Good morning, everyone, and welcome to the Second Quarter 2015 Financial Results Conference Call for American Shared Hospital Services. [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, Christine, and thank you all for joining us for AMS' Second Quarter 2015 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 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 Securities and Exchange Commission, including the company's Annual Report on Form 10-K for the year ended December 31, 2014; its quarterly report on Form 10-Q for the 3 months ended March 31, 2015; and in the definitive proxy statement for the Annual Meeting of Shareholders held on June 16, 2015. The company assumes no obligation to update the information contained in this conference call. We are pleased with our operating results for the second quarter, which were masked on the bottom line by our decision to recognize an impairment in the value of our strategic equity interest in Mevion Medical Systems. Under generally accepted accounting principles, the recent cancellation of Mevion's initial public offering required us to recognize the impairment in the value of our investment in the company. We continue to believe strongly in Mevion's long-term prospects based on the demonstrated clinical potential of its advanced single treatment room MEVION S250 Proton Therapy System. Mevion has manufactured and delivered 6 proton therapy systems to date and has added strong healthcare venture capital firms to its investor base through multiple financing rounds. In the end therefore, this impairment was based on accounting rules only and for reasons I'll discuss later, we remain optimistic about our investment as an economic and…

Thank you, Craig. For the 3 months ended June 30, 2015, medical services revenue increased 30% to $4,394,000 compared to medical services revenue of $3,379,000 for the second quarter of 2014. Revenue for last year's second quarter included the company's operations in Turkey, which were sold effective May 31, 2014. Excluding prior year's revenue in Turkey, medical services revenue increased 38.2% for the second quarter of 2015 compared to the second quarter of 2014. The company incurred a net loss of $1,970,000 or $0.36 per share for the second quarter solely attributable to an impairment charge of $2,114,000 or $0.39 per share related to AMS' strategic equity investment in Mevion Medical Systems. Excluding this charge, the company would have reported net income of $144,000 or $0.03 per share for the quarter. This compares to a net loss for the second quarter of 2014 of $927,000 or $0.20 per share, which included a pretax loss on the sale of the Turkey subsidiary at $572,000 and a pretax gain from foreign currency transactions of $146,000 due to the strengthening of the Turkish lira against the U.S. dollar. The total number of procedures performed in AMS' U.S. Gamma Knife business increased 27.6% for the second quarter compared to the same period of 2014, excluding procedures performed in Turkey. Medical services gross margin for the second quarter of 2015 increased to 41% compared to medical services gross margin of 25% for the second quarter of 2014, primarily as a result of increased treatment volume, higher Medicare reimbursement for certain Gamma Knife procedures and lower costs due to the sale of the Turkish subsidiary. Operating income increased to $478,000 for the second quarter of 2015 compared to an operating loss of $602,000 for the same period a year earlier. Pretax income, net of income attributable…

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

[Operator Instructions] Our first question is from Tony Kamin of Eastwood Partners.

A question for you on Gamma Knife. Do you have a sense of why the number of procedures increased ex Turkey?

I think what we're seeing is more of a migration from whole brain radiation therapy into radiosurgery. As we mentioned before, metastatic brain tumors is the largest indication of what the Gamma Knife can treat. Literature has been coming out stronger and stronger, emphasizing that radiosurgery really should be the first choice for all that -- that it would be appropriate for. There is -- there are complications from whole brain radiosurgery, namely a higher potential for dementia. So more and more people are now switching to radiosurgery, and we're seeing that.

Craig, there are 180,000 new patients every year in the United States of metastatic brain tumors, and that number is increasing.

Correct.

Great. Turning to Mevion, and I note that the stock was down a little bit today, and I'm wondering if it's related to the Mevion write-off, because -- I'd really like to get into more of the context around that. As you mentioned, Mevion was a strategic investment and a few issues around that. You've mentioned in the past that some of the reluctance of hospital customers to enter into contracts with you for a Mevion system was they were concerned about seeing which way things would develop for Mevion, would they go public, would they not be able to raise enough money. Now that they're decisively funded, I would assume that's going to create an easier sales process for you in terms of the Mevion?

