U.S. NeuroSurgical Holdings, Inc. - Quarter Report: 2019 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ |
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 June 30, 2019
or
| ☐ |
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
U.S. NeuroSurgical Holdings, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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47-5370333
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(State of other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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2400 Research Blvd, Suite 325, Rockville, Maryland 20850
(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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Non-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, $0.01 par value, outstanding as of June 30, 2019 was 7,792,185.
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3
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3
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20
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26
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26
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28
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28
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28
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28
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28
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28
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28
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29
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U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30,
2019
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December 31,
2018
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|||||||
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(UNAUDITED)
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||||||||
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ASSETS
|
||||||||
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Current assets:
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||||||||
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Cash and cash equivalents
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$
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1,618,000
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$
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1,519,000
|
||||
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Accounts receivable
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411,000
|
318,000
|
||||||
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Due from related parties
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-
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1,141,000
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||||||
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Investment in sales-type sublease - current
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858,000
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828,000
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||||||
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Income taxes receivable
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11,000
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101,000
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||||||
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Other current assets
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200,000
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154,000
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||||||
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Total current assets
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3,098,000
|
4,061,000
|
||||||
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Other assets:
|
||||||||
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Notes receivable
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38,000
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38,000
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||||||
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Term loan receivable-related parties
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77,000
|
517,000
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||||||
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Due from related parties
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1,367,000
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-
|
||||||
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Investment in sales-type sublease - net of current portion
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984,000
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1,421,000
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||||||
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Investments in unconsolidated entities
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213,000
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168,000
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||||||
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Total other assets
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2,679,000
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2,144,000
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||||||
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Property and equipment:
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||||||||
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Operating lease right-of-use asset
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144,000
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-
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||||||
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Total property and equipment
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144,000
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-
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||||||
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TOTAL ASSETS
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$
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5,921,000
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$
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6,205,000
|
||||
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LIABILITIES
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||||||||
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Current liabilities:
|
||||||||
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Obligations under finance lease - current portion
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$
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1,391,000
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$
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1,399,000
|
||||
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Operating lease right-of-use liability - current portion
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34,000
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-
|
||||||
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Accounts payable and accrued expenses
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201,000
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227,000
|
||||||
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Deferred revenue
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567,000
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255,000
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||||||
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Total current liabilities
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2,193,000
|
1,881,000
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||||||
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Operating lease right-of-use liability - net of current portion
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125,000
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-
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||||||
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Obligations under finance lease - net of current portion
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323,000
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988,000
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||||||
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Deferred tax liability
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131,000
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314,000
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||||||
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Guarantee liability
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11,000
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11,000
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||||||
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Total liabilities
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2,783,000
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3,194,000
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||||||
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STOCKHOLDERS’ EQUITY
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||||||||
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Common stock - par value $.01; 25,000,000 shares authorized; 7,792,185 shares issued and outstanding at June 30, 2019 and December 31, 2018.
