American Shared Hospital Services (AMS) 2014 Q2 法說會逐字稿

Good afternoon everyone, and welcome to the 2014 second-quarter financial results conference call for American Shared Hospital Services. (Operator Instructions). Joining us on the call today are Dr. Ernest Bates, Chairman and Chief Executive Officer; Craig Tagawa, Chief Operating and Financial Officer; Ernest R. Bates, Vice President of Sales and Business Development; and Alexis Wallace, Controller of American Shared Hospital Services.

I will now turn the call over to Mr. Craig Tagawa. You may begin, sir.

Thank you, Brandon, and thank you all for joining us for AMS' second-quarter 2014 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 and 10-Ka for the year ended December 31, 2013, the quarterly report on Form 10-Q for the quarter ended on March 31, 2014 and the definitive proxy statement for the annual meeting of shareholders held on June 10, 2014. The Company assumes no obligation to update the information contained in this conference call.

Obviously, the main issue in the second quarter was the decrease in procedure volume and revenue. In addition to lower procedure volume in many of AMS' Gamma Knife sites and the sale of our Turkey operations effective May 31, 2014, the decrease in revenue was exacerbated by several factors.

The severe winter weather in the Midwest and the East Coast that affected us in the first quarter lingered and April. One site was down for the entire quarter due to personnel issues that have now been resolved, and two sites which generate significant procedure volumes in the second quarter of 2013 had an unusually slow second quarter this year. I am glad to report that both sites have bounced back to the usual treatment levels in July.

We have worked diligently to resolve all the issues and restore normal procedure volume as quickly as we can. We appear to be making good progress as Gamma Knife revenues in July improved 18% and 33% compared to average monthly revenues for the first and second quarter of 2014, respectively, and improved 5% compared to July 2013 net of volume in Turkey.

We closed the sale of our business in Turkey effective May 31, 2014. While we viewed our Turkey operations as a good long-term investment, the continued volatility of the Turkish lira against the US dollar resulted in cumulative foreign currency transaction losses of $908,000 and absorbed a great deal of management's time. This, plus the opportunity to generate approximately $540,000 in cash for our domestic operations, were compelling reasons to consummate the sale.

We also completed the private placement of common stock to several AMS directors in the second quarter which raised approximately $1.6 million. We used the proceeds of this transaction to strengthen our balance sheet in anticipation of our proton therapy initiatives.

We also are encouraged by the continued growth of our domestic Perfexion portfolio. We recently announced a contract to supply a Perfexion system to Peace Health Sacred Heart Medical Center at Riverbend in Springfield, Oregon. This new Perfexion system, the 14th in AMS' portfolio, is expected to begin treating patients in the fourth quarter of 2014. This installation will also mark our 28th new Gamma Knife site.

Another reason for optimism are the proposed Medicare hospital outpatient prospective payment rates for calendar year 2015 recently posted by the Centers for Medicare and Medicaid Services. Effective January 1, 2015, the proposed comprehensive reimbursement rate for both Gamma Knife and LINAX one session cranial radiosurgery of approximately $9,768 will be inclusive of the delivery and ancillary codes but exclusive of coinsurance payments or other adjustments. The average current CMS reimbursement rate for delivery and ancillary codes, exclusive of coinsurance and other adjustments, is approximately $5600. While these reimbursement rates are not final and could change, we are pleased that CMS has proposed an increase for this life-saving therapy.

The cost reduction program we announced in April 2013 has helped mitigate the impact of lower revenue on our financial results. General and administrative expenses decreased 18.7% for this year's second quarter and 22.2% for the first half versus the same periods a year ago. We are on track to reduce cash outlays by approximately $1 million annually compared to our cash outlays in 2013.

Turning to the Company's proton therapy business, construction of the dedicated proton center at the University of Florida Health Cancer Center at Orlando Health is moving forward. AMS will supply a MEVION S250 proton therapy system for this facility. Delivery of the MEVION synchrocyclotron to the UF Health Cancer Center is expected this fall and the facility is expected to begin treating patients in first quarter 2016. The UF Health Cancer Center at Orlando Health is the model for additional proton centers AMS is developing.

Now, I'm going to turn the call over to Alexis Wallace to go over the results in detail. Alexis?

