ELITE HEALTH SYSTEMS INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2022
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
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For the transition period from to .
Commission file number: 0-15586
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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(Address of principal executive offices)
(301 ) 208-8998
(Registrant’s telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting company, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer ☐
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Accelerated filer ☐
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Smaller reporting company
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(do not check if a smaller reporting company)
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Emerging Growth Company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of
the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
No ☒
The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of March 31, 2022 was 7,792,185 .
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20
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U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
BALANCE SHEETS
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March 31,
2022
(Unaudited)
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December 31,
2021
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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$
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Other current assets
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Total current assets
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Other assets:
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Due from related parties
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Investments in unconsolidated entities
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Total other assets
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Property and equipment:
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Operating lease right-of-use asset
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Total property and equipment
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TOTAL ASSETS
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$
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$
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LIABILITIES
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Current liabilities:
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Operating lease right-of-use liability - current portion
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$ |
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$ |
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Accounts payable and accrued expenses
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Income taxes payable
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Total current liabilities
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Operating lease right-of-use liability - net of current portion
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Guarantee liability
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Total liabilities
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EQUITY
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Common stock - par value $
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Additional paid-in capital
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Accumulated deficit
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U.S. NeuroSurgical Holdings Inc. stockholders’ equity
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Noncontrolling interests
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Total equity
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TOTAL LIABILITIES AND EQUITY
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$
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$
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The accompanying notes to condensed consolidated financial statements are an integral part hereof.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended
March 31,
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2022
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2021
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Revenue
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$
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$
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Costs and expenses:
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Patient expenses
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Selling, general and administrative
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Total
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Operating (loss) income
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(
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Interest expense
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Interest income - sales-type sublease
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Loss from investments in unconsolidated entities, net
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(
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(
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Total other expense
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(Loss) income before income taxes
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(
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)
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Provision for income taxes
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Net (loss) income
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(
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| Net loss attributable to noncontrolling interests | ||||||||
| Net (loss) income attributable to U.S. Neurosurgical Holdings, Inc. | $ | ( |
) | $ |
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Basic and diluted net (loss) income per share attributable to U.S. NeuroSurgical Holdings, Inc.
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$
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(
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$
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Weighted average common shares outstanding, basic and diluted
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The accompanying notes to condensed consolidated financial statements are an integral part hereof.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(UNAUDITED)
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Three Months Ended
March 31,
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2022
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2021
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Cash flows from operating activities:
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Net (loss) income
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$
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(
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$
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Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
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Amortization of operating lease right-of-use asset
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Loss from investments in unconsolidated entities, net
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Distributed earnings from unconsolidated entities
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Deferred income taxes
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Changes in:
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Accounts receivable
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Income taxes receivable/payable
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(
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Other current assets
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Accounts payable and accrued expenses
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Operating lease right-of-use liability
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Net cash (used in) provided by operating activities
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Cash flows from investing activities:
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Advances to unconsolidated entities
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Captial contributions to unconsolidated entities
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Principal payments received under sales-type sublease
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Net cash (used in) provided by investing activities
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Cash flows from financing activities:
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Repayment of finance lease obligations
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Net cash used in financing activities
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Net change in cash and cash equivalents
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(
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)
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Cash and cash equivalents - beginning of period
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Cash and cash equivalents - end of period
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$
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$
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Supplemental disclosures of cash flow information:
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Cash paid for:
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Interest
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$
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$
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The accompanying notes to condensed consolidated financial statements are an integral part hereof.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Note A - Basis of Preparation
The accompanying Condensed Consolidated Financial
Statements of U.S. NeuroSurgical Holdings, Inc. and Subsidiaries (the “Company”) as of March 31, 2021, and 2020, are unaudited. However, in the opinion of management, such statements include all adjustments necessary for a fair statement
of the information presented therein. The Consolidated Balance Sheet at December 31, 2021, has been derived from the audited Consolidated Financial Statements at that date appearing in the Company’s Annual Report on Form 10-K.