|
78,000
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78,000
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||||||
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Additional paid-in capital
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3,100,000
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3,100,000
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||||||
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Accumulated deficit
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(40,000
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)
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(167,000
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)
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||||
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Total stockholders' equity
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3,138,000
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3,011,000
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||||||
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
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$
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5,921,000
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$
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6,205,000
|
||||
The accompanying notes to condensed consolidated financial statements are an intergral part hereof
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
Three Months Ended
June 30,
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||||||||
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2019
|
2018
|
|||||||
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Revenue
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$
|
825,000
|
$
|
1,121,000
|
||||
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Costs and expenses:
|
||||||||
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Patient expenses
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84,000
|
378,000
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||||||
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Selling, general and administrative
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365,000
|
388,000
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||||||
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Total
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449,000
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766,000
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||||||
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Operating income
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376,000
|
355,000
|
||||||
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Interest expense
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(25,000
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)
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(28,000
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)
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||||
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Interest income
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43,000
|
3,000
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||||||
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Interest income - sales-type sublease
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35,000
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-
|
||||||
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Loss from investments in unconsolidated entities, net
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(513,000
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)
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(160,000
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)
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||||
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(Loss) income before income taxes
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(84,000
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)
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170,000
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|||||
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Benefit (provision) for income taxes
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25,000
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(93,000
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)
|
|||||
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Net (loss) income
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$
|
(59,000
|
)
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$
|
77,000
|
|||
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Basic and diluted net (loss) income per share
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$
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(0.01
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)
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$
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0.01
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|||
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Weighted average common shares outstanding
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7,792,185
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7,792,185
|
||||||
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)
|
Six Months Ended
June 30,
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||||||||
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2019
|
2018
|
|||||||
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Revenue
|
$
|
1,666,000
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$
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1,986,000
|
||||
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Costs and expenses:
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||||||||
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Patient expenses
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170,000
|
756,000
|
||||||
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Selling, general and administrative
|
673,000
|
666,000
|
||||||
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Total
|
843,000
|
1,422,000
|
||||||
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Operating income
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823,000
|
564,000
|
||||||
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Interest expense
|
(54,000
|
)
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(60,000
|
)
|
||||
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Interest income
|
82,000
|
4,000
|
||||||
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Interest income - sales-type sublease
|
73,000
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-
|
||||||
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Loss from investments in unconsolidated entities, net
|
(746,000
|
)
|
(190,000
|
)
|
||||
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Income before income taxes
|
178,000
|
318,000
|
||||||
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Provision for income taxes
|
(51,000
|
)
|
(179,000
|
)
|
||||
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Net income
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$
|
127,000
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$
|
139,000
|
||||
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Basic and diluted net income per share
|
$
|
0.02
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$
|
0.02
|
||||
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Weighted average common shares outstanding
|
7,792,185
|
7,792,185
|
||||||
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)
|
Six Months Ended
June 30,
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||||||||
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2019
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2018
|
|||||||
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Cash flows from operating activities:
|
||||||||
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Net income
|
$
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127,000
|
$
|
139,000
|
||||
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Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
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Depreciation and amortization of property and equipment
|
-
|
570,000
|
||||||
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Amortization of operating lease right-of-use asset
|
17,000
|
-
|
||||||
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Loss from investments in unconsolidated entities, net
|
746,000
|
190,000
|
||||||
|
Accrued interest from notes receivable
|
(82,000 | ) |
(4,000
|
)
|
||||
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Accretion of asset retirement obligations
|
-
|
13,000
|
||||||
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Deferred income taxes
|
(183,000
|
)
|
(390,000
|
)
|
||||
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Changes in:
|
||||||||
|
Accounts receivable
|
(93,000
|
)
|
243,000
|
|||||
|
Income taxes receivable
|
90,000
|
325,000
|
||||||
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Other current assets
|
36,000
|
|
(120,000
|
)
|
||||
|
Accounts payable and accrued expenses
|
(11,000
|
)
|
(139,000
|
)
|
||||
|
Deferred revenue
|
312,000
|
497,000
|
||||||
|
Operating lease right-of-use liability
|
(17,000
|
)
|
-
|
|||||
|
Net cash provided by operating activities
|
942,000
|
1,324,000
|
||||||
|
Cash flows from investing activities:
|
||||||||
|
Advances made under loans to unconsolidated entities
|
(928,000
|
)
|
(1,276,000
|
)
|
||||
|
Repayments from loans to unconsolidated entities
|
351,000
|
-
|
||||||
|
Principal payments received under sales-type sublease
|
407,000
|
-
|
||||||
|
Net cash used in investing activities
|
(170,000
|
)
|
(1,276,000
|
)
|
||||
|
Cash flows from financing activities:
|
||||||||
|
Repayment of finance lease obligations
|
(673,000
|
)
|
(453,000
|
)
|
||||
|
Net cash used in financing activities
|
(673,000
|
)
|
(453,000
|
)
|
||||
|
Net change in cash and cash equivalents
|
99,000
|
(405,000
|
)
|
|||||
|
Cash and cash equivalents - beginning of year
|
1,519,000
|
2,684,000
|
||||||
|
Cash and cash equivalents - end of year
|
$
|
1,618,000
|
$
|
2,279,000
|
||||
|
Supplemental disclosures of cash flow information:
|
||||||||
|
Cash paid for:
|
||||||||
|
Interest
|
$
|
58,000
|
$
|
60,000
|
||||
|
Income taxes
|
$
|
140,000
|
$
|
244,000
|
||||
|
Supplemental disclosure of noncash investing and financing activities:
|
||||||||
|
Recognition of a right-of-use asset
|
$
|
161,000
|
$ | |||||
|
Recognition of a right-of-use liability
|
$
|
176,000
|
$
|
-
|
||||
|
Derecognition of deferred rent liability (previously included in accounts payable and accrued expenses)
|
$
|
15,000
|
$
|
-
|
||||
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 June 30, 2019 and 2018, are unaudited. However, in the
opinion of management, such statements include all adjustments necessary for a fair statement of the information presented therein. The Balance Sheet at December 31, 2018 has been derived from the audited 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
financial statements.
