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Edited Transcript of AMS earnings conference call or presentation 28-Mar-19 7:00pm GMT

Q4 2018 American Shared Hospital Services Earnings Call

San Francisco Apr 23, 2019 (Thomson StreetEvents) -- Edited Transcript of American Shared Hospital Services earnings conference call or presentation Thursday, March 28, 2019 at 7:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexis Wallace

American Shared Hospital Services - Controller

* Craig K. Tagawa

American Shared Hospital Services - Senior VP, Chief Operating & Financial Officer

* Ernest A. Bates

American Shared Hospital Services - Founder, Chairman & CEO

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Conference Call Participants

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* Anthony Gabriel Marchese

TriPoint Global Equities, LLC - Former MD

* Anthony Kamin

* Leonard Euler Dunn

Mutual Trust Company of America Securities - Analyst

* Vivian Cervantes

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Presentation

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Operator [1]

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Welcome to the fourth quarter earnings conference call. My name is Paulette, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Vivian Cervantes of Investor Relations. You may begin.

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Vivian Cervantes, [2]

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Thank you, operator. 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 we may make 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, including the company's annual report on Form 10-K for the year ended December 31, 2017; its quarterly reports on Form 10-Q for the 3 months ended March 31, June 30, and September 30, 2018; and the definitive proxy statement for the Annual Meeting of Shareholders held on June 14, 2018. The company assumes no obligation to update the information contained in this conference call.

I would like to now turn the call over to Dr. Ernie Bates, Chairman and Chief Executive Officer.

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Ernest A. Bates, American Shared Hospital Services - Founder, Chairman & CEO [3]

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Thank you, Vivian. Good afternoon, everyone. Thank you for joining us on our fourth quarter and year-end 2018 earnings conference call. This afternoon, Craig Tagawa, our Chief Operating and Financial Officer, will walk through business and operational results. Alexis Wallace, our Controller, will then provide our financial review. Following that, we will open the call to your questions.

We are focused in our proton therapy business and are pleased to report continued system utilization gains with Orlando Health, UF Health Center and single room proton center. And as we mentioned during our third quarter earnings conference call, we are hard at work expanding our footprint. We're making progress with talks on proton units in Southern California as well as our hometown of San Francisco. We plan to provide timely updates on these activities.

Turning to our Gamma Knife business. We anticipate upgrading at least 3 of our Gamma Knife units to Icon to allow treatment of larger tumors for incremental revenue opportunities in the next 12 months.

With that, let me now turn the call over to Craig.

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Craig K. Tagawa, American Shared Hospital Services - Senior VP, Chief Operating & Financial Officer [4]

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Thank you, Dr. Bates, and good afternoon, everyone, and thank you for joining us. Our proton therapy business remains in a positive growth trend, and we are pleased to report approximately 22% annual revenue growth in the fourth quarter and for the full year 2018. Driving profitable growth are the increasing number of patients treated at Orlando Health, with increasing indications treated and favorable reimbursement rates. Therefore, the number of proton fractions continue to rise and was up 339 or 28% to 1,544 during the quarter. Orlando Health continues to expand its use of the proton system, aided by increased awareness of the clinical benefits of this advanced therapeutic technology. We believe proton therapy represents a significant long-term growth opportunity for us.

Turning to the Gamma Knife. While we saw some softness in total procedures year-over-year on lingering trends from our transition to 2 centers in Lincoln, Nebraska and Lima, Peru, we also noted a sequential improvement in volume from the third quarter and attribute a portion of the 16% decline in annual revenues of approximately 320,000 in the fourth quarter to an unfavorable shift in payer mix at the company's retail sites. While still profitable, we still saw more Medicare versus private pay patients in the quarter. Gamma Knife procedures in the fourth quarter declined by 28 or 7% to 350 versus the comparable period prior year. On a sequential basis, we saw an improvement in procedure volumes with third quarter 2018 procedures at 337 or 5%. We are optimistic as clinical turnover in certain sites normalize.

In addition, we look forward to contribution from Merrillville, Indiana, which began treating patients in January 2019.

Finally, as Dr. Bates mentioned, we anticipate upgrading at least 3 of our Gamma Knife units to Icon in the next 12 months, allowing these centers to target larger tumors with incremental revenue opportunities.

I will turn the call over to Alexis for a detailed financial discussion.

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Alexis Wallace, American Shared Hospital Services - Controller [5]

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Thank you, Craig, and good afternoon. Before I begin my prepared remarks, I would like to call your attention to our fourth quarter and year-end 2018 earnings release, which was issued this morning.

