American Shared Hospital Services (NYSE:AMS) Q3 2024 Results Conference Call November 13, 2024 1:00 PM ET

Company Participants

Kirin Smith - IR
Ray Stachowiak - Executive Chairman and Chief Executive Officer
Bob Hiatt - Chief Financial Officer

Conference Call Participants

Marla Marin - Zacks
Tony Kamin - Eastwood Partners

Operator

Good day, and welcome to the American Shared Hospital Services Third Quarter 2024 Earnings Conference Call. [Operator Instructions] please note that this event is being recorded.

I would now like to turn the conference over to Kirin Smith, Investor Relations. Please go ahead.

Kirin Smith

Thank you, Nick, and thank you, everyone, for joining us today. AMS' Third Quarter 2024 earnings press release was issued today before the market opened. If you need a copy, it can be accessed on the company's website at www.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 report on Form 10-Q for the 3-month period ended June 30, 2024. The annual report on Form 10-K for the year ended December 31, 2023, and the definitive proxy statement for the Annual Meeting of Shareholders that was held on June 25, 2024.

The company assumes no obligation to update the information contained in this conference call. Before I turn the call over to Ray, I'd like to remind everyone about our Q&A policy where we provide each participant the time to ask 1 question and 1 follow-up. As always, we'll be happy to take additional questions off-line at any time.

With that, I'd now like to turn the call over to Ray Stachowiak, Executive Chairman and CEO. Ray, please go ahead.

Ray Stachowiak

Thank you, Kirin. Good afternoon, everyone. Thanks for joining us today for our third quarter 2024 earnings conference call. I'll begin with some opening remarks, then turn the call over to Bob Hiatt, our Chief Financial Officer, for a financial review of our third quarter results.

Following the prepared remarks we'll open the call for your questions. Before we review the quarter, I'd like to highlight a key addition to our executive management team that we previously announced in mid-October. Gary Deans has joined our team as our Executive Vice President and Chief Operating Officer.

Gary's deep experience with physician and Taylor relationships, billing and collections, policies and procedures, lends itself directly perfectly to our overall growth strategy as we further expand and optimize our overall business. Gary is a seasoned executive with a wealth of progressive health care management experience, providing innovative and proven solutions to physician groups, health systems, ACOs and health plans.

He has significant Board of Director experience with various health care systems based in California, West Virginia, Rhode Island, and Michigan. Prior to this role, Mr. Deans served as Senior Vice President, U.S. Operations at 21st Century Oncology responsible for daily operations at over 140 radiation therapy centers, working with over 160 radiation oncologists treating thousands of patients daily.

Clearly, he is more than qualified and is a welcome addition to our team. We also announced the promotion of Ranjit Pradhan, the Senior Vice President, Sales and Marketing. Ranjit played a critical role in the company's success recently renewing and expanding 5 of American shares 10 domestic Gamma Knife agreements over the last 18 months.

In his new role, he will spearhead the company's strategic business development and marketing initiatives and drive growth in new business, further strengthening the company's impact and outreach and oncology services.

Now let's review our quarterly results. We reported another quarter of strong revenue growth and our enthusiasm for our overall prospects continues to grow. We've continued to show solid improvement and advancement in several important ways and we're extremely excited about the upcoming year. This is, of course, not without our fair share of challenges as we navigate through seasonality and procedure volume fluctuations, integrate the Rhode Island acquisition, invest in much needed upgraded equipment and implement additional operating efficiencies that in the short run, impacted our margins and profitability, but positions us for success over the longer term.

We followed our quarter 1 and quarter 2 with another solid quarter of revenue growth, which totaled $6.99 million up nicely from the comparable quarter in 2023 of $5.1 million. The 36% year-over-year revenue growth for this past quarter was showcased by continued early benefits from the Rhode Island acquisition that we closed this past May as well as from our new facility in Puebla, Mexico.

The gross margin declined by $732,000, which was affected by lower Gamma Knife treatment volumes and also is reflective of the change in mix from the strong growth of our Retail segment. Additionally, we recorded a small net loss of $207,000 or $0.03 per share for the quarter compared to a small gain of $118,000 or $0.02 per share in the third quarter of '23.

Our balance sheet remains strong. We ended the third quarter with over $14.1 million in cash and equivalents, which is roughly equal to $2.17 a share. We also had $4.5 million outstanding on our $7 million line of credit as of September 30, 2024.

We continue to leverage these resources carefully for additional long-term revenue streams. We're fortunate to have this strong balance sheet with significant capital to deploy in strategic initiatives such as the Rhode Island acquisition, as well as other business opportunities that we come across.

