US NEUROSURGICAL HOLDINGS, INC. – 10-K/A – Management report and analysis of the financial situation and operating results.

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Restatement of previously published consolidated financial statements

The following discussion and analysis should be read in conjunction with the audited consolidated financial statements and accompanying notes as of and for the year ended December 31, 2021, included elsewhere in this Annual Report on Form 10-K/A. This Annual Report on Form 10-K/A summarizes the amounts included in the 2021 Annual Report as of and for the year ended December 31, 2021. See Note L, Restatement of previously issued consolidated financial statements, in Section 8, Financial statements and supplementary data, for more information. Relevant unaudited interim financial information for each quarter of the year December 31, 2021 was also retired. See Note M, Quarterly Results of Operations (unaudited), in Section 8, Financial Statements and Supplementary Data, for this restated information.

Operating results

2021 Compared to 2020

Patient turnover in 2021 was $1,061,000 compared to $3,173,000 in 2020. Prior to the termination of the Company’s contract with NYU in March 2021the Company’s Gamma Knife factory in NYU Medical Center represented all of the Company’s patient revenues.

Patient spending in 2021 was $86,000 compared to $361,000 in 2020, mainly due to the annualized effects of the NYU contract ending with March 2021.

General and administrative expenses decreased by $134,000 i.e. about 11% of $1,197,000 in 2020 for
$1,063,000 in 2021. This decrease is mainly due to a decrease in insurance costs and other costs related to the maintenance of the NYU Gamma Knife Center. Interest expense decreased to $3,000 in 2021 from $25,000 in 2020, mainly due to the repayment of the equipment loan in March 2021. The loss of investments in non-consolidated entities decreased by $809,000 in 2020 for $470,000 in 2021, mainly due to lower impairments of amounts advanced to MOP and CBOP, itself due to lower advances to these entities in 2021. The Company recorded a net loss of $973,000 in 2021, compared to a net result of $533,000 the previous year, primarily due to the closure of the NYU Gamma Knife Center. The Company incurred an income tax expense of $420,000 in 2021, compared to $323,000 in 2020.

Cash and capital resources

To December 31, 2021the Company had a working capital of $1,617,000 compared to $2,597,000 at December 31, 2020. Total assets decreased by $485,000 from 2020 to 2021 mainly due to the Company having to use its reserves, since the closure of the NYU Gamma Knife Center. Cash and cash equivalents at December 31, 2021
were $2,178,000 compared to $2,030,000 at December 31, 2020.

Net cash provided by operating activities was $174,000 in 2021, compared to
$1,117,000 in 2020. The net cash used in the activities of $89,000 in 2021 compared to $901,000 in 2020 mainly due to lower finance lease principal payments.

For the year ended December 31, 2021net cash from investing activities was $63,000 in 2021 compared to $479,000 used in 2020, mainly due to
$356,000 lower principal payments received under the sale-type sublease of NYU Gamma Knife Center.

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Off-balance sheet arrangements

None

Critical accounting conventions

Estimates and assumptions

The preparation of financial statements in accordance with generally accepted accounting principles 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 income and expenses during the reporting period. Actual results could differ materially from these estimates.

Revenue recognition

Prior to October 2018, the company’s NYU agreement was primarily an operating lease, and patient-associated revenue from the use of the gamma knife was primarily operating lease revenue. Following an amendment to the Company’s rental agreement with NYUefficient August 2016the company received a $30,000 minimum rental payment from NYU each month. With the exception of these fixed payments, the NYU agreement provided only for conditional rental income based on a tiered fee schedule tied to the number of patient procedures and associated thresholds, with the rate per procedure decreasing as more procedures are performed. The Company recognizes any rental income and fixed monthly payments on a systematic basis using an average rate per act calculated by estimating the expected number of acts per contractual year which extends from November, 1stfollowing October 31. Any amount received above the average rate was considered deferred revenue. At the end of each reporting period, the Company reviewed its estimated revenues for the contract year and adjusted its revenues if there was a material change in the estimate. At the end of the contract year, the receipts were adjusted to the actual amount received.

In September 2017USN and NYU entered into a further amendment to the NYU agreement, whereby NYU committed to purchase all gamma knife equipment from
NYU for a purchase price of $2,400,000composed of 41 monthly payments of
$50,000 starting at the end of October 2017 and continue until the end of
February 2021with a final payment of $350,000 on March 31, 2021. Upon receipt of final payment, title to all center equipment shall pass to NYU.

In October 2018USN has met its obligation to recharge the cobalt, and the NYU
the agreement was reevaluated to be a sale-type sublease between USN, the lessor, and NYU, the tenant. At the start of a sale-type sublease, the lessor recognizes its gross investment in the sublease, unearned revenue and the sale price. The cost or book value, if different, of the leased asset plus any initial direct costs less the present value of the unguaranteed residual value accruing to the lessor, is charged by the lessor to income in the current period. Management has concluded that all future fixed minimum payments (“PLMs”) payable by NYU to USN must be included in the sublease investment. The MLPs included fixed monthly payments of $50,000
through February 2021and $30,000 through March 2021as well as a final payment of $350,000 in March 2021. The current value of MLPs has been estimated at approximately $2,447,000 and was accounted for as an investment in a sublease agreement October 1, 2018. Until the renewal of the contract in October 2020, patient income under the tiered scale was considered contingent income under the hire purchase agreement and was accounted for on a systematic basis using an average fee per procedure, up to ‘that has October 2020when the Company has recorded patient revenue based on procedures performed at the applicable billing rate for each procedure since the Company has not exceeded the threshold at which billing rates have decreased prior to the full sale of the equipment on March 31, 2021.

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NYU maintenance revenue

The NYU agreement, which ended in March 2021, states that the USN has an obligation to maintain gamma knife equipment in good working order. This maintenance obligation was incurred during the term of the agreement while the patient procedures were performed. The use of the gamma knife machine was directly related to the maintenance of the machine. USN billed NYU monthly for maintenance and gamma knife services provided. The portion of the total contract consideration allocated to maintenance services was $79,000 for 2021 and
$316,000 for 2020 and has been recognized as each year progresses.

Investments in non-consolidated entities

The Company recognizes its investments in non-consolidated entities using the equity method. The Company recognizes its share of such earnings (losses) in the Consolidated Statements of Income as “Income (loss) from investments in non-consolidated entities”. The carrying value of the Company’s investments in unconsolidated entities is recorded on the consolidated balance sheets. The Company recognizes losses of unconsolidated entities only to the extent of the Company’s interest in and advances to the entities.

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