American Shared Hospital Services (AMS) 2011 Q4 法說會逐字稿

Good day, everyone, and welcome to the 2011 fourth quarter and 2011 financial results 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, Norm Houck, Controller of American Shared Hospital Services, and Ernest R. Bates, Vice President, Sales and Business Development. Mr. Tagawa, you may begin.

Thank you, Christine, and thank you all for joining us for AMS' fourth-quarter and 2011 financial results conference call and webcast. 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, 2010, the quarterly report on Form 10-Q for the quarter ended March 31 2011, Form 10-Q and 10-QA for the quarter ended June 30, 2011, Form 10-Q for the quarter ended September 30, 2011, and a definitive proxy statement for the annual meeting of shareholders held on June 9, 2011.

The Company assumes no obligation to update the information contained in this conference call. We apologize for the error in the original press release regarding EBITDA for the fourth quarter and 2011. We ran a correction about a half-hour ago, as soon as we realized the error.

We are pleased by our fourth quarter and 2011 performance, which we believe sets the stage for further gains in 2012. For the fourth quarter, revenue increased 8.4% to $4.5 million, and net income rose to $0.05 a share. As we reported to you on prior calls, during the past year we installed 4 Gamma Knife Perfexion systems, which increased depreciation expense right away by about $240,000 in 2011, compared to 2010, with most of the increases coming in the fourth quarter.

But it takes several quarters for the Perfexion systems to ramp up to their full revenue potential. In other words, cost of goods sold increases faster than revenue for a while. We believe gross margin should gradually improve, as procedure volume and revenue continue to grow. Make no mistake, our strategy to upgrade many of our existing Gamma Knife sites to Gamma Knife Perfexion specifications, and to expand our base of Perfexion's clients is delivering the growth we are striving for. The higher throughput of the Perfexion units, compared to the Gamma Knife units they replace, is allowing us to realize significant incremental revenue, with just a few months of installation.

Our results for the fourth quarter also featured initial revenue from our newest Perfexion site, St. Vincent's Medical Center in Jacksonville, Florida, and the Elekta Axesse Radiosurgery system we supplied to the Kisla campus of Baskent University in Adana, Turkey under a contract announced last March. This past January, we entered into a contract to supply our twelfth Perfexion system in the United States to Sacred Heart Health System in Pensacola, Florida. Pending regulatory approval, patient treatments on this Perfexion system are expected to begin later this year. We are pleased to welcome to Sacred Heart Health System as a new AMS client.

We are seeing interest opportunities to place the Gamma Knife Perfexions at new and existing AMS sites, both in the US and internationally. Additionally, the Perfexion unit AMS will supply to Florence Nightingale Hospital Group in Istanbul, Turkey is expected to begin treating patients in the second quarter. And the Gamma Knife unit AMS will provide to Hospital Central FAP in Lima, Peru and the linear accelerator site in San Paulo, Brazil, are expected to begin treating patients later this year.

Also in January 2012, MEVION Medical Systems, formerly Still River Systems announced a $45 million investment in their company by a group of leading private venture capital firms. After this funding, AMS owns approximately 1% of MEVION, the manufacture of the MEVION S250 Proton Therapy System. Proton therapy permits more precise dose targeting at predictable tissue depth than conventional x-rays, allowing the treatment of targets adjacent to critical structures without inadvertent damage.

However, due to the high cost, large footprint, and technical complexity of traditional proton systems, the availability of proton therapy currently is limited. The MEVION S250 significantly reduces the cost, size and complexity to levels similar to other modern x-ray radiation therapy devices, and promises to bring accessibility, affordability, and practicality to proton therapy.

I am very excited to report that just yesterday, MEVION announced that it has received CE Mark certification for the MEVION S250 Proton Therapy System. This important commercial milestone indicates that MEVION has completed it's development compliance with the European Union's Medical Device Directive. The CE Marking allows the MEVION S250 to be marketed, sold, and installed in the European Union, and in any country that recognizes CE Mark approval.

