American Shared Hospital Services (AMS) 2008 Q4 法說會逐字稿

Good afternoon, everyone and welcome to the 2008 fourth quarter conference call for American Shared Hospital Services. (Operator Instructions) Later, we will conduct a question and answer session.

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; and Norman Houck, Controller of American Shared Hospital Services. Mr. Tagawa, you may begin.

Thank you, Jamie. And thank you all for joining us for AMS' fourth quarter and 2008 earnings conference call and Webcast. We were pleased to deliver a profit of $0.10 per share, Our 10th consecutive profitable year. And strong cash flow with EBITDA of more than $2 per share for 2008. The year of transition, as we upgrade our portfolio of radiosurgical and radiation therapy assets to next generation devices for radiation oncology delivery. Our growth strategy is to use 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 for our clinical partners and their patients.

Financing requests from current and prospective clinical partners remained strong in 2008 for the entire range of radiation therapy equipment available today and on the horizon. In fact, we are now exploring opportunities to apply our fee-for-service financing model internationally, following the receipt of requests for proposals from potential clinical partners in South America, Europe and the Middle East for the Perfexion system. The compelling value proposition we offer our clinical partners, together with our solid cash flow and balance sheet, position us to pursue these opportunities aggressively and that's what we are doing. We are confident that we are on the right path to deliver the growth and enhanced profitability we are striving for.

Our second, third and fourth Perfexion systems went into clinical service during 2008. Also during 2008, we entered an arrangement with a leading radiation oncology group to place our third single treatment room proton beam radiation therapy device. This one at Long Beach Memorial Medical Center. This is in addition to the contracts, we announced in 2007, to place single treatment room PBRT devices at Tufts Medical Center in Boston and Orlando Regional Healthcare.

I am proud to report that AMS owns more radiosurgery devices than any other company in the world. And we have rapidly emerged as a global leader in the PBRT market, the next evolutionary step in the radiation treatment of cancer. Just last month, we announced plans to develop a three treatment room PBRT facility in the San Francisco Bay Area. And have entered a non-binding agreement with Varian Medical Systems, under which Varian will supply proton therapy equipment for this facility. We are evaluating potential sites and working to form a consortium of hospital partners for this project. Subject to financing and FDA approval, we hope to begin treating patients at this facility in 2011.

We are excited about this project, which is by far the largest project we have announced in our history. This Varian three room PBRT system is a development model we expect to repeat in other major urban settings. It is a natural complement to our Still River single treatment room offering. We're negotiating contracts to place additional PBR systems in medical centers throughout the country. Now, I am 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, quarterly report on Form 10-Q for the three months ended March 31, 2008; June 30, 2008; and September 30, 2008, and the definitive proxy statement for the annual meeting of shareholders held on June 20, 2008. The Company assumes no obligation to update the information contained in this conference call.

For the three months ended December 31, 2008, revenue was $4.740 million. This compares to revenue for the fourth quarter of 2007 of $8.311 million, which included $3.2 million from the sale of equipment to a clinical partner, whose lease agreement on a Gamma Knife expired under its terms in January 2008. The decrease in revenue for the fourth quarter of 2008 versus fourth quarter of 2007, net of revenue from the asset sale, reflected the planned reduction in Gamma Knife units in operation, partially offset by a 5% increase in revenue for units in operation for more than one year. Net income for the fourth quarter of 2008 was $83,000 or $0.02 per diluted share, compared to net income of $178,000 or $0.04 per diluted share for the fourth quarter of 2007.

The effective income tax rate for the fourth quarter of 2008 was 65%, compared to an income tax rate of 57% for the fourth quarter of 2007. The fourth quarter is when we true-up the income tax provision to the prior year actual tax returns and adjust our estimated state income taxes accordingly. The state income tax estimates were slightly higher than we anticipated and there were some minor upward adjustments from the true-ups. These adjustments totaled about $39,000, which is relatively small in dollar terms but represents a large percentage of fourth quarter pre-tax income. A similar thing happened in the fourth quarter of 2007, when we had a $40,000 adjustment in the fourth quarter, which caused the effective tax rate for the quarter to jump to about 57%.

