Good morning, everyone, and welcome to the 2017 Second Quarter Financial Results Conference Call for American Shared Hospital Services. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session [Operator instructions] I would now like to turn the call over to Dr. Ernest Bates, Chairman and Chief Executive Officer; Craig Tagawa, Chief Operating and Financial Officer; and Alexis Wallace, Controller of American Shared Hospital Services. Mr. Tagawa, you may begin.

Thank you, Allie, and thank you all for joining us for AMS's 2017 Second Quarter Financial Results Conference Call and Webcast. Please note that various remarks that we may make on this conference call about future expectations, plans and prospects of 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 Securities and Exchange Commission, including the company's annual report on Form 10-K for the year ended December 31, 2016, its quarterly report on Form 10-Q for the three months ended March 31, 2017, and the definitive proxy statement for the Annual Meeting of Shareholders held on June 27, 2017. The company assumes no obligation to update the information contained in this conference call. AMS's second quarter financial performance did not live up to our expectations. There are several reasons for this. In our proton therapy business, treatment volume at our proton center at UF Health Cancer Center in Orlando increased to 1,189 fractions in this year's second quarter compared to 442 fractions during the Center's initial quarter of operations last year. However, treatment volume for this year's second quarter decreased slightly compared to this year's first quarter. We believe this was due to random variations in patient flow that we also have experienced from time to time in our Gamma Knife business. We are confident that there is room -- that there's plenty of room for future growth in treatment volume at this center, and we expect volume to resume its upward trend in this year's second half. In our Gamma Knife business, as we discussed on our first quarter…

Thank you, Craig. For the three months ended June 30, 2017, medical services revenue increased 9.5% to $4,945,000 compared to medical services revenue of $4,518,000 for the second quarter of 2016. Net income attributable to the company for the second quarter of 2017 was $113,000 or $0.02 per share. This compares to net income attributable to the company for the second quarter of 2016 of $93,000 or $0.02 per share. As Craig mentioned, this year's second quarter net income reflected unusually high selling and administrative expenses consisting primarily of certain one-time legal and consulting fees and nonrecurring costs associated with the startup of AMS's Gamma Knife center in Lima, Peru. Second quarter revenue for the company's initial Proton Therapy System installed at Orlando Health-UF Health Cancer Center in Florida was $862,000. The center, which began treating patients in 2016, generated revenue for the second quarter of 2016 of $446,000. Revenue for the company's Gamma Knife operations increased to $3,968,000 for the second quarter of 2017 compared to $3,962,000 for the second quarter of 2016. As previously announced, AMS lost one of its Gamma Knife unit due to the expiration of its contract term at the end of April 2017. Excluding this site, Gamma Knife revenue increased 6% for this year's second quarter compared to the second quarter of 2016. Medical services gross margin for the second quarter of 2017 increased to 45.5% of revenue compared to medical services gross margin of 40.7% of revenue for the second quarter of 2016. The positive impact on gross margin from the increase in proton therapy revenue in this year's second quarter versus prior year was partially offset by higher depreciation expense associated with Cobalt-60 reloads at two Gamma Knife centers in this year's first quarter and depreciation expense for the proton system. Operating…

Thank you, Alexis. Allie, we are ready for the first question.

Thank you. We'll now begin the question-and-answer session. [Operator instructions] And our first question comes from Anthony Marchese. Please go ahead.

Hey. Good morning, guys. How are you?

Good morning

Hey. A couple of questions. First, can you -- we're halfway, I guess, through the next quarter. Is it safe to assume that treatment volume has gone up relatively speaking in the proton beam center in Florida?

What we saw in July is it was still a little weak compared to what it had been, very similar to what it was in June when we had a slow period. And it's ramping up now in August, and we're seeing that from the beginning of August and it's starting to ramp up. And we fully anticipate it going back to higher levels during the next 5 months.

Right, okay. And the second question, I guess it's for both of you, Dr. Bates as well. Any update on potential new proton beam therapy? I know one of the issues was the settlement of any health care or changes to the health care bill. I know that hasn't happened, but I'm just curious if you can give some color on any financing or opportunities to do proton beam therapy machines.

Anthony, the 11 or 12 hospitals that we have been in negotiations with are still in negotiations with us to have a single room placed. And none of these have gone to another of our competitors nor have they put one in on their own or intend to. So, they are still there. I think everyone's waiting to see what's going to happen to the repeal and replace in Washington, D.C. And I think as soon as that occurs and the Congress does -- get its act together, they will be then doing more CapEx expenditures. Everybody would go because they're waiting for that.

Now is your -- are your funding sources waiting for the same thing? If, for argument's sake, we had some resolution, do you then have to go and secure funding sources? Or do you think you have gone far enough with any potential sources that would sort of accelerate if Washington would accelerate its negotiations?

Anthony, we're still confident that we can get financing. I think you and I had this discussion before. We think it is an opportunity to get financing. But again, it's not -- the difficulty is not ours, but these hospitals, as you recall, in our model, has to come up with the land and the construction. And they're having difficulty, more so than we are.