Yes, we looked at it very favorably, the transaction that Mevion recently entered into. I think for 2 reasons, one, it provide them -- it provided them with a good infusion of capital. And two, it's going into a market that's very large: The China market, with a venture partner that is -- that has better access to that market than Mevion alone would have. So we look at this as a very positive development and one that should help us all. And as we've said in the -- in this call, we believe that it validates the single room concept to have someone put that much funding into Mevion.

Tony, the Chinese market is the largest market in the world. There are about 25,000 hospitals in China compared to our 5,000 in the United States, so this is a huge market.

Well, following up on this, I think when people see a write-off again, they -- their first inclination is, so this is a big negative. But you still remain one of Mevion's first backers and have a very strong relationship. And I guess, my question is now that they're more capable, do you see that this potentially portends for you to get more flexibility or support from them in terms of you being such a prominent purchaser of Mevion's for the U.S.?

Well, they both cooperate with us, and I think we'll get even more cooperation going forward. And they're expecting that their sales are going to grow both domestically and internationally as a result of this infusion of cash, and this is $200 million. This is going to be one of the best capitalized proton businesses in the world right now.

Okay. And next question, it relates more directly to the AMS sort of valuation impact of Mevion. I think that personally, we felt that you were probably going to have to write that down for a long time, but that far more important was the fact that you have 3 units that you agreed to purchase many years ago at this point and that the value of those or the purchase price for those is far below the current cost for a Mevion system. Can you comment on that a little bit?

Well, what you've said is true. The first one -- our first unit is, as we said, is going into Orlando Health. And if we can stay on track, which we are so far, we expect to treat our first patient during first quarter of 2016. We are looking to solidify placement of the next 2 units that we have, and we're working diligently on both the agreements with potential partners as well as the financing aspects of that. So we hope to be able to announce something in the not-too-distant future, but these things do take a little while because of the magnitude of the transaction.

I noted that you said in this announcement today, it seemed an expansion from what you've said before where you talked about that you're negotiating with hospitals around the country, something to that effect. Can you talk about that statement a little bit and maybe give a little bit more color? Is that an expansion beyond what you've done, what you've had available before? And does that portend that the next 2 units that you have, you believe you'll be able to enter into agreements with hospitals fairly soon? I'm hoping maybe one before the end of the year.

That's correct, Tony. We are negotiating with a chain in Northern California to place a unit in San Francisco and with a large hospital in Southern California to place our third unit down there. And we're talking with an organization that is considering financing these 2 units.

Okay. And on the first unit, on the UF unit, do you expect to announce financing for that by the end of the year?

Yes.

Great. Well, I think those will be really positive. I mean, I think you guys really had a great quarter. And it strikes me that most for this Mevion news, despite the phase sort of write-off, is actually extremely positive.

Our next question is from Jim Canning of Cathaca [ph].

I'm a smaller shareholder, and I'm pretty new to AMS. I guess, the question I have for you guys is, the book value is now like $4.60 a share, and the stock's trading $2.50, $2.40. Can you guys explain how you see that dichotomy, and why there's such a big difference? I get worried that the book value has got a problem and you see a write-off and say, "Okay, maybe the book value has got problems." But based on your report, the operations look good and you're generating cash. So how do you guys explain the difference between the market value and the book value?

Well, we obviously don't control what the market valuation is. It's a free market concept. We think probably people are waiting to see how the proton impacts the company. Our first Proton Therapy System, once it's in operation, we expect that to really change the look of American Shared. As we've mentioned, that's one of the things that we're concentrating on for future growth. These are big transactions, and potentially, they will provide significant revenue increases to what we're currently doing as well as to the EBITDA. So we expect once we get going that hopefully the market will take this into account and increase the value of our shares.

Okay, I get that. And I guess, the last -- the other question I have is, Craig, you went through all the changes -- the proposed changes on the pricing.

Yes.

If you had the same volume that you had in the second quarter in this new pricing that's proposed, what does that do to revenue? Does it increase it or decrease it?