For the 12 months ended December 31, 2008, revenue decreased to $19.099 million, compared to $22.622 million for 2007, which included the $3.2 million equipment sale. Net income for 2008 was $477,000 or $0.10 per diluted share. This compares to net income of $951,000 or $0.19 per diluted share for 2007. Cash flow was measured by earnings before interest, taxes, depreciation and amortization, or EBITDA, was $2.513 million for the fourth quarter of 2008 and $9.811million for the year as a whole; compared to EBITDA of $2.403 million and $9.405 million for the fourth quarter and 2007 respectively.

At December 31, 2008, AMS reported cash, cash equivalents and short and long term securities of $10.286 million. This compares to cash, cash equivalents and short and long term securities of $10.010 million at December 31, 2007. Shareholders' equity at December 31, 2008, was $19.728 million or $4.19 per outstanding share. And this compares to shareholders' equity at December 31, 2007 of $19.540 million or $3.89 per outstanding share.

A final note. The Company repurchased 315,904 of its common shares during the fourth quarter of 2008 for an average purchase price of $1.40 per share. These repurchases reduced the number of common shares outstanding to 4,712,183 at December 31, 2008 from 5,026,587 at December 31, 2007. The Company still has about 200,000 left on the stock repurchase authorization, originally approved by our Board of Directors in 2001 and reaffirmed in 2008. Craig?

Thank you, Norm. Before we turn the call over for your questions, I want to bring you up-to-date on an exciting development at Still River systems, the developer of the compact Monarch 250 PBRT device, in which AMS owns an equity interest. Late last month, Still River announced the successful operation of the world's highest field, high energy, cyclotron magnet. This superconducting magnet, developed in an industrial and academic partnership with the Massachusetts Institute of Technology, is the heart of the Monarch 250. The magnet has now tested operational and stable at its full design current.

According to Still River, this magnet sets a record for magnetic field strength used in a high energy cyclotron. The cyclotron built around this magnet will be the most compact source for proton therapy available today. Although the Monarch 250 subsystems are now in the final phases of manufacturing and will be ready to ship to its first customer, Barnes Jewish Hospital in St. Louis for installation later this year. This is not one of AMS' sites but it is important to us, since this will be the site used to obtain FDA certification. And we believe that the pace of activity in our PBRT business will pick up substantially once FDA clearance has been received. Jamie, we are now ready for the first question.

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

Hi, guys. Outstanding quarter. I think $0.50 in cash flow for a Company trading at whatever, $1.30 is certainly -- if that's not value I don't know what is. But in any case, enough of the political. Could you talk a little bit about the 8-K that was filed this afternoon? I'm trying to still sort of work through what this all means. It sounds like you guys were in talks or you received an offer for 81% of your finance unit for 3 and change and then they lowered it to 2 and change and threatened to go public with it. If you can perhaps talk a little bit about what that's all about?

We had received some inquiries from a couple of companies about the American Shared and the Gamma Knife business. And we did entertain those and nothing really came of it, as we mentioned the 8-K. But we wanted to alert people as to what some of the indications of interest were. And that had to do with perhaps what they wanted to do in terms of pricing for the Company but there was nothing really definitive in that regard.

I understand that but the first offer was in the 3's if I'm not mistaking. And then, you said, for some reason in December, they lowered it to 2 and change, unexplainably. And you guys in response put in a poison pill or shareholder rights plan?

Yes, we've always had the poison pill and since it was expiring, we decided to renew it.

