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MarketScreener Homepage  >  Equities  >  OTC Bulletin Board - Other OTC  >  US NeuroSurgical Holdings Inc    USNU

US NEUROSURGICAL HOLDINGS INC

(USNU)
Delayed Quote. Delayed OTC Bulletin Board - Other OTC - 08/07 02:41:30 pm
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US NeuroSurgical : U.S. NEUROSURGICAL HOLDINGS, INC. Management Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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08/14/2019 | 05:22pm EDT

Critical Accounting Policies

The condensed consolidated financial statements of U.S. NeuroSurgical Holdings, Inc. and subsidiaries (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America. As such, some accounting policies have a significant impact on amounts reported in the condensed consolidated financial statements. A summary of those significant accounting policies can be found in Note B to the Consolidated Financial Statements, in our 2018 Annual Report on Form 10-K. In particular, judgment is used in areas such as determining and assessing possible asset impairments, including investments in, and advances, to unconsolidated entities.

We adopted the provisions of Topic 606 as of January 1, 2018 on a modified retrospective basis and applied it to the Company's sole contract at the date of adoption. We concluded that the impact to the manner in which we recognize revenue is immaterial. Our revenue is primarily generated from a leasing arrangement with NYU, which is not within the scope of Topic 606, or from the sale of maintenance services with a single performance obligation, under which revenue is recognized in a similar manner as compared to the method under prior revenue standards.

We adopted the provisions of Topic 842 as of January 1, 2019. The adoption of Topic 842 had a material impact on the Company's Consolidated Balance Sheets due to the recognition of the ROU assets and lease liabilities. Although a significant amount of our revenue is now accounted for under Topic 842, this guidance did not have a material impact on our Consolidated Statements of Operations or Cash Flows. Because of the transition method we used to adopt Topic 842, Topic 842 will not be applied to periods prior to adoption and the adoption of Topic 842 had no impact on our previously reported results.

The following discussion and analysis provides information which the Company's management believes is relevant to an assessment and understanding of the Company's results of operations and financial condition. This discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere herein.

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  Table of Contents
Results of Operations

Three Months ended June 30, 2019 Compared to Three Months ended June 30, 2018

Patient revenue for the three months ended June 30, 2019 and 2018 was $825,000 and $1,121,000, respectively. The lower revenue in 2019 was primarily due to a lower average rate per procedure due to part of the NYU lease payments being applied against the Company's investment in sales-type sublease.

Patient expenses for the three months ended June 30, 2019 were $84,000, a decrease of 78% compared to $378,000 reported for the comparable period in the previous year, primarily related to the elimination of depreciation and amortization expense after October 1, 2018. When the NYU agreement was reclassified as a sublease on October 1, 2018, the cost or carrying amount of the leased property was netted against the gross investment in the sublease. As a result, depreciation and amortization expense did not occur after October 1, 2018.

Selling, general and administrative expense of $365,000 for the second quarter of 2019 was 6% lower than the $388,000 incurred during the comparable period in 2018, due to lower professional fees.

The Company incurred $25,000 of interest expense in the second quarter of 2019 and $28,000 in the comparable period in 2018 related to the finance lease, due to lower principal balances on the gamma knife and ICON unit leases, partly offset by a new cobalt reload lease liability.

The Company earned $35,000 and $43,000 of interest income from its investment in a sales-type sublease and advances to unconsolidated entities, respectively, for the three months ended June 30, 2019. There was no corresponding sublease income for the three months ended June 30, 2018, as the Company's arrangement with NYU was reclassified as a sales-type sublease effective October 1, 2018. Similarly, the Company's interest income from advances to unconsolidated entities increased in 2019, primarily due to higher principal balances.

During the three months ended June 30, 2019, the Company recognized a $513,000 loss from its investment in unconsolidated entities compared to a $160,000 loss during the same period in 2018. The higher current quarter loss is primarily due to the Company recording allowances totaling $514,000 against advances made to its unconsolidated entities and accrued interest thereon, compared with $160,000 of allowances in the second quarter of 2018.

During the three months ended June 30, 2019, the Company recognized an income tax benefit of $25,000 compared to a $93,000 provision during the same period in 2018. The tax benefit related to the pretax loss incurred during the period as well as a lower effective rate when compared to the same period in the previous year.

For the three months ended June 30, 2019, the Company reported a net loss of $59,000 as compared to $77,000 in net income for the same period a year earlier. The decrease in net income is largely due to the loss from the Company's investments in unconsolidated entities.

