American Shared Hospital Services (AMS) 2009 Q1 法說會逐字稿

Good morning, everyone. And welcome to the 2009 first 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 Operator 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's 2009 first quarter earnings conference call and webcast. As we disclosed on our conference call, last conference call, during the past 18 months the Company has engaged in discussions with two parties concerning the possible sale of its 81% interest in GKF, the operating subsidiary for our Gamma Knife business. One of the parties recently provided indicative pricing for the interest that would be attractive to the Company, if it were to sell its interest in GKF.

Accordingly, the Company has permitted the prospective acquirer to conduct a due diligence review of GKF and the parties have engaged in preliminary negotiations of the terms of a transaction. We are unable to predict whether an agreement will be achieved. Under applicable accounting rules, the Company is required to expense the legal, accounting, investment banking and other costs incurred for these activities which are classified separately as transaction costs. These transaction costs of $197,000 were responsible for the loss we reported for the first quarter.

Right now, AMS's portfolio includes 14 Gamma Knife systems and five Leksell Gamma Knife Perfexion system, as well as, an IMRT system and related equipment, now treating patients at hospitals throughout the United States. AMS owns more radio surgical assets than any other Company. AMS also is a leader in the emerging market for proton beam radiation therapy, known as PBRT, which is widely viewed as the next evolutionary step in the radiation treatment of cancer.

We have entered into contracts to place three Monarch 250 single-treatment room PBRT devices and we are negotiating to place many addition systems. The Monarch 250 is an affordable, precise and compact proton therapy system for cancer treatment under development by Still River Systems in which AMS owns an equity interest.

AMS also is developing a three-treatment room PBRT facility in the San Francisco Bay Area with proton therapy equipment to be provided by Varian Medical Systems. We are looking at other opportunities for multi-treatment room PBRT, development projects as well. We want AMS to be the one-stop shop that hospitals and radiation oncology groups turn to first to meet their PBRT requirements. Whether for single-treatment room or multi-treatment room facilities depending on their patient volume.

Our creative financing solutions enable our clinical partners to make the latest advances in radiation oncology available to patients at an affordable price. For AMS the result is a steady of financing request from current -- potential clinical around the world for the entire range of radiation therapy equipment available today and on the horizon. With our balance sheet and cash flow, we are pursuing our opportunities aggressively. Now, I'm going to turn over the call the 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 31st, 2008. The Company assumes no obligation to update the information contained in this conference call.

For the three months ended March 31st, 2009, revenue decreased to $4.167 million, compared to $4.725 million for the first quarter of 2008. This decrease primarily reflected lower patient volume at one Gamma Knife Center and down time associated with the upgrade of another Center to the Leksell Gamma Knife Perfexion System. The center that accounted for most of the decrease in patient volume recently added a total body radiosurgery device to complement the Gamma Knife that has been operating there for a number of years. The physicians are reviewing the capability of the new device in relation to the Gamma Knife. We expect volumes to increase as protocols for each device are developed in the coming months.

Maintenance and depreciation expenses increased in this year's first quarter versus prior year due to the Perfexion upgrades we have done over the past year or so. Selling and administrative costs declined, reflecting effective cost control. Interest costs and interest income both are down of course, due to the substantial reduction in interest rates since last year. I note also that last year's first quarter income included a gain on the sale of equipment of about $56,000. There were no such gains for this year's first quarter.

As Craig mentioned, the Company recorded a net loss for the first quarter of 2009 of $94,000, or $0.02 per share. This loss resulted primarily from pretax transaction costs and investment banking fees incurred during the quarter of $197,000, which equates to $99,000 or $0.02 per share after tax. For the first quarter of 2008, net income was $156,000, or $0.03 per diluted share. Cash flow as measured by earnings before interest, taxes, depreciation and amortization, EBITDA, was $1.909 million for the first quarter of 2009, compared to EBITDA of $2.368 million for the first quarter of 2008. At March 31st, 2009, AMS reported cash, cash equivalents and short and long-term securities of $9.546 million. This compares to cash, cash equivalents and short and long-term securities of $10.286 million at December 31st, 2008.

