American Shared Hospital Services (NYSE:AMS) Q3 2022 Earnings Conference Call November 10, 2022 3:00 PM ET

Company Participants

Stephanie Prince - PCG Advisory
Raymond Stachowiak - CEO
Craig Tagawa - CFO
Peter Gaccione - COO

Conference Call Participants

Tony Kamin - Eastwood Partners

Operator

Good day, and welcome to the American Shared Hospital Services Third Quarter 2022 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. Please go ahead.

Stephanie Prince

Thank you, Matt, and thank you to everyone joining us today. AMS' Third Quarter 2022 earnings press release was issued this morning before the market opened. If you need a copy, it can be accessed on the company's website at ashs.com at Press Releases under the Investors tab. 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 quarterly reports on Form 10-Q for the 3-month periods ended March 31, 2022 and June 30, 2022, the annual report on Form 10-K for the year ended December 31, 2021, and the definitive proxy statement for the Annual Meeting of Shareholders that was held on June 21, 2022. 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?

Raymond Stachowiak

Thank you, Stephanie, and good afternoon, everyone. Thank you for joining us today for our third quarter 2022 earnings conference call. I'll begin with some opening remarks. And then I'll turn the call over to Craig Tagawa, our President and CFO, for a financial review of the third quarter. Craig will then turn the call over to Peter Gaccione, AMS' newly appointed Chief Operating Officer. Peter is going to spend a few minutes talking about his first priorities and plans for operations and sales. Following the prepared remarks, we'll open the call for your questions.

The third quarter was another good quarter for AMS. Revenue increased 18%, driven by higher PBRT volume, and higher average reimbursement for both proton beams and Gamma Knife procedures. For the first 9 months of the year, revenue increased 14%. Net income for the third quarter was $316,000 or $0.05 per diluted share, the fifth consecutive quarter that we've reported positive earnings. On a trailing 12-month basis, our earnings per share now totaled $0.21. Our cash has grown over that time as well and now totals $11.7 million, which equates to $1.90 per outstanding share at quarter end. Craig will go into more detail in a few minutes, but I'm proud of our accomplishments and all that our team has achieved over the past couple of years.

As we've talked about, this has included strengthening the balance sheet to take on new projects, expanding our product and service offerings and most recently, bringing in experienced sales and operations management to generate new business. We were excited to appoint Peter Gaccione as Chief Operating Officer in September. Peter is well known and respected in the healthcare industry and bring strong market knowledge across the entire radiation oncology spectrum. The company has known him for many years. Peter has the right experience and professional contacts and we believe he is the right person to lead the operating efforts of the company. Peter will be working with Tim Kill, a senior healthcare finance professional who joined us last May, as our Vice President of Sales and Marketing and Ernie Bates, Vice President of International Sales and Marketing, who's been with the company for many years.

With this team in place, we look forward to leveraging our very strong financial resources, the $11 million in cash and the unused line of credit we have of $7 million as we aggressively pursue new business opportunities for our company. I'll now turn the call over to Craig for his financial review of the third quarter. Craig?

Craig Tagawa

Thank you, Ray, and good afternoon, everyone.

Third quarter revenue increased 17.6% to $4.8 million compared to $4.1 million in the third quarter last year. We've been reporting stronger revenue from the pandemic lows for several quarters now. For the first 9 months of the year, revenue increased 14%. Third quarter revenue for the proton therapy system in Florida increased 82.4% to $2.4 million due to continuing growth in volumes and higher average reimbursement for the current quarter. Total proton therapy fractions in the third quarter increased 40.1% to 1,363 compared to 973 in the third quarter last year. Last year's quarter was impacted by the COVID-19 pandemic as well as downtime for some system repairs. Gamma Knife revenue decreased 12% to $2.5 million compared to Q3 last year.

The decrease was due to a decrease in procedures, offset by an increase in average reimbursement, which in turn was driven by an increase in the average rate at the company's retail sites caused by a favorable shift in payer mix to more commercial payers. Revenue for same centers in operation, which excludes the 2 Gamma Knife contracts that expired 1 each in the first and fourth quarters of 2021 decreased 12.5% when compared to those same centers during the same period of the prior year.

Gamma Knife procedures decreased by 12.8% to 293 for the third quarter, primarily due to the expiration of the 2 contracts I just mentioned. Gamma Knife volumes for same centers in operation for the 3- and 9-month periods decreased 9.3% and 4.4%, respectively, when compared to Gamma Knife volumes for those same centers during the same period of the prior year. In the current period, there were temporary staffing shortages at several of our domestic customers in addition to normal cyclical fluctuations.

We went back and compared our current Gamma Knife volumes to 2019, the year before the pandemic, and same-store volumes are up for both the third quarter and 9-month periods from that time. At our international locations, volumes at our center in Ecuador have picked up. The Icon upgrade at the center is now scheduled for spring 2023 with the delay being related to obtaining the necessary regulatory approvals. It will be one of the few Gamma Knife Icon units in all of South America.