Consolidated results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal years.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”), amending existing revenue recognition guidance and requiring more detailed disclosures to enable users
of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Topic 606 defines a five-step process to accomplish this objective, including identifying the contract
with the customer and the performance obligations within the contract, determining the transaction price including estimates of any variable consideration, allocating the transaction price to each separate performance obligation, and recognizing
revenue as the company satisfies the performance obligation. We adopted the provisions of Topic 606 as of January 1, 2018 on a modified retrospective basis and applied it to the Company's sole contract at the date of adoption. We concluded that the
impact to the manner in which we recognize revenue is immaterial. Our revenue is primarily generated from a leasing arrangement with New York University (“NYU”), which is not within the scope of Topic 606, and from the sale of maintenance services
with a single performance obligation, under which revenue is recognized in a similar manner as compared to the method under the prior revenue standards. The Company recognizes maintenance income ratably over time as patient procedures are performed.
Prior to October 2018, the Company’s agreement with NYU primarily consisted of an operating lease, and the associated patient revenue from the use of the gamma knife was primarily operating lease
income. In October 2018, the agreement was reevaluated to be a sales-type sublease between the Company, the lessor, and NYU, the lessee. The present value of all fixed future minimum lease payments payable by NYU to the Company were recorded as an
investment in sublease effective October 1, 2018. The patient revenue under the tiered schedule (“Note B”) continues to be considered contingent income and is recognized on a systematic basis using an average fee per procedure.
We adopted the provisions of ASU 2016-02, Leases ("Topic 842"), as amended, 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 certain right-of-use (“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 will not be applied to periods prior to adoption and the adoption of Topic 842 had no impact on our previously reported results, or on opening equity
at January 1, 2019.
The tables below present financial information associated with our leases. This information is only presented as of, and for the six months ended, June 30, 2019, because, as noted above, we adopted
Topic 842 using a transition method that does not require application to periods prior to adoption.