Okay. Right. Okay. Good enough. Thank you.

Our next question comes from Lenny Dunn from Mutual Trust Co.

Good morning, Lenny.

Well, I guess for you it's still morning, but, okay. Either way, the Gamma Knife business is also a little disappointing in the quarter, but it sounds like you've turned that around. I understand the excess cost with Peru. The very high tax rate also, I would appreciate a little more explanation on that because I'm not sure why you couldn't write off whatever you have with the excess spending in Peru. But I guess my hunch -- so there's two questions, one is the tax rate and the other is now Peru is running and going forward, we should do well. This is actually the most encouraging going forward remarks I've ever seen in one of your releases. So, you must feel pretty good about what's going to happen the rest of the year because, usually, you don't have too much of a going forward news. And do you -- then the third part of my question is, do you anticipate that maybe we could place one more Gamma Knife between now and the end of this calendar year?

The answer to your tax question is, I think if you look at this year's tax provision, it was about -- or this quarter's, excuse me, it was about 66%. Generally, we're running in about the 41% to 42% rate. And to go and look at it from a layman's person perspective, it's -- we were not able to deduct the losses from our pretax income that were a part of Peru as they were foreign operations, so we couldn't deduct those. We weren't allowed to deduct those from the calculation for the provision. And yes, we expect the Peru operations to turn around, and we expect the rate to go back to its normal rate as the Peru operation gets up and ramps up. What was the second question, Lenny?

On Lima, Peru.

Gamma Knife site.

On Lima, Peru and the new Gamma Knife site.

Okay. The new Gamma Knife sites, we're working with some sites right now to see if there's a possibility to sign them. We're optimistic that we will get some. Whether it's by the end of the year or not, I can't be certain. Certainly, we will not be able to start up any before the end of the year because the backlog in terms of installing these Gamma Knifes, but we're diligently working to get more Gamma Knife contracts, and we'll keep you posted.

Okay. Now as a layman, if you can't write off the expenses in Peru, will the Peru earnings then be taxed -- have a more favorable rate going forward? Or are you just -- you lose its -- heads, you lose; tails, you lose.

We're looking into that right now, Lenny. So, I wouldn't wanted to speak, but we'll take that one for the next conference call and get back to you on that.

Okay. Because it would seem like if you can't do the write-downs, well, I'm sure we should have a different tax rate on the earnings. But anyhow, that's -- go ahead.

Well, Lenny, we're encouraged about Peru. Right now, we have about 15 patients that are going to be scheduled. They have to get prior authorization, and they need to be clinically vetted waiting to be treated on that unit going forward.

It should be a moneymaker, but I'm just wondering what the tax rate would be because it seems patently unfair that you can't write off the normal expenses that you would have. The 66% tax rate is punitive. So okay, hence -- but you are definitely optimistic. For the rest of the year, we'll see better numbers in both the Gamma Knife side and the proton beam side. And I guess, I have another question as far as -- I have no way of knowing if and when we're going to have any type of adjustment to ObamaCare. So, with that in mind, isn't -- would, at some point, hospitals decide this proton beam therapy is life-saving and necessary so that they'll proceed anyhow because...

Well, hopefully, that will happen, but it hasn't happened so far. I do think that Washington will eventually get it back together because I think lives are at stake here. We feel strongly about the clinical evidence that this treatment prolongs lives and gives local tumor control. So, I believe it's going to happen. We're confident that it's going to happen. And I'm confident that our numbers are going to be good after July for the rest of the year.

Okay. That, I'm glad to hear. But as far getting new -- if everybody is going to stay their hands until Washington does something, I'm a little fearful of that because it would seem like in some hospitals somewhere, it's going to say, "Let's just go forward with this because it's life-saving and we want to have it." Do you think that's -- is that pie in the sky on my part?

I don't think it's pie in the sky. And I think, eventually, it will happen. We have always been, as a country, favorable to new technology, and we make most of this new technology happen. I think we have, as a country, in moral obligation to extend the lives of our citizens. And they'll see that. I think this is going to happen. I am not discouraged. I'm confident that we are going to do better in terms of how we treat our citizens.

Okay. Well, I'm confident the company will do reasonably well either way, but you'll do a lot better if you get another one of these proton beam operations up and running. And it may be a little bit of a domino effect because if somebody does it, then somebody else will do it.

Okay. Thank you.

And our next question comes from Tony Kamin from Eastwood Partners.

Hey everybody. My initial questions I was going to ask was sort of asked by the last 2 callers. So, I just want to try to -- the last thing that was being talked about in terms of how people make a proton decision is, I think, kind of complicated and hard for people to understand. And I just wanted to get your sense of, if you look at it from a slightly longer perspective in terms of time, several years ago, it seemed like protons were just considered too expensive and too unproven by the marketplace. Has that really changed now? Dr. Bates, in your opinion, do hospitals and administrators, not all of them but for the most part, is there an acceptance that, at some point, if they're going to be considered the best hospital in the area and be ahead of the competition, that they're going to have to get proton beams?