Well, for protons, it would obviously increase it. And for the Gamma Knife, it would decrease it a little bit. We're not sure exactly, because not all of our contracts are pegged off the Medicare amount and to varying degrees. We're still waiting to see what the final would be, and then we'll do a final analysis.

But do you think it's material one way or another or...

Excuse me?

Do you think it's material one way or another? Does it look like it averages out about the same?

No, it's going to be down. Any time you have a decrease in revenue -- Medicare revenue, I think we said it's about 9.5%, but again, that doesn't translate to all the units. So once we find out what the final is, we will do a more thorough analysis based on where we think our volumes are going.

Our next question is from Lenny Dunn of Freedom Investors.

A good quarter, at least a much improved quarter was masked by the write-down, but the book value wasn't impaired that badly, and we saw signs of huge discount to book value, which recurring earnings will cure. The market will take this up if it continues to see recurring earnings. And I saw the SG&A was up a little because of increased legal and accounting. Do you anticipate seeing increased legal and accounting in the current quarter, or do you think it'll back off to a more normalized level?

I think in reality, it will be a little lumpy for a while, mainly because these -- the proton transactions are fairly complex. And we're going to incur legal and accounting expenses to complete these things. So depending on where -- what states we're at, I think you're going to continue to see that, the lumpiness, it won't be a consistent continuous number.

Okay. And do we have -- I assume we're not giving up at all on the Gamma Knife business, which is a good solid business that you've been in for a long time. Do you anticipate being able to sign up 1 or 2 more hospitals in the near future, or do you think that we're going to stay pretty much at the number we have or...

No. We look at the Gamma Knife business as a solid business, one that we want to grow. So we are not going to slow down. We're going to look to expand the business.

And Elekta has got to advance now in the Gamma Knife avenue, Gamma Knife coming out, which just was recently FDA approved. And we think that there will be demand for this new version of the Gamma Knife.

Okay. Well do you think that the new version may help you to get a little better reimbursement from CMS or...

No. I don't think that, that will impact with the CMS payment. Well, the CMS payment is based on a fact whether it's a Gamma Knife or a LINAC single fraction radiosurgery. That's the payment you will get. So they're not taking into account any differences between the modalities.

Okay. And the other question I have is it's kind of Hobson's choice, because you have Elekta probably making considerably more than you on a smaller share of the placement, but at that the same time, you need to have Elekta as a partner, because -- for the obvious reasons. So is there a way you can negotiate a little better deal with Elekta, so they don't get the lion's share of the profits, because they don't have overhead, they just get profit?

No. The -- we've entered into this agreement since 1995, and it really has worked out well for both parties so far. So I don't think there is any anticipated changes in any material respects at this point.

Yes. I'd love to see the earnings go back to close to the levels we were doing before when we were making better than $0.10 a quarter rather than $0.03. But I'm just trying to figure out different ways to get there.

Understood.

Okay. But you do anticipate at least procedures running at least at the rate they ran in this quarter, in the current quarter and possibly picking up from that?

Well, we can never predict what the treatments will end up being. So can't make any promises. All I can tell you, there's been no changes in developments.

Our next question is from Tony Polak of Aegis.

Could you run us a possible scenario in terms of the first Mevion System in terms of investment and return on investment once it's up and running at normal levels?

You know, we've never given individual projections, and so we're really not prepared to do that at this point. We look at those as confidential, and at some point, we may give more guidance, but at this point, we're not prepared to. It's a very competitive field in terms of trying to get these contracts, so we would rather not go into detail.

Could you give us an idea of what your purchase price is for the 3 systems that you've purchased?

We cannot. We're under confidentiality, so...

Okay. Can you tell us what the -- how you arrived at the write-off on the Mevion valuation?

Yes. We looked at certain valuation principles and determined what we thought was the fair value for the -- our common stock. Most of the holders of Mevion hold preferred stock, and there are certain preferences allocated to them. So the valuation for the preferreds would be significantly different from what the common is. So we took all those factors into account, coming up with what we believe the fair value was.

Is there any way to determine, if you could tell us, what that value is?

Yes, we wrote it down to $600,000.

Okay. And what was the original investment in it?

Roughly $2.7 million.