AMS is developing proton therapy centers in Boston, Orlando, and Long Beach, California which are expected to employ the MEVION S250 proton therapy device, once it is cleared by the FDA. MEVION reports that its first site at Barnes-Jewish Hospital at Washington University in St. Louis, Missouri, accepted delivery of it's superconducting synchrocyclotron in October 2011, and is now producing a powerful 250 megavolt energy beam. MEVION has filed a 510(k) application for marketing clearance with the FDA. We are also developing a two room proton therapy center in Dayton, Ohio.

On our last call, I mentioned that the centers for Medicare and Medicaid announced a 15% increase in its payment rate for proton therapy for hospital-based centers beginning in 2012. This is the third increase in CMS' payment rate for hospital-based proton therapy centers in the last three years. Obviously this latest increase further strengthens the economic proposition behind the development of proton centers, a proposition that was compelling even before this latest change.

We estimate that each of our proton treatment centers will generate about $6 million to $7 million in EBITDA annually, after the ramp-up period. Our MEVION-based products -- projects alone comprise a total of three treatment rooms. So obviously, our success in the proton business can have a dramatic impact on AMS's performance in the years to come.

Finally, I'm pleased to report that a US patent has been allowed on a variety of technologies jointly owned by AMS and NBBJ LP, a leading global architectural and design firm, that are designed to increase efficiency and improve patient outcomes in the operating room. These technologies, which we will incorporate in our operating room for the 21st century concept, have applications ranging from novel operating room lighting systems to innovative operating table designs.

We believe they have the potential to improve patient safety and comfort, surgical team efficiency and satisfaction, and enhance returns for healthcare institutions. We intend to license these inventions to various manufacturers. Licensing of these technologies will provide a non- capital-intensive business model that nicely complements our other businesses. Now I'm going to turn the call over to Norm to review our financial results. Norm?

Thanks, Craig. For the three months ended December 31, 2011, revenue increased 8.4% to $4,500,000, compared to $4,152,000 for the fourth quarter of 2010. Net income for the fourth quarter of 2011 rose to $244,000 or $0.05 per share. This compares to net income of $40,000 or $0.00 per share for the fourth quarter of 2010.

A note on the tax rate in the fourth quarter. As you know, AMS has devices treating patients in many states around the country. In general, taxable income in each state is apportioned based on various factors typically revenue, fixed assets, rent paid, and payroll. California adopted into law effective in 2011, an alternative single sales factor apportionate formula, that permits companies to determine their taxable income apportioned to California based solely on revenue.

This obviously helped us tremendously, since most of our payroll is in California. The amount of our taxable income and net deferred tax liability apportioned to California was reduced significantly. The discrete tax benefit determined in the fourth quarter reflected the reduction of California current and deferred taxes that resulted from the adoption of the alternative single sales factor formula.

The total number of procedures performed in AMS Gamma Knife business increased 11.4% for this year's fourth quarter, and increased 4.8% for 2011, compared to the fourth quarter and 2010, respectively. Gross margin for this year's fourth quarter decreased to 39.5%, compared to 46.1% for the fourth quarter of 2010. As Craig explained, this was primarily the result of an increase in depreciation expense associated with the upgrade of a number of Gamma Knife systems to Perfexion's specifications during the past year.

Gross margin also was affected to a lesser extent by the initiation of patient treatments during the quarter, of the new devices supplied by AMS to St. Vincent's Medical Center and Baskent University in Turkey. Selling and administrative expenses for the fourth quarter of 2011 decreased 16.4% to $840,000, compared to $1,005,000 for the fourth quarter of 2010. Reflecting the addition of new Perfexion systems to AMS Gamma Knife portfolio, interest expense increased to $613,000 for this year's fourth quarter, compared to $562,000 for the fourth quarter last year.

For the 12 months ended December 31, 2011, revenue increased to $22,221,000, consisting of medical services revenue of $17,237,000 and revenue from equipment sales of $4,984,000. This compares to medical services revenue of $16,675,000 for 2010. Net income for 2011 increased to $506,000 or $0.11 per diluted share, compared to net income for 2010 of $57,000 or $0.01 per diluted share.