Shareholders equity at March 31st, 2009 was $22.862 million, or $4.87 per outstanding share. This compares to shareholders equity at December 31st, 2008 of $22.938 million, or $4.80 per outstanding share. The Company repurchased 21,245 of its common shares during the first quarter of 2009 for an average purchase price of $2.13 per share. Reducing the number of common shares outstanding to 4,690,938 at March 31st, 2009, from 4,712,183 at December 31st, 2008. This is in addition to the 315,904 shares purchased during the fourth quarter of 2008 for an average purchase price of $1.40 per share. The Company still has about 180,000 shares left on the stock repurchase authorization originally approved by our Board of Directors in 2001, and reaffirmed in 2008. Craig?

Thank you, Norm. As we reported to you on our 2008 results conference call in March, Still River, the development that Monarch 250 PBRT system recently announced a successful operation of the world's highest field, high energy cyclotron magnet. This super conducting magnet developed in an industrial and academic partnership with MIT 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.

All of the Monarch 250 subsystems will be shipped to Still River's first customer, Barns Jewish Hospital in St. Louis for installation later this year. This is not one of AMS's three contracted sites but is important to us, since this will be the site used to obtain FDA Certification, which we hope will but you achieved in 2010. Based on what we are told by many groups, which we are negotiating contracts to supply Monarch 250, we are confident that the pace of activity in our PBRT business will pick up substantially once FDA clearance has been received. To summarize, once again, in the first quarter we delivered profitability prior to transaction-related expenses and cash flow from our legacy portfolio of radio surgical and radiation therapy assets while we simultaneously work to expand our portfolio of next generation devices for oncology delivery that is the heart of our long-term strategy for growth. Jamie, we are ready for the first question now.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Anthony [Charza] from Key Equity Investors. Please go ahead.

Good morning. Thank you for taking my question. Just to help me clarify, if you were to sell and come to a transaction to sell your GKF subsidiary, what would be left of the remaining business, so it's clear?

I believe what you'll see is we still have an IMRT system and we have a proton beam radiation therapy system that -- a division that we're still growing.

Craig, you might want to mention what you have internationally.

Yes, what we're working on internationally is we're working on several Gamma Knife sites, potential sites, one in the UK and several in South America that we're pursuing very actively right now.

And those are not part of the transaction.

Yes. Those are not part of the transaction and there's several other opportunities that we have outside of even the Gamma Knife in some of these countries.

So if I understand correctly, the objective would be then to take the cash that you're getting from selling the Gamma Knife business and then apply it to the PBRT and to the advanced technology, to try to develop again a database or a group of financings for the new technology; is that correct?

Correct. That's what we're looking at as one source of financing for these the PBRT.

And it's a question of the price being attractive to provide funding. In other words, you could get a better return on the new technology is what you think.

Well, we look at our long-term strategies, we stated before is we see the proton beam radiation therapy as really the next step in the treatment of cancer using radiation. We want to pursue that.

We see that the hurdle rate for hospitals with protons is very high, so they're all looking for partners and that's something that Dr Bates has initiated from the start of the Company. We're partners with hospitals and we grow the business synergistically and we're looking to continue to do that. And we see that as a big growth opportunity, very much in its infancy yet. There are only five proton centers operating in the United States right now.

It's always been our plan since we started the proton beam business to monetize some of the Gamma Knife business, in order to grow this new business, because there are much more opportunities out there.

Right now, we are either probably number one or number two in Companies in the world that have ordered proton beam systems and I'm very excited about our program in San Francisco, which hopefully will include all the major hospitals in the area that will share this one machine.

If this transaction were to close, is this something that's two, three months away or is this six months away or -- ?

No, these -- this is probably about a year and-a-half to two years away.

In terms of --

The operation, what we're planning in San Francisco will be at least 24 months after shovel in the ground.

What I meant is the closing of the GKF transaction.

That will -- we have to go through a proxy process if we do that, so it will be several months.

Okay. Thank you very much. Good luck.

Thank you.

Our next question comes from Anthony Marchese. Please go ahead.

Hi, good morning, guys. I have a question and a comment. First of all, you guys generated very impressive cash flow for just even a drop in revenue. My suggestion is get that out front. I mean, we have to read four or five paragraphs to figure out you guys are still generating some very impressive cash flow. That's a suggestion. Get that earlier in the release so the news services pick that up as opposed to lost money. That's my comment.

