Welcome to the Third Quarter 2019 Earnings Conference Call. My name is Paulette, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded.I will now turn the call over to Stephanie Prince with Investor Relations. Stephanie, you may begin.

Thank you, Paulette, and thank you, everyone, for 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, 2018, its quarterly reports on Form 10-Q for the three months ended March 31 and June 30, 2019, and the definitive proxy statement for the Annual Meeting of Shareholders held on June 21, 2019. The company assumes no obligation to update the information contained in this conference call.I would now like to turn the call over to Craig Tagawa, Chief Operating and Financial Officer. Craig?

Thank you, Stephanie, and good afternoon to everyone joining us today for our third quarter 2019 earnings conference call. I will begin by walking through our business and operational results, Alexis Wallace, our Controller, will then provide a financial review. Following that, Dr. Bates, Alexis Wallace, Ernie Bates and myself will open the call for your questions.In the third quarter, our proton therapy business continued to perform well with revenue for the Orlando Health proton therapy system increasing approximately 61% to $1.677 million. Total proton therapy fractions in the third quarter increased by 371 or 34.3% quarter-over-quarter to 1 million – to 1,452 compared to 1,081 in the 2018 third quarter. The revenue increase reflected these higher volumes and was also due to a quarter of operations this year compared to last year when the PBRT system was down for two weeks. Awareness of the benefits of proton therapy treatment also continues to increase, adding support to the growth in usage and demand.Turning to Gamma Knife. Revenue increased by 3.6% in the third quarter. This increase was lessened due to the downtime at Kettering Medical Center in Ohio, which was down for two months for a Cobalt-60 reload and Icon upgrade. As previously noted, the service disruption in second quarter 2019 was resolved at the start of the third quarter.The number of Gamma Knife procedures increased by 11 in the third quarter to 348 compared to 337 a year ago. The increase was primarily driven by our stand-alone facility in Lima, Peru. Looking ahead, we expect Icon upgrades to contribute to future volume expansion in our Gamma Knife business. Kettering Medical Center was the first to be completed this quarter, but we anticipate additional upgrades in 2020. These Icon upgrades allow us to capture incremental revenue opportunities through treatment of larger tumors.As noted in our press release this morning, in July 2019, the centers for Medicare and Medicaid Services, CMS, announced a proposed new mandatory payment model for radiation oncology services that is intended to test an episodic payment structure or bundled payment across certain radiation therapy providers and suppliers. CMS projects that approximately 40% of radiation oncology providers will be randomly selected and included in this model, and approximately 60% will continue to receive reimbursement based on the current fee-for-service methodology.The proposed payment model would significantly alter CMS’ payment methodology for radiation oncology services. For the 60% of the centers not included in the proposed model, Medicare reimbursement in 2020 for the most commonly used proton therapy delivery codes has been scheduled to increase approximately 15.5% and 3.6% for Gamma Knife. These are the final scheduled payments. The amounts that were previously submitted in the press release this morning were finalized to these numbers from – previously, they were 11.5% and 5% for Gamma Knife.The timing and details of the proposed payment model are uncertain. As a result, we cannot estimate the potential impact of adoption of the proposed rule. However, reductions in the reimbursement rates or changes in reimbursement methodology or administration for radiosurgery and radiation therapy could adversely affect our revenues and financial results. We’ll keep you informed of any new information that we receive on this.With that, I will now turn the call over to Alexis for a detailed financial discussion. Alexis?