The equipment sales revenue came about as follows. In March 2011, AMS announced a contract to upgrade Gamma Knife to Perfexion specifications at Lehigh Valley hospital in Allentown, Pennsylvania. As part of this upgrade, AMS agreed to the early termination of the existing ten year lease on the Gamma Knife system it supplied to Lehigh in 2004, and Lehigh agreed to purchase the Perfexion system. Pretax income of approximately $840,000 was recognized from this transaction. Cash flow as measured by earnings before interest, taxes, depreciation and amortization or EBITDA was $2,493,000 for the fourth quarter, and $9,265,000 for 2011, compared to $2,159,000 for the fourth quarter, and $8,211,000 for 2010.

On the international front, AMS invested approximately $1.2 million in cash during 2011. And by redeploying and financing an existing unit, we received about $1 million in cash during the year. Our international capital investment in 2011 therefore was minimal. On the balance sheet at December 31, 2011, AMS reported cash, cash equivalents and certificates of deposit of $11,580,000, compared to $10,438,000 at December 31, 2010. Shareholders equity at December 31, 2011, was $25,171,000 or $5.46 per outstanding share. And this compares to shareholders' equity at December 31, 2010, of $23,044,000 or $5.01 per outstanding share. Craig?

Thank you, Norm. Now we would like to open the call to questions. Christine, we are ready for the first question.

Thank you.

(Operator Instructions).

The first question comes from Anthony Marchese from Axiom Capital. Please go ahead.

Hi, congratulations, great quarter.

Thanks.

It's nice to see with -- hopefully the beginning, of a series of increases in the EPS. A question for you relating to overseas activities. You mentioned that MEVION just received the CE Mark. Are you doing anything with them overseas? I know in the US, obviously, you are. But do you have the right to, or will you be planning on doing anything overseas?

Hi, Tony, this is Ernest Bates, Junior.

Hi.

We -- how are you? We -- we are having some discussions with various parties about placing MEVION, and possibly other units from other manufacturers into some of these international markets.

Okay. So -- I mean -- this is -- fine. A second question for you is, what is happening with financing for the -- I guess, you had this two room system in United States?

Yes. It's a -- we are looking at a two-room system, and we're looking at currently -- we've -- we're engaging a banker to assist us in raising some money for the proton sector, as well as there is some other avenues, that -- financing avenues that are open to us that we're pursuing. And we have also talked to some lending institutions, and -- about senior financing for this project.

And one of the things that we are looking for, Tony, is the fact that some of the manufacturers that we are looking to utilize for that two-room system, you can get credit enhancements from their foreign governments. So we're going to -- we're in the process of seeing what steps need to be taken to take advantage of all that.

I see. Okay. Thank you.

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

Hi, excellent quarter, really outstanding on so many different metrics. A couple questions, on the Perfexion, you mentioned that you see increased opportunities. And I wondered if you could sort of generally comment on what the pipeline for that looks like, compared to anything you want? Essentially, how is this pipeline compared to whatever you have seen in prior?

Well, that I can tell you from the domestic standpoint -- with the Perfexion, it's a very capital-intensive -- has a very capital-intensive cost structure. It lists for $4.5 million. And what we're seeing there are opportunities for hospitals that want to upgrade, but don't want to take the full risk or the capital investment that's required to go from an existing Gamma Knife center to a Gamma Knife Perfexion.

They all see the benefits of it, much like what we've proved through our operations. And really, the doctors are now pushing to have Perfexion units at their sites. And still, with hospitals being a little cautious about their capital allocations, we're seeing significant opportunities at existing Gamma Knife sites that aren't our own, to upgrade. And I would say, this is the most activity we've seen in probably five or six years. And we are also continuing to upgrade some of our own systems to Perfexion. So I think you'll see some of that activity in the next year to 18 months, as well. And, Ernie, do you want to comment on the international front?

