American Shared Hospital Services Q4 FY2020 Earnings Call

Good day, and welcome to the American Shared Hospital Services Fourth Quarter and Year End 2020 Earnings Conference Call. Please note this conference is being recorded. I would now turn the conference over to Stephanie Prince of PCB Advisory. Please go ahead.

Thank you, Melissa, 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. The company assumes no obligation to update the information contained in this conference call.

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, will 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 beam and Gamma Knife 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 stream, 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 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 the same centers offset by the contribution of GKCE.

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 ashes.com at press releases under the investors tab. Now turning to our fourth quarter results. For the three 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 of the prior year. 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 added 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 asset 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.

Thank you. The first question is from Tony with Wood Partners.

I would like to ask either Ray or Craig about the MEVION write down of the deposits. Is this a technical write down? If you eventually secure customers for a few MEVION units, would that discount no longer apply? I'm bringing this up because I noticed that MEVION sold a system just a couple of weeks ago to a facility in North Carolina. I would appreciate some more details on what this really entails.

We wrote it off on our books based on the information we had 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.

You mentioned MR/LINAC, a new area of equipment that you're going to move AMS into. Can you provide more details about this and whether there are other types of machines you can disclose? Do you believe there's potential for progress in this area this calendar year? While there are no guarantees, are your sales efforts ongoing, and might we start seeing these new products added to the portfolio?

I think there's a couple of 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 stronger balance sheet that we have. And our balance sheet is stronger because we are no longer economically committed to elect the Gamma knifes 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've got a great product, 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’ll 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 and 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 like 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 part 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, Ernie has been looking at it extensively as to what the potential is for that mark. And again, that's an advanced linear accelerator that we think because its capital cost structure is right for someone like American Shared to partner with hospitals on.

Can you comment on the post COVID period for hospitals regarding their thoughts on moving forward with new equipment? I've spoken to a few hospital representatives, and it seems they had a challenging financial year but are eager to explore growth opportunities without significant upfront capital spending. This could be an ideal time for a company like AMS. What are you hearing about the environment for hospital spending?

I think there's a couple of comments trends we're seeing, and they kind of offset each other in a way. One, the volumes are still reflective of the pandemic and are not at the pre-pandemic level 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 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 two kind of offsetting trends we are observing and we just need to zero in and focus on those that are more favorable to us.

The next question comes from Ed, private investor.

I'm very interested in the write down because the return on capital and the book value have always been viewed as reasons for the shares' underperformance. Regarding the assets being written down, are the units being stored, or are you attempting to resell them in the aftermarket? Another question is whether we have conducted appraisals on this equipment to determine if its value is zero, or is it simply an accounting write down? Those are my two questions about those assets.

I think we are in an environment where we had an extraordinary number of contracts that are expiring within a short limit of time, about five contracts over about an 18 month period and that’s pretty abnormal. If we have 15 domestic Gamma Knifes and contracts of 10 years in length, you'd only expect one or two 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 that those factors 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 Knifes. 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 have been successful at doing that.

I understand your explanation. My question is about the units that are taken out of service since there are several at once and whether the market, particularly the US market, is likely to absorb them. Will these be sold to an equipment broker afterwards, or are they going into storage? I'm particularly interested in the physical aspect. Also, did we have an appraisal done on these?

Craig, you want to comment on that?

Two of the six units were older models that we determined had no remaining value, so we wrote those down. Another two were included in our agreement with Elekta during the de-installation process, so those are no longer available. We still have a couple more that we haven't finalized arrangements for yet, so those are still up for consideration. From a financial accounting perspective…

Does that mean they will be dismantled for parts or what does that imply? I have owned a lot of equipment in the past, and I am trying to understand what happens to those assets afterward. I appreciate the information you have provided; in the ten years I've held the stock, I have never received this kind of detail. I commend you for having this discussion, as it hasn’t been provided in the past due to competitive concerns. I value this clarification and would like to understand my investment better and what has happened to the book value. You are explaining it well, but I would like to know specifically where these assets are located, whether they are being scrapped, and if you plan to sell them through a broker in a market that may take them at a low cost basis for use with patients.

As Ray mentioned, relocating these assets is quite expensive. We have not made a decision on how to handle the last two assets, so I cannot provide any specifics on their outcome. However, from an accounting perspective, we believe they were impaired, and we have recorded a write-down on them.

So Ed, physically 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 because they're the best source of people. There might be some value in the spare parts or something that we as an operator will never be able to take advantage of. So I asked whether they go to a broker, the equipment manufacturer, or someone who re-leases these. That's clear, and if there's no market, then there's no market for the expense of relocation, which is a significant issue that wasn't clear. The relocation expense is millions of dollars, probably. It's better to focus on that and on the new equipment.

Yes, that was a good question, Ed. Thanks for asking.

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

Or reduced cost to de-install the equipment.

So you don't put in that we don't accrue a closure and post closure amount over the lifespan of this equipment. Is that correct?

I don't think we 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.

I'm just suggesting that 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 closure and post closure costs that we accrue for just for this, but that's a different industry. But in general, 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 EBITDA that's, of course, not taxable because you have a tax write-off on that close and post closure cost. So I could talk to you about that privately, but just in 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. So thanks. Appreciate it.

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.