For the 3 months ended December 31, 2018, revenues decreased 6.2% to $4,770,000 compared to revenues of $5,084,000 for the fourth quarter of 2017. Net income attributable to the company for the fourth quarter of 2018 was $178,000 or $0.03 per share. This compares to net income attributable to the company for the fourth quarter of 2017 of $1,418,000 or $0.24 per share, which included an income tax benefit of $1,546,000 attributable to the revaluation of the company's federal and state deferred tax liabilities following recently enacted federal tax legislation and the full write-down of the company's investment in equity securities of $579,000.

Fourth quarter revenue for our proton therapy system installed at Orlando Health in Florida increased 21.5% to $1,419,000 compared to revenue for the fourth quarter of 2017 of $1,168,000. Revenue for the company's Gamma Knife operations decreased 16.1% to $3,102,000 for the fourth quarter of 2018 compared to $3,697,000 for the fourth quarter of 2017. The decline is due to fewer procedures and an unfavorable payer mix at the company's retail sites.

Gross margin for the fourth quarter of 2018 decreased to $1,565,000 or 32.8% of revenue compared to gross margin of $2,184,000 or 43% of revenue for the fourth quarter of 2017. That reflected a decline in Gamma Knife revenue and an increase in cost of revenue primarily attributable to the initiation of maintenance and service costs for the company's proton therapy system at Orlando Health.

Net income for the fourth quarter of 2018 was $178,000 compared to net income of $1,418,000 in the fourth quarter of 2017.

Non-GAAP adjusted net income was $178,000 for the fourth quarter of 2018. This compares to non-GAAP adjusted net income, net of the tax benefit from tax reform and a loss on the write-down of the company's investment in equity securities of $451,000 in the fourth quarter of 2017.

Adjusted EBITDA, a non-GAAP financial measure, was $2,346,000 for the fourth quarter of 2018 compared to $2,673,000 for the fourth quarter of 2017. A reconciliation of GAAP to non-GAAP financial measures is provided in our released fourth quarter of 2018 results.

Cash and cash equivalents and restricted cash was $1,792,000 at December 31, 2018, compared to $2,502,000 at December 31, 2017. Shareholders' equity at December 31, 2018, was $31,048,000 or $5.43 per outstanding share. This compares to shareholders' equity at December 31, 2017, of $29,885,000 or $5.23 per outstanding share.

Operator, I'd like to turn the call back over to you for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Robert [Baki], private investor.

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Unidentified Participant, [2]

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Yes, Dr. Bates, I'm calling in reference to our investment in Mevion. I'm wondering, I know it's a private company, but with MEVION doing well, do they help us obtain work? Or do we give work to them? What is the relationship between the 2 companies? I'd like to know.

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Ernest A. Bates, American Shared Hospital Services - Founder, Chairman & CEO [3]

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We're working together. They are bringing us [work].

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Unidentified Participant, [4]

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Good, all right. You're working together, all right. Well, that's fine then.

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Operator [5]

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

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Leonard Euler Dunn, Mutual Trust Company of America Securities - Analyst [6]

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It's my understanding that we have been close to getting some new proton contracts, and it always seems like it's in front of our nose but not quite there. How close are we now?

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Ernest A. Bates, American Shared Hospital Services - Founder, Chairman & CEO [7]

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I can answer that, Lenny. We're very close to getting a contract in Southern California. I can't give you the name of the hospital but hopefully, that we will have that contract concluded within the next 2 to 3 months.

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Leonard Euler Dunn, Mutual Trust Company of America Securities - Analyst [8]

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Okay, but do you think it will take that long to get it signed or that long to get it started or...

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Ernest A. Bates, American Shared Hospital Services - Founder, Chairman & CEO [9]

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Well, we have to get the document signed, but there's already been a tentative agreement. But we have to get the document signed so we can name the hospital.

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Leonard Euler Dunn, Mutual Trust Company of America Securities - Analyst [10]

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Do you think that it will take that long just to get the document signed or to get it financed or...

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Ernest A. Bates, American Shared Hospital Services - Founder, Chairman & CEO [11]

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Well, Craig thinks it will. Craig, do you want to comment on that?

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Craig K. Tagawa, American Shared Hospital Services - Senior VP, Chief Operating & Financial Officer [12]

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Yes, these are -- because of the dollar amounts of these types of transactions, the documentation takes a little longer than you would expect. So I think we want to be safe and not overpromise as to when it will be completed.

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Leonard Euler Dunn, Mutual Trust Company of America Securities - Analyst [13]

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Okay. Well, this is almost the end of March, so certainly, by the end of May?

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Ernest A. Bates, American Shared Hospital Services - Founder, Chairman & CEO [14]

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Well, I was hoping that we would -- by our next earnings call, we could announce it, but Craig seems to think that's too early.

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Leonard Euler Dunn, Mutual Trust Company of America Securities - Analyst [15]

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Well, your next earnings call would be the end of June. I wonder when would it be.

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Craig K. Tagawa, American Shared Hospital Services - Senior VP, Chief Operating & Financial Officer [16]

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No, it will be probably the middle of May.