Thank you, Craig. For the three months ended June 30, 2014, Medical Services revenue decreased 26.3% to $3.379 million compared to $4.583 million for the second quarter of 2013. As Craig explained, in addition to lower procedure volume at many of AMS' Gamma Knife sites and the sale of our Turkey operations effective May 31, 2014, the decrease in revenue was exacerbated by one site being down for the entire quarter due to personnel issues that have now been resolved and two sites which generated significant procedure volumes in the second quarter of 2013 having an unusually slow second quarter this year.

The net loss for the second quarter of 2014 was $927,000, or $0.20 per share, which included a pretax loss from the sale of the Turkish subsidiary of $572,000, a pretax gain from foreign currency transactions of $146,000 due to the strengthening of the Turkish lira against the US dollar, a net income tax charge of $165,000 which offset income an tax benefit of $131,000 from the Company's operating loss. Although this sale resulted in a bulk loss, it generated approximately $540,000 in cash for the Company. This compares to a net loss for the second quarter of 2013 of $122,000 or $0.03 per share, which included a pretax loss from foreign currency transactions of $393,000.

The number of procedures performed on Gamma Knife Perfexion systems supplied by AMS decreased 25% for the second quarter and 12% for the first six months of 2014 compared to the same periods of 2013. The total number of procedures performed in AMS' gamma knife business including Gamma Knife and Gamma Knife Perfexion procedures decreased 28% for the second quarter and 17% for the first six months of 2014 compared to the same periods of 2013.

Medical Services gross margin for the second quarter of 2014 was 25% compared to Medical Services gross margin of 41.3% for the second quarter of 2013. In addition to the impacts of lower revenue, the decrease in gross margin reflected higher depreciation and maintenance costs associated with the opening of a new Perfexion site in the second quarter of 2013 as well as the upgrade to Perfexion specifications of the gamma knife site at another site and two Cobalt reloads which occurred in the fourth quarter of 2013. Because an upgrade of Cobalt reload increases the book value of the unit, depreciation expense also increases.

Selling and administrative expenses for the second quarter of 2014 decreased 18.7% to $937,000 compared to $1.153 million for the second quarter of 2013. For the six months ended June 30, 2014, Medical Services revenue decreased to $7.443 million compared to Medical Services revenue of $9.251 million for the first six months of 2013. The net loss for the first six months of 2014 of $1.023 million or $0.22 per share included a pretax loss from the sale of the Turkish subsidiary of $572,000, a pretax gain from foreign currency transactions of $161,000, and an income tax charge of $165,000 which offset an income tax benefit of $161,000. In comparison, the net loss for the first six months of 2013 of $97,000 or $0.02 per share included a pretax loss from foreign currency transactions of $534,000.

On the balance sheet at June 30, 2014, cash, cash equivalents, and certificates of deposit were $9.944 million compared to $10.909 million at December 31, 2013. Shareholders equity at June 30, 2014 was $25.021 million, or $4.76 per outstanding share. This compares to shareholders equity at December 31, 2013 of $24.055 million or $5.22 per outstanding share. Craig?

Thank you, Alexis. Brandon, we are now ready for the first question.

(Operator Instructions). Stephan Miskjian.

Several questions. First of all, when the Turkish operations were initiated, one of the I guess what I would call a partner was brought on board as a Board of Director. Is that person still on the board?

Yes, he is.

Okay. Is there a need to, now that the Turkish operations have been closed, is there a need to keep that person on the board given that it's an expense to the Company to have the board of directors?

He's a very effective board member and has been very helpful to the board.

Okay. Very helpful outside of the Turkish operations?

Yes.

Okay. And looking to the proposed rates that CMS has suggested, I believe it's been the last two years, they've suggested a very high rate in the middle portion of the year, and then when the final rates come out toward the end of the year, it ends up being a much lower number. What's to say that this won't happen again in this year, that the number that's finalized is a much lower number than what's proposed?

Yes, that could always happen. It's unusual what happened last year in that there was so much change from the initial proposal to the final number. There could be some slight variances due to refinements of the figure, but last year was quite unusual. I can't say that it won't change again this year because we have no control over that. I think one of the things that is different this year, it's a comprehensive rate, which is something completely new. And we're very happy that CMS is allowing the regular single session radiosurgery for cranial procedures to be a part of that study.

And I think, from what I'm told there, were a number -- a greater number of claims that were processed to come up with the numbers. So, we're hopeful that there is no significant change, but there can be no guarantees since we are not in control of that.

Okay. You provided an update on the University of Florida MEVION proton beam. Can you provide a quick update on the other centers that AMS is involved with?