As a reminder, the Rhode Island acquisition is a great example of how we deployed $3 million, and we're able to strategically acquire fair market value and net assets worth $8 million. This was clearly an excellent allocation of capital.

Furthermore, of the assets acquired, $2.4 million alone was cash, cash. We've been implementing operating efficiencies to better optimize this business. Specifically, we have invested $1.1 million in CapEx in our Rhode Island centers. We've replaced 2 very old CT simulators which are needed for treatment planning and purchased the third CT SAM, which was being leased. We've also added software packages for improved efficiency and patient care. We've also begun converting some higher-cost temporary staffing at the previous Rhode Island facilities owner, GenesisCare was utilizing as it was struggling, struggling to bring on permanent employees, which are more cost-effective and provide longer-term stability overall.

We've also recently put our linear accelerators on service and maintenance agreements, which adds to our dependability and high uptime for better quality service. It should be noted that we acquired 3 radiation therapy centers, which are generating positive income, they were generating positive income, positive EBITDA. But they were being managed by a company that was going through the bankruptcy process.

Let's keep that in perspective. The team also continues to focus on strengthening our core business by working with clients to increase utilization of our equipment. This focused strategy has led to the signing of 5 lease extensions in the last 18 months from our 10 domestic Gamma Knief clients, and we have others in the pipeline.

Again, this is not without heartache. In this quarter, we navigated through the loss of a site that we had in third quarter '23. We had scheduled downtime for an equipment upgrade. In addition, there are lower treatment volumes partially due to physician storages and seasonal staffing factors at some of our sites.

Despite the challenges our team faces. We believe these extended agreements are a testament to our partnership business model, our financial flexibility and a very important growth driver. We have already noticed an uptick in our Gamma Knife treatment volumes in the month of October.

Our international business represents a large growth opportunity. We're also expecting continued momentum. As many of you know, we have the only Gamma Knife systems in the countries of Peru and Ecuador. Just a few months ago, we announced that our third international center in Puebla, Mexico had begun treating patients. The newly opened linear accelerator LINAC that we installed has BMAT, IGRT and radiosurgery capabilities that offer the most advanced radiation therapy available in our attachment area.

In early July, we announced our fourth international center with the signing of a joint venture agreement for Gamma Knife facility in Guadalajara, Mexico. This facility will have 1 of only 3 Gamma Knife systems in a country of 130 million.

I'd like to also comment that we've been incurring incremental costs related to our Rhode Island acquisition in excess of $300,000 or $400,000 a quarter. We expect to see a decrease in excess of $300,000 in our fourth quarter. I'd also like to remind our investors that we announced early this year, we had 3 unique business opportunities.

The first of these was the closing of our 60% majority interest in the 3 radiation therapy cancer centers in Rhode Island. We closed that in early May. These are our first direct patient services or retail centers in the United States. This new business, which is the first from our expanded team and new pipeline clearly reflects the power of our growth strategy.

I'd like to talk about the second. The second is the CLN certificate of need that we have been granted to build a fourth radiation therapy center in Bristol, Rhode Island. And the third business opportunity is a very powerful one. We have applied for a sophisticated need to provide a radiation therapy center with proton beams. A proton beam radiation therapy center in the state of Rhode Island. This proton beam radiation therapy center will be the only system New York City and Boston and represents a significant growth opportunity.

As of now, I'll think about this, we would be the 100% owner operator of this proton beam radiation therapy center. We look forward to announcing additional progress on this matter as appropriate. As we look into the coming months and the year ahead, we expect stronger international growth from additional treatment capabilities in Ecuador. Strong volumes from our center in Peru and the new centers in Guadalajara and Puebla. The recent closing of the Rhode Island acquisition adds 3 new revenue streams to our business, in addition to the other exciting new business opportunities moving through the long sales cycle. Our backlog continues to give us strong confidence in the overall business for our long-term future.

With that, I'll turn the call over to Bob for a financial overview.

Bob Hiatt

Thank you, Ray and Good Afternoon everyone. Third quarter revenue increased 36.3% to $6.99 million compared to $5.13 million in the year ago quarter. Revenue benefited by the Rhode Island acquisition that closes past May as well as from the new facility in Pueblo, Mexico.

Revenue from the company's direct Patient Services or Retail segment was $3.7 million for the third quarter ended September 30, 2024, compared to $988,000 for the year ago quarter year over quarter, marking an increase of 273%. The increase in retail revenue was primarily due to revenue generated by the Rhode Island companies we acquired on May 7, 2024, and the startup of the Puebla operations in the third quarter.

