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.
Results of operations
2019 Compared to 2018
Patient revenue in 2019 was $3,070,000 as compared to $3,424,000 in 2018. The
decrease in revenue is 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, and due to fewer procedures being performed in 2019,
compared to 2018.
Patient expenses in 2019 were $350,000 as compared to $1,341,000 in 2018.
Patient expenses do not vary materially with the number of procedures performed,
but are tied to depreciation and amortization, maintenance and other fixed
expenses. Maintenance expenses, over extended periods of time, tend to increase
with higher usage rates. The decrease experienced in 2019 over 2018 is mainly
because the NYU agreement was reclassified to a sales-type sublease on October
1, 2018, therefore 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.
SG&A decreased by $50,000 or approximately 5% from $1,289,000 in 2018 to
$1,230,000 in 2019. This decrease is primarily due to a recharge of $50,000 of
SG&A expenses to CGK in 2019 but not in 2018, as permitted by a management
agreement between the Company and CGK. Interest expense decreased to $91,000 in
2019 from $113,000 in 2018, due mainly to lower principal amounts outstanding in
2019. Loss from investments in unconsolidated entities increased from $743,000
in 2018 to $1,386,000 in 2019, primarily due to allowances recorded against
advances to FOP, MOP, and CBOP. The Company reported a net income of $142,000
in 2019, as compared to a net loss of $421,000 in the prior year, primarily due
to no depreciation expense in 2019 compared with the $983,000 of depreciation
expense in 2018, and a one-time charge against income of $663,000 relating to
the reclassification of the NYU agreement as a sales-type lease in 2018, offset
by $643,000 of increased losses from investments in unconsolidated entities,
net. The Company incurred an income tax charge of $9,000 in 2019, compared with
an income tax benefit of $192,000 in 2018.
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Liquidity and capital resources
At December 31, 2019, the Company had working capital of $1,043,000 as compared
to $2,180,000 at December 31, 2018. Total assets decreased by $1,208,000 from
2018 to 2019 principally due to impairments recorded against advances to
unconsolidated entities. Cash and cash equivalents at December 31, 2019 were
$1,335,000 as compared to $1,519,000 at December 31, 2018.
Net cash provided by operating activities was $1,547,000 in 2019 as compared to
$2,288,000 in 2018. Net cash used in financing activities was $1,397,000 in
2019 as compared to $1,084,000 in 2018. There was no depreciation and
amortization expense in 2019 as compared to $983,000 in 2018.
For the year ended December 31, 2019, net cash used in investing activities was
$334,000 in 2019 as compared to $2,369,000 in 2018, primarily due to $855,000
lower net advances to unconsolidated entities, and $631,000 more in principal
payments received under sales-type sublease in 2019. In addition, the Company
incurred no fixed asset additions in 2019 as compared to $1,503,000 of fixed
asset additions during 2018, of which $833,000 was financed through a capital
lease, $100,000 is included in accrued expenses at December 31, 2019 and 2018,
and $570,000 was paid in cash.
Off-balance sheet arrangements
None
Critical accounting policies
Estimates and assumptions
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ materially from those estimates.
Revenue Recognition
Prior to October 2018, the Company's NYU Agreement primarily consisted of an
operating lease, and the associated patient revenue from the use of the gamma
knife was primarily operating lease income. Following an amendment to the
Company's lease agreement with NYU, effective August 2016, the Company received
a $30,000 minimum lease payment from NYU each month. With the exception of these
fixed payments, the NYU agreement provided only for contingent rental income
based on a tiered fee schedule related to the number of patient procedures and
associated thresholds, with the rate per procedure decreasing as more procedures
are performed. The Company recognized the contingent rental income and the
fixed monthly payments on a systematic basis using an average fee per procedure
calculated by estimating the expected number of procedures per contract year
which runs from November 1, to the following October 31. Any amounts received
in excess of the average fee were considered deferred revenue. At the end of
each reporting period, the Company reviewed its estimated revenue for the
contract year and adjusted revenue for any material changes in the estimate. At
the end of the contract year, the revenue was adjusted to the actual amount
received.
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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
NYU for a purchase price of $2,400,000, consisting of 41 monthly installments of
$50,000 commencing at the end of October 2017 and continuing through the end of
February 2021, with a final payment of $350,000 on March 31, 2021. Upon receipt
of final payment, title to all the equipment at the center will pass to NYU.
This agreement required USN to reload the cobalt in the gamma knife and to
reimburse NYU for certain costs NYU incurred due to the cobalt reload. Payments
received before USN satisfied its obligations to reload the cobalt and pay these
costs were recorded as deferred revenue.
In October 2018, USN satisfied its obligation to reload the cobalt, and the NYU
agreement was reevaluated to be a sales-type sublease between USN, the lessor,
and NYU, the lessee. 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. The 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 these 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 and is recognized on a
systematic basis using an average fee per procedure.
NYU Maintenance Revenue
The NYU agreement, which ends in March 2021, specifies that USN is obligated to
maintain the gamma knife equipment in good operating condition. This maintenance
obligation is incurred through the term of the agreement while patient
procedures are performed. Usage of the gamma knife machine is directly linked to
the maintenance of the machine. USN bills NYU monthly for the maintenance and
gamma knife services provided. The portion of the total contract consideration
allocated to the maintenance services was $316,000 for 2019 and 2018,
respectively and was recognized ratably over each year. For the remaining term
of the NYU agreement, the Company expects to recognize $316,000 of maintenance
revenue ratably per annum.
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Asset retirement obligations
The Company records liabilities for legal obligations associated with the
retirement of tangible long-lived assets based on the estimated future cost of
asset retirement obligations discounted to present value, and records a
corresponding asset and liability on its consolidated balance sheets. The values
ultimately derived are based on many significant estimates, including future
decommissioning costs, inflation, cost of capital, and market risk premiums.
The nature of these estimates requires the Company to make judgments based on
historical experience and future expectations. Revisions to the estimates may
be required based on such things as changes to cost estimates or the timing of
future cash outlays. Any such changes that result in upward or downward
revisions in the estimated obligation will result in an adjustment to the
related capitalized asset and corresponding liability on a prospective basis.
In 2014 the Company estimated that the cost to remove the gamma knife at the end
of the agreement to be approximately $620,000. The estimated costs of these
obligations are capitalized as costs of the assets subject to the retirement
obligations and amortized over the lives of the assets. The Company had
previously recoded an asset retirement obligation associated with the gamma
knife at NYU. This obligation was derecognized when the NYU agreement was
recharacterized as a sales type lease.
Investments in unconsolidated entities
The Company accounts for its investments in unconsolidated entities by the
equity method. The Company records its share of such earnings (losses) in the
consolidated statements of operations as "Income (loss) from investments in
unconsolidated entities". The carrying value of the Company's investments in
unconsolidated entities is recorded in the consolidated balance sheets. The
Company records losses of the unconsolidated entities only to the extent of the
Company's interest in, and advances to, the entities.
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U.S. NEUROSURGICAL HOLDINGS, INC. 