Okay. All right the question I also have is and I'm sure other people have operational questions but you guys purchased a fair amount of stock at $1.40. Here, lately the stock traded down as low as $1.05 and $1.06. If you loved it at $1.40 and you're doing $0.50 in cash flow per quarter, $2 as you point out, $2 a year, why not buy more stock? You had plenty of opportunity to buy stock below $1.40. So I'm trying to figure out why stop at $1.40? If you like it there, you certainly should like it lower.

Well, I think we do like it at those levels to repurchase but as we mentioned in the 8-K, we did have some inquiries, so we didn't think it was appropriate.

Okay, that's reasonable.

So we will continue to look at it. We have about 200,000 shares still available under our repurchase program and we will take a look at it going forward again.

Okay. And that's all, for the time being. I'll let somebody ask some questions from the operational side.

Thank you.

Our next question comes from Lenny Dunn from Freedom Investors.

Good morning guys. It looks like we reentered the stock at the right time in January and February, based on what I can see happening with Still River. We've been gone for awhile and we've come back with a pretty good sized position. What I wanted to know -- my only question about the financing on the Still River things because this is much larger numbers than you previously have dealt with, in the current economic environment, are you comfortable that you'll be able to get these things financed? Now clearly, these are very large, well known hospitals that you're setting it up with. But still, I'd like to have a little comfort level with your ability to obtain the financing.

We're comfortable. It's a tough economic environment, where the financing will hinge for us on the FDA approval. So we're anxiously awaiting FDA approval on the Still River system. Regarding the Varian system, which is again a much larger purchase is --- there's a couple things with the Varian system. One, there are foreign government credit enhancements that you can receive because the Varian system -- although Varian is a US Company, Accel who manufactures the proton beam is in fact a German-based company. So they can get enhancements for the German government. So that will definitely assist in the financing of this project. But again, they will need to get FDA approval before we can really move forward in terms of financing. So, both of these projects do hinge on FDA approval of the products.

Getting back to Tony's question. I can certainly understand why, when there's an offer that's not been disclosed on the table, you couldn't really buy back stock. And clearly, now that everything is out in the open, would you be able to buy back say starting in two days or whatever the limits are?

Yes, we can.

And it looks to me, and I can only read with the market open, I can only quick read the 8-K, but it looks like you might -- you may have an interest in selling the Gamma Knife business off. Would that be because the future is with the PBRT? And then you have all of this cash on hand, which would certainly make it a lot easier to get financing in the future. Am I reading that wrong?

Well, this is Dr. Bates. We always thought, at some point, we might monetize the Gamma Knife business and use that money to grow the proton beam business. But the Gamma Knife business on its own has just made a resurgence. And the resurgence is coming about as a result of this new Perfexion. The demand for the Perfexion is quite high. I just got back from some overseas travels and I'm convinced that we probably have at least $20 million worth of new business for these new Perfexions. That's -- in the United States, it's roughly about $13 million and $7 million abroad. So we don't necessarily have to monetize the Gamma Knife to grow the proton beam business because there is so much renewed interest in the Gamma Knife. But yes, there's always a possibility that we'll consider, if someone will come and make the appropriate right offer, that we might monetize some of that.

I understand. No, I'm not anxious for you necessarily to do it. Because I do think that both businesses can complement each other but I was just asking the question, trying to understand the direction of the Company. But anyhow at these prices, it's amazing to me that the shares continue to trade over here. This market is a cruel market to say the least.

But I also want to re-emphasize what Craig has said about the import/export banks being able to assist us. And this is something that we had looked at before and what got us to looking at it and what was going on with the proton beam business, and we think this is an avenue that's going to make it, for us, a lot easier to get financing, than what we've ever had in the past. And it's very encouraging and we've made some inquiries of these banks. And these things are all deliverables. We feel reasonably comfortable that we can deliver on these kinds of financings with the assistance of the import/export banks.

Well, thank you. You've answered my questions. And certainly, we're pleased to be shareholders at the current levels.

Thank you.