Well, the other centers that we are involved with is one that will hopefully be going into a hospital in Southern California. That is progressing well. We have several institutions that we have been in serious discussions about financing that and going forward. And the same is true of the third unit which hopefully we're going to put into the San Francisco Bay area. Very encouraging. We have spoken to several investors. I do not anticipate any major problems getting those -- all three of those units financed.

Okay. It seems like, in the past news items and conference calls, that there were more than three potential centers. Has there been a center or two that's dropped off the radar?

I think what Dr. Bates was referring to, the three MEVION systems that we've been committed to.

Okay.

But we have been in discussions with over 25 hospitals over the last few years.

Okay, so as of right now, there's three that are --

Three that we are committed to.

Yes.

Yes, okay. And looking at MEVION, is it possible to provide an update onto how many systems in total they've committed to? And is there growth there, or has it stalled? Or, any feedback you can provide just on their business as a whole?

Well, we were in discussions with MEVION this morning asking those similar questions. I did not feel that they were are comfortable giving us a backlog number to date, though when we last discussed this on our last earnings call, we thought the backlog was close to 17 machines. And it's my understanding that they have gone beyond that, but we did not get a firm number today.

Okay, all right. Okay, that's it. Thank you very much.

Tony [Cayman].

The previous caller was touching on the topics that I'm curious about, which, again, are sort of on the pipeline of the 25 or so hospitals you've spoken to be on the three that are committed. Can you talk about what you've learned from MEVION in terms of where they are with Barnes? Because I know that that was one of the gating factor you felt until that got up to a certain number of procedures. And what do you think it will take to start to convert some of those 25 into the next level of agreement as opposed to just being prospects?

Well, to answer the question about Barnes, we were told this morning that Barnes is doing quite well. They are doing over 20 patients a day. The breakeven at that Barnes or units similar to Barnes will be about 26 patients a day. Is that correct, Craig? Am I --

No, I'm sure it's a lot lower than that. But we are not privy to their financials, so it would be a supposition.

But what is our breakeven on the average?

It's going to vary by how we structure these transactions, so I wouldn't give a number and be committed to it.

I think what Craig is trying to say is that we feel very comfortable that, the way the Barnes unit is performing, that we will meet breakeven with all of our machines.

By the way, the uptime for that Barnes unit since its operation over the last I guess you said several months is 100%. So we know that this machine works and works well.

Okay. And the second part of the question in terms of last -- I think on the last call that seemed to be a lot of the gating factor in getting other hospitals to move forward. The fact that they've been up 100% of the time is terrific news. The fact they've got patients is terrific news. So what do you think it will take to start to move discussions forward with even more hospitals?

I think what people are waiting for is an understanding of where MEVION is going with its fundraising, how it intends to bring more money into the Company so that they can meet this demand. And hopefully we'll hear something from them in the near future about what they intend to do to raise more money.

Okay. Anything new that you are aware of on the clinical study side on actually on either Proton or Gamma Knife?

Nothing new that I'm aware of at this point. I think still, in our minds and most people who believe in Proton because that clearly the clinical evidence suggests that there is better local tumor control and life extension with protons versus photons.

Okay. And a final question, you had your big raise this quarter, and it was terrific to see your director step up so strongly. Can you talk a little about that, what you feel it says about the director's motivation and their commitment to the Company and if it's anything more than an investment then what it means? Because it was certainly very encouraging to see them step up.

Yes, I think it speaks for itself. They believe in what the Company is doing. They like the progress thus far. They are pleased with the way management has run the Company in the last several years, and it shows their personal commitments. And it wouldn't surprise me if they don't step up at some point in the future if that is required.

Okay, great. Thank you guys.

(Operator Instructions). Lenny Dunn.

The quarter was disappointing, but it was explained why was it disappointing. And you say that, July, things have picked up again so we should have a decent quarter in the current quarter. And with MEVION, it's been my hope and I'm sure yours that they take this company public because that monetizes our stake and that would be the best way for them to go forward. Do you think that may be the direction they take before the end of this year?

Well, Lenny, as you well know, if that is the case, it's not something that we can talk about. But I'm very encouraged that the management of MEVION is doing everything they can to raise money, and it would not surprise me if they don't announce something by the end of the year. But if we did know at this point, it would not be something that we could discuss.

Okay, no, I understand --

Lenny, one thing is clear to me, that this MEVION single room machine is the only machine -- and I mean that -- the only machine that is economically feasible. All of the other machines which are going to post well over $25 million to $30 million make no economic sense.