|
Classification
|
June 30, 2019
|
||||
|
Assets
|
|||||
|
Current
|
|||||
|
Finance lease assets
|
Investment in sales-type sublease - current
|
$
|
858,000
|
||
|
Long-term
|
|||||
|
Finance lease assets
|
Investment in sales-type sublease - net of current portion
|
984,000
|
|||
|
Operating lease assets
|
Operating lease right-of-use asset
|
144,000
|
|||
|
Total leased assets
|
$
|
1,986,000
|
|||
|
Liabilities
|
|||||
|
Current
|
|||||
|
Finance lease liabilities
|
Obligations under finance lease - current portion
|
$
|
1,391,000
|
||
|
Operating lease liabilities
|
Operating lease right-of-use liability - current portion
|
34,000
|
|||
|
Long-term
|
|||||
|
Finance lease liabilities
|
Obligations under finance lease - net of current portion
|
323,000
|
|||
|
Operating lease liabilities
|
Operating lease right-of-use liability - net of current portion
|
125,000
|
|||
|
Total lease liabilities
|
$
|
1,873,000
|
|||
|
Lease Cost
|
|||||
|
Operating lease cost
|
Selling, general and administrative
|
$
|
21,000
|
||
|
Finance lease cost
|
|||||
|
Interest on lease liabilities
|
Interest expense
|
52,000
|
|||
|
Sublease income
|
Interest income - sales-type sublease
|
73,000
|
|||
|
Net lease cost
|
$
|
-
|
|||
|
Maturity of lease liabilities (as of June 30, 2019)
|
Operating lease
|
Finance lease
|
||||||
|
2019
|
$
|
21,000
|
$
|
759,000
|
||||
|
2020
|
43,000
|
923,000
|
||||||
|
2021
|
45,000
|
90,000
|
||||||
|
2022
|
46,000
|
-
|
||||||
|
2023
|
24,000
|
-
|
||||||
|
Total
|
$
|
179,000
|
$
|
1,772,000
|
||||
|
Less amount representing interest
|
20,000
|
58,000
|
||||||
|
Present value of lease liabilities
|
$
|
159,000
|
$
|
1,714,000
|
||||
|
Discount rate
|
5.850
|
%
|
4.555
|
%
|
||||
Note B – Gamma Knife at NYU Medical Center
U.S. NeuroSurgical, Inc. (“USN”), a wholly-owned subsidiary of U.S. NeuroSurgical Holdings, Inc., opened its New York gamma knife treatment center in July 1997 on the campus of New York University
(“NYU”) Medical Center. USN installed a new Leksell gamma knife, the PERFEXION model, at the NYU Medical Center in March 2009 in replacement of the older gamma knife equipment which it had been leasing to NYU. In connection with this upgrade, USN
modified its arrangement with NYU to extend the term for 12 years from March 2009.
In October 2012, the Company’s facility at NYU was totally destroyed as a result of flooding from Hurricane Sandy. The gamma knife had to be removed to prevent any cobalt leakage that might occur due
to rusting of the equipment. The removal cost was $525,000. The Company paid a lease settlement of the outstanding principal balance only and received from insurance coverage $930,000 above the lease principal payments and removal costs.
The Company finalized arrangements with NYU regarding the restoration of the gamma knife center and entered into an amendment to the original Gamma Knife Neuroradiosurgery Equipment Agreement (“NYU
Agreement”). The NYU facility was rebuilt and reopened in the Tisch Hospital of NYU Langone Medical Center. The first patient was treated on April, 29, 2014. The Company expects to generate revenue from the restored gamma knife center under the NYU
contract until March 2021, at which time the NYU contract ends and title to the gamma knife will transfer to NYU.
The Company is responsible for the maintenance and insurance for the gamma knife equipment at the NYU facility and earns income 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.
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 is payable over 60 months. The first payment of $31,000 was paid
on April 1, 2016 and the final payment will be due on March 1, 2021. The Company continues to be a 20% guarantor on the new lease and expects any potential obligations from this guarantee would be reduced by the recovery of the related collateral,
and thus expects any exposure from this guarantee to be remote.
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.
For the six months ended June 30, 2019 and 2018, the Company’s equity in earnings of NeuroPartners LLC and CGK was $45,000 and $65,000, respectively. The Company did not record the $65,000 equity in
earnings for the six months ended June 30, 2018 due to prior losses incurred by NeuroPartners, LLC and CGK. During the six months ended June 30, 2019, the Company’s share of the combined equity in NeuroPartners LLC and CGK became positive, and the
Company recorded $44,000 of equity in earnings. At June 30, 2019, amounts due from related parties include $8,000 in receivables from CGK. The Company’s recorded investment in NeuroPartners LLC and CGK is $45,000 at June 30, 2019 and $0 at December
31, 2018.