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

Hi, gentlemen and congratulations. I'm particularly impressed by the deal you announced with Varian to go into San Francisco. And I wondered if you could first comment a little bit on the consortium you're building? And do you expect, sort of over the next several months, to be able to start to announce who some of the potential hospital partners or location partners would be?

Well we can't disclose the names of the partners, the people that we're talking to. But obviously, they're significant players within the Bay Area in Northern California. But we've been moving forward fairly quickly at this point. The two things that we're doing right now is trying to secure a site and finalize our consortium. And I think, we hope to make some announcements fairly shortly in that regards. And I'll let Dr. Bates make any comments that he might want on top of that.

Well Tony, if you went over the list of the major hospital systems in the Bay Area, you would probably have the names. And we've talked to all of them and there is no one that says they are not highly interested this. This is $110 million project. And the truth is, it makes no sense for any one hospital to attempt to do this on its own. And highly unlikely that that's going to happen. And the other advantage of working with Varian, Varian is going to make some research funds available. We're going to have one or two research beams in two of these major universities that are participating, are interested in research. We think this is one of a kind. And I personally believe that this model will decrease costs and will be repeated in other major urban centers around the country.

It's a tremendous partner for you. And I noted, that Craig said, that you were going to try to do this in other cities. And I wonder, do you think that people understand the impact of the relative size that this kind of deal could have versus sort of the current Gamma Knife business that you're doing now?

No, I don't think they do. And of course, we've been very cautious not to over hype this but the potential is unlimited.

Okay. I agree. Switching to your current business, as you're trying to upgrade people to Perfexion systems, with your contracts that expire over time, can you sort of give us a feel for what you're encountering when you're trying to get people to renew or upgrade?

Well, I think as we try and get people to renew, what we're looking at is moving them up to the Perfexion where it's appropriate. It's truly a wonderful machine. It's got great reviews. The physicians love it because it can do more treatments than they're currently able to do on the existing systems. As well as, it's a lot faster because it's all automatic. And we're encouraging our centers to move up to the Perfexion. And we just think that long term, it's the right thing to do and that the revenues will go up because they can treat a greater number of people than they can on the current system.

A question on the 8-K. You mentioned two companies. Can you characterize at all the buyers in terms of, are they in the industry or are they primarily just sort of financial buyers? And can you mention whether they're public companies or not? I know you won't disclose the name but --?

No. We really would rather not at this time.

Okay. And my last comment/question would be in terms of the buyback, as I think Tony Marchese mentioned, I was noting also this morning that just with your last quarter's EBITDA, you could have, as where the stock was this morning, just with the last quarter, probably bought -- repurchased 40% of your outstanding. Given the 8-K filing and what outsiders see as the value of this Company and frankly, we see it as a lot higher, we would really encourage you to consider even increasing the size of your buyback. And really trying to be in there every day. What we've noticed is that they're mutual funds who are redeeming and they come into sell. And there's just such a limited awareness of the Company, that having the Company in there rebuying stock every day or having a bid, we think, would give the stock a much better trading pattern and accrue a lot more value to everyone, every constituency. So anyway, congratulations and thank you.

Thank you.

Yes, but before you leave, Tony, I just want to suggest that if you want to get some idea how we expect this machine, the Varian machine in San Francisco, what it will be like. There's already a pre-existing model, that you might want to look up. And that's the machine down at Loma Linda. That's been there for at least 10 years. And we think we'll be very comparable or should exceed that machine. And that machine is doing 150 cases a day, at roughly a reimbursement of about $1,200 a case.

Yes, it seems like the -- I've seen numbers anywhere from sort of $58 million to $70 million in revenue with tremendous margins, so yes. We've very, very encouraged.

But you might confirm that by giving them a call.

Okay, terrific. Thank you.

Thank you.

Our next question comes from Steve [Miskan] from Strategies Investment Agency. Please go ahead.

Okay. I'm going to reiterate great quarter and I really like the progress you're making. Two questions. First question is, when a client ends a contract, what happens to that equipment that's there? At the center?