Rental revenue from the company's Medical Equipment Leasing segment, which we now refer to as leasing was $3.31 million for the third quarter of 2024 compared to $3.95 million in the year ago quarter, a decrease of 16.1%. The decrease in leasing revenue was driven by lower Gamma Knief volumes. The prior year comparison does exclude the $200,000 equipment sales recorded in the third quarter of 2023.

Third quarter revenue for the company's proton therapy system in Florida was $2.3 million, an increase of 4.4%, primarily due to continued cyclical volume changes. Proton therapy fractions in the third quarter were 1,252 compared to 1,188 proton therapy fractions in the third quarter of 2023, a 5.4% increase. Again, due to normal cyclical fluctuation.

Total Gamma Knife revenue decreased by 32.9% to $1.82 million due to the expiration of 1 contract in the third quarter of 2023 as well as 2 months of downtime at one of our sites due to a scheduled equipment upgrade and staffing shortage 2 of our other sites. Gross margin for the third quarter of 2024 decreased to $1.37 million compared to gross margin of $2.10 million for the third quarter of 2023, which was affected by lower Gamma Knief treatment volumes and the strong growth from our patient services segment, which has a lower gross margin.

Selling and administrative costs increased to $1.93 million for the third quarter of 2024 compared to $1.74 million in the year ago quarter. This was due to acquisition and development costs for Rhode Islands as well as legal fees. Interest expense was $336,000 in the 2024 period, compared to $277,000 in the comparable period of last year. The increase is due to an increase in interest rates and borrowings on the company's variable rate debt.

The operating loss for the third quarter of 2024 was $889,000 compared to a slight operating income of $90,000. The year-over-year decline was due to increased operating costs from the company's recently acquired facilities in Rhode Islands and the company's name facility in Puebla, Mexico, combined with lower Gamma Knife treatment volumes.

The bargain purchase gain recognized on the Rhode Island transaction in the second quarter was increased by $263,000 net of income taxes in the third quarter, primarily due to changes in the valuation before an unserved naval state holdings and noncontrolling interests as well as expectations related to recoverability of acquired receivables.

The income tax benefit of $169,000 for the third quarter of 2024 compared to income tax expense of $60,000 for the same period last year. Net loss attributable to American Shared Hospital Services in the third quarter of 2024 was $207,000 or $0.03 per diluted share, compared to net income of $118,000 or $0.02 per diluted share for the third quarter of 2023. The period-over-period decrease was primarily due to losses incurred by the leasing segment, driven by lower Gamma Knife volume as well as increased depreciation from planned equipment upgrades.

Fully diluted weighted average common shares outstanding were relatively unchanged at $6,483,000 for the third quarter of 2024 and $6,432,000 for the third quarter of 2023. Adjusted EBITDA, a non-GAAP financial measure, was $1.37 million for the third quarter of 2024 compared to $1.67 million for the third quarter of 2023.

Moving on to the 9-month financial statements. For the 9 months ended September 30, 2024, revenue increased 23.3% to $19.27 million compared to revenue of $15.63 million for the first 9 months of 2023. Revenue from the company to a Patient Services or Retail segment was $7.81 million for the 9 months ended September 30, 2024, compared to $2.44 million for the year ago period, marking an increase of 220%. The increase in retail revenue was primarily due to revenue generated by the Rhode Island Company, we acquired on May 7, 2024, 25.1% revenue growth in Peru and Ecuador and the start-up of the total operations in the third quarter.

Gamma Knife revenue decreased 14.6% to $7.13 million for the first 9 months of 2024 compared to $8.35 million for the first 9 months of 2023. The number of Gamma Knife procedures in the first 9 months of 2024 were 831, a decrease of 9.5% compared to 918 Gamma Knife procedures in the comparable period of 2023. This was due to the Gamma Knife procedure declines in the third quarter, as discussed earlier. Proton therapy revenue increased 4.4% to $7.39 million for the first 9 months of 2024, compared to $7.08 million for the first 9 months of 2023. Total proton therapy fractions in the first 9 months of 2024 or 3,764, a decrease of 8.1% compared to 4,094 proton therapy fractions in the comparable period of 2023. Net income attributable to American Shared Hospital Services for the first 9 months of 2024 was $3.51 million, a $0.54 per diluted share compared to net income of $195,000 or $0.03 per diluted share for the first 9 months of 2023.

The large increase was due to the bargain purchase gain generated from the Rhode Island acquisition and the net income earned from the Rhode Island facilities acquired. Adjusted EBITDA, our non-GAAP financial measure was $5.12 million for the first 9 months of 2024 compared to $5.51 million for the first 9 months of 2023. September 30, 2024, cash and cash equivalents and restructuring cash was $14.1 million compared to $13.8 million at December 31, 2023. Shareholders' equity, excluding noncontrolling interest in subsidiaries was $26.42 million or $4.14 per outstanding share as September 30, 2024, compared to $22.62 million or $3.59 per outstanding share at December 31, 2023.