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Ernest A. Bates, American Shared Hospital Services - Founder, Chairman & CEO [17]

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May.

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Alexis Wallace, American Shared Hospital Services - Controller [18]

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Yes, it will be first week of May.

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Ernest A. Bates, American Shared Hospital Services - Founder, Chairman & CEO [19]

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First [quarter] in May.

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Leonard Euler Dunn, Mutual Trust Company of America Securities - Analyst [20]

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Yes. So -- okay, and is there anything else that's close to completion?

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Craig K. Tagawa, American Shared Hospital Services - Senior VP, Chief Operating & Financial Officer [21]

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I would say as we mentioned in the press release, Lenny, that we're diligently working on a project in San Francisco, which we feel very good about. But these are very complex transactions and until you obviously get something signed, is not definite, but we feel good about this transaction based on who we're partnering with.

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Ernest A. Bates, American Shared Hospital Services - Founder, Chairman & CEO [22]

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We're also looking at a facility in upstate New York because that will require a Certificate of Need, but that also looks very promising.

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Leonard Euler Dunn, Mutual Trust Company of America Securities - Analyst [23]

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So you could have some time in the next 4 months or so, 3 of them signed?

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Craig K. Tagawa, American Shared Hospital Services - Senior VP, Chief Operating & Financial Officer [24]

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Well, some of these, as Dr. Bates mentioned, require a CON, so those take a little longer to get. So what I would say is we're working on a number of them, but I think our priority is to try and close the one in Los Angeles and San Francisco first.

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Leonard Euler Dunn, Mutual Trust Company of America Securities - Analyst [25]

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Okay. And with the Orlando facility doing so well, do you think there's a chance for the hospital to put in a second one before somebody else puts a competing one in?

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Craig K. Tagawa, American Shared Hospital Services - Senior VP, Chief Operating & Financial Officer [26]

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We've been talking to the hospital about putting a second one in and the -- and we continue to do that. We've had very consistent, I would say, volumes and reimbursement at Orlando. So we're very pleased with it and I think it's a matter of time before we mutually agree to do a second unit in Orlando.

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Leonard Euler Dunn, Mutual Trust Company of America Securities - Analyst [27]

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Okay. And with the 3 Gamma Knives that you're upgrading, when do you anticipate having those upgraded?

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Craig K. Tagawa, American Shared Hospital Services - Senior VP, Chief Operating & Financial Officer [28]

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Probably in the third and fourth quarter of this year is what we're targeting.

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Leonard Euler Dunn, Mutual Trust Company of America Securities - Analyst [29]

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Okay. And do you plan to do any type of roadshow in the near term?

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Ernest A. Bates, American Shared Hospital Services - Founder, Chairman & CEO [30]

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Yes, we are. I don't have a date yet.

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Leonard Euler Dunn, Mutual Trust Company of America Securities - Analyst [31]

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Because we certainly could use some exposure. The stock is selling for approximately half of book value, with it being up $0.30 today. So we do need to expose what we're doing to new investors and particularly with the likelihood of having some proton signings in this year, 3 of them and additionally, upgrade the 3 Gamma Knives, so it's a pretty good story to tell.

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Ernest A. Bates, American Shared Hospital Services - Founder, Chairman & CEO [32]

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Yes, it is. I think we're planning to do the Sidoti Conference and also one down in Southern California.

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Leonard Euler Dunn, Mutual Trust Company of America Securities - Analyst [33]

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Okay, okay. I mean, when is the Sidoti conference?

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Ernest A. Bates, American Shared Hospital Services - Founder, Chairman & CEO [34]

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I think it's in the fall. I don't have the exact date, but I'll let you know.

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Operator [35]

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Our next question comes from Tony Kamin from Eastwood Partners.

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Anthony Kamin, [36]

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I guess 2 questions. On the Icon upgrade, you mentioned that it would potentially give you some incremental revenues that you don't get now. Can you talk about the upgrade to Icon, what it really lets you do that those sites are not doing now and what you're -- when you say incremental revenues, what kind of magnitude would we potentially be talking about?