Pursuant to accounting requirements of the Securities
and Exchange Commission applicable to quarterly reports on Form 10-Q, the accompanying Condensed Consolidated Financial Statements and notes do not include all disclosures required by accounting principles generally accepted in the United
States of America for complete financial statements. Accordingly, these statements should be read in conjunction with the Company’s most recent annual Consolidated Financial Statements.
Consolidated results of operations for interim
periods are not necessarily indicative of those to be achieved for full fiscal years. The only change to the Company’s equity in the three months ended March 31, 2022, and 2021 was net (loss) income for the periods.
The Company applies the provisions of Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation to noncontrolling interests in consolidated financial statements. The guidance requires noncontrolling interests to be
reported as a component of equity separate from the parent’s equity and purchases and sales of equity interests, that do not result in a change in control, to be accounted for as equity transactions. In addition, net (loss) income
attributable to noncontrolling interests are to be included in net (loss) income and, upon a loss of control, the interest sold, as well as any interest retained, is to be recorded at fair value, with any gain or loss recognized in net
(loss) income.
The Company recognizes revenue in accordance with two different accounting
standards: 1) Topic 606 and 2) Accounting Standards Codification (“ASC”) Topic 842, Leases.
The Company primarily generated revenue, in 2021,
from a leasing arrangement with New York University, which is not within the scope of Revenue from Contracts with Customers (Topic 606), and from the sale of maintenance, under the same agreement, with a single performance obligation. The
NYU agreement ended in March 2021.
The tables below present financial information
associated with our leases.
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Classification | March 31, 2022 |
March 31, 2021 |
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| Assets | |||||||||
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Long-term
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Operating lease assets
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Operating lease right-of-use asset
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$ |
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$ |
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Total leased assets
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$
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$
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Liabilities
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Current
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|||||||||
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Operating lease liabilities
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Operating lease right-of-use liability - current portion
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$ |
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$ |
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Long-term
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Operating lease liabilities
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Operating lease right-of-use liability - net of current portion
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$ |
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$ |
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Total lease liabilities
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$
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$
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Lease Cost
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Operating lease cost
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Selling, general and administrative
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$
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$
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Finance lease cost
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Interest on lease liabilities
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Interest expense
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Sublease income
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Interest income - sales-type sublease
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Net lease expense
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$
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$
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Maturity of lease liabilities (as of March 31, 2022)
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Operating lease
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2022
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2023
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Total
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$
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Less amount representing interest
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Present value of lease liabilities
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$
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Discount rate
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%
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Note B – Gamma Knife at
NYU Medical Center
U.S. NeuroSurgical, Inc. (“USN”), a wholly-owned subsidiary of U.S. NeuroSurgical Holdings, Inc., opened a New York gamma knife treatment center in July 1997 on the campus of New York University (“NYU”) Medical Center. The Company’s
contract with NYU, its only customer, ended in March 2021. Upon termination of the NYU contract, the Company recognized a gain of $100,000
relating to previously accrued expenses. This gain was included as a reduction in selling, general and administrative expense in the quarter ended March 31, 2021. The Company is actively seeking new business ventures and believes that its cash
reserves, which are in excess of $1.6 million at March 31, 2022, 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.
Note C – The Southern California Regional Gamma
Knife Center
During 2007, the Company, through a noncontrolling
interest in joint ventures, managed the formation of the Southern California Regional Gamma Knife Center at San Antonio Regional Hospital (“SARH”) in Upland, California. Corona Gamma Knife, LLC (“CGK”) is party to a 14 -year agreement with SARH to renovate space in the hospital and install and operate a Leksell PERFEXION gamma knife. CGK leases the gamma
knife from NeuroPartners LLC, which holds the gamma knife equipment. In addition to returns on its ownership interests, USNC expects to receive fees for management services relating to the facility.
USNC is a 20 % owner of NeuroPartners LLC and owns 39 % of CGK.
USNC was a 20 % guarantor on NeuroPartners LLC’s seven-year lease
with respect to the gamma knife equipment and certain leasehold improvements at SARH. In February 2016, NeuroPartners LLC negotiated a new five-year
lease to fund the reloading of cobalt and related construction services. The new lease of $1,663,000 included a balance of $668,000 from the prior lease obligations. This new lease was payable over 60 months. The first payment of $31,000 was paid in April 2016 and
the final payment was paid in March 2021, removing USNC’s guarantee obligation.
