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 transition method we used to adopt
Topic 842, Topic 842 was 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.
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.
The extent of the impact of the COVID-19 outbreak on our operational and
financial performance will depend on certain developments, including the
duration and spread of the outbreak and its 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 outbreak may
impact our financial condition or results of operations is uncertain. While we
are unable to quantify the impact at this time, we have observed some increases
in patient cancellations and requests to reschedule appointments due to
circumstances relating to the outbreak, such as the difficulties faced by some
patients in traveling to our treatment centers and fear of exposure to the
virus. The full effect of the COVID-19 outbreak, however, will not be fully
reflected in our results of operations until future periods.
17
--------------------------------------------------------------------------------
Table of Contents
Results of Operations
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Patient revenue for the three months ended March 31, 2020 and 2019 was $747,000
and $841,000, respectively. The lower revenue in 2019 was primarily due to fewer
procedures being performed in the three months ended March 31, 2020, compared to
the corresponding prior year period, because of the COVID-19 outbreak.
Patient expenses for the three months ended March 31, 2020 were $79,000, a
decrease of 8% compared to $86,000 reported for the comparable period in the
previous year, primarily due to lower gamma knife supplies expenses during the
first quarter of 2020.
Selling, general and administrative expense of $302,000 for the first quarter of
2020 was 2% lower than the $308,000 incurred during the comparable period in
2019, due mostly to lower insurance costs and audit related fees partly offset
by higher consulting fees during the three months ended March 31, 2020.
The Company incurred $11,000 of interest expense in the first quarter of 2020
and $29,000 in the comparable period in 2019 related to finance leases, due to
lower principal balances on the gamma knife, ICON unit, and Cobalt reload
leases.
The Company earned $24,000 and $38,000 of interest income from its investment in
a sales-type sublease for the three months ended March 31, 2020 and 2019,
respectively.
During the three months ended March 31, 2020, the Company recognized a $146,000
loss from its investment in unconsolidated entities compared to a $194,000 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 March 31, 2020, the Company recognized an income
tax provision of $58,000 compared to an income tax provision of $76,000 during
the same period in 2019.
For the three months ended March 31, 2020, the Company reported a net income of
$175,000 as compared to $186,000 for the same period a year earlier.
18
--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources
At March 31, 2020, the Company had working capital of $1,518,000 as compared to
$1,043,000 at December 31, 2019. Cash and cash equivalents at March 31, 2020
were $1,734,000 as compared to $1,335,000 at December 31, 2019.
Net cash provided by operating activities for the three months ended March 31,
2020 was $752,000 as compared to $454,000 in the same period a year earlier.
With respect to investing activities, the Company made $172,000 of advances to
FOP, CBOP, and MOP during the three months ended March 31, 2020, compared with
$430,000 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, and received $31,000 of distributed
earnings from unconsolidated entities in the first quarter of 2020 with no
corresponding payments or cash receipts in the first quarter of 2019. The
Company also received $216,000 in principal payments under the NYU sales-type
sublease in 2020, compared to $202,000 during the first quarter of 2019.
With respect to financing activities, the Company paid $370,000 towards its
capital lease obligations during the three months ended March 31, 2020, compared
with $318,000 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 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.
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.
19
--------------------------------------------------------------------------------
Table of Contents
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.
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.
20
--------------------------------------------------------------------------------
Table of Contents
The COVID-19 Outbreak and Its Potential Adverse Effect on Business Operations
and Financial Condition. 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 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.
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.
21
--------------------------------------------------------------------------------
Table of Contents
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.
© Edgar Online, source Glimpses