The following tables present the aggregation of summarized financial information of NeuroPartners LLC and CGK:
NeuroPartners LLC and CGK Condensed Combined Income Statement Information
|
Six Months Ended
June 30,
|
||||||||
|
2019
|
2018
|
|||||||
|
Patient Revenue
|
$
|
489,000
|
$
|
510,000
|
||||
|
Net income
|
$
|
147,000
|
$
|
227,000
|
||||
|
|
||||||||
|
USNC's equity in earnings of NeuroPartners, LLC and CGK
|
$
|
45,000
|
$
|
65,000
|
||||
|
Three Months Ended
June 30,
|
||||||||
|
2019
|
2018
|
|||||||
|
Patient Revenue
|
$
|
189,000
|
$
|
299,000
|
||||
|
Net income
|
$
|
22,000
|
$
|
170,000
|
||||
|
USNC's equity in earnings of NeuroPartners LLC and CGK
|
$
|
1,000
|
$
|
52,000
|
||||
NeuroPartners LLC and CGK Condensed Combined Balance Sheet Information
|
June 30,
2019
|
December 31,
2018
|
|||||||
|
Current assets
|
$
|
418,000
|
$
|
304,000
|
||||
|
Noncurrent assets
|
936,000
|
1,064,000
|
||||||
|
Total assets
|
$
|
1,354,000
|
$
|
1,368,000
|
||||
|
Current liabilities
|
$
|
399,000
|
$
|
399,000
|
||||
|
Noncurrent liabilities
|
763,000
|
924,000
|
||||||
|
Equity
|
192,000
|
45,000
|
||||||
|
Total liabilities and equity
|
$
|
1,354,000
|
$
|
1,368,000
|
||||
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. These centers utilize linear accelerators with IMRT (Intensity Modulated Radiation Therapy) and IGRT (Image Guided Radiation Therapy) capabilities. In 2010, the Company formed FOP in partnership with local physicians and other
investors. USNC owns a 24% interest in the venture. FOP’s first center was located in Miami, Florida and opened in the second quarter of 2011.
During 2011, FOP entered into a seven-year capital lease with Key Bank for approximately $5,800,000. Under the terms of the capital lease, USN agreed to guarantee a maximum of $1,433,000,
approximately 25% of the original lease obligation in the event of default. USN was a guarantor jointly with most of the other members of FOP. The guarantee was eliminated upon repayment of the outstanding lease balance in May 2018.
In December 2015, FOP entered into an agreement with 21st Century Oncology for the sale of FOP’s Varian Rapid Arc linear accelerator and other medical equipment at the FOP location. 21st Century
Oncology paid FOP $1,000,000 as a down payment for the equipment and agreed to make monthly payments of $172,000 for the equipment and all monthly payments due under the equipment lease with Key Bank. As of this date, 21st Century Oncology has not
satisfied all of the terms of the agreement. In late May 2017, 21st Century Oncology filed for Chapter 11 bankruptcy protection and FOP was listed as an unsecured creditor. As a result, since June 2017, FOP has not received the agreed rental
payments beyond the monthly payments for the equipment lease. As noted above, the equipment lease was repaid in May 2018 and title to the equipment was transferred to 21st Century Oncology. In December 2018, FOP was awarded 10,820 shares of 21st
Century Oncology Holdings Inc. common stock as part of the bankruptcy proceedings. The market value of these shares is unclear at this time as there is no readily available market for them, and accordingly, no value has been recorded for these shares
at June 30, 2019. FOP will continue to monitor the impact of 21st Century’s bankruptcy and pursue amounts that it is owed. However, there can be no assurance that FOP will be successful in these efforts.