Construction of the SARH gamma knife center was
completed in December 2008 and the first patient was treated in January 2009. The project has been funded principally by outside investors. While the Company, through its joint ventures, has led the effort in organizing the business and
overseeing the development and operation of the SARH center, its investment to date in the SARH center has been minimal.
At March 31, 2022 and December 31, 2021, the
Company’s recorded investment (loss) of NeuroPartners LLC and CGK was $0 and ($10,000 ), respectively. For the three months ended March 31, 2022, the Company’s equity in income of NeuroPartners LLC and CGK was $10,000 and compared to equity in loss of ($2,000 )
for the three months ended March 31, 2021. At March 31, 2022, and December 31, 2021, amounts due from related parties was $19,000
and $6,000 , respectively.
The following tables present the aggregation of
summarized financial information of NeuroPartners LLC and CGK:
NeuroPartners LLC and CGK Condensed Combined Income
Statement Information
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Three Months Ended
March 31,
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2022
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2021
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Patient revenue
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$
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$
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Net (loss) income
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$
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(
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)
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$
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USNC’s equity in income (loss) of
NeuroPartners LLC and CGK
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$
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$
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(
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)
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NeuroPartners LLC and CGK Condensed Combined Balance
Sheet Information
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March 31,
2022
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December 31,
2021
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Current assets
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$
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$
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Noncurrent assets
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Total assets
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$
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$
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Current liabilities
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$
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$
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| Noncurrent liabilities | |
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Equity
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Total liabilities and equity
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$
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$
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Note D – Florida Oncology Partners
During 2010, through the formation of a joint venture, in which it has a
noncontrolling interest, the Company expanded its market strategy to include opportunities to develop cancer centers featuring radiation therapy. In 2010, the Company formed FOP in partnership with local physicians and other investors.
USNC owned a 24 % interest in the venture. FOP abandoned its operations on June 28, 2019, due to continued losses at the site
and lack of success in good faith efforts to renegotiate the agreement after several months of discussion. Due to the circumstances, FOP derecognized the associated assets and liabilities and calculated a contingent liability equal to
the net liabilities derecognized. On November 24, 2021, the third-party owner filed a Voluntary Motion to Dismiss their lawsuit against FOP, and on December 11, 2021, it was accepted and recorded by the court. There can be no guarantee
the third-party owner will not reinstitute any future claims against FOP.
The Company’s recorded investment in FOP prior to
dissolution had been reduced to zero due to losses incurred in prior years. No equity in earnings had been recorded by the Company due to FOP’s deficit equity.
On September 21, 2021, FOP filed Articles of Dissolution with the Florida
Department of State that were recorded on September 22, 2021. FOP is fully dissolved.
Note E – Boca Oncology Partners
During the quarter ended June 30, 2011, the Company,
through the formation of a joint venture, in which it had a noncontrolling interest, participated in the formation of Boca Oncology Partners, LLC (“BOP”), for the purpose of owning and operating a cancer center in Boca Raton, Florida. In
June 2011, Boca Oncology Partners RE, LLC (“BOPRE”,) an affiliated entity, purchased a 20 % interest in Boca West IMP, owner of
a medical office building in West Boca, Florida in which BOP operates. BOP occupies 6,000 square feet of the 32,000 square foot building. The Company invested $225,000 initially and had a 22.5 % interest in BOP and BOPRE. In February 2014, the Company
and other members sold their interests in BOP.
In June 2012, BOPRE purchased an additional 3.75 % of Boca West IMP from another investor bringing its total interest to 23.75 %. BOPRE accounts for this investment under the cost method since it does not exercise significant influence over Boca West, IMP.
During the years ended December 31, 2018 and 2017,
several investors relinquished part of their ownership interest in BOPRE, and those interests were distributed among the remaining investors in relationship to their percentages owned. During 2021 and 2022 additional members relinquished
its ownership to USNC. As a result, the Company now holds a 24.36 145,000 and $151,000 at March 31, 2022 and December 31, 2021, respectively.