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  Table of Contents
Six Months ended June 30, 2019 Compared to Six Months ended June 30, 2018

Patient revenue for the six months ended June 30, 2019 and 2018 was $1,666,000 and $1,986,000, respectively. The lower revenue in 2019 was primarily due to a lower average rate per procedure due to part of the NYU lease payments being applied against the Company's investment in sales-type sublease.

Patient expenses for the six months ended June 30, 2019 were $170,000, a decrease of 78% compared to $756,000 reported for the comparable period in the previous year, primarily related to the elimination of depreciation and amortization expense after October 1, 2018. When the NYU agreement was reclassified as a sublease on October 1, 2018, the cost or carrying amount of the leased property was netted against the gross investment in the sublease. As a result, depreciation and amortization expense did not occur after October 1, 2018.

Selling, general and administrative expense of $673,000 for the first half of 2019 was 1% higher than the $666,000 incurred during the comparable period in 2018.

The Company incurred $54,000 of interest expense in the first half of 2019 and $60,000 in the comparable period in 2018 related to the finance lease, due to lower principal balances on the gamma knife and ICON unit leases, partly offset by a new cobalt reload lease liability.

The Company earned $73,000 and $82,000 of interest income from its investment in a sales-type sublease and advances to unconsolidated entities, respectively, for the six months ended June 30, 2019. There was no corresponding sublease income for the six months ended June 30, 2018, as the Company's arrangement with NYU was reclassified as a sales-type sublease effective October 1, 2018. Similarly, the Company's interest income from advances to unconsolidated entities increased in 2019, primarily due to higher principal balances.

During the six months ended June 30, 2019, the Company recognized a $746,000 loss from its investment in unconsolidated entities compared to a $190,000 loss during the same period in 2018. The higher current period loss is primarily due to the Company recording allowances totaling $790,000 against advances made to its unconsolidated entities, and accrued interest thereon, compared with $190,000 of allowances in the six months ended June 30, 2018.

During the six months ended June 30, 2019, the Company recognized an income tax charge of $51,000 compared to $179,000 during the same period in 2018. The higher effective rate for 2018 includes a $33,000 adjustment to the estimated effective state tax rate and $56,000 of permanent items arising from the $190,000 of losses from investments in unconsolidated entities.

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Table of Contents For the six months ended June 30, 2019, the Company reported net income of $127,000 as compared to $139,000 for the same period a year earlier. Lower patient revenue was offset by lower patient expenses. Higher interest income was offset by higher losses from investment in unconsolidated entities. Lower pretax income was offset by lower effective tax rates.

Liquidity and Capital Resources

At June 30, 2019, the Company had working capital of $905,000 as compared to $2,180,000 at December 31, 2018 following the reclassification of amounts due from related parties from current to other assets. Cash and cash equivalents at June 30, 2019 were $1,618,000 as compared to $1,519,000 at December 31, 2018.

Net cash provided by operating activities for the six months ended June 30, 2019 was $942,000 as compared to $1,324,000 in the same period a year earlier. Net income for the six months ended June 30, 2019 and 2018 was comparable at $127,000 and $139,000, respectively. The main cause of the lower cash inflows from operating activities in the six months ended June 30, 2019 compared with the corresponding period last year, was the net collection of $243,000 of accounts receivable last year compared with a net increase in receivables of $93,000 this year. During the six months ended June 30, 2019, $746,000 in losses from investments in unconsolidated entities were recorded as compared to $190,000 in losses in the same period a year earlier, which was largely offset by $570,000 of depreciation and amortization of property and equipment last year, with none this year.

With respect to investing activities, the Company made $928,000 of advances to FOP, CBOP, and MOP and received $351,000 of loan repayments from FOP during the six months ended June 30, 2019, compared with $1,276,000 of advances in the same period a year earlier to assist with new business operations and working capital requirements. The Company also received $407,000 in principal payments under the NYU sales-type sublease in 2019. There were no corresponding payments in 2018.

With respect to financing activities, the Company paid $673,000 towards its capital lease obligations during the six months ended June 30, 2019, compared with $453,000 in 2018.

The Company entered into a six year lease in the amount of $4.7 million for the purchase of the replacement equipment and associated leasehold improvements. The lease payments commenced in September 2014 and end in May 2020.

In 2016, USN entered into an agreement with Elekta for the installation of new ICON imaging technology for the NYU Gamma Knife equipment with a total cost, including sales taxes, of $816,000. This ICON technology was installed during the month of July 2016 and the gamma knife center reopened on August 5, 2016. The Company entered into a four-year lease for $879,000 to finance the acquisition of the ICON technology and associated installation costs. A monthly maintenance agreement commenced a year after the installation date for $6,000 per month. The two parties also agreed for USN to receive a fixed monthly payment of $30,000 for the remaining term of the agreement through March 2021.