Late in 2016, FOP took initial steps toward the development of a new radiation therapy center in Homestead, Florida. In December 2016, FOP entered into a ten-year lease agreement for office space
located at 20405 Old Cutler Towne Center. FOP had to deliver an $88,000 letter of credit in conjunction with this office lease which collateral is being held in a restricted certificate of deposit. FOP began incurring architecture costs for
planning/refitting the new space. During the first half of 2017, a financing agreement with BB&T Bank for the medical equipment and leasehold improvements was negotiated and then signed on August 31, 2017. In November 2017, the amounts for the
equipment and leasehold improvements costs were finalized and paid under this financing agreement for a total loan of $4,106,000 to be paid over seven years. Under the terms of the financing agreement, USN agreed to guarantee the amount initially
borrowed. USN is the guarantor with several other members of FOP. The outstanding balance on the financing facility was $3,394,000 at June 30, 2019, and $3,919,000 at June 30, 2018. The Company expects any potential liability from this guarantee to
be reduced by the recoveries of the respective collateral. Late in the third quarter of 2017, it was determined that the business opportunity at this new location should be pursued by a different investor group, and FOP arranged to sell the
opportunity to this group. CBOP was organized on September 1, 2017, to acquire the assets and rights in this new center from FOP.
In June 2017, FOP entered into an agreement with a third-party owner of a radiation therapy center located in Miami, Florida, whereby FOP took over the operation of the center effective September 22,
2017, for a ten-year initial term, and up to three additional terms of five years each. This agreement has been accounted for as a capital lease and, accordingly, FOP recorded assets and capital lease liabilities totaling $14,321,000 at September 22,
2017. The lease required monthly payments in the first year of $160,000, increasing by 2% each year; currently the payment is $163,200. FOP terminated its operations at this radiation center 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. FOP could be considered in default of the agreement and the third-party owner could pursue action against FOP. Due to the circumstances, FOP
derecognized the associated assets and liabilities and calculated a contingent liability equal to the net liabilities derecognized. FOP has not, however, been released from its contractual obligation to the third-party owner. At June 30, 2019, FOP
was obligated to make a further $17.6 million of lease payments for the period from July 2019 to September 2027. The derecognition of these assets and liabilities and the recording of the contingent liability had no effect on FOP’s net loss for the
six months ended June 30, 2019. Due to the termination of operations of the Miami center as well as continued working capital deficits, FOP’s ability to continue as a going concern will require FOP to restructure debt or raise new capital. Since
these plans are preliminary and have not been approved at this date, there is substantial doubt about FOP’s ability to continue as a going concern within the next twelve months from the date these financial statements are available to be issued.
The Company’s recorded investment in FOP at June 30, 2019 and December 31, 2018 has been reduced to zero due to distributions and losses incurred. Amounts due from FOP included in due from related
parties total $120,000 and $223,000 at June 30, 2019 and December 31, 2018, respectively. In addition, in October 2017, FOP entered into a promissory note payable agreement with the Company. Under this facility, borrowings accrue at 6% per annum. At
June 30, 2019, FOP owed $600,000 of principal and $53,000 of accrued interest to the Company. At December 31, 2018, FOP owed $735,000 and $30,000 of accrued interest to the Company; the Company provided an allowance of $218,000 against this
promissory note receivable, reducing its carrying amount to $517,000 at December 31, 2018. During the six months ended June 30, 2019, the Company increased this allowance by $305,000 to $523,000, resulting in a carrying amount for the promissory note
of $77,000 at June 30, 2019. The additional loans assisted with the funding of operations of the radiation therapy center in Miami.
Because of loans made to FOP, FOP is considered to be a variable interest entity of the Company. However, as the Company is not deemed to be the primary beneficiary of FOP, since it does not have
the power to direct the operating activities that most significantly affect FOP’s economic performance, the entity is not consolidated, but certain disclosures are provided herein.