This concludes the formal part of our presentation. Thank you again for joining us today. We look forward to updating you on our progress in the quarters ahead.

Nick, we'd now like to turn the call back to you and open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today will come from Marla Marin with Zacks.

Marla Marin

So I want to follow up on something you said in the prepared remarks, right? About certain start-up costs, I guess, I guess they would be as you bring on new business launch in Rhode Island and Puebla. But I'm also wondering if when you bring on a new business, if there's a bit of a ramp-up period during which that new center or new centers sort of are ramping up to reach their peak operating efficiency. And Puebla, I think, came online during the quarter. So would you say that, that is something that we're seeing right now in the third quarter?

Ray Stachowiak

I think you bring up two, I'll say, categories of costs that impacted our third quarter results. One is the Rhode Island acquisition costs, as we refer to them in our company. We've been incurring $300,000 or $400,000 a quarter, it seems like a lot of it is legal fees, a lot of it is accounting fees. We've had to have valuations done because we are a public company.

Let's value the assets and using outside consultants to do that to help us not just value to assets, but establish our opening balance sheet, so that it can pass mustard with the audit requirement, the review requirements necessary as a public company. The other second kind of category of cost is the cost that integrating our Rhode Island radiation therapy centers, we've been incurring costs that are a result of the fact that these 3 centers were being managed by a company going through the bankruptcy process.

So its equipment was outdated as I've talked to explained in the CT simulators, we had to replace two of them. We put our equipment on service and maintenance agreements. The employees that we hire, we hired almost without exception, all the employees that have been employed by Genesis Care, but there were a lot of personnel that were not employees. These centers were contracting with outside third-party staffing firms and local tens at exorbitant cost to the center because they were losing radiation therapists. They were losing synthesis and we employ the existing radiation therapists in existing physicist, but we had to transition from these third-party staffing costs to employees.

As an additional example of that, we acquired -- I think there are 4 temporary outside third party 4 radiation therapists being supplied by outside third parties. We hired 2 of those 4, I'll say, head count as employees now, but -- and we're close to employing the third, but that additional cost is the cost that we've inherited, we know how to fix it, but it's going to take some time to get it under proper management.

Can that answer your question?

Marla Marin

Yes. That's helpful. And then just one follow-on. In terms of the Puebla facility, so now you've been operating that facility, I think since August, are you -- is there any kind of color that you have there on that facility in terms of what you had expected to see that you're satisfied with?

Ray Stachowiak

I’d say that the start-up was delayed – we did not start generating revenue until early July. But I’ll tell you, we are very pleased with the results, the revenue that’s being generated at that site keeps increasing every month since we’ve opened. We’re very pleased with its performance.

Operator

[Operator Instructions]

Our next question today will come from Tony Kamin with Eastwood Partners.

Tony Kamin

Question from a slightly different angle on the Rhode Island. You mentioned, I think, in your prepared remarks a couple of times you said, remember, this was being operated out of bankruptcy or whatever. So my question is -- and you mentioned just now the equipment that was kind of older or whatever. What kind of impact was that having on the other side of the business, not the cost side, but the utilization side from patients and doctors recommending patients and the uncertainty of the bankruptcy. Did that -- do you feel that you can gain new business in terms of more referrals and all that stuff on the customer and the doctors referring site.

Ray Stachowiak

Thank you, Tony. I think we definitely can increase our volumes. Let me give 1 example. One of the CT simulators that we replace was in a nonoperating condition for several months. It was, in effect, down. It couldn't be used prior to our acquisition.

So that was the first one we replaced, and there was a referring physician that would not refer to that site because the CT simulator was down. Since we've replaced that CT simulator, that referring physician has started referring his patients back to our center.

So I mean, that's just like an ideal case situation of the efforts that we're deploying to increase our volumes.

Tony Kamin

And is there other sort of marketing going on as -- I mean, are you kind of getting the word out to doctors now that, hey, the center has been upgraded and all that? And then just a second part, which isn't really related, but can you comment a little also on the Gamma Knife side and whether it was a tough quarter for some reasons there. Is -- do you guys have sort of a plan on the Gamma Knife side that you think might help turn things around there a little bit.

Ray Stachowiak

Sure. So 2 questions, make bringing more awareness to our radiation therapy centers in Rhode Island, we are absolutely doing that. Keep in mind, our joint venture partners, the other 20% owners is the second largest health care system in the state.