My question is could you be a little more specific as to -- I mean, spending almost $200,000 on banking fees is not an inconsequential amount of money, especially for a Company your size. Could you be a little more specific as to sort of how that was spent? Where it was spent?

Well, it was not just banking fees. A great majority of that related to legal fees. As you know, any time you do a transaction, the legal fees are not inconsequential and those are generally earlier in the process.

We did have some banking fees but I would say that was not a large share of that. We also had some accounting and tax advisory fees. So it's a combination. I would say most of the -- a great part of the fees were legal in nature at this point.

I see. Okay. And final question. Could you bring us up-to-date as to where you stand in terms of Varian system in terms of financing the Varian systems?

Well, I think what we're doing right now is we're working with many of the hospitals to build up a consortium. We're getting very close to finalizing some details on the consortium now. The Varian project itself is not quite FDA approved. Although, it has the European equivalent which is a CE mark.

So one of the issues always as well as with the Still River system is prior to getting financing, you need to have the system FDA approved. So we're going through the -- we're waiting for that process to occur. Simultaneously, we're getting our consortium tied up and we will look to put together the financing package once we get all our member partners. So we can agree on how much equity and how much debt the -- and what form of debt we will take on.

Are you going to find -- do you think you'll find it easier to finance the Varian systems than the Still River Systems?

We do. Only from the standpoint, the Varian systems actually made in Germany. Varian, when they got into the proton business, they acquired a Company called Accel, which is German-based. So the German government gives credit enhancements of their equipment. So it makes it easier to finance, banks have an additional back stop when they do their financing.

I see. Okay.

We're not too anxious to describe exactly how we're financing it. So not to give a leg up to our competitors. But I'm very confident that we'll have absolutely no difficulty getting this machine financed once it's FDA approved.

I see. All right. Great. Great job. Thank you.

Thank you.

Our next question comes from Paul Thomas, a Private Investor. Please go ahead.

Hi, guys.

Hi.

I have a quick question regarding the Still River Systems. Was reading a recent filing and it said that you have a $1.2 million unrealized loss on that investment and it just sounds like the BC's got in at a lesser price than you guys did a little bit earlier.

Could you talk a little bit about why you think there was a valuation stepdown and is that any indication of your the BC's confidence in the Still River business?

No, I think you can look at it two ways. One, I think it was remarkable that in these tough credit -- this tough credit environment, the Still River was able to raise a significant amount of funds. And I think the stepdown in price is a reflection of the times and what people were able to get from manufacturers or people that were going out for funding at that time.

So yes, they did get a step down. I think the quality of the investors that we have are very significant and very impressive. And I think the fact that Still River was able to raise the funds that they did in this tough economic time is a credit to them and what people really think of their long-term success possibilities.

Okay. And just to be clear, the reason you guys didn't write it down is because you don't believe that it's permanently impaired?

No, we do not believe it's permanently impaired. As we are long-term holders. We believe that they will ultimately prevail and provide a product.

Okay.

And I think it's clear to us that their business continues to grow as they've added on new contracts, particularly some abroad in Japan and there's a tremendous amount of interest in the Still River machine.

Yes. Well, let me ask you this, and this is the a hypothetical that you guys can just answer it how you see fit. You know, with FDA approval and all that kind of stuff being somewhat of an uncertainty, let's assume for a moment that Still River doesn't work out. How does that affect your longer-term growth strategy?

Well, if it didn't work out it would certainly slow us down but we would convert over to other companies that are out there and I suspect that most likely what we would do is we would be working with Varian.

Okay. Okay. And just another question as it relates to kind of financings and deal structure and obviously you don't want to give away any of your secret thoughts on how you're thinking about getting this stuff financed.

But historically, you guys have been able to get these Gamma Knife machines 100% essentially debt financed, non-recourse collateralized by the machine and then also the receivables. You know, generally speaking, is that the kind of deal structure that you're looking to finance these things down the road or it's probably just too early to tell?

I think it's a little early to tell and I think it will depend in part on the environment when we finally go for permanent financing on these transactions as to what that environment dictates. So I think it's a little early to tell right now, since we need to wait for the when the FDA gives their approval.