I think they all believe in the clinical advantages. It's the cost. And I have spoken with both the CEO of IVA and Varian and Mevion and say we need to get the cost of these machines down. We need to get them down below $20 million, and they're working on it. I think that, that technology is going to happen, and in the next few years. But it's not there yet. And I think that's the obstacle to really growing this business, bringing the cost of the equipment down.

Well, I mean, isn't that though what AMS does, it get -- for the hospitals and allows them to buy it without putting up all that money? So, when you mentioned, competitively, the 11 or so hospitals you mentioned you were talking to haven't lost any of them to competitors, is that probably why because you're the one enabling that solution for that price?

Yes. But there have been -- Mevion is working a hard, but they haven't been -- they're not announcing any sales in the last 12 months. But we talked to them expecting something to happen in the near future, but it's not happening. If you look at the number of new proton machines that have been placed over the last 12 months, 16 months worldwide, it's not what we all expected.

Right, okay. But just to wrap this question up, so -- but from a clinical standpoint and a justification of price per treatment and all that, it's -- that's really changed over the last few years, right? Whereas before, it was kind of a really speculative, now it's just, hey, we've got to figure out a way to get the price down?

Tony, just to piggy back off of what Dr. Bates has said, proton, even for a single room, still would take up quite a bit of most hospitals' capital budget if they did it on their own. These are still large projects, and it's more a really -- still would be considered a niche business. And it's not like they're going to do 1,000 patients in a year on a single room. And yet, it's going to cost upwards of probably $25 million to $35 million or $40 million. So, it's still a very expensive decision that the hospital has to make. And when they have varying demands on the capital budget, they have to allocate. And sometimes, it takes one of their competitors to step up before they do something. So, we're still very bullish on proton, both from a clinical standpoint and the business model, that American Shared offers to them. And we'll continue to press forward, but it hasn't quite happened yet, but we're still very optimistic.

Yes. And the other point I want to make is that all the Mevion single-room machines that have been in operation longer than our lending it are averaging over 30 patients today.

When you mentioned talking to the various manufacturers, is it possible that you can encouraged some of the manufacturers to give -- to also give maybe further incentives or something to get the market moving?

Well, we are looking at other ways to get the finance and looking at some ways that the vendors might be able to participate. We are looking at something that has been done in the past where they are plain leasing, rental car leasing, shipping container leasings. These are equipment trust, and we think this model can work with what we're trying to do.

Okay. Switching gears to the Gamma Knife. Obviously, this year, you've had 2 expire and 2 new ones that you're putting in. Just a question in general, when your contract expires, what are those institutions doing? Are they replacing the Gamma Knife equipment with other equipment? Or are they just -- what are they doing?

In the cases that have occurred so far, they replace them with Gamma Knifes and they bought directly. They've essentially -- we've proven the concept to them. Some of these, we were there for 17 years. And the other one, I think, we were there for close to probably 15. If the timing worked for them where they were able to buy directly and we essentially proved the economics of the project to them and they went direct but they would have to switch technologies.

Okay. And then talk a little more, if you would, about Peru and your decision to put a unit there. I mean, 50 sounds like an awful lot of patients to start with. So, my assumption would be that you believe there's going to be a tremendous demand down there. But what -- that's my thought. What were your thoughts on why Peru?

We had an opportunity there. One of the partners essentially with a neurosurgeon that practice both in Miami Beach and Peru. He essentially splits his time between the two. He had Gamma Knife experience. He was already doing radiosurgery in Peru, so he had a following. He does surgery in Peru. And then we were able to capitalize and get many other neurosurgeons and some radiation oncologists that wanted to have the opportunity to have the Gamma Knife available to them. This is the first and only Gamma Knife in Peru. Lima alone has the population of 10 million people. And if you look at -- in the United States, there's about 350 potential Gamma Knife patients per million. So, we think the opportunity is very good here. The reimbursement rates in South America and in Peru are at a very good level. So, we're very comfortable that this could be a very accretive transaction for American Shared going forward. The start-up losses that we have were because this is a turnkey operation, in which case, we had to start it up, we had to do the -- all the certifications from a licensure standpoint. So, these are really a one-time obligation that we had. But we felt it was worth it from a long-term standpoint to get this project going, and we're very comfortable that it's going to be very accretive for American Shared over the years.

And this is a very stable political situation, Tony, in Peru. And it has been for years.

Great. Well, congratulations on that one. Okay. Thank you, guys very much.

Thank you.

Mr. Tagawa, there are no further questions. Would you like to make your closing remarks?

Again, we were disappointed what happened with the quarter. But again, I'll say it again and again, that we are confident that this is going to improve over the rest of the year, and we'll be seeing some better numbers.

And I would like to thank everyone for joining this afternoon, and we look forward to speaking with you in November on our third quarter results conference call.

This call will be available in digital replay immediately following today's conference. To access the system, dial (888) 843-7419 and enter the passcode 45435421 followed by the pound sign to access the replay. The webcast of this call will be available at www.ashs.com and www.streetevents.com. This concludes today's teleconference. Thank you for participating. You may now disconnect.