American Shared Hospital Services (AMS) 2020 Q4 法說會逐字稿

Good day, and welcome to the American Shared Hospital Services Fourth Quarter and Year-end 2020 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Stephanie Prince of PCG Advisory Group. Please go ahead.

Thank you, Elissa, and thank you to everyone joining us today.

Before turning the call over to management, I would like to make the following remarks concerning forward-looking statements. Please note that various remarks that may be made 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 SEC. This includes the company's annual report on Form 10-K for the year ended December 31, 2020. Form 10-Q for the periods ended March 31, June 30 and September 30, 2020, and the definitive proxy statement for the Annual Meeting of Shareholders that was held on June 26, 2020. We The company assumes no obligation to update the information contained in this conference call.

I would now like to turn the call over to Ray Stachowiak, CEO of AMS. Ray?

Thank you, Stephanie. Good afternoon, everyone. Thanks for joining us today for our Fourth Quarter and Year-end 2020 Earnings Conference Call. I'll begin with some opening remarks; and then Craig Tagawa, our President, COO and CFO, will go through the business and operational results; Alexis Wallace, our Chief Accounting Officer, will then provide a financial review. Following that, myself, Craig, Alexis and Ernie Bates, our Senior VP, Sales and Business Development and International Operations, we'll open the call for your questions.

Today, we announced an important action that has resulted in a stronger company and is expected to enhance long-term shareholder value as we work to form a more solid foundation to achieve our goal of increased growth and sustained profitability. This action is the write-down of impaired assets on our balance sheet of $8.3 million, which is substantially a noncash charge. The asset write-down will result in a significantly stronger balance sheet, which Craig will discuss in more detail in a few minutes. This decisive action is part of our strategic plan that also includes the diversification of our product offerings, geographic expansion and offering additional types of financing solutions to increase the company's revenue streams.

More specifically, we've expanded our product offerings beyond proton beams and gamma Knives to also include MR-guided LINAC and more advanced linear accelerators. We're also continuing to look for additional opportunities to expand geographically, like the acquisition of the only Gamma Knife center in the country of Ecuador that we completed this past June. As we work to increase our revenue streams, we're offering more flexibility in our wholesale and retail financing solutions.

In combination, I believe that these actions will put us on the right path to reach our goal of sustained profitability. We have many opportunities for future growth, and we can provide tremendous flexibility to the marketplace and our clients with the many different ways we can meet their needs. The team and I are excited to build on this strong base.

I'll now turn the call over to Craig for the fourth quarter operational review.

Thank you, Ray, and good afternoon, everyone. In the fourth quarter, our volumes were impacted by spikes in COVID-19, coupled with patient reluctance to come into hospitals for routine care. This was compounded by the typical holiday period slowdown and together led to a total revenue decrease of 3.7% compared to the fourth quarter of 2019. An increase in average reimbursement at our proton beam radiation therapy center and the contribution from our acquisition of Gamma Knife Center Ecuador last June, masked the period-over-period COVID-related volume declines in both PBRT and Gamma Knife operations. Gamma Knife revenue was essentially even with the fourth quarter of 2019. This was a result of lower volumes at same centers, offset by the contribution of GKCE.

Revenue for the company's proton therapy system decreased 5.6% compared with the fourth quarter of 2019. An increase in average reimbursement during the quarter offset the decline in volume. Gamma Knife procedures increased by 3.1% compared to the same period of last year. The results reflect the positive contribution from the acquisition of GKCE as Gamma Knife volumes for centers in operation decreased 7.8% from volumes from those same centers during the same period last year. Total proton therapy fractions decreased 25% compared to the fourth quarter of 2019. The period-over-period decrease was partly due to the spike of COVID-19 in the fourth quarter compounded by maintenance-related downtime.

The Q4 gross margin was 22.3% of revenue compared to the gross margin of 30.1% for the fourth quarter of 2019. This was due to lower revenue and a 7.1% period-over-period increase in cost of revenue, a function of our high fixed cost basis, which does not decrease in step with lower volumes.