I might add to that, that we are in negotiations now with a very large public/private partnership in the UK for Perfexion. And we've got a verbal at this point, a verbal okay for financing with a bank in Europe. And we think that is probably the way we'll finance these Gamma Knives going forward, particularly in South America, where we're now in negotiations in Brazil and Peru and every indication that we'll probably finance these out of Europe. There is financing available in Europe for these kinds of transactions.

And then -- and this is just more kind of a technical question. I noticed on most of the machines that you guys do, you have an 84 month depreciation schedule and your general lease life is ten years. Just kind of walk me through why 84 months? Since the lease life is a little bit longer and are you just trying to shield cash flow or how have you come to decide that that's kind of the shelf life of the machine?

We don't decide that that's the shelf life of the machine. I think we get seven year financings on the machine with a ten year useful life of the machine. And obviously they even last longer than ten years was that's what we use because that's the -- in general, the lease term that we have with the hospital. But I think, if you're referring to the 84 months, that is the term of the financing.

Oh, that's the term of the financing. But your depreciation is over ten years?

Ten years, for the most part the length of the lease agreement with the hospital.

Okay. Okay. Then I just misunderstood. So you finance it over seven years but the lease extends for ten and the depreciation is over ten?

Correct.

Okay. All right. Well, thanks, guys.

Thank you.

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

Good morning, gentlemen.

Good morning.

The last 8-K you came out with regarding the potential transaction indicated that one of the parties had initially offered 385 a share and then had reduced its offer to 230 a share which the Company said it found unacceptable.

I think another issue was the ability to retain -- your ability to retain contacts with the institutions you already have relationships with in terms of PBRT. Would it be a fair assumption to assume that if things are back on, that you found an improvement in these areas?

Well, I think we really cannot speak to that at this point because of the confidential abilities that we have -- confidentiality agreements that we have, but as we said in the release, we found that the terms I would say satisfactory to us to at least -- to pursue this opportunity that was presented to us.

Okay. You sort of touched on this before and maybe this is impossible to answer at this point, but just as we're -- it's such a big potential evolution for the Company, I want to try to understand it. Assuming you've got with your current cash and whatever cash you get in a potential transaction, I'll just throw out a figure of $20 million or more.

As you look towards financing PBRTs and the sort of leverage you could get off them as the previous caller mentioned, you're getting sort of 100% financing now, I'm trying to figure out if you had 20 or $25 million is your thought that with 20 or 25% down you could leverage this potentially up to 80 or $100 million worth of PBRTs?

We think we can do a significant number of PBRTs. Again, the financing and the debt-to-equity ratios that you will get will depend on when we get permanent financing for these systems.

I think as we said before, it's probably a little premature to guess what that ratio is going to be, but we clearly, want to make this Company a significant player in the PBRT business and that's our goal and that's what we're trying to achieve.

Okay. In terms of the timing of the -- you mentioned in terms of the timing of the potential FDA approval for Still River, how about in terms of the Varian system?

I think Varian, as I mentioned before, has a CE mark already, a European, and I think they're doing their financing probably -- not the financing, their FDA application in the US a little later this year. Is that correct, Dr Bates?

Yes. On a recent call with Varian, which is actually about two days ago, they indicated to us that they would probably have all the necessary documents filed by the end of the year and they would expect the FDA action on that within 90 days of that.

Okay. Great. In terms of the financing deal that Still River received, obviously it was very impressive, the amount they raised also having Venrock as a lead.

Are you concerned or slash see it as an opportunity now that players like Venrock are involved an there's that level of financing that maybe Still River will set up its own financing arm and the opportunity would be obviously potentially with you as some sort of partner in that? Or are they just pretty committed to exclusively staying as a manufacturer?

Well, we're not on the Board, unfortunately of Still River, so we don't know what the Board deliberations have been. But I really think that Still River has a leg up on everybody in this business right now and it's clear to me that with the results that we're seeing with protons, particularly, in other parts of the world in terms of non-small cell lung cancer, and other cancers including prostate, that the results are so spectacular when you compare them with present radiation therapy. That that is probably going to be the primary radiation treatment for cancer going forward, once all these proton machines are up and running.

