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 2019 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 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 modified retrospective transition
method we used to adopt Topic 842, Topic 842 was not 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.
Recent events
The novel coronavirus COVID-19 pandemic has had a materially adverse effect on
operations in New York and Florida. The extent of the impact of the pandemic on
our operational and financial performance in future periods will depend on
certain developments, including the duration and spread of the outbreak and its
continued impact on our customers, which are uncertain and cannot be fully
predicted at this time. We will continue to actively monitor the situation and
may take further actions that alter our business operations as may be required
by federal, state, or local authorities, or that we determine are in the best
interests of our employees, customers, and stockholders. At this point, the
extent to which the COVID-19 pandemic may impact our financial condition or
results of operations is uncertain. While we are unable to quantify the long
term impact at this time, we have observed at our centers in Florida increases
in patient cancellations and requests to reschedule appointments due to the
effects of the pandemic, such as the difficulties faced by some patients in
traveling to our treatment centers and fear of exposure to the virus. At our
NYU facility, we have experienced some disruption in patient flow as a result of
the significant increase in the general operations at the hospital resulting
from increased patient admissions as well as illnesses among the hospital staff.
We experienced a 24% reduction in procedures at NYU, and a corresponding
$319,000 reduction in total revenues, for the first nine months of 2020 as
compared to the first nine months of 2019. At one point, our entire staff of the
facility tested positive which severely impacted operations. We expect that
operations will begin returning to normal levels, although in July the principal
physician at the New York facility was on PTO for two weeks.
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Results of Operations
Three months ended September 30, 2020 compared to three months ended September
30, 2019
Patient revenue for the three months ended September 30, 2020 and 2019 was
$662,000 and $658,000, respectively. The 1% higher revenues in the third quarter
of 2020 compared with the corresponding period in 2019 are due to the effects of
a higher rate per procedure outweighing a reduced number of procedures performed
this year.
Patient expenses for the three months ended September 30, 2020 were $81,000, an
increase of 3% compared to $79,000 reported for the comparable period in the
previous year, due to higher gamma knife supplies expenses in 2020.
Selling, general and administrative expense of $297,000 for the third quarter of
2020 was 3% higher than the $287,000 incurred during the comparable period in
2019, due primarily to higher accounting and professional fees in 2020.
The Company incurred $5,000 of interest expense in the third quarter of 2020 and
$21,000 in the comparable period in 2019 related to finance leases, due to lower
principal balances on the Cobalt reload lease, and the gamma knife an ICON unit
leases being paid off during the period.
The Company earned $16,000 and $31,000 of interest income from its investment in
a sales-type sublease for the three months ended September 30, 2020 and 2019,
respectively, with the lower 2020 income also due to lower outstanding principal
balances.
During the three months ended September 30, 2020, the Company recognized a loss
of $56,000 from its investment in unconsolidated entities compared to a $135,000
loss during the same period in 2019. The lower current quarter loss is primarily
due to a reduction of advances made to its unconsolidated entities and
associated allowances.
During the three months ended September 30, 2020, the Company recognized an
income tax provision of $75,000 compared to a $52,000 provision during the same
period in 2019 due to higher income before taxes in 2020.
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For the three months ended September 30, 2020, the Company reported a net income
of $164,000 as compared to $115,000 for the same period a year earlier due
primarily to lower losses from investments in unconsolidated entities in 2020.
Nine months ended September 30, 2020 compared to Nine months ended September 30,
2019
Patient revenue for the nine months ended September 30, 2020 and 2019 was
$2,005,000 and $2,324,000, respectively. The lower revenue in 2020 was primarily
due to fewer procedures being performed in the nine months ended September 30,
2020, compared to the corresponding prior year period, because of the COVID-19
outbreak, partly offset by an increase in the effective rate per procedure.
Patient expenses for the nine months ended September 30, 2020 were $276,000 an
increase of 11% compared to $249,000 reported for the comparable period in the
previous year, primarily due to higher gamma knife supplies expenses during the
first nine months of 2020.
Selling, general and administrative expense of $941,000 for the nine months
ended September 30, 2020 was 2% lower than the $960,000 incurred during the
comparable period in 2019, due mostly to lower insurance costs, travel, and
consulting fees during the nine months ended September 30, 2020.
The Company incurred $24,000 of interest expense during the nine months ended
September 30, 2020 and $75,000 in the comparable period in 2019 related to
finance leases, due to lower principal balances on the Cobalt lease, and the
gamma knife and ICON unit leases being paid off during the period.
The Company earned $60,000 and $104,000 of interest income from its investment
in a sales-type sublease for the nine months ended September 30, 2020 and 2019,
respectively with the lower 2020 income also due to lower outstanding principal
balances.
During the nine months ended September 30, 2020, the Company recognized a
$292,000 loss from its investment in unconsolidated entities compared to a
$799,000 loss during the same period in 2019. The lower current period loss is
primarily due to a reduction of advances made to its unconsolidated entities and
associated allowances.
During the nine months ended September 30, 2020, the Company recognized an
income tax charge of $148,000 compared to an income tax charge of $103,000
during the same period in 2019 due to higher income before taxes in 2020.