Net loss for the fourth quarter of 2020 was $6,231,000 compared to net income for the fourth quarter of 2019 of $193,000. The Q4 loss includes a pretax write-down of impaired assets totaling $8,264,000. The impaired assets include 6 Gamma Knife units for which customer contracts will not be renewed and the related removal costs, plus the 2 deposits for the purchase of proton beam systems, related capitalized interest and other charges. We determined that the PBRT deposits were other than temporarily impaired due to the impact that the COVID-19 pandemic has had on medical centers and their capacity to undertake large capital expenditure projects for selective patient base at this time, combined with the length of time realistically required to negotiate and implement a proton therapy project. We do not, however, continue to believe -- we do, however, continue to believe that proton therapy will be an important component of a cancer center's radiation therapy services.

The 6 Gamma Knife units that were impaired consisted of 2 units that had been taken out of service in prior years, one unit that was taken out of service in 2020 and 3 units that have already or will anticipate will be taken out of service in 2021. Included in the impairment write-off was estimated cost to de-install and remove 4 Gamma Knife units of $1,350,000. This is the portion of the write-down that is cash. The balance of $6,914,000 is a noncash charge.

The number of agreements that expiring within a short period of time and not renewing is an anomaly for us. There were 5 agreements coming due within an approximately 18-month span of time. Most of these were long-term customers that had renewed their contracts at least once before. But in considering this lease or buy decision, many had the cash on hand to bring the equipment in-house. A center's decision to go in-house is, in fact, a testament to our development of a successful Gamma Knife program.

Adding back the impairment charge resulted in adjusted EBITDA of $2,538,000 for the fourth quarter compared to $2,056,000 for the fourth quarter of 2019. We ended the quarter with a strong cash position of $4.3 million. During the first quarter of 2021, we completed 2 Cobalt-60 reloads. We have another upgrade pending in our pipeline at Gamma Knife Center Ecuador, which is scheduled for installation in midyear and which will be one of the few gamma knives in all of South America. Other discussions with potential clients for our expanded product line, as Ray spoke about, are ongoing.

Looking ahead, we continue to closely monitor the COVID-19 infection rates for any further potential impact on our operations. In the current first quarter, we're experiencing the lingering impact of the pandemic at some of our locations. We do anticipate that the impact of COVID-19 will decline at some point during the year, although it's hard to be precise about that timing. However, when it happens, we believe that we'll begin to see a return to our historical volumes and recapture some of the pent-up demand. And as we previously discussed, we expect a lower fixed rate of selling and administrative costs in 2021.

With that, I'll now turn the call over to Alexis for a detailed financial discussion. Alexis?

Thank you, Craig, and good afternoon, everyone. Before I begin my prepared remarks, I'd like to call your attention to our fourth quarter and year-end earnings press release that was issued earlier this morning. If you need a copy, it can be accessed on our website at ashs.com at press releases under the Investors tab.

Now turning to our fourth quarter results. For the 3 months ended December 31, 2020, total revenue was $4,608,000, a decrease of 3.7% compared with $4,786,000 reported for the fourth quarter of 2019. Fourth quarter revenue for the company's proton therapy system installed at Orlando Health in Florida was $1,403,000, a decrease of 5.6% when compared to the fourth quarter of 2019. Total proton therapy fractions decreased 25% compared to the fourth quarter of 2019.

Revenue for the company's Gamma Knife operations was $3,205,000, a 0.8% decrease compared with the fourth quarter of 2019. Gamma Knife procedures increased by 3.1% to 427 for the fourth quarter of 2020 from 414 in the same period.

Gross margin for the fourth quarter of 2020 decreased to $1,027,000 or 22.3% of revenue compared to gross margin of $1,441,000 or 30.1% of revenue for the fourth quarter of 2019.

Selling and administrative costs increased by 22.5% to $1,052,000 for the fourth quarter compared to $859,000 for the fourth quarter of 2019. The period-over-period increase is due to increases in tax and audit expense, stock-based compensation and software-related expenses.