Our next question is from Richard Greulich of REG Capital Advisors.

Did the second quarter have any maintenance -- significant maintenance downtime at any of the Gamma Knife units?

No, no.

And could you say what the -- if there's any planned significant maintenance for the third or fourth quarter?

Right now, there are none.

The -- just going back to the Mevion write-down, what was the factoring in to cause the carrying value to be $600,000? In other words, like why not $200,000, why not $1 million? How did that pan out?

Well we looked at various aspects, including the preferences for the preferred and did an analysis, and that's how we came up with the $600,000 valuation.

Did that all -- did that tie in with the $200 million investment? In other words, like was that consistent with what the $200 million brought into the party in percentage and interest of that?

No. The recent transaction was on the preferred stock basis, not on a common stock basis.

And I'm not aware, was that on a convertible preferred?

I really -- I'm under confidentiality, so I can't really say anything more than what Mevion has said in their press release.

Okay. I would have thought that the second quarter would have been actually just a little bit better based on your comments, Craig, in the last conference call, where it sounded to me like the company was being -- taking a very conservative approach in terms of any positive impact for the higher Medicare reimbursement rate until that all flowed through in terms of actual payments and all that stuff.

Yes, I think when the question came up the second time, I said we felt pretty comfortable that our estimate was pretty close. We might be a little conservative, but we felt it was pretty close. And I think now that we have more history, I think we were pretty close.

Okay. So we're at the rate, there's no build-up or take-back at this point in time in terms of the second quarter how you're estimating the cost and reimbursements?

Yes, we don't believe so. But you got to remember, we have a mix of contracts. And depending on what their volumes are for a particular quarter, we may get swings, but it won't necessarily have to do with a change in what we're getting. It has more to do with the mix of the centers.

Last year, I believe in -- it was unnamed, but I think you had referenced one center as sort of operating below normal. Is that -- how is that going now this year, and are there any units that are -- you would categorize as operating subpar at this point for whatever reason?

I think most of them are doing about what we thought they were or exceeding it. The one that you've mentioned, I think we were having difficulties with getting some personnel. And I think that's been rectified, and we're trying to grow that. So we're going to -- business is fluid. You're going to continue to have changes in operating personnel, and so that will lead to peaks and valleys. But right now, we don't have that issue.

Okay. And I'm asking -- in this case, let me throw a few numbers out, and if you could simply say no, that's way off the mark for some reason, I would appreciate it. So I'm looking at the first Mevion system. And if I say you treat 30 patients a day and you're open, let's say, 280 days a year, that's 8,000 to 9,000 patients. And if you get reimbursed $900 a patient, that's $8 million annual revenue for that system. Is there anything way off in those numbers? And I'm talking about once you're really up and running, not the first year, obviously.

Like I said, we're not -- we don't comment on projections for individual units.

But there's an operating model for the proton systems. I mean...

But that's your...

You also said that they're hoping to treat 30 a day.

Well, I would say that's your model. And for competitive reasons, we wouldn't want to comment on that.

Okay. And again, not asking for comment, but for the benefit of the prior caller, I have estimated what the cost of your first 3 Mevion systems were, and that's all based on public filings. So it's -- it's actually pretty easy to do in space, it comes to like $10.5 million for the first, $11 million for the second and $12.5 million for the third. And that would suggest there's about -- there's a significant value built into that lower cost, not all of which you're probably going to realize because of the various agreements that you entered into, but you should be able to realize a fair amount.

Well, I'm not commenting on what the amounts are, but I think we feel there's a -- what I will say is we did purchase these -- made commitments to purchase these units very early, so we did get preferential pricing accordingly.

And is the current Mevion list price still around 25 at least on a list basis?

Yes, I believe so.

It's about that.

Yes.

Okay. And I'm assuming that obviously nobody pays less, so. Okay.

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

I would just like to thank everyone for joining us this afternoon. And we look forward to speaking with you in November on our third quarter 2015 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 40509234 followed by the pound sign to access the replay. The webcast of this call will be available at www.ashs.com and www.earnings.com. This concludes today's teleconference. Thank you for participating. You may now disconnect.