Yes. Tony, I was just going to add that we're going to be placing our first international Perfexion unit at Florence Nightingale Hospital. The unit has been installed, and we expect to start treating patients at the end of this month, or in the early part of April. So we're very excited about that. And we're also working on putting together an affiliation agreement with the University of California San Francisco. And so, we expect that the two neurosurgery departments will be collaborating together. So, we're looking forward to putting that agreement in place.

Given sort of the geographic spread, and now the breadth of products you are dealing with, and now with MEVION, hopefully close to US approval, are you going to add more sales personnel?

We probably will as we go on. I think we've looked over the years for the right person. These are very complex transactions, as you can imagine. And a lot of it is relationship-oriented at this present time, that we're really leveraging people that all of us know, and relationships that we have over the years. So -- but we will be looking for someone to handle some of these projects for us, I think over time. It won't be right away, but it will be in the not too distant future probably.

Yes, it just seems like your in a nice position of potentially being overwhelmed with business. And it would be great to capture it, obviously. Turning to proton beams, can you talk a little bit about -- I believe your first center is going to be the M.D. Anderson Orlando Center. And then followed by [Tufts], but where are you in the queue of MEVION systems, numbers-wise ?

We, currently we are -- the M.D. Anderson is going to be -- it can be in about 2013 for delivery. We're just waiting to get the final FDA approval. Everything is going to hinge on that.

Okay. But would you say your the fourth MEVION system, or do they look at it that way in terms of --

Yes, they are going to be looking at a couple things. We're either between four and six. The -- I think it's going to be who is going to want to go before FDA approval, and start their construction. And I think that's what will hinge on, what number we actually become.

You might want to add, Craig, that there are some institutions that already have started their construction.

Correct, there --

-- mention those.

There are three institutions that have already started construction, and have started taking possession of various pieces of the proton system. And that would be the Barnes-Jewish system, which is the first one that is mentioned. And the second one would be Robert Wood Johnson in New Jersey. And third one is the University of Oklahoma in Oklahoma City.

Okay. And with the -- what was new information to me, they actually have now filed their 510(k). So does that set off a sort of 90-day clock, and do you know when that was filed?

The -- it was just filed recently, within the last week or so. The final application was submitted and accepted. And it does start the 90-day cycle.

That's great. Well, again, thank you, and congratulations on a great quarter.

Thank you, Tony.

(Operator Instructions).

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

Hi, good afternoon. It was a good quarter, and we seem to be back on track to becoming a profitable Company without the proton beam, which of course, obviously, we're all looking forward to. And, I have a few questions. One, if you upgrade someone else's Gamma Knife, how does that work, from the standpoint of revenue? In other words, your business model is a turnkey. And clearly, somebody else -- whether it's the hospital or some other finance, got this thing started. So how does the revenue model work on that?

The revenue model is the same as what we use. It's just the percentage that we would receive from the hospital. We primarily, are doing revenue sharing models now. And we would just allocate the revenue based on what each party's putting into the capital structure. So it's much like, what we're doing currently, but the model is the same.

(Inaudible) get the same type of higher price for a procedure that were getting with the Gamma Knife that we installed?

The -- I'm sorry, I didn't quite understand that.

The Gamma Knifes that we installed, and then upgraded to Perfexion systems, we now will get the differential between that and the Perfexion systems?

What would actually happen is, there'll be revenue generated from the Perfexion. And we will split that revenue on an agreed-upon percentage with the hospital.

Craig, you might point out where you are compared to Elekta with upgrading to Perfexions, what you've done in the last year, compared to Elekta as a whole?

Yes. Well, what we understand is we probably converted more of our Gamma Knife fleet to Perfexions than the market as a whole has. And I think that's -- we've identified that the -- the benefits of the Perfexion. I think that there are even some more benefits of the Perfexion that are still untapped.

And that has to do with the extend system that has been FDA approved, about six months to a year ago, that can do fractionated treatments. So patients that have a tumor that's slightly too large for a single treatment can now be treated on the Perfexion, with the extend modification to treat one to five fractions. So I think that, as we start rolling out that product onto our Perfexions, can also increase our revenue base. Yes. And Elekta is going to essentially finance some of those additions for us. So we don't look at this as being something that's going to be capital-intensive for us, rather accretive from a revenue standpoint.