Operating loss for the fourth quarter of 2020 was $8,543,000 compared to operating income of $279,000 in the fourth quarter of 2019. Excluding the pretax write-down of impaired assets in the quarter, that totaled $8,264,000, the operating loss was $279,000.

Net loss for the fourth quarter of 2020 was $6,231,000 or 1.01 per share, which includes the pretax write-down of impaired assets of $8,264,000. This compares to net income for the fourth quarter of 2019 of $193,000 or $0.03 per diluted share.

Adjusted EBITDA, a non-GAAP financial measure, was $2,538,000 for the fourth quarter of 2020 compared to $2,056,000 for the fourth quarter of 2019.

Now turning to the annual results. For the full year of 2020 ended December 31, revenue decreased 13.4% and to $17,837,000 compared to revenue of $20,605,000 for the 12 months of 2019. The company recorded no revenue from IGRT equipment in the 12-month 2020 period compared to $840,000 in the comparable period of 2019, following the expiration of the company's contracts and the equipment is fully depreciated and sold.

Proton therapy revenue decreased 0.8% to $6,167,000 for the 12 months of 2020. Total proton therapy fractions for 2020 and were 5,868, a decrease of 2.5%. Gamma Knife revenue decreased 13.9% to $11,670,000 for the 12 months of 2020. The number of gamma knife procedures in the 12 months of 2020 was 1,530, an increase of 2.1%.

Operating loss for 2020 was $9,463,000 compared to operating income of $1,542,000 for 2019. Excluding the pretax write-down on impaired assets in the fourth quarter of 2020, that totaled $8,264,000, the 2020 operating loss was $1,199,000.

The net loss for the 12 months of 2020 was $7,058,000 or $1.14 per share, including the pretax write-down of impaired assets of $8,264,000. This compares to net income for the 12 months of 2019 of $659,000 or $0.11 per diluted share. Adjusted EBITDA was $7,776,000 for 2020 compared to $9,676,000 for 2019.

Shareholders' equity at December 31, 2020, was $23,650,000 or $4.08 per outstanding share. This compares to shareholders' equity at December 31, 2019, of $31,811,000 or $5.47 per outstanding share.

This concludes the formal part of our presentation. Elissa, we'd like to turn the call back over to you for questions.

(Operator Instructions) The first question is from Tony Kamin with Wood Partners.

I guess my first question, I guess, either to Ray or Craig, in terms of the Mevion write-down of the deposits, is that a technical write-down? Meaning if you eventually are able to find customers for a couple Mevion units, is that discount no longer available to you? And I say that in the context of I noticed Mevion sold the system, it looks like just a couple weeks ago to a place in North Carolina. So I'm a little -- just want some more detail on what this really means.

Yes. Tony, that's a good question. We wrote it off on our books based on the information we have. But we still consider that deposit to be on our account with Mevion. We still are bullish about proton beam systems and in particular, Mevion proton beam systems. So it's only from an accounting standpoint, I'll say, not in our relationship with Mevion.

Sure. That's very helpful. And then next question on the -- you mentioned MR/LINAC's new areas of equipment that you're going to move AMS into. Can you talk a little bit more about that of what other sorts of machines if you can disclose that yet? And if you feel that this is something that can start to show any progress this calendar year in terms of, obviously, no guarantees, but is your belief that sales efforts are under -- are underway, and we might start to see some of these new products start to add into the portfolio?

I think that's a really good questions. I think there's a couple different parts to it. I'll probably point to Craig to discuss the product offerings and the different types of products. But before we do so, I'd like to just mention the concept of a stronger balance sheet that we have. And our balance sheet is stronger because we are no longer economically committed to elective gamma knives and/or Mevion proton beam systems.

We love those products, we love working with those vendors, and we'll continue to work with those vendors and those products. They got great products, we support them. We continue to believe in those products and those vendors. But we're no longer economically committed to only those products. So with that being said, I will point over to Craig, and Craig maybe you can expand on the different types of product offerings?