No, I understand that, and I believe that they are the future, but they have taken longer than I initially expected to get to the stage where they could start mass-producing these things.

God knows you are right, Lenny, and I agree with you.

And the other thing that, clearly if this reimbursement holds up, the gamma knife business could return to the levels it was producing for you seven or eight years ago. The arithmetic is pretty compelling. You've got to have that per procedure. And I also believe that one of the reasons for a little bit lower procedures is it's not as profitable to do it at the low rate that they were reimbursing. So everybody wins with a better reimbursement rate. So I could see this being a terrific shot in the arm. And you guys used to earn $0.50 to $0.60, so I could see that happening again if this holds up. Am I looking at pie in the sky?

Craig, do you want to comment on that because it's your --

Well, we think it will definitely be a big shot in the arm for the Company, and we're just hoping that the proposal stays as announced.

I understand it's not anything you can control and it's more likely to stay as announced that it was last year when all of the initial uncertainty with Obamacare was out there. So no, I think it's realistic to expect it, but it's not a certainty; I understand that. So, I'd certainly like to see the Company showing some nice quarterly numbers again. It would also help out with the proton beam products because you can then transfer real cash over.

Okay, well, again, I'm looking forward to seeing what they finally decide, but I think you've got a pretty good shot at getting something very close to those numbers.

And I also understand why you keep the Turkish director around. Besides the fact that he brings things to the board, he stepped up and bought quite a few shares at -- you had around $3.30 a share about a year ago and he's made open market purchases. He's a shareholder. So he's got skin in the game.

You are absolutely correct, and it wouldn't surprise me if he doesn't step up at some point in the future because he has confidence in what we're doing. He has been a good director.

No, I have no problems with him or any of the directors. I think the directors own a huge percentage of the business now, including yourself, so you have terrific insider ownership, which should lead to the right moves because it's your money. So, okay, well, thank you very much.

Anthony Marchese.

I have a question for you. Maybe it's a question that Craig could answer or you, Dr. Bates. The stock trades at half of book. Obviously, there is some confidence in the Company because I see some of the directors buying the stock, although, frankly, I'm a little surprised that the Turkish director didn't buy any stock in the private placement given that he stepped up and bought stock at higher prices last year. But in any case, I'd love an opinion from you guys. A, why do you think the Company trades at half of what I think is tangible book if I'm not mistaken? And what can the Company do to perhaps close that gap? Or to help close the gap, obviously. You know what I'm saying.

Yes, we have no knowledge as to why, just like you do, we have no knowledge as to why there is that gap or inbalance between the two. I think what we try to do is run the Company and manage the Company as well as we can, and I think what we're doing now with the proton initiatives and, as that takes effect, I think the value, you'll see the value in the future increase above what the book is, because I think there are a lot of people who have been waiting for a number of years for the proton initiative to start and I think each month we get closer to that happening.

Now we are within 18 months of first treatment at our first center. So we're very excited about that and we're hopeful that people will see the value in that and it should increase our EBITDA significantly once we are up and running. So, I think the metrics will drive the stock up. That's our hope.

Yes, I think, for the microcap investor, 18 months is literally an eternity. Most microcap investors find it hard to see beyond three months. So, while I agree with you that the value is there, I'm wondering if there aren't any investor awareness initiatives that, on a short-term basis, could highlight or bring to investor attention the merits of the Company, the disparity between book value and share price? So, I guess that's what I was thinking. Craig, I agree with you 18 months from now, no question. But between now and then, to see the stock trading at half of book is just, in my opinion, a disservice the current shareholders and to yourselves.

I think what everybody is waiting for is to see at least two machines that are really clinical machines that are not at an academic center like Barnes, to get them up and running and treating patients. And I think you're going to see that within the next 12 months. And what are those two units, Craig?

The next two units that will be up and running -- there's one at the University of Oklahoma in Oklahoma City and the second one is Robert Wood Johnson in New Jersey.

And I think, when those two machines get up and running, and you'll see their numbers. I suspect that they'll even surpass what Barnes is doing.

Okay. All right. Thank you.

We have no further questions at this time. Mr. Tagawa, I will turn it back to you for closing remarks.

Thank you, Brandon. I have no other closing remarks other than to thank everyone for joining us this afternoon and we look forward to speaking with you on our third-quarter results conference call in about three months.

Thank you. And 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 37873970 followed by the # 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. We thank you for joining. You may now disconnect.