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Table of Contents In September 2017, USN and NYU entered into an additional amendment to the NYU Agreement, whereby NYU committed to purchase all of the gamma knife equipment at the NYU Medical Center for a purchase price of $2,400,000, with 41 monthly installments of $50,000 from October 2017 through February 2021, and a final payment of $350,000 on March 31, 2021. Previously, the NYU agreement ended on March 17, 2021 and NYU had an option to purchase the gamma knife equipment at the appraised value of the equipment at that time. In June 2017, the Company obtained an independent estimate of $2,570,000 for the fair value of the equipment in March 2021. The Company believes that the accelerated payments amounting to $2,400,000 represent fair consideration considering all aspects of the transaction.

The Company continues to be responsible for the maintenance and insurance for the gamma knife equipment at the NYU facility through the contract period and continues to be reimbursed for use of the gamma knife based on a fee per procedure performed with the equipment. NYU provides the medical and technical staff to operate the facility.

With the September 2017 amendment, the Company became obligated to reload the cobalt for the gamma knife at its own expense and bear the cost of site work involved in reloading the cobalt, up to a maximum of $1,088,000. In July 2018, USN entered into an agreement with Elekta for the cobalt reload on the NYU gamma knife equipment with a cost, including sales taxes, of $925,000. This cobalt reload occurred in July 2018, and the gamma knife center reopened on August 6, 2018. The Company obtained lease financing of $833,000 to partially finance the reload of the cobalt, and paid the remaining balance directly to Elekta. In addition, the Company incurred costs of $578,000 to install the new cobalt to be paid directly to the contractor. All cobalt related costs were finalized by October 1, 2018 and totaled $1,503,000. As a result of the Company satisfying its obligation to reload the cobalt, the agreement with NYU met the criteria to be classified as a sales type lease. In addition, the Company is now no longer obligated to restore the NYU facility to its original condition. Accordingly, all related assets and the asset retirement obligation were derecognized effective October 1, 2018.

Risk Factors

We desire to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The following factors, as well as the factors listed under the caption "Risk Factors" in Annual Report on our Form 10-K for the fiscal year ended December 31, 2018, have affected or could affect our actual results and could cause such results to differ materially from those expressed in any forward-looking statements made by us. Investors should carefully consider these risks and speculative factors inherent in and affecting our business and an investment in our common stock.

Reliance on Business of the New York University Gamma Knife Center; Recent Destruction of Equipment and Discontinuation of Business at NYU. While it is the Company's objective to expand activities to additional cancer centers that rely on a broad range of diagnostic and radiation treatments, the Company has relied on the NYU gamma knife for substantially all of its revenue. In recent periods, services provided at NYU have represented over 90% of the Company's revenues. Unless and until the Company is successful in building its activities at other centers and at new locations, disruptions at NYU could have a materially adverse effect on the Company. The Company's lease with NYU ends in March 2021, and it has agreed to sell its gamma knife to NYU at the end of the lease term. Effective October 1, 2018 the Company's arrangement with NYU met the criteria to be classified as a sales type lease, resulting in the derecognition of the gamma knife and related assets and obligations.

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Table of Contents Availability of Working Capital. To date, we have earned sufficient income from operations to fund periodic operating losses and support efforts to pursue new gamma knife or other types of cancer treatment centers.

Disclosure Regarding Forward Looking Statements

The Securities and Exchange Commission encourages companies to disclose forward looking information so that investors can better understand a company's future prospects and make informed investment decisions. This document contains such "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements anticipating future growth in revenues and cash flow. Words such as "anticipates," "estimates," "expects," "projects," "targets," "intends," "plans," "believes," "will be," "will continue," "will likely result," and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify such forward-looking statements. Those forward-looking statements are based on management's present expectations about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances, and the Company is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of such changes, new information, future events or otherwise.

The Company operates in a highly competitive and rapidly changing environment and in businesses that are dependent on our ability to: achieve profitability; increase revenues; sustain our current level of operations; maintain satisfactory relations with business partners; attract and retain key personnel; maintain and expand our strategic alliances; and protect our intellectual property. The Company's actual results could differ materially from management's expectations because of changes in such factors. New risk factors can arise and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Investors should also be aware that while the Company might, from time to time, communicate with securities analysts, it is against the Company's policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, investors should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, the Company has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts or others contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.

In addition, the Company's overall financial strategy, including growth in operations, maintaining financial ratios and strengthening the balance sheet, could be adversely affected by increased interest rates, construction delays or other transactions, economic slowdowns and changes in the Company's plans, strategies and intentions.

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Table of Contents

© Edgar Online, source Glimpses

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