4.652 million for the third quarter of 2007. Net income for the third quarter of 2008 was $25,000, which is$0.00 per diluted share. This compares to net income for the third quarter of 2007 of $268,000, or $0.05 per diluted share. Revenue from our clinical sites in operation more than one year increased slightly in this year's third quarter compared to the third quarter of 2007, although total revenue decreased slightly versus prior year. Recall that we had 21 Gamma Knife sites in operation during last year's third quarter. Currently we have a total of 19 Gamma Knife sites. This total includes the four Perfexion sites that went into operation during the past year; one in the fourth quarter of 2007 and one each in this year's first, second and third quarters, as well as the IGRT site that we opened last September.

Our third quarter financial results also reflected the higher depreciation and interest expenses associated with our growth strategy. Depreciation is up because of the four new Perfexion units and upgrade of a Gamma Knife at one site and a cobalt reload at a couple of other sites. For the nine months ended September 30, 2008, revenue increased to $14.359 million compared to $14.311 million for the first nine months of 2007. Net income for the first nine months of 2008 was $394,000, or $0.08 per diluted share. This compares to net income for the first nine months of 2007 of $773,000, or $0.15 per diluted share.

Cash flow is strong. Earnings before interest, taxes, depreciation and amortization, EBITDA, was $2.273 million for this year's third quarter and $7.298 million for this year's first nine months. This compares very favorably to EBITDA of $2.368 million and $7.002 million for the third quarter and first nine months of 2007 respectively. The balance sheet also is in good shape. At September 30, 2008, AMS reported cash, cash equivalents and short and long-term securities of $9.853 million. This compares to cash, cash equivalents and short and long-term securities of $9.341 million at September 30, 2007. Shareholders equity at September 30, 2008, was $20.040 million, or $3.99 per outstanding share. This compares to shareholders equity at September 30, 2007, of $19.357 million, or $3.85 per outstanding share.

Craig?

Thank you, Norm. A quick update on progress at Still River. The Still River compact proton beam system recently reached a major technical manufacturing milestone and is making significant progress towards FDA approval, which we still expect in 2009. We believe the Still River compact proton beam system, of which we are part owner through our equity investments in the company, is the first major disruptive innovation in the history of radiation therapy. The Still River proton beam system combines scientific advantages with increased affordability, resulting in better cancer treatment results for more patients.

Aside from the early adopters we are prepared to get in line for a device -- who are prepared to get in line for a device before FDA approval, a far larger number of our potential customers cannot commit significant dollars in clinical resources for any unapproved device no matter how promising. That's why we believe that the single-treatment room PBRT market really will take off once FDA approval is received. In any event, we already have contracted to place three devices and we hope to announce even more. We are also pursuing several projects that contemplate using multi-treatment room systems that are already approved by the FDA. We look forward to talking to you again in a profitable fourth quarter.

Jamie, we are ready for the first question.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Anthony Marchese from Monarch Capital. Please go ahead.

Yes, hi. Good afternoon. Good results. If I could make a suggestion just before my questions, I know you guys report EPS on a net income basis but since this Company is so strong in cash flow and it's a cash flow story, frankly, more than a EPS story, it would be helpful just to report cash flow on a per share basis, as well, just so that people can look at both, because I think both numbers are very important to understanding AMS. So that was just a comment, but my first question relates to Still River. Can you talk about -- you mentioned that they had a recent technological break-through. What is that break-through?

Really it's called the cold mass tests and what they're testing is the ability of the magnet to remain stable, which is an important part of the acceleration of the protons. So that was the test that we were referring to and they're -- that was a big first test for them and they continue to -- from there they'll go into beam extraction, so I think they're making significant progress. And as we understand, there are several faci -- locations that are now starting construction in anticipating the delivery. And Barnes is obviously the first unit they've started construction, so I think that's a good sign.

Okay. Secondly, my understanding is, at least through what I read on the internet, is that Still River has just gone through another round of financing. If you could just -- if that's true, could you just talk about valuations that they're putting on it at this point?

Well, they just went through another round of financing. That was the one that we were involved in and I think the series C that you're referring to.

Right.

And that was clearly a bump up of roughly 20% from the initial offering that they did the series B that we participated in.

So post money what are they valuing the company at?

I think roughly it was -- for the new -- the most recent valuation is coming up to about $30 million to $35 million.

Okay. And final question is you guys have a fair amount of cash. I realize that it's going to be used to buy systems down the road, but with the stock trading at one-third -- or one-third of -- even less than that, almost one-quarter of tangible book wouldn't it make sense to take a small portion, say $1 million, and do a 500,000 share buyback? I have to believe that the return on that money would be just as good, if not better, than on anything you can do with that money right now?

You're absolutely correct. We do have that provision that the board had previously authorized us to do that and we're giving that serious consideration.

Okay. Thank you very much.

Our next question comes from Tony Kamin from Eastwood Partners. Please go ahead.

Hi, guys. I guess I'd second the comment that Mr. Marchese just made on a buyback, but I have three questions. One, I noticed with the Long Beach deal that you did you were involved with a radiation oncology group, as you mentioned, in this macroenvironment the ability to work with doctors groups, does that create a much wider potential audience for you as opposed to just dealing exclusively maybe with hospitals and institutions?

Well, there are two factors. One, clearly we want to partner with physicians that want to be a part of it, whether it be professionally or in an equity position. There's certain limitations that are now imposed by the states and the federal government as to which physicians can partake in certain types of transactions, so we've got to be cognizant of those and make sure that we're compliant with all those. Currently the radiation oncologists are able to participate in these types of transactions. In this case they wanted to and we welcomed their participation as an equity partner in going forward with the Long Beach Memorial.

