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 2020 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 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 recent outbreak of the novel coronavirus COVID-19 has spread across the
globe and has been declared a public health emergency by the World Health
Organization and a National Emergency by the President of the United States.
Most states and municipalities in the U.S., including California, and Florida,
have taken aggressive measures 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 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.
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While the healthcare treatments that are provided by the Company are generally
critical to the well-being of the patients it serves, a sustained COVID-19
pandemic, and continued measures by the government and industry to contain the
pandemic, 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.
Although the Company's contract with its only customer ended in March 2021, the
Company is actively seeking new business ventures and believes that its cash
reserves, which are in excess of $2.8 million at June 30, 2021, will allow the
Company the opportunity do so. Such plans include possible new operations or
extensions of its activities in Florida and California, where it has established
working relationships with physician groups, hospitals and other organizations.
In addition to these activities, the Company has been exploring possible
combinations with other existing businesses that would create a larger operating
entity that would better justify the expenses involved in continuing as an
independent publicly traded company.
Results of Operations
Three Months Ended June 30, 2021, Compared to Three Months Ended June 30, 2020
Patient revenue for the three months ended June 30, 2021, and 2020 was $0 and
$596,000, respectively. Prior to the termination of the Company's contract with
NYU in March 2021, the Company's Gamma Knife facility at NYU Medical Center
represented all of the Company's patient revenue.
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Patient expenses for the three months ended June 30, 2021, were $0, as compared
to $116,000 reported for the comparable period in the previous year, primarily
due to the annualized effects of the NYU contract ending in March 2021.
Selling, general and administrative expense of $249,000 for the second quarter
of 2021 was 27% lower than the $342,000 incurred during the comparable period in
2020, due to mostly timing differences of the audit and audit-related fees
during the three months ended June 30, 2021 and 2020.
The Company incurred $1,000 interest expense in the second quarter of 2021 and
$7,000 in the comparable period in 2020 related to finance leases. Interest
expense decreased due to repayment of principal balances on the gamma knife,
ICON unit, and Cobalt reload leases prior to April 1, 2021.
The Company earned $0 and $20,000 of interest income from its investment in a
sales-type sublease for the three months ended June 30, 2021 and 2020,
respectively.
During the three months ended June 30, 2021, the Company recognized a $135,000
loss from its investment in unconsolidated entities compared to a $91,000 loss
during the same period in 2020. The higher current quarter loss is primarily due
to an increase of advances made to its unconsolidated entities and associated
allowances.
During the three months ended June 30, 2021, the Company recognized an income
tax provision of $189,000 compared to an income tax provision of $15,000 during
the same period in 2020. The higher tax expense in 2021 is primarily due to the
annualized effects of the NYU contract ending in March 2021, forecasted taxable
losses for the rest of the year, and the tax effect of a valuation allowance
expected to be necessary for any deferred tax asset at the end of the year.
For the three months ended June 30, 2021, the Company reported a net loss of
$574,000 as compared to net income of $45,000 for the same period a year
earlier. The lower net income was primarily due to the lack of revenues due to
the sale of the NYU gamma knife in 2021, and higher income tax expense.
Six Months Ended June 30, 2021, Compared to Six Months Ended June 30, 2020
Patient revenue for the six months ended June 30, 2021, and 2020 was $1,061,000
and $1,343,000, respectively. Prior to the termination of the Company's contract
with NYU in March 2021, the Company's Gamma Knife facility at NYU Medical Center
represented all of the Company's patient revenue
Patient expenses for the six months ended June 30, 2021, were $86,000 as
compared to $195,000 reported for the comparable period in the previous year,
primarily due to the annualized effects of the NYU contract ending in March
2021.
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Selling, general and administrative expense of $547,000 for the first six months
of 2021 was 15% lower than the $644,000 incurred during the comparable period in
2020, offset by a $100,000 gain on termination of the NYU contract and the
cancellation of the flood insurance policy for the NYU facility at March 31,
2021.
The Company incurred $3,000 of interest expense in the first six months of 2021
and $19,000 in the comparable period in 2020 related to finance leases. Interest
expense decreased due to lower principal balances on the gamma knife, ICON unit,
and Cobalt reload leases.
The Company earned $8,000 and $44,000 of interest income from its investment in
a sales-type sublease for the six months ended June 30, 2021, and 2020,
respectively.
During the six months ended June 30, 2021, the Company recognized a $274,000
loss from its investment in unconsolidated entities compared to a $236,000 loss
during the same period in 2020. The higher current year loss is primarily due to
an increase of advances made to its unconsolidated entities and associated
allowances.
During the six months ended June 30, 2021, the Company recognized an income tax
provision of $194,000 compared to an income tax provision of $73,000 during the
same period in 2020. The higher tax expense in 2021 is primarily due to the
annualized effects of the NYU contract ending in March 2021, forecasted taxable
losses for the rest of the year, and the tax effect of a valuation allowance
expected to be necessary for any deferred tax asset at the end of the year.
For the six months ended June 30, 2021, the Company reported a net loss of
$35,000 as compared to net income of $220,000 for the same period a year
earlier. The lower net income was primarily due to the lack of revenues due to
the sale of the NYU gamma knife in 2021, and higher income tax expense.
Liquidity and Capital Resources
At June 30, 2021, the Company had working capital of $2,543,000 as compared to
$2,597,000 at December 31, 2020. Cash and cash equivalents at June 30, 2021 were
$2,820,000 as compared to $2,030,000 at December 31, 2020.
Net cash provided by operating activities for the six months ended June 30,
2021, was $635,000 as compared to $983,000 in the same period a year earlier.
The $348,000 lower net cash inflow in 2021 was primarily due the NYU contract
ending in March 2021.
With respect to investing activities, the Company made $288,000 of advances to
unconsolidated entities during the six months ended June 30, 2021, compared with
$232,000 of loans and advances in the same period a year earlier to FOP, CBOP,
and MOP to assist with business operations and working capital requirements.
During the first six months of 2020, the Company made $36,000 of capital
contributions to unconsolidated entities with no corresponding payments in the
first six months of 2021. The Company also received $532,000 in principal
payments under the NYU sales-type sublease in 2021, compared to $436,000 during
the first six months of 2020.
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With respect to financing activities, the Company's contract with the NYU
Medical Center ended in March 2021 along with all related lease arrangements.
The Company had been receiving 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 Company is actively seeking new business ventures
that could require investment beyond its current cash reserves. Such plans
include possible new operations or extensions of its activities in Florida and
California, where it has established working relationships with physician
groups, hospitals and other organizations.
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, 2020, 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.
Termination of Business Activity at 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 had 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. The Company's lease with NYU ended in March 2021, and it has
transferred ownership of its gamma knife to NYU. The future of the Company will
depend on whether it is able to achieve success with other existing and new
operations, and this will depend to a significant degree on whether it is able
to identify and secure new business opportunities and achieve profitable
operations at those businesses in the near term.
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.
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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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U.S. NEUROSURGICAL HOLDINGS, INC. 