Thank you, Craig. Good afternoon, everyone. Before I begin my prepared remarks, I’d like to call your attention to our third quarter 2019 earnings results issued this morning. You can access a copy of the earnings release on our website, ashs.com at Press Releases, under the Investor tab.For the three months ended September 30, 2019, revenues increased 18.6% to $5.301 million compared to revenues of $4.470 million for the third quarter of 2018.Third quarter revenue for our proton therapy system installed in Orlando Health in Florida increased 61.1% to $1.677 million compared to revenues for the third quarter of 2018 of $1.041 million. The 2018 period included two weeks of downtime for the system.Revenue for the company’s Gamma Knife operations increased 3.6% to $3.310 million for the third quarter of 2019 compared to $3.194 million for the third quarter of 2018 due to increased volumes at existing sites. One of the company’s sites was down for two months during the quarter for a Cobalt-60 reload and Icon upgrade, which contributed to a lessening of the increase in Gamma Knife volumes and revenues.Gross margin for the third quarter of 2019 increased to $1.813 million or 34.2% of revenue compared to gross margin of $1.634 million or 36.6% of revenue for the third quarter of 2018. This reflected an increase in cost of revenue, including maintenance and supplies and other direct operating costs, partially due to the company’s new site in Merrillville, Indiana and the company’s stand-alone facility in Lima, Peru.Net income for the third quarter of 2019 was $165,000 or $0.03 per share. This compares to net income for the third quarter of 2018 of $168,000 or $0.03 per share and $31,000 or $0.01 per share in the second quarter of 2019.Adjusted EBITDA, a non-GAAP financial measure was $2.445 million for the third quarter of 2019 compared to $2.467 million for the third quarter of 2018.At September 30, 2019, cash, cash equivalents and restricted cash was $1.647 million compared to $1.792 million at December 31, 2018. Shareholders’ equity at September 30, 2019 was $31.422 million or $5.40 per outstanding share. This compares to shareholders’ equity at December 31, 2018 of $31.048 million or $5.43 per outstanding share.This concludes the formal part of our presentation. Paulette, we now like to turn the call back over to you for questions.

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] And our first question comes from Tony Kamin.

Hi. Question on the – well, I’ve several questions. First, on the – Craig, on the Medicare and Medicaid new proposal that you talked about, what percentage of your revenue on the Gamma Knife comes from Medicare and Medicaid?

Generally, from – it’s – as you know, our revenue stream is broken into 2 parts: one, the revenue – the retail side and the fee-per-use side. So we really only have a handle on the retail side. And I would say, it’s probably about 40%, 45%, Alexis, generally for our retail sites that – for Medicare.

Okay. So potentially 40% of – 40% of your business could be affected? Is that...

Yes. And then it’s also – we haven’t broken that number down further to calculate which of those are the Medicare advantage. There might be some of those Medicare advantage numbers in that as well. So we have to look more closely at that.

Okay. And when you – I mean, is there any possibility this could actually be a benefit? Or – and I guess, secondarily to that, is there anything you can do with your centers in case this seems difficult to – I mean, do you have any flexibility here to, kind of, protect yourselves?

In terms of the Gamma Knife business, we don’t think it’s going to be significant impact at this point based on the analysis of some of our advisers. But this is not a final rule. So we don’t know what the final rule’s going to come out to be. But from the Gamma Knife standpoint, we don’t think it’s going to have a significant impact.

Okay. Back to the statement you came out with this morning. The – I was struck in your release by a notion that there’s a growing number of indications for proton, can you talk about that a little more?

Sure. I think what we’re seeing is the indications are not necessarily growing. I think the volume that we’re seeing per indication is growing at our Orlando site. They’re becoming more comfortable with certain tumor sites, like lung, liver and head and neck, that we’re seeing more of those types of procedures being implemented by the physicians. So I think it’s – a better word may be increased adoption for the treatment of those indications.

Okay. And you know that this question was going to come up the – we continue to hold discussions for additional PBRT. Can – I think probably for many of us long-term shareholders, if we could get some more color on that? You’ve obviously discussed some the potential for centers in Southern and Northern California. Is there any more color on those? I know for myself, I believe, if you could get a center in your home base of the San Francisco area that would, I think, really cause an inflection in the company’s valuation. So really eager to hear whatever you can comment on that.

Let me have Ernie comment on some of the things that we’re doing in Southern California.

Yes. Hi Tony, this is Ernie. We – as you know, we’ve been in active discussions with various parties in Southern California for some time now. And as we’ve stated previously, we do have an operating agreement with a radiation oncology group in Southern California, and we are in active discussions, as I mentioned earlier, to work with this group to identify a potential hospital partner with which we would look to move forward with, establishing this proton facility. We are also contemplating the addition of potentially adding a linear accelerator to this proposed facility as well in which that LINAC will complement the proton facility because typically, based on certain protocols, one would need to have both the linear accelerator and a proton on machine. Then if it also would be that if we were to do this in two phases, we would propose to start with the LINAC first and that would be a much shorter time frame in terms of the facility build out and actual implementation of the LINAC facility. So we’re actually very encouraged by the continuing prospects to start our operations down there. So please stay tuned.