The following tables present the summarized financial
information of BOPRE:
BOPRE Condensed
Income Statement Information
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Three Months Ended
March 31, |
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2022
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2021
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Rental Income
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$
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$
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Net income
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$
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$
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USNC’s equity in earnings of BOPRE
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$
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$
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BOPRE Condensed Balance Sheet Information
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March 31,
2022
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December 31,
2021
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Current assets
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$
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$
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Noncurrent assets
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Total assets
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$
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$
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Current liabilities
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$
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$
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Noncurrent liabilities
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Equity
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Total liabilities and equity
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$
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$
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Note F - Medical Oncology Partners
In April 2015, MOP, was formed in partnership with
local physicians and other investors. MOP was established to acquire a 100 % equity interest in UOMA. USNC was not a member of
MOP at the time of formation as it was not able to participate due to the fact that USNC was not a physician. Nevertheless, USNC wished to eventually obtain an equity interest in MOP and loaned Dr. Jaime Lozano, the principal investor in
MOP and a co-investor in FOP, $173,000 . Dr. Lozano used these funds, along with an equal amount of his own funds (a total of $345,000 ), to purchase a 76.67 %
interest in MOP. Other investors paid a further $105,000 for the remaining equity in MOP. MOP used the $450,000 of financing to acquire a 100 %
equity interest in UOMA. An application was filed for a waiver to allow USNC to hold an equity interest notwithstanding the physician requirement and on December 22, 2016, USNC was cleared to become a part owner of MOP. Dr. Lozano agreed
to exchange half of his membership interest to USNC in settlement of the note to USNC. USNC and Dr. Lozano also agreed to share equally in providing a 5 % equity interest in MOP to an additional investor as a consulting fee for services rendered in the administration of MOP and UOMA. At December 22, 2016, USNC owned 35.83 % of MOP with an initial carrying value of $161,000 .
The Company recorded its share of losses of $12,000 for the period from December 22, 2016 to December 31, 2016, against its
investment which resulted in a reduction of its equity investment to $149,000 .
Due to increasing costs, continued net losses since
April 2015, and reliance on related party and other debt for operating cash flows, the fair value of UOMA is less than its carrying amount. The Company tested its investment for impairment at December 31, 2016 and determined that the
investment was impaired, and an impairment loss was recorded against the entire equity balance in MOP, as well as loans from USN and USNC to MOP and UOMA. For the three months ended March 31, 2022 and 2021, the Company’s equity in loss of
MOP was $39,000 and $60,000 ,
respectively, but was not recorded due to prior losses.
During the three months ended March 31, 2022 and
2021, the Company advanced $99,600 and $141,000 , all of which has been fully impaired. These allowances and write offs were recorded as losses from investments in unconsolidated entities.
Due to loans made to MOP and UOMA, MOP and UOMA are
considered to be variable interest entities of the Company. However, as the Company is not deemed to be the primary beneficiary of MOP or UOMA, since it does not have the power to direct the operating activities that most significantly
affect MOP’s or UOMA’s economic performance, the entities are not consolidated, but certain disclosures are provided herein.
The following table presents the summarized financial
information of MOP:
MOP Condensed Consolidated Income Statement
Information
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Three Months Ended
March 31,
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2022
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2021
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Patient revenue
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$
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$
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Net loss
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$
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(
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)
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$
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(
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)
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||
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USNC’s equity in loss of MOP
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$
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(
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)
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$
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(
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)
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MOP Condensed Consolidated Balance Sheet Information
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March 31,
2022
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December 31,
2021
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Current assets
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$
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$
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Noncurrent assets
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Total assets
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$
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$
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||||
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Current liabilities
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$
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$
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Noncurrent liabilities
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Deficit
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(
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)
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(
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)
|
||||
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Total liabilities and deficit
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$
|
|
$
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|
||||
Note G - CB Oncology Partners
CBOP was organized September 1, 2017, to acquire the
rights of the new center from FOP. USNC originally had a 24 % equity interest in CBOP. Beginning in October of 2017, CBOP
began paying the remainder of the costs associated with opening the center. The medical center opened and treated its first patient in January of 2018.