The new linear accelerator for our joint venture in Puebla, Mexico is now scheduled for spring 2023 as well. Again, pending the necessary licensing and regulatory approvals. Gross margin dollars increased 33.4% to $2 million for the third quarter. The gross margin percentage expanded 470 basis points to 40.5% of revenue. The increase was achieved despite higher operating costs, at the company's international sites, driven by increased volumes. Selling and administrative costs increased by 12.6% to $1.3 million for the third quarter due to higher sales and related fees associated with new business opportunities.

Operating income increased 141% to approximately $0.5 million, reflecting higher revenue and cost -- good cost container. Income tax expense increased to $176,000 for the 3-month period compared to $17,000 for the same period in the prior year. The increase in income tax expense for the current period was due to higher earnings during the current period, return to provision adjustments arising from foreign income tax returns filed during the current period as well as permanent domestic tax differences that are expected to continue through the end of this year.

Net income attributable to American Shared Hospital Services in the third quarter 2022 was $315,000 or $0.05 per diluted share compared to net income of $33,000 or $0.01 per diluted share for the third quarter of 2021.

Fully diluted weighted average common shares outstanding increased modestly from last year to [$6,273,000]. Adjusted EBITDA, a non-GAAP financial measure, increased 28% year-over-year to $1,999,000 for the third quarter of 2022. At September 30, 2022, cash, cash equivalents and restricted cash was -- it was $11,664,000 compared to $8,263,000 at December 31, 2021. Shareholders' equity, excluding noncontrolling interest in subsidiaries was $21,215,000 or $3.45, a $0.45 per outstanding share at September 30, 2022, compared to $19,893,000 or $3.28 per outstanding share at December 31, 2021.

In closing, we believe that AMS has strengthened on every level and is poised for renewed growth in the years ahead. I'll now turn the call over to Peter for some comments about his mandate and initial focus. Peter?

Peter Gaccione

Thank you, Craig, and good afternoon, everyone. I'm happy to be here, and I'm excited about the prospects and opportunities here at AMS. At AMS, and uniquely in the radiation oncology business, clinical cancer treatment centers have the opportunity to partner with all the major original equipment manufacturers through 1 turnkey vendor in 1 creative relationship. This is uncommon in our industry and is one of the major factors in my decision to join the management team here at AMS. Since I joined the company a few weeks ago, I'm focused on key targeted areas. Firstly, I've been aggressively working with major OEMs to strengthen our business relations and on developing joint sales and marketing strategies.

These strategies are focused on obtaining new sockets with advanced treatment systems and solutions using linear accelerators, MR linac, ton beam therapy as well as total turnkey services such as new goals, room renovations and even modular buildings.

Next, I've been working with our clients and our current installed base on Lexel Gamma Knife sites and treatment centers to strengthen and enhance these business relationships. Our installed base sites are in a stage where many need to start planning for either upgrades, new systems to replace current systems or even exploring the expansion of their current centers treatment capabilities by adding new products to help treat cancer patients. These relationships are extremely important in ensuring they're strong as part of managing and expanding the life cycle of our installed base.

Another area I have been focusing on is developing and implementing big sales and marketing strategies and programs to assist our sales teams in lead generation, prospecting managing the funnel, the sales funnel and the pipeline. Some of these strategies include working more in concert with major OEM sales and marketing teams as well as on their senior leadership level, bringing together senior management with the OEMs.

In addition, we plan to use more targeted sales and marketing based data that show where the highest cancer treatment incidences are seen and then discussing this aspect with prospects in more of a consultative sales approach. Further, and as part of this, we will be working closer with an expert marketing firm who help customers market their treatment abilities to cancer patients within their own community to local physicians and hospitals and to cancer survivors as well.

So when they need to recommend a treatment facility to a family member or a friend, they will know who has the latest treatments available. These are just a few of the key areas that I've been addressing since coming aboard in September. And of course, there are many other areas that will be addressed over time. I very much look forward to updating you on our progress in the quarters ahead. Thank you for listening today. This concludes the formal part of our presentation.

Question-and-Answer Session

Operator

[Operator Instructions]

Our first question will come from Tony Kamin with Eastwood Partners.

Tony Kamin

It -- on the surface, and I've been a shareholder on and off with AMS for, I think, about 20 years. I think that was 1 of the best quarters, if not the best quarter I've ever seen. So congratulations on that. I'm curious, though, with Gamma Knife volumes, as you indicated, being down due to things like temporary staffing issues have so far in this quarter, have you started to see any normalization of that kind of activity?

Raymond Stachowiak

Thank you for your question. As you know, we can't really comment on fourth quarter activity in this call, but we are very closely monitoring the causes of the decreases in our Gamma Knives volumes. We have had some staffing shortages and we'd be happy to share maybe a couple of examples with you that Craig can get into and assure you that we're well aware of it and that corrective action by management is being taken. Craig, would you like to give Tony a couple of examples and the rest of our investors on this call?