And you anticipated in one of my questions. I noticed that your historical partner on Gamma Knife, Elekta, had gotten 510(k) for an MR-Linac in late December last year. It’s interesting to hear what you’re saying, it seems like that would potentially be a great product for a lot of your historical hospital customers.So given it’s your historical partner in Elekta, given that it seems like it has a place in the marketplace, is it possible that this – I know you had one LINAC for many years at Tufts, but is it possible that this whole kind of MR-Linac becomes maybe a third important product category for the company after proton and Gamma Knife?

Yes, I think so. We’ve been looking at it, and we think it has real possibilities because of the high capital cost of these systems. They really lend themselves to self-partnering with third parties, like ourselves. So we are looking at that, we’re looking at the MRI-LINAC, and we also are looking at the – some of these MRI PET/CT scanners that are coming out. So…

Okay. And I think it makes all the sense in the world what you were talking about in Southern California. But I don’t want to press too hard, but do you guys – when you say you’re starting to look for hospitals to work with, is that process underway? And can you comment at all on are we at the very beginning of something that might take a long period of time? Or are you making progress on that?

It’s something, I think, we’re making very good progress on, Tony. We’ve been working on this initiative, as you know, for quite a number of years, and we had identified several hospital partners, and those situations did not work out. But we have identified another hospital partner, and we are in active discussions now with this potential partner. So we’re very encouraged by it.

That’s great. And then a final question. Just if you can comment at all on, I know, for – I know the company would love to have one near the Bay Area somewhere. Is there any activity continuing, kind of, in the Bay Area to identify a potential partner or site?

Yes, I think we’re looking for a site. I think we’ve identified a couple of sites. And as you know, it’s not easy to find a site large enough in a San Francisco, but we have identified a site and we hope to be able to go forward on that. But there are a few obstacles that we have to overcome in order to secure the site.

Okay. Great, thank you very much and it was a good quarter. So thank you.

Thanks, Tony.

Our next question comes from the Steve Smith. Please go ahead.

Yes, hi. You’ve chosen to value MEVION at zero on your balance sheet. Why is that?

The MEVION was acquired through the most recent financing. And at that point, the oldest shareholders, essentially, their value was 10 to 0. And that’s why the – that is no longer an investment that American Shared holds in the MEVION.

Okay. Does that mean that in the new financing, there were just so many shares issued? Or that the AMS’ ownership stake is now down to a, sort of, a miniscule amount and is not worth anything anymore?

The – our – we do not own any shares in MEVION anymore after the transaction that MEVION underwent in the final refinancing of their company.

It almost sounds like a bankruptcy, where existing shareholders get nothing. Is that kind of what happened?

Well, I don’t know. It’s not a bankruptcy, but the end result is that the – some of the existing shareholders, the value was zero at the end of the financing.

Okay. Yes, I’m going to go back to Tony’s comment about long-term shareholders. It’s been a very frustrating ride. You go back 15 years, the stock was at $5 or $6 a share, it paid a healthy dividend, it was a profitable company. And you fast forward 15 years, the stock price has lost half its value. If you compare it to the Russell Microcap Index, which the average stock there is up 150%. Along the way, there’s been – there was an initiative to a lighting initiative in operation – operating rooms that was talked about a lot and never happened. There was a failed venture in Turkey, where money was lost.And then the company even went forward to the person you were working with there, you brought on to the Board of Directors, getting compensation and shares. There was a period where a company was looking to buy the Gamma Knife operations. And I think the legal fees there were $1 million and it never happened. It’s been a very frustrating ride. And on top of that, every single quarter, it’s – Dr. Bates saying, yes, we’re there, we’re there, and it’s going to happen. And you can go back three, four years and hear the same thing again.You know that the MEVION machines, they have to get out there. And once they do and people see that they work, we expect more business and it just hasn’t happened. If this one MEVION machine wasn’t part of the – part of AMS, it’s a little bit frightening to see where the company would be. And I’d just like to – what are your thoughts about what’s happened over the last 15 years and regarding the leadership of this company?