Effective November 15, 2019, FOP transferred to, and
CBOP assumed, a loan with BB&T bank, that it had entered into in order to finance the purchase of equipment and build out of the new center, as well as the associated property and equipment. In addition, CBOP and BB&T agreed to
reduce the monthly loan repayments for the next nine months, and to extend the term of the loan from November 2024 to July 2025. In July 2020 CBOP and BB&T further agreed to reduce the monthly payments for the life of the loan and
extended the loan to July of 2027.
In June 2020, CBOP made a $500,000 capital call to its members. UNSC converted previously-made advances totaling $121,000 into equity in CBOP to meet its capital requirement, and other members contributed $212,000 in cash. The remaining capital contributions are not expected to be met and, accordingly, the Company’s equity interest in CBOP increased to 28.58 % in June 2020.
Amounts due from CBOP at March 31, 2022, total $2,208,000 of outstanding principal, less $1,289,000
of allowances, for a net receivable of $919,000 all of which is included in due from related parties on the accompanying
Condensed Consolidated Balance Sheets. Amounts due from CBOP at December 31, 2021, total $2,174,000 of outstanding principal,
less $1,251,000 of allowances, for a net receivable of $923,000 all of which is included in due from related parties on the accompanying Condensed Consolidated Balance Sheets. These balances accrue interest at 6 % per annum. Interest earned by the Company from the amounts owed by CBOP totaled $29,000 and $31,000 for the three months ended March 31,
2022 and 2021, respectively. At March 31, 2022 and December 31, 2021, total accrued interest was $427,000 and $398,000 , respectively, all of which has been fully reserved for. The Company recorded increases in the allowance as a component of loss from
investments in unconsolidated entities and as a deduction in interest income for interest earned.
Due to loans made to CBOP, CBOP is considered to be a
variable interest entity of the Company. However, as the Company is not deemed to be the primary beneficiary of CBOP, since it does not have the power to direct the operating activities that most significantly affect CBOP’s economic
performance, the entity is not consolidated, but certain disclosures are provided herein.
The following table presents the summarized financial
information of CBOP:
CBOP Condensed Income Statement Information
|
Three Months Ended
March 31,
|
||||||||
|
2022
|
2021
|
|||||||
|
Patient revenue
|
$
|
|
$
|
|
||||
|
Net (loss) income
|
$
|
(
|
)
|
$
|
|
|||
|
USNC’s equity in (loss) income of CBOP
|
$
|
(
|
)
|
$
|
|
|||
CBOP Condensed Balance Sheet Information
|
March 31,
2022
|
December 31,
2021
|
|||||||
|
Current assets
|
$
|
|
$
|
|
||||
|
Noncurrent assets
|
|
|
||||||
|
Total assets
|
$
|
|
$
|
|
||||
|
Current liabilities
|
$
|
|
$
|
|
||||
|
Noncurrent liabilities
|
|
|
||||||
|
Deficit
|
(
|
)
|
(
|
)
|
||||
|
Total liabilities and deficit
|
$
|
|
$
|
|
||||
Note H – Elite Health
Effective October 1, 2021, U.S. NeuroSurgical, Inc. (“USN”), acquired all of the outstanding shares of capital stock of Elite Health Plan, Inc., a California corporation (“Elite
Health”.) The transaction with Elite Health was structured as an investment by Elite Health shareholders in USN, and as such did not have an immediate effect on the percentage ownership of the shareholders of the Company. However, the Company’s
interest in USN, which currently holds substantially all of the interest in the Company’s businesses and operations, was effectively diluted by 15 %
as a result of the issuance of the new USN shares to the former holders of Elite Health. In addition, pursuant to the terms of this transaction, the former shareholders of Elite Health may request that the Company take steps that would
give such holders access to the public trading market. If this is requested by the Elite Health holders, it could be accomplished at the Company’s election through an exchange of such holders’ shares in USN for common stock of the Company.