That's good. And also, with the MEVION, that we have deposits on two units.

We have deposits on three units.

Three units, excuse me, so there is -- that will finally release some of the capital we've allocated for a number of years now, and make it productive, once you get the units installed.

Correct.

Okay. Now, looking at the book value, it actually moved up a little more than I would have anticipated with the earnings. Can you kind of give me a little light on that? The book value, this quarter versus last quarter, went up a little more than I would --

Well, it went up, based on the increase in net income.

Well, that, that I saw. And --

Yes.

-- seemed like it increased by more than that, but. And looking at the revenues, it looks like now, we actually could earn more than the nickel going forward, because you're ramping up the revenues. Am I misreading anything there?

Well, the only thing is if you look at some of the gain in the fourth quarter is due to the tax benefit that we received --

Well, that I understand --

-- due to the change in allocation.

That I understand --

Yes, so that did impact the fourth quarter's earnings per share number. So I just want to point that out to you, Lenny.

Of that I'm aware of, but --

Okay.

Historically, people kind of postpone procedures during the holidays, so that this is not historically as strong of quarter, where the -- so that that's why I thought going forward, we would actually have a little better revenues from the install base, isn't that the fact?

Well, we are in a -- we do not get fixed amounts from any of our sites. So it really depends on just the usage. And it's been cyclical over the years, so I can't predict exactly what that number is going to be. We had a very strong fourth quarter, and we hope to continue that trend.

Good. Your -- from what your saying -- you would expect the MEVION approval to likely come by the end of the second calendar quarter. Is that accurate?

No, what we -- just to clarify that, the -- the FDA as I understand it, has to respond to the application within 90 days. They may come up with questions, in which case MEVION will have to answer those questions. And then another 90-day cycle would commence. So it just depends how many cycles they go through, as to when the final FDA 510(k) approval will be granted.

Just my view of this, because I've been watching this for a number of years now, is that by now MEVION ought to have this thing down pretty well. So I can't see a lot of questions coming up at this late juncture. You wouldn't have thought they could have got the latest round of financing, if that were the case.

Yes. We just can't predict what questions the FDA may come up with.

Well, of course, that I understand. Okay. Well, I'm very pleased to see us earning money. And I was also very pleased to see the SG&A drop, because that was quite a bit out of line, going into this quarter, but it seems like it's under control now. Do you feel you can continue to keep it that way?

It's -- it varies according to the amount of development costs we have. And it will continue to do that, as we forge ahead in building our various businesses both domestically, internationally, the proton business and OR 21. We think those are all very important platforms that we want to expand to really increase the shareholder value long-term. So I -- we are making every effort to contain our SG&A, but it will fluctuate as according to the needs of each of these platforms to keep them on track.

Haven't you decreased a little bit on your office rent too now?

We haven't decreased our office rent, and our rental expense in general. That's correct.

But we're finally getting to the end of the on-hold road, and entering the growth mode again. So I'm glad to see that, and compliment you on the quarter. But look forward to actually better quarters, and some control in the SG&A. Thank you.

Thank you.

Your next question comes from [Tony Pollock] from Maxim Group. Please go ahead.

Good afternoon. Could you give us a little time table, assuming we get [401(k)] approval for the MEVION system, let's say by the fourth quarter on Boston, Orlando, Long Beach? What is your timetable? And will the margins be similar to your other businesses, once those get up and running?

We believe the margins will be very similar to what we get in the rest of our businesses. It's a little hard to pin down, what the order will be. But we expect, there is a good possibility if, the MEVION does receive FDA approval in the not too distant future, that by early 2014, we should see some revenues being generated by our first proton site.

Are any of those being built now? Or are they waiting for approval?

None of them have started yet.

Okay. Okay. Thank you.

Thank you.

The next question is a follow-up from Tony Kamin from Eastwood Partners. Please go ahead.