What I would say is – just to add some color, the fees were not $1 million when we did not finish the sale of the Gamma Knife business that you referred to. They were nowhere close to that. It’s honestly taking us longer to roll out the proton program than we had thought. When we started, we thought MEVION would come up with the system much faster than they did. The first system wasn’t operational for 2014. The system is a very good system, and it’s the right technology, the single-room technology has been adopted by mostly all the manufacturers at this point because it makes the most sense. We’re still very bullish on protons and the single-room concept.And as Ernie Bates had mentioned earlier, we’re still pursuing the – doing one in Long Beach, and we feel very good about that. And we’re looking at other opportunities, whether they be through protons or, as Mr. Kamin mentioned, MRI-LINAC. And we think those all hold promise, and we’re still looking at expanding our Gamma Knife business on an opportunistic basis, both domestically and internationally. So I think it is – it has granted – taken us longer than anticipated, but we think the course that we’re taking is the right course.

Okay. If you look out there, MEVION was one of the first ones to come out with a single-room proton system, and you see a lot of the bigger players with a single-room system. Is the MEVION product – I know that the company is under contract to purchase two more, is the MEVION system still competitive in the current landscape?

Yes. The MEVION system is a very good system. The newest one, which – we actually upgraded our two initial orders to the MEVION S250i, which really does pencil beam scanning, and they’ve also adopted some imaging technology to complement that. So we feel very good about the system.

Okay. Those were my questions I had. Sorry for some tough questions, but I think they need to be asked. The performance of the stock has been dismal, and as the leadership of the company, I – it’s – I think it’s important to be held accountable to that. That being said, again, I appreciate your answers and your time. Thanks.

Thank you very much.

Our next question comes from Lenny Dunn. Please go ahead.

Again, the performance with the Gamma Knife looks fine and even with the proton center that you have. But as the previous callers have mentioned, it’s been terribly long to get to the finish line with Long Beach, and is it still realistic to expect this to happen this year?

We are having those discussions, as I mentioned, Lenny, earlier. So in terms of actually closing documentation, not sure if we’re actually going to be able to do that specifically, but we are confident that the discussions are going in very positive direction. And as I’ve mentioned, we are working hand-in-hand with our clinical partners and that really is a key element to the potential future success of this proposed facility. And our physician partners are very confident that this will be a successful center once we’re open and treating patients.

Well, I’m sure it will be, and I’m sure, eventually, it will happen. But I just don’t know why it takes that long to put this together.

Yes, unfortunately, these projects are just – they require long lead times. And we understand, based on Steve’s comments that this has been a frustrating process. It does take a long time to develop these proton centers. And that’s another reason why we’re also looking to diversify our revenue streams with other modalities. As Craig mentioned, we’re looking at MR-guided LINACs and straight linear accelerators as well. I will add it, we’re looking at other initiatives that address this issue of rising medical costs, and we’re looking to find ways to provide cancer care in this environment where there is a lot of cost containment pressure. And we think that we may be identifying a model that will enable us to expand our scope of services that will complement some of the demand that we’re seeing in the marketplace now lower health care costs.

And with the Gamma Knife business, because that does not take as long a lead time, do we have a couple of things in the pipeline that we can expect to see reasonably soon?

Yes. I think we’ll be initiating some more Icon upgrades in the first six months of next year.

I’ll also add, Lenny, that on the Peru Gamma Knife, we continue to see steady growth in that operation, and we’re going to – we are putting in place certain initiatives, marketing initiatives, where we think that we’re going to successfully be able to raise better awareness of the Gamma Knife in the country that a country of 32 million people, and this is the only Gamma Knife serving the entire population. So we think that there is a large growth opportunity for us there as well as some other international markets that we’ve been looking at. So we’re looking at both organic growth opportunities and also potential acquisitions could be also accretive to American Shared.

Okay. Well, I continue to be hopeful that we’ll see some positive announcements soon. And well, Dr. Bates and I are both young enough to enjoy the fruits. Thank you.

Thanks, Lenny.

And we are showing no further questions, and now I’ll turn the call back to Craig Tagawa.

I’d like to thank everyone, again, for joining us this afternoon. As I said previously, at American Shared Hospital Services, we continue to strive for operating growth as we remain driven to replicate the success we’ve achieved at Orlando Health.In Gamma Knife, we remain optimistic for continued business gains at our existing sites through the implementation of Icon upgrades, which will enable us to capture incremental revenue opportunities in large tumors.We look forward to speaking with you on our 2019 year-end conference call in early March. Have a great afternoon, and wish to thank you, again.

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating, and you may now disconnect.