Elite Health is a private company with a limited operating history. It was formed in 2017 with the purpose of establishing a managed care organization that will operate as a
Medicare Advantage plan for seniors. It is expected that Elite Health will operate in California, initially San Bernadino, Riverside, and Orange Counties, with the objective of addressing the growing number of Medicare eligible seniors in those
markets.
Elite Health is in
the process of applying for a Knox Keene license to operate a Medicare Advantage plan in California and has taken preliminary steps toward identifying a network of providers who are well-versed in the healthcare needs of seniors in the communities
in which they practice. If Elite Health is successful in obtaining the license, establishing Elite Health as an operating entity will require significant investment not currently available to the Company. The Company is currently exploring
opportunities to provide the necessary funding to proceed with activities required to launch Elite Health.
Note I – Income Taxes
The Company’s income tax rate, which includes federal
and state income taxes, was approximately 1 2,000 and $252,000
(restated) for the three months ended March 31, 2022, and 2021, respectively.
Note J - Restatement of Previously Issued Financial Statements
During the quarter ended March 31, 2022, the Company determined that in March 2021, pursuant to an agreement with New York University ("NYU"),
ownership of all of the gamma knife equipment at the NYU Medical Center transferred from the Company to NYU, resulting in the recognition of a gain on the sale and transfer of the gamma knife property on the Company's December 31, 2021 income tax
returns. The Company previously received insurance proceeds with the Gamma Knife facility, which was destroyed as a result of flooding from Hurricane Sandy. For tax purposes, the resulting gain becomes taxable when the replacement property is sold
or disposed of, which occurred in 2021. As a result, the Company recorded this tax liability and restated its consolidated financial statements as of and for the year ended December 31, 2021 and each of the quarters during the year ended December
31, 2021 on Form 10-K/A for the year ended December 31, 2021.
The restatement tables below present a reconciliation from the previously reported to the restated values as of and for the three months ended March
31, 2020. The values as previously reported were derived from the Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 filed on May 17, 2021.
CONDENSED CONSOLIDATD STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2020
|
As previously
|
Restatement
|
|||||||||||
|
Reported
|
Impacts
|
As Restated
|
||||||||||
|
Income tax provision
|
$
|
|
$
|
|
$
|
|
||||||
|
Net income
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
Basic and diluted net income per share
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS
For the Three Months Ended March 31, 2020
|
Net income
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
Change in: Income taxes receivable/payable
|
$
|
|
$
|
|
$
|
|
| Item 2. |
Management Discussion and Analysis of Financial Condition and Results of Operations.
|
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 2021 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.
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.
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 $1.6 million at March 31, 2022, 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 March 31, 2022, Compared to Three Months Ended March 31, 2021
Patient revenue for the three months ended March 31, 2022, and 2021 was $0 and $1,061,000, 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 three months ended March 31, 2022, were $0 as compared to $86,000 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 $360,000 for the first quarter of 2022 was 19% higher than the $298,000 incurred during the comparable period in 2021, due mostly to lower accounting
fees in 2022 offset by a $100,000 gain on termination of the NYU contract during the three months ended March 31, 2021.
The Company incurred no interest expense in the first quarter of 2022 and $2,000 in the comparable period in 2021 related to finance leases.
The Company earned $0 and $8,000 of interest income from its investment in a sales-type sublease for the three months ended March 31, 2022, and 2021, respectively.
During the three months ended March 31, 2022, the Company recognized a $133,000 loss from its investment in unconsolidated entities compared to a $139,000 loss during the same period in 2021. The
lower current quarter loss is primarily due to a decrease of advances made to its unconsolidated entities and associated allowances.
During the three months ended March 31, 2021, the Company recognized an income tax provision of $2,000 compared to an income tax provision of $252,000 (restated) during the same period in 2021.
For the three months ended March 31, 2022, the Company reported a net loss of $421,000 as compared to $292,000 (restated) net income for the same period a year earlier. The net loss was primarily
due to the termination of the NYU contract.
Liquidity and Capital Resources
At March 31, 2021, the Company had working capital of $1,128,000 as compared to $1,918,000 at December 31, 2021. Cash and cash equivalents at March 31, 2022 were $1,658,000 as compared to
$2,178,000 at December 31, 2021.