Craig Tagawa

Sure. I think, Tony, as you know, one of the key aspects of our contracts is that we don't have any minimum volume guarantees. So as there are fluctuations within some of the centers regarding staffing, which we did have in the third quarter, as we mentioned in our press release, we could have temporary downturns of -- in 1 case, a physician had left 1 of the sites, 1 of the treating physicians. But he has since come back. So that led to one of the decreases, a significant decrease at one of the centers that we have. And there was another one where there was a staffing shortage. As you know, there are many staffing shortages throughout the health care industry currently. And we did experience that, and it's since been corrected, but those are 2 of the instances where we were hurt during the 9-month period and more particularly in the third quarter of this year.

Tony Kamin

Okay. And the sort of the description of all the new or further efforts that you're making in terms of things like getting closer relationships with your manufacturers, the sales teams and the manufacturers. That all sounds really promising. When you look at the -- just the knockout performance of your current proton beam, I know I've asked this in the past, but it would seem like that would be an incredible kind of reference client to hospitals to really demonstrate the reality of kind of positive economics they could achieve. I know that's balanced against the economy lately with much higher interest rates, which isn't a positive, but can you talk about proton beam in particular? And what it might take to see to see sort of a breakthrough there where you could start to actually place some of these?

Raymond Stachowiak

Yes. Tony, that's a great question. We have 1 proton beam center in Orlando, as you're well aware of. It's performing well. We've been trying to pursue for years now, additional proton centers. And we continue to do so in our efforts to do so are probably stronger today than they ever have been, primarily because we got more human resources to go after that business. we've got Peter. We've got Tim Kio. We've added myself a couple of years ago in addition to Craig and Ernie Bates, Junior. So we got more resources at that. But we're not going to wait around to get our second, third proton being deal. We think that will eventually come. But in the meantime, let's expand our product offerings.

There's a huge demand and need for radiation oncology equipment. And it doesn't necessarily have to be just protons. It doesn't necessarily have to be gamma knives. So we've kind of expanded our product offerings so that we can grow our business and not be dependent upon any 1 product or manufacturer. Those opportunities for proton beams, I feel confident that they'll come along in due time. And we're not going to be reluctant to pursue that whatsoever. We're going to pursue it aggressively. And I think our day will come when that second and third systems will be placed.

Tony Kamin

Okay. And I certainly appreciate and extremely supportive of you're going in placing other new equipment and kind of broadening AMS' line and maybe getting some things in there a little less expensive and easier to to get approval to put in the hospitals. I guess as a final comment, Ray, in particular, even though the declines in the markets have brought a lot of stocks to being really cheap. When I look at AMS on any sort of quantitative basis. It just seems like the company company's valuation remains just remarkably cheap. And I just wonder if you have any thoughts on what might be done to address that?

Raymond Stachowiak

Well, Tony, I couldn't agree with you more. I totally agree, and we'll make these comments to our investors on this call. that we believe our stock is undervalued. I made that comment, I spoke at the LD Micro conference a couple of weeks ago out in L.A. and made that same comment. I'm proud to say that if you take our last 12 months of earnings, our EPS over those last 12 months is $0.21 a share.

Our price at closing yesterday was $2.73. That's a P/E ratio of 13%. That's a pretty low PE ratio, in my opinion, and as almost every quarter goes by, that PE ratio starts getting lower and lower, I think we're undervalued. It is part of my job to be bullish on our company and on our stock. One of the reasons that I have become our largest shareholder, close to 18%, 19%, 20% ownership now. I remain very bullish. We're not widely followed I was reluctant. I'll say, a year or 2 ago to go on the road and promote our stock.

I think we need to take care of some of internal issues that we had and solidify the foundation of our company and I think that's been done. So now let's expand our sales and management, marketing efforts, operations management and let's see how we can grow our company. I'd like to point out in addition that if you annualize our first 9 months of this year, we're close to about $19.5 million, $20 million on an annualized rate for 2022. We closed last year at about $17.6 million of revenue. So even without expanding incremental new revenue streams, we've grown our business double digits. That's not a bad accomplishment. And it's a reflection of trying to increase our volumes from our own existing sites, which because of our high fixed cost structure, really adds to the bottom line when we increase their treatment volumes.

Tony Kamin

Well, and I think if you look. At the company on an EBITDA basis, as I do, it's the valuation is even more stark. But anyway, thank you very much for the questions and good luck going forward. Really appreciate it.

Operator

[Operator Instructions]

This concludes our question-and-answer session. I would like to turn the conference back over to Ray Stachowiak for any closing remarks.

Raymond Stachowiak

Well, thank you, Matt, and thank you for everyone who's joined us today. I just -- in my closing comments, I wanted to make the point I just made about our earnings per share, $0.21. Our closing price at yesterday's close at $273 in a PE ratio of 13%. It seems like a low valuation. We've got a strong foundation. We've got significant resources available to invest readily available to invest. We've expanded our sales and management and marketing team. And I really believe we're positioned well for what I have always said our goal is sustained growth and profitability.

So with that being said, thank you again. We look forward to speaking with you again on our fourth quarter and year-end call in early March. If you have any questions, feel free to contact us directly. And we appreciate your time, be well, stay safe, and goodbye.

Operator

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