It's very exciting. The carbon machines, which we have not ordered at this point are showing in preliminary results in Japan at Cheba University. Results that look almost like cures for non-small cell lung cancer. I mean, just some spectacular stuff that's happening. This has not come out in the general literature yet, but eventually you're going to see this. I think Still River is going to be far ahead of the curve, Still River and Varian, answering the need for this spectacular new therapy.

That is fantastic news. I know a lot of general press has been sort of harping on cost versus benefit of PBRT and sounds like you're seeing that some of these results are now --

Of course, all of us are concerned when you see things like -- what's it called -- comparative effectiveness. How will that affect what we're doing because our modalities are clearly the most expensive. But when the issue is one may provide a cure and the other may not, I don't see our government or any government saying, we're not going to make that treatment available. So I don't think that is -- that is a major concern for us. As long as the clinical results continue to show the superiority.

Okay. Two more brief questions.

Back to Still River, in terms of as you said you're not on the Board but you were one of their first shareholders and obviously one of their main conduits to placing machines. Can you comment any more in terms of that relationship in terms of how you can kind of stay close to Still River, because it sounds like it's a fairly important component of your future plan.

Well, we've already ordered three machines from Still River. We're in negotiations probably with several more hospitals that want the smaller system. We just see that growing. And I don't see anyone replacing us in the foreseeable future as Still River's biggest customer. There's certainly going to be advantage to that.

Okay. That actually answered both my questions. I appreciate it. Thank you, guys.

Thank you.

Our next question comes from Lenny Dunn from Freedom Investors. Please go ahead.

Good morning.

Good morning, Lenny.

Some of my questions have been answered but -- so what I have left really are minor questions.

One is that it's my understanding that you have made a deposit on two of the machines. So you have two of them coming at probably a little more favorable prices because you put the deposit on a few years ago. Is that accurate?

Correct. That is correct.

Okay. So we have two machines at a favorable price. And the other is, do you still think that you will probably see FDA approval in the Fall this year on the Still River systems?

It's more likely during the first half, I think they're predicting of 2010 because the installation of the first unit will start at the end of this year at Barnes Jewish, as we mentioned earlier.

But Barnes Jewish has started construction.

Correct.

Okay. And I'm glad to see that you were continuing to purchase at opportune times shares without revealing any numbers or anything like that. Is that still ongoing in the current quarter or are you restricted in some manner because of negotiations that you're having with possibly selling the Gamma Knife business?

Right now, we're not in the market purchasing right at this moment.

We're restricted, Lenny, by legal counsel.

Okay. And will you keep shareholders as much in the loop as possible on this, because this is clearly -- I understand that you'll have to do a vote on it too because it's -- you're selling basically what the Company used to be for what the Company will be, so could we look forward to any updates on this or would this be at one time?

No, you can expect updates and we do expect that we'll file a proxy and that shareholders will obviously have to approve of this but I think that we'll be able to clearly demonstrate in the proxy that this is the best thing for shareholders going forward.

I'm not questioning that. I just -- you know, I would hate to have to wait three more months before we find out anything further.

No, as -- Craig, our agreement with the present people we're negotiating with ends when?

It's shortly. And I think obviously, we will take guidance from our legal counsel as to disclosure issues and clearly, we will make the disclosures as they're appropriate.

Are these the same people, though, that tried to play a game by lowering their offer or is it a different group?

We're not -- we really can't say any more than what we've said in the release.

Okay.

But I can say this, Lenny, negotiations at this point are going along favorably to our thinking. So I'll just say that much about it.

Well, thank you very much.

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

I would like to thank everyone for joining us today and we look forward to speaking with you on our 2009 second quarter conference call in about three months. And Dr Bates, do you want to have any closing comments or -- ?

No, only to say that we're very excited about the proton beam business going forward. We're very excited that the Gamma Knife business is still doing well. And will continue to grow. We have seen more interest in the Perfexions in the last two months than what we've seen since its introduction. Not only here in this country but abroad. So, I mean, I'm convinced that radiosurgery is going to continue to grow, along with proton beam, as the treatments for cancer.

Thank you.

That's all I have.

Thank you. This call will be available in digital replay in one hour following today's conference. To access the system, dial 888-843-8996 and enter the pass code of 245-25292 followed by the pound sign to access the replay. The webcast of this call will be available at www.access.com and www.earnings.com. This concludes today's teleconference. Thank you for participating. You may now disconnect.