Okay. On the traditional side of your business you mentioned in the press release that you're seeing increased interest along the entire range and when I look at, for example, an Acuray having a $600 million backlog I wonder whether you see opportunity to continue to -- or try to take some more market share on the traditional side? And related to that, as you get into the transition to the PBRT being approved and you've got certain contracts that are expiring on your traditional stuff are you going to be able to manage through that transaction and stay profitable?

Yes. Actually we've stayed ahead of the curve. We're looking at -- we've looked for several years at those that are going to -- that had reached the end of their term or getting close and many of those have already been upgraded with Perfexion and renewed for many years to come. We're working on a few others so that we can keep our customers and most of our customers have thought the relationship with us has been very beneficial for both parties and are looking to extend with us, and I think we are now seeing more opportunities, as we mentioned in the press release, for whether it be Gamma Knives, other radiosurgery equipment or linear accelerators. Hospitals with this current credit limitation are seeing that they want to spend less in capital expenditure for these -- some of these large ticket items and find it very beneficial to partner with someone that's experienced in this realm and we are getting calls with more opportunities to upgrade, whether they be [Lenox] or Gamma Knife's for existing facilities.

Okay. And final question and following up on the last two. Given the level of activity you're seeing in terms of interest across the entire range and given, as you said, that you are -- have sold more Still River systems than anyone else, it seems that you really have a clear chance to be a or the leader in an incredibly exciting field. Given that, as you just said, your traditional business is still seeing a lot of interest, when does the company need to think about adding more sales staff to really go after all these opportunities?

I think Dr. Bates and I were recently discussing this and we are going to be looking to add sales staff in the very near future. There's a window of opportunity here and I think if you look at what we did with the Gamma Knife, we essentially at one point had 20% of the market share and we certainly look to be able to replicate that going forward with the proton beam, and I think what we did with the Gamma Knife is we got some of the premier institutions and that is our business model that we look to go forward with the proton beams, as well.

Okay. Great. Nice job and keep up the good work.

Thank you.

Our next question comes from Greg Greenberg, private investor. Please go ahead.

Hi. Just with the three announced potential sites for the Monarch 250, are those items that would be 100% financed by AMS, would they be shared or would AMS just earn a commission? And then similarly, assuming it is approved what's an estimate of the list price of one of these machines?

Well, the list price currently for a Monarch 250 is $17 million. The types of transactions that we have entered into with the hospital is very similar to our Gamma Knife. We're just actually doing the equipment. We're providing the equipment and the hospital is providing the leasehold improvements and the installation costs. So very similar to what we've done in the Gamma Knife business model.

Okay. So $17 million times three, we're talking about significant capital. Even though you have a great balance sheet would you be able to deliver on all those three?.

Yes, we believe so. Obviously FDA approval is critical, but the first two proton beams that we purchased, the first two Monarch 50s were to a discount to that price because we were one of the early adopters, one of the first five.

Have you already placed deposits for those?

Yes, we have.

Have you disclosed the amount of the deposit?

Yes. They were $1 million per system.

Okay. Separately just approximately how much do you guys estimate it costs you to be a public company versus a private one and is it worth it at this point?

I think we've tabulated it's about $0.5 million probably a year that it costs us to be a public company.

Okay. Thank you very much.

Our next question comes from Anthony Chiarenza from Key Equity Investors. Please go ahead.

Good afternoon.

Hello.

A question about funding. Obviously there's been a great deal of difficulty, to say the least, in the financial markets over the last two or three months. How has this affected you or how do you expect it to affect you as you try to build new systems and get additional funding and lines of credit and debts, et cetera?

I think -- we've expanded the breadth of finance companies that we're looking to finance these. We still have had success when we've talked to people about their eagerness to finance for us. One of the things that they see that we have is we have a very strong track record and a very solid balance sheet. They recognize that the institutions that we really partner with are major institutions and that we have done our homework and they appreciate that and give us credit for that. So I think we see that we can continue for the projects that we want to do that we can get financing for going forward. The rates might be a little higher in the interim, but we can get financing.

So you haven't seen any resistance or just concern at some of the financial -- just given the problems they're having, not necessarily the problems that you're having?

We clearly have with some of ours, that's why we broadened the scope of people that we're dealing with to factor that in. People can't do as many deals as they once did, even if they are doing deals. Regarding the Still River, I think the real issue with the Still River financing is FDA approval. It's not just the capital markets at this point. It's that once they get FDA approval I think the credit markets will welcome that transaction because they are a very strong transaction.

And, Craig, you might point out that -- this is Dr. Bates speaking -- that we really don't need that financing until probably the latter part of next year and the institutions that we are talking to think the crisis will be limited by that time and this should not be a major issue as long as we have major institutions that clearly have the volume.

We're all very hopeful it will be over soon, well before that. And on the last point just to reiterate for the third time with everyone else, I think a stock buyback makes tremendous sense given the current factors.

I might add to this is that we had a board meeting today and the board has agreed that we would go ahead and buy back 500,000 shares.

Great, great. Congratulations on a good quarter and good luck.

Thank you.

Thank you.

Mr. Tagawa, there are no further questions. Would you like to make your closing remarks?

Okay. Well, thank you all. We will now -- and we will look forward to talking to you in the next quarter.

Thank you. This call will be available in digital replay and will be available one hour after today's conference. To access the system dial 800-299-5919 and enter the passcode of 23136023 followed by the pound sign to access the replay. The webcast of this call will be available at www.ashs.com and www.earnings.com. This concludes today's conference. Thank you for participating. You may now disconnect.