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Craig K. Tagawa, American Shared Hospital Services - Senior VP, Chief Operating & Financial Officer [37]

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Well, there's 2 things that are different with the Icon upgrade. It has a cone beam CT attached to Perfexion. So we don't -- it's not a forklift upgrade at the Perfexion. All our units are currently Perfexions and they're upgradable to Icon. So we're going to roll some of the Icons out at some of our larger-volume sites first, and there's -- one of the differences with the Icon, it allows you to do nonframe-based procedures. You could use a mask. So by doing -- on the larger tumors, you're not able to necessarily treat them in one fraction because of the dose that you would have to provide. So by having a mask-based system, you're able to provide up to 5 fractions or 5 treatment sessions with lower doses that on a cumulative basis, equal the -- of the large-enough dose to kill the tumor. So we think there are larger tumors that we can do. The other thing that the Icon does, it allows more flexibility for the clinicians, and we think that will also help in terms of volumes. The physicians can now, with the Icon, have the ability to do MR several days in advance, use that MR and do the treatment planning. So the day of treatment, they would just do the CT, a cone beam CT scan on that patient and co-merge that image with the treatment plan that's already been completed. And if they match up, there's no further work and they can do the treatment. Currently, they would do -- put on a frame and then do an MR the day of the treatment. So this really streamlines it and allows for the physician to use their time more efficiently. So we think that may help us in terms of getting additional volumes as well by being more efficient and taking less of their time. So from the both of those, we think we will get more volume. Elekta believes that you can get 20% to 30% more volume but for us, we want to -- we don't want to promise at those. We're going to be what we're going to see, but we're testing it out at some of the sites that we think are the most appropriate and will give us the best hands-on data to see how far it will take the Icon.

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Anthony Kamin, [38]

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Great. And then, Dr. Bates, a question more on the sort of macro landscape for proton. I get the sense that in terms of the acceptance of it, whether it's through clinical trials or just treatment modalities becoming more favorable or maybe it's just insurance companies that the hostility that was there from a cost basis and a not proven yet basis on proton beam several years ago has greatly changed and seems to be going from that attitude towards this really is the right thing to treat. And so I wanted to ask you about that and then if in your opinion, that will likely make more hospitals interested in making that transition to offering proton beams.

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Ernest A. Bates, American Shared Hospital Services - Founder, Chairman & CEO [39]

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You're correct, there is now greater utilization. And also, because the cost of cancer drugs have increased so dramatically, it's making now more sense to use protons, particularly since we can get the same results or better. So you're correct, utilization is going up. We're able to treat more tumors in different sites in the body than what we were able to do before.

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Anthony Kamin, [40]

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And do you think that, that has -- that, that which have -- it's pretty logical but that happening is now getting more and more hospitals to seriously consider their need to offer those?

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Ernest A. Bates, American Shared Hospital Services - Founder, Chairman & CEO [41]

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Yes, yes.

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Operator [42]

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Our next question comes from Anthony Marchese, which is a private investor.

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Anthony Gabriel Marchese, TriPoint Global Equities, LLC - Former MD [43]

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Two questions. We're pretty much at the end of the first quarter. Can you shed any light on how you're feeling about the quarter or the same factor? I guess the question is, has the same factor that affected you -- first question, same factor that affected you in the fourth quarter potentially going to impact you in the fourth quarter with respect to part of the business.

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Craig K. Tagawa, American Shared Hospital Services - Senior VP, Chief Operating & Financial Officer [44]

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I think I just want to be consistent with what we've always done as a practice, and that's not give guidance. So I would defer on that question at this point.

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Anthony Gabriel Marchese, TriPoint Global Equities, LLC - Former MD [45]

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Okay. Second question would be, it was my understanding that there was an East Coast hospital, an Ivy League hospital that was considering a proton beam machine. Any idea whether that's gone anywhere?

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Craig K. Tagawa, American Shared Hospital Services - Senior VP, Chief Operating & Financial Officer [46]

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Yes. We were not selected on that in that RFP.

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Anthony Gabriel Marchese, TriPoint Global Equities, LLC - Former MD [47]

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Okay. Do you know who it went to? Or did they do it themselves?

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Craig K. Tagawa, American Shared Hospital Services - Senior VP, Chief Operating & Financial Officer [48]

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It's -- I'm under a confidentiality, so I really can't speak to it.

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Ernest A. Bates, American Shared Hospital Services - Founder, Chairman & CEO [49]

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Talking about Yale or Harvard, no, we did not get that but we were told, if it doesn't work out with the people that they've chosen, they'll come back to us.

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Operator [50]

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(Operator Instructions) And we're showing no further questions at this time. I will now turn the call back to Dr. Bates for closing comments.

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Ernest A. Bates, American Shared Hospital Services - Founder, Chairman & CEO [51]

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Thank you again for joining us this afternoon. In summary, we remain confident of our outlook, our profitable businesses, a particular focus on driving our proton therapy operation. Volume and reimbursement trends in proton therapy at our Orlando Health facilities continue to support our growth expectations, and we are focused on expanding our footprint. We are in talks to place proton units in California, including our hometown of San Francisco. We anticipate upgrading at least 3 of our Gamma Knife units to Icons in the next 12 months to expand our market to include large tumors and continue the plan to add to our Gamma Knife centers. We look forward to providing timely updates on our activities and remain focused on driving steady gains in revenue and earnings performance. We look forward to speaking with you in our first quarter 2019 conference call in May.

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Operator [52]

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