Net cash used in operating activities for the three months ended March 31, 2022, was $336,000 as compared to $214,000 provided by operating activities for the same period a year earlier. This
change is primarily due to the termination of the NYU contract and the Company using cash reserves for day to day expenses. During the first quarter of 2022, the Company received $11,000 of distributed earnings from, unconsolidated entities with no
corresponding cash receipts in the first quarter of 2021.
With respect to investing activities, the Company made $182,000 of advances to unconsolidated entities during the three months ended March 31, 2022, compared with $144,000 of loans and advances in
the same period a year earlier to NP, CGK, CBOP, and MOP to assist with business operations and working capital requirements. The Company also received $532,000 in principal payments under the NYU sales-type sublease in 2021, compared to $0 during
the first quarter of 2022.
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 paid $89,000 towards its finance
lease obligations during the three months ended March 31, 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 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.
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.
| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk.
|
Not applicable.
| Item 4. |
Controls and Procedures
|
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, as appropriate, to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and procedures. We do realize that we are a very small company and as a small company with only the officers and directors participating in the day to day management, with
the ability to override controls, each officer and director has multiple positions and responsibilities that would normally be distributed among several employees in larger organizations with adequate segregation of duties to ensure the appropriate
checks and balances. Because the Company does not currently have a separate chief financial officer, the Chief Executive Officer performs these functions with the support of one of the Company’s outside directors who assists in the reporting and
disclosure process (the “Lead Director”).
Our management evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer concluded that the Company’s disclosure controls and procedures were not effective as of the end
of the period covered by this report for the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended, to be recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission’s rules and forms, due to the material weakness in internal control over financial reporting described below.
Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United
States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the
financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only
reasonable assurance of achieving their control objectives.
Our management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2022. A material weakness is a control deficiency, or a combination of control
deficiencies in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. In connection with
the assessment described above, management identified the following material weakness as of March 31, 2022: The Company did not maintain sufficient qualified personnel with the appropriate level of knowledge, experience and training in the
application of accounting principles generally accepted in the United States of America and in internal controls over financial reporting commensurate with its financial reporting requirements. Specifically, effective controls were not designed and
in place to ensure that the Company maintained, or had access to, appropriate resources with adequate experience and expertise in the area of financial reporting for transactions such as investments in unconsolidated entities, related party
receivables, impairments, lease accounting, accounting for business combinations, income taxes, and to properly assess the application of new accounting pronouncements. The Company is in the process of developing efficient approaches to remediate
this material weakness. To do this in a cost-effective manner, considering the current extent of the Company’s operations, management is making arrangements with consultants and advisors to assist on an as-needed basis.
Changes in Internal Control over Financial Reporting
While there have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal
quarter ended March 31, 2022, management is in the process of developing plans to remediate the material weakness identified above.
| Item 1. |
Legal Proceedings
|
None
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds
|
Not applicable.
| Item 3. |
Defaults Upon Senior Securities
|
Not applicable.
| Item 4. |
Submission of Matters to a Vote of Security Holders
|
Not applicable.
| Item 5. |
Other Information
|
Not applicable.
| Item 6. |
Exhibits
|
31.1 Certification of President and Chief Executive Officer (Principal
Executive Officer and Principal Financial Officer) pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.1 Certification of President and Chief Executive Officer (Principal
Executive Officer and Principal Financial Officer) pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
101 Interactive Data Files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 in XBRL (eXtensible Business Reporting Language). Pursuant to Regulation 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of
Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
U.S. NeuroSurgical Holdings, Inc.
|
||
|
(Registrant)
|
||
|
Date: June 24, 2022
|
By:
|
/s/ Alan Gold
|
|
Alan Gold
|
||
|
Director, President and Chief Executive Officer
|
||
|
and
|
||
|
Principal Financial Officer of the Registrant
|
||
23
TABLE OF CONTENTS
Part I - Financial InformationItem 1. Financial StatementsItem 2. Management Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission Of Matters To A Vote Of Security HoldersItem 5. Other InformationItem 6. Exhibits