For the nine months ended September 30, 2020, the Company reported a net income
of $384,000 as compared to $242,000 for the same period a year earlier primarily
due to lower losses from investments in unconsolidated entities in 2020.
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Liquidity and Capital Resources
At September 30, 2020, the Company had working capital of $1,909,000 as compared
to $1,043,000 at December 31, 2019. Cash and cash equivalents at September 30,
2020 were $1,500,000 as compared to $1,335,000 at December 31, 2019.
Net cash provided by operating activities for the nine months ended September
30, 2020 was $522,000 as compared to $1,081,000 in the same period a year
earlier.
With respect to investing activities, the Company made $337,000 of advances to
CGK, NeuroPartners, LLC, FOP, CBOP, and MOP during the nine months ended
September 30, 2020, compared with $1,221,000 of loans and advances in the same
period a year earlier to assist with business operations and working capital
requirements. The Company also made $36,000 of capital contributions to,
unconsolidated entities during the nine months ended September 30, 2020 with no
corresponding payments in the same period in 2019. The Company received $170,000
of repayments from loans to unconsolidated entities during the nine months ended
September 30, 2020 compared with $431,000 of repayments during the same period
of 2019. The Company also received $660,000 in principal payments under the NYU
sales-type sublease in 2020, compared to $616,000 during the nine months ended
September 30, 2019.
With respect to financing activities, the Company paid $814,000 towards its
finance lease obligations during the nine months ended September 30, 2020,
compared with $1,034,000 in 2019.
In 2014, the Company entered a six-year lease for the purchase of the
replacement gamma knife equipment and associated leasehold improvements, 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 ended 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. The final
payment under this lease was made in September 2020. 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.
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.
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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. At the inception of a sales-type sublease, the
lessor recognizes its gross investment in the sublease, unearned income and
sales price. The cost or carrying amount, if different, of the leased property
plus any initial direct costs minus the present value of the unguaranteed
residual value accruing to the benefit of the lessor, is charged by the lessor
against income in the current period. Management has concluded that all fixed
future minimum lease payments ("MLPs") payable by NYU to USN should be included
in the investment in sublease. These MLPs include fixed monthly payments of
$50,000 through February 2021 and $30,000 through March 2021, as well as a final
payment of $350,000 in March 2021. The present value of the MLPs was estimated
to be approximately $2,447,000 and was recorded as an investment in sublease
effective October 1, 2018. The patient revenue under the tiered schedule
continues to be considered contingent income under the sales type lease and is
recognized on a systematic basis using an average fee per procedure.
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, 2019, 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.
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Reliance on Business of the New York University Gamma Knife Center. 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.
The COVID-19 Pandemic and Its Potential Adverse Effect on Business Operations
and Financial Condition. The novel coronavirus COVID-19 pandemic has had a
materially adverse effect on operations in New York and Florida, and could
continue to impact our business in all locations. Most states and
municipalities in the U.S., including New York, California and Florida, have
announced aggressive actions to reduce the spread of the disease, including
limiting non-essential gatherings of people, ceasing all non-essential travel,
ordering certain businesses and government agencies to cease non-essential
operations at physical locations and issuing "shelter-in-place" orders, which
direct individuals to shelter at their places of residence (subject to limited
exceptions). Across the healthcare industry, resources are being prioritized
for the treatment and management of the outbreak. Consequently, there are
delays in delivering Gamma Knife and other radiation therapy treatments. In
addition, the COVID-19 pandemic poses the risk that the Company and its
employees, contractors, customers, government and third party payors and others
may be prevented from conducting business activities for an indefinite period of
time, including due to spread of the disease within these groups or due to
shutdowns that have been and may continue to be requested or mandated by
governmental authorities.
While the healthcare treatments that are provided by the Company are generally
critical to the well-being of the patients it serves, a broad, sustained
outbreak of COVID-19 could negatively impact results for the following reasons:
(i) operations at medical facilities, including those operated by the Company,
could be subject to reduced operation or prolonged closure; (ii) medical
facilities may defer Gamma Knife and other cancer therapy treatments for
non-urgent patient cases in order to allocate resources to the care of patients
with COVID-19; (iii) patients may defer or cancel treatments due to real or
perceived concerns about the potential spread of COVID-19 in a medical facility
setting; (iv) the outbreak could materially impact operations for a sustained
period of time due to the current travel bans and restrictions, quarantines,
shelter-in-place orders and shutdowns; and/or (v) members of the Company's
workforce may become ill or have family members who are ill and are absent as a
result, or they may elect not to come to work due to the illness affecting
others in our office or facilities.
The occurrence of any of the foregoing events could have a material adverse
effect on our business, financial condition and results of operations. The
COVID-19 outbreak and mitigation measures have had and may continue to have an
adverse impact on global economic conditions which could have an adverse effect
on our business and financial condition. The extent to which the COVID-19
outbreak impacts our results will depend on future developments that are highly
uncertain and cannot be predicted, including new information that may emerge
concerning the severity of the virus and the actions to contain its impact.
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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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