They’re well aware of this acquisition and continue to refer patients to our centers. Our other 20% partner is the third largest health care system in the same scenario there. And I am – the largest health care system is well aware of our activities and they’re very amenable as we are to be talking about a relationship and how we can grow it.

So there’s a lot of awareness going on in the State of Rhode Island about our presence, especially the Health Service Council that here’s our CON applications. They’re very cognizant and the leaders in the entire state are cognizant of our efforts in Rhode Island.

Going to the Gamma Knife question that you had, Tony. We had almost what I’d characterize as an anomaly third quarter with our treatment volumes. From physicians, radiation oncologists, neural surgeons that went on vacation in the months of July and August to one physician that was on maternity leave. And we had downtime at one of our sites that we were upgrading their system. So it was kind of a a variety of factors. And all of them, very, I’ll say, overcomeable, I don’t know if that’s a word, but I guess we can overcome those situations, and I’m not happy about the results there, but we dug it into it. We understand it very clearly. And I think – we’ve got a plan in place. We are more engaged than ever in making awareness of our Gamma Knife in these communities.

Operator

And your next question today will come from [Anthony Marches], private investor.

Unidentified Analyst

When you look at the stock, the stock was at $3 in March, today as you obviously know the small cap market has been on fire. So I guess as a shareholder, I'm kind of frustrated in that every quarter, there seems to be some issue that causes results to either be really good or really bad. And I guess one of the hopes I have is that you could be more transparent about the issues that are affecting the coming quarters, as an example. And maybe it didn't, but it would seem to me that if you had a center which is closing rather, which has not been renewed or downtime that it would be helpful on these calls to make that known to people.

It just seems as though every quarter we're surprised with RG, there was downtime because people are on vacation. They're a downtime because we didn't get a renewal. It was downtime -- always seems to be something and so when you look at the stock, you're trading at cash, no growth in stock price since March.

Why not buy the stock back. And I realize you're going to say, well, we need the money for expansion, but certainly, a small buyback program would go a long way to reassuring people that management believes in the future of the company. And I realize that I know you have ZAC, which is an independent research service, but you haven't been able to get any type of sell-side coverage.

So I guess, I'm frustrated in that, I just think that without any forward guidance, without any kind of warnings about what's coming up that people just move on, they lose confidence and there are a lot of other investments, especially with the action in the small cap markets. Anyway, those are my thoughts.

Ray Stachowiak

Anthony, thanks for your question and observation. Our business model calls for our investors to be patient in a very long-term oriented I hear in your voice, the frustration. I stick with us long term. I know many of you already have. But look at the transition we're making in our business model. If you look at our transition, we're expanding geographically. We're expanding our product diversification 4 years ago, we had Gamma Knife and a proton beam.

Today, we have added 4 linear accelerators and Rhode Island, another one in Puebla, Mexico. And in fact, we're going to add a fifth linear accelerator at our fourth radiation therapy center in Bristol, Rhode Island. We also are expanding into our second proton beam system. And the other diversification play that we're making is in the changing from the leasing segment company being dominated by leasing segment and being more dominant and prevalent in the retail segment. And our proton beam center in Rhode Island, subject to the CON is exactly another proton.

We've been -- our investors have been asking when are you going to get your second proton beam. We're getting one here in Rhode Island. And oh, by the way, it's not going to be lease where we get a percentage of the revenue that the hospital care system collects. No, we're going to be 100% owner and operator if and when we get that CN approved and just stay tuned on that matter.

Unidentified Analyst

What about small buyback? I mean -- I'm sorry to cut you off. What about some small buyback, which, again, given your cash resources and your borrowing capacity, it just seems to me as an investor and for you guys, if you're buying the stock at cash assuming the business has a future, to me, it would be an incredible use of -- and you're buying a way below tangible book, it would seem to me to be a good use of your funds.

I'm not saying that's the whole ranch. I'm simply saying a small buyback.

Ray Stachowiak

Anthony, duly noted.

Operator

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

Ray Stachowiak

Thank you, Nick. Thanks, everyone, for joining us today. We are very clearly excited by our future. American Shared at a critical inflection point especially following the Rhode Island acquisition and the other growth opportunities we’re currently pursuing. We fully appreciate it will not be a straight line up. There will be challenges along the way. We’re very confident we’ve got the right strategy in place. We have a strong team now to execute on our growth initiatives. We look forward to updating you on our continued progress.

If you have any questions, don’t hesitate to contact will accommodate further conversation. Thanks for your continued interest in American Shared Hospital Services. Have a great remainder of the day and the week. Goodbye.

Operator

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