Hi, one follow-up. In terms of the -- your ability, you said with the Perfexion to go after other manufacturers' machines for upgrades, would the Perfexion be comparable in terms of treatment modalities to, like the cyber knife installed base?

In terms of the cranial procedures, papers that we've all reviewed, show that the Perfexion is a superior to the Accuray system that you've mentioned.

Yes, and -- I mean that's a very large installed base, so it would seem like that would be a great opportunity --

Yes. We really think that the two could coexist. And what I meant about upgrades, it's upgrading existing Gamma Knife programs that we are not currently participating in, as opposed to necessarily supplanting another device.

Okay. But that might be an opportunity, as well at some point?

That might be an opportunity as well, if someone has enough cranial business, that they want just a dedicated system.

Okay. Thank you.

Thank you.

Your final question is a follow-up from Anthony Marchese from Axiom Capital. Please go ahead.

Hi. You mentioned in your press release, and I guess in your prepared remarks about these patents that you received. If you could just take us through, how you see that generating revenue for the Company over what period of time or -- ?

Sure. What I can tell you was, we've developed these patents over a number of years with our strategic partner, and we are in the process of trying to develop the first system. And I actually have a confidentiality agreement that I can't disclose what that is. But the -- how it will work is, there are about 60,000 operating rooms in the United States. And really, if you look at it, how often do these -- what we did was an analysis of how often do these operating rooms get turned over or modified? And that's about 10% every year get modified in some way.

So, we're looking at opportunity of about 6,000 operating rooms for some of our inventions to go into on an annual basis. And what we plan on doing is partnering up, with a manufacturer that's going to design and build these inventions that we've come up with, and just enter into licensing agreements with them. So, we view this as very complementary to what we're currently doing, which is a very capital-intensive business.

This will not be a capital intensive business, but this will again, be a function of the relationships that we have with many of our hospital partners, and introducing them to new products that we have, and simply getting a licensing fee, as opposed to financing the equipment and then accruing revenue over time.

I might add to that that we went to Innsbruck, where these lights have been developed in Austria, and went with a group of doctors including some from UCSF in San Francisco, and some from Johns Hopkins, and these are a remarkable improvement over the existing operating room lights. They've pretty much do away with shadows, the illumination is higher. They are quite remarkable, and they are automatically controlled, controlled by either voice activation or a touchpad, really in many ways revolutionary.

And I'm quite excited about it. And the neurosurgeons that went with us, and general surgeons, just thought this was a remarkable piece of technology. And we've been working on this thing for the last 10 years, and Craig and I do have in our names, along with our partners, 17 patents. So it's quite exciting.

Is this something that can generate revenue? What's the earliest that you see this generating revenue? Sounds like it's 2013.

It's about two years. But if you look at the numbers, we're thinking that these lights will sell for about $100,000 a light. And if we get a licensing fee, which we share with our partners of 2.5%, and if we just did 10% of the market, that would be $1.5 million. If we get 5%, it's 3 million.

I get it.

Yes. And so it could be quite profitable. We're quite excited about it. And there are other things that we will add onto this whole concept of modernizing the operating room.

Great. All right. Thank you very much.

Your next question is a follow-up from Lenny Dunn from Freedom Investors Corporation. Please go ahead.

In view of the future looking bright, but also us now having a profitable Company, there's no way this stock should be selling for less than book value. And it has for some time, because nobody knew if you were ever going to make any money again. But you are. So it's probably time to start showing it to Wall Street again. I mean, there was no point in showing it to anybody, when you didn't have profitability, but everything was on the come, so to speak. But now we have, both a bright future and a -- (inaudible).

Thank you, Lenny.

I'd like to see you start showing it to some people, because I think you could get interest now, where you couldn't have been able to before.

Thank you.

Mr. Tagawa, there are no further questions at this time. Please go ahead with any final remarks.

I think -- so thank you. And since there are no -- for joining us this afternoon. And we look forward to speaking with you on our 2012 first quarter results conference call in about three months.

Thank you. This call will be available in digital replay immediately following today's conference. To access the system, dial 888-843-7419, and enter the passcode 31962119, 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.