Yes. We're looking at really some advanced linear accelerators, accelerators that incorporate MRI technology so you can better see soft tissue. And these products are more in the $6 million to $10 million range. So it's a good avenue for us to pursue in that many hospitals will be looking for partners to go in on this new technology with them. It's much like when the Gamma Knife was first introduced, hospitals wanted to partner with people American Shared that could share in the risk, both in terms of the technology and the reimbursement and the volumes. So we look at this as a very promising avenue for us to pursue.

One of the things that you asked, Tony, will we be able to see revenues right away? And the answer is, you wouldn't see it in 2021 for the most because these things do take a little while to install. But we think it's a very promising technology. We're also looking at some of the other technologies that incorporate PET/CT, although that's not FDA-approved yet. We're closely looking at that and Ernie has been looking at it extensively as to what the potential is for that market. Again, that's an advanced linear accelerator that we think because that's -- capital cost structure is ripe for someone like American Shared to partner with hospitals on.

We are also looking at more standard linear accelerators where hospitals may want to partner with -- on a revenue-sharing basis with us to add some IGRT machines. So we're looking at all those types of linear accelerators in addition to our gamma knives and other stereotactic radiosurgery devices and proton therapy devices.

Okay. And 1 final question. Can you comment on the post -- hopefully, very soon, post-COVID period for hospitals in there and what you're hearing about their thoughts on moving forward with new equipment? And I ask that in the context that I've talked to a couple hospital people, and it sounds like they've had a really tough years financially, but they want to also start to explore avenues for growth without having to do a lot of upfront capital spending.

So it sounds like kind of a perfect -- it's one of the best ones in a long while, potentially for a company like AMS, but what are you hearing? And what do you think of the environment for hospital spending?

I think there's a couple comments trends we're seeing, and they kind of offset each other in a way. One, the volumes are still reflective of the pandemic. They are not at the pre-pandemic levels. And that's given hospitals, I'll say, pause until they get their financial condition in order and/or things turn back to pre-pandemic levels.

On the other hand, there are some hospitals that are weathering this pandemic well. And in today's marketplace, funds are readily available to them. And it's -- they're more inclined to work directly with vendors, in some cases, to expand their operations because of the easy access to capital that they may have. So it does vary. But those are 2 kind of offsetting trends we are observing, and we just need to 0 in and focus on those that are more favorable to us.

(Operator Instructions) The next question comes from Ed Corcoran, a private investor.

I'm very interested, of course, in the write-down and because the return on capital was always -- and the book value was always looked at as a reason for underperformance of the shares. But regarding the assets themselves, are these -- the units that you're writing down, are they being stored? Or you're trying to resell them in aftermarket?

And another question is, have we had appraisals on this equipment so there is -- it's 0 or is that just an accounting write-down? So those are the few questions I have on those assets.

Ed, thanks for joining us today. I think we're in a environment where we had an extraordinary numbers of contracts that are expiring within a short window of time, about 5 contracts over about an 18-month period, and that's pretty abnormal. If we have 15 domestic gamma knives and contracts are 10 years in length, you'd only expect 1 or 2 to expire each year.

We had an inordinate amount of contracts that did expire, that they wanted to terminate their agreements, too. So we feel it's an anomaly those factors that all came together pretty much all at once. And our ability to recover that value is dependent upon that supply and demand. There's not a readily available marketplace for elective gamma knives. And it's very costly to de-install them and reinstall them at a different location.

So we've been able to recover value by extending, renewing our agreements, upgrading the equipment and most of those upgrades are software-type upgrades and been successful at doing that.

I've got that. You've explained that very clearly. The question is, like, are these things -- are they these units when they're taken out of service because you have a bunch at the same time so the market's not going to likely to take them up or at least the U.S. market? Are these being sold to an equipment broker afterwards? Are they going to be put in a warehouse? I'm more interested in the physical part of it. And the second part is did we have an appraisal on these?