They would either purchase it from us, they could, if we -- there's no set rate. Or they could -- or we' pull it out and move it to a different site.

Okay. And how easy is it to do that, to pull it out and move it somewhere else or sell it or --?

Well, we always just contract with the manufacturer to do that. And then, we would just -- whatever we would have to refurbishment that would be needed, we would do that with our partner Alecta. And then just move it to a new customer.

Okay. Second question, is regarding Still River and we've talked about getting FDA approval. Do you have a timeline, a window when you expect that to happen? And once it's -- the application is made, how long do you expect for it to take?

The process is probably going to be, we believe, in the latter part of this year, the final submittal --.

Excuse me, Craig. Is this the Varian or the Still River machine?

The Still River.

The latter part of this year, we believe. And there's a 90 day turnaround process at the FDA, currently. So it depends on how many iterations they go through before they get final approval. But that's our understanding as it currently stands.

Okay. All right, that's it for me, thank you.

Thank you.

We have a follow-up question from Anthony Marchese from Monarch Capital. Please go ahead.

Yes, hi. If you could just talk a little bit about your capital needs? Before -- my concern has always been that, while you guys have enormous opportunities, is the financing there for you to take advantage of it? It sounds like what you're saying is, on the Varian side, the export/import bank can help you dramatically. I assume that's correct, right?

Right.

Okay. And what about Still River? Now, what happens in a case with Still River? Is that something -- how do you finance that or how do your clients finance the Still River systems?

We're going to finance that in a very conventional way, like we have before. And again, the key there is to get FDA approval. We've had numerous conversations with people but it always comes down to the FDA approval.

We've been led to believe by every major financing institution, that we've talked to, that there should be no major difficulties with getting these financed once they're FDA approved. Remember, we're at some major, major medical centers, Tufts New England Medical Center, Orlando, Long Beach Memorial and very shortly -- Well I better not mention those other names because they haven't been signed yet and Craig is shaking his head at me. So I won't mention them. But I don't think we'll have any difficulties getting these financed once they're FDA approved.

I see, okay. So then, you have unlimited growth potential. So, I'll repeat what I said before, buy the stock aggressively at these levels. Anyway, that's it. Thanks, I appreciate that guys.

You're welcome.

Our next question comes from Nathan [Machewski] from Raymond James. Please go ahead.

Hi, guys. I'm new to the story for the last few months and I know it's been a very hard stock market and hard for a lot of the investors that invest in small micro cap companies. I think it's a wonderful story and I really do spend a lot of time and listen to a lot of people before I invest in a Company, especially now in this situation. And I'm just still amazed that there's so few investors in your stock. And I know that a lot of people have been hurt. So I was interested if you guys are planning on maybe saving the Company a little bit of money and going out on the road? Instead of you guys buying back as much stock but having other people learn the story? Because I thought it was such a great story, I can't imagine if another 50 people heard it.

Yes, we're doing a road trip in two weeks in New York.

That's wonderful. That's great.

Well we were reluctant to do much road tripping until these other issues, which were mentioned earlier, were resolved. And we think all of these have been resolved now.

Could you give me a little bit of insight on the cash, how is that held? And the total asset number you used is that 100% in cash or how do you hold that?

Most of it is in cash or very, very short-term securities. And, as you know, we have a GK financing level and we have American Shared hospital level. And predominantly, the cash is held at the American Shared Hospital Services level.

Okay. Thank you.

(Operator Instructions). And Mr. Tagawa, there are no further questions. Would you like to make your closing remarks?

Just to thank everyone for joining us this afternoon. And we look forward to speaking with you on our first quarter 2009 conference call.

Thank you. This call will be available in digital replay and will be available one hour following today's conference. To access the system, dial 888-843-8996 and enter the passcode of 24082053 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 teleconference. Thank you for participating. You may now disconnect.