Craig, you want to comment on that?

Sure. Unit 2 of the units -- 2 of the 6 units were very older -- were older models of in the units that really had no -- we could not see that there is any value left in those, Ed. So we took those as a write-down. There were another 2 that when we de-installed them, we essentially included those in the de-install aspects of the our agreement with Elekta. So those 2 are gone. They're a couple more that we have not worked out the arrangement exactly yet. So we're -- those 2 are still up for grabs, I would say. But from a finance standpoint...

So does that mean there is -- so does that mean that -- Craig may I interrupt and ask does that mean they are going to be scrapped for parts or they -- what does that mean? I've owned a lot of equipment in my days and I'm trying to nail what happens to those assets afterwards?

And I do appreciate you being -- you guys have given a lot of information in the past 10 years I've owned the stock, we've never gotten this information, so I applaud you for having this conversation because in the past you didn't give it for supposedly competitive reason. So this is -- I appreciate it. And I just wanted to -- I want to understand my investment and what happened to that book value? Is it -- and you're explaining it in a very detailed manner.

So I just going to that last amount of detail. Where are these assets located or they scrapped? And are you going to put -- given them to a broker to try to sell them in a market that will take those at a low-cost basis and try to use them with patients?

As Ray mentioned, these are very -- they're very expensive to relocate. We haven't decided how we will dispose of these, the last 2. And so those are still undecided, Ed, so that I can't give you any specificity as to how those will end up. But from an accounting standpoint, we think they were impaired, and we did take the write-down on those is what I would say.

So Ed, physically when -- on a couple of these situations, when the equipment is physically de-installed, it's given back to the vendor. And as a reduction, we try to mitigate our cost to remove the equipment by that concept of providing the physical equipment back.

Okay. That makes sense. That makes sense because they're the best sourcer of people might -- there might be some value in the spare parts or there might be something of value that us, as an operator or financier, is never going to be able to take advantage of. So that's why I was asking do they go to a broker, do they go to the equipment manufacture or someone who re-leases it.

So that's clear and I -- if there's no market for it, then there's no market in the expense of relocation, that's a big issue that really wasn't that clear is that if relocation expense of millions of dollars, it probably is. And it's better to not be focused on that and focused on the new equipment.

Got it. That's a good question, Ed. Thanks for asking.

So there's no need for an appraisal since you believe the valuation is 0? Or just some possible reduction in a future purchase of equipment or services from the vendor?

Or reduced cost to de-install the equipment.

Okay. Okay. Fair enough. Yes. Exactly. Okay. So you don't put in -- we don't accrue a closure and post closure amount over the life span of the -- these -- this equipment. Is that correct?

I don't think anticipate having that equipment come out over the initial 10-year period, at least. One of the situations that expired was a customer of ours since 1999. So typically, we don't need to because of those long-term relationships that we build.

Okay. I'm just suggesting that, if you're doing -- if there is a 10-year contract and there's a potential for $0.5 million scrapping or relocation that we might want to put small accruals in place over time because you do have this. It's a real cost that can be accounted for. Industries I've been in, we have a closure and post closure costs that we accrue for -- just for this, but -- that's a different industry, but in general, the -- if there's a equipment fixed plant and property, we could always do that, and that's in installation for taxes because it's a real cost that can be accounted for. And then it will take out of earnings, but it will result in an EBITDA that's, of course, is not taxable because you have a tax write-off on that closure and post-closure cost.

So I could talk to you about that privately, just general. I don't have any other questions, but I do appreciate your time and what you guys are trying to do as a team here in terms of controlling costs and just trying to get a new chapter in the company. Appreciate it.

Thank you, Ed.

(Operator Instructions) So with no further questions. This concludes our question-and-answer session. I would now like to turn the conference back over to Ray Stachowiak for any closing remarks.

Thanks for joining us today. We're very excited about the future for AMS. Please contact us directly if you have any further questions before the first quarter conference call in mid-May. Stay safe, and have a great day, stay tuned, and goodbye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.