The following tables present the summarized financial information of FOP:
FOP Condensed Income Statement Information
|
Six Months Ended
June 30,
|
||||||||
|
2019
|
2018
|
|||||||
|
Patient Revenue
|
$
|
1,922,000
|
$
|
2,306,000
|
||||
|
Rental Income
|
$
|
362,000
|
$
|
890,000
|
||||
|
Net (loss) income
|
$
|
(591,000
|
)
|
$
|
109,000
|
|||
|
USNC's equity in (loss) earnings of FOP
|
$
|
(143,000
|
)
|
$
|
26,000
|
|||
|
Three Months Ended
June 30,
|
||||||||
|
2019
|
2018
|
|||||||
|
Patient revenue
|
$
|
891,000
|
$
|
1,706,000
|
||||
|
Rental income
|
$
|
181,000
|
$
|
408,000
|
||||
|
Net (loss) income
|
$
|
(409,000
|
)
|
$
|
577,000
|
|||
|
USNC's equity in (loss) earnings of FOP
|
$
|
(99,000
|
)
|
$
|
139,000
|
|||
FOP Condensed Balance Sheet Information
|
June 30,
2019
|
December 31,
2018
|
|||||||
|
Current assets
|
$
|
586,000
|
$
|
401,000
|
||||
|
Noncurrent assets
|
3,835,000
|
16,570,000
|
||||||
|
Total assets
|
$
|
4,421,000
|
$
|
16,971,000
|
||||
|
Current liabilities
|
$
|
4,530,000
|
$
|
3,974,000
|
||||
|
Noncurrent liabilities
|
2,840,000
|
15,360,000
|
||||||
|
Deficit
|
(2,949,000
|
)
|
(2,363,000
|
)
|
||||
|
Total liabilities and deficit
|
$
|
4,421,000
|
$
|
16,971,000
|
||||
Note E – Boca Oncology Partners
During the quarter ended June 30, 2011, the Company, through the formation of a joint venture, in which it has 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, LLC, (“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. As a result, the Company now holds a 21.22% ownership interest in BOPRE, which it accounts for under the equity method, at June 30, 2019. The Company’s recorded investment in BOPRE is $168,000 at June 30, 2019
and December 31, 2018.
USNC is a 10% guarantor of 50% of the outstanding balance of Boca West IMP’s ten-year mortgage. This mortgage had an original balance of $3,000,000 and is secured by the medical office building in
which BOP operates. The outstanding balance on the mortgage is $2,262,000 and $2,303,000 at June 30, 2019 and December 31, 2018, respectively. Any liability from this guarantee would be mitigated by the recovery from the underlying real estate, and
the Company expects its potential exposure from this guarantee to be remote.
The following tables present the summarized financial information of BOPRE:
BOPRE Condensed Income Statement Information
|
Six Months Ended
June 30,
|
||||||||
|
2019
|
2018
|
|||||||
|
Rental Income
|
$
|
-
|
$
|
-
|
||||
|
Net loss
|
$
|
-
|
$
|
(4,000
|
)
|
|||
|
USNC's equity in loss of BOPRE
|
$
|
-
|
$
|
(1,000
|
)
|
|||
|
Three Months Ended
June 30,
|
||||||||
|
2019
|
2018
|
|||||||
|
Rental income
|
$
|
-
|
$
|
-
|
||||
|
Net loss
|
$
|
-
|
$
|
(4,000
|
)
|
|||
|
USNC's equity in loss of BOPRE
|
$
|
-
|
$
|
(1,000
|
)
|
|||
BOPRE Condensed Balance Sheet Information
|
June 30,
2019
|
December 31,
2018
|
|||||||
|
Current assets
|
$
|
25,000
|
$
|
18,000
|
||||
|
Noncurrent assets
|
928,000
|
935,000
|
||||||
|
Total assets
|
$
|
953,000
|
$
|
953,000
|
||||
|
Current liabilities
|
$
|
-
|
$
|
-
|
||||
|
Noncurrent liabilities
|
-
|
-
|
||||||
|
Equity
|
953,000
|
953,000
|
||||||
|
Total liabilities and equity
|
$
|
953,000
|
$
|
953,000
|
||||
Note F - Medical Oncology Partners
In April 2015, Medical Oncology Partners, LLC (“MOP”), was formed in partnership with local physicians and other investors. MOP was established to acquire a 100% equity interest in United Oncology
Medical Associates of Florida, LLC (“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 six months ended June 30, 2019 and 2018, the Company’s equity in loss of MOP was $37,000 and $49,000 respectively but was not recorded due to prior losses.
The Company to date has advanced $794,000 to MOP and has recorded $708,000 in allowances against these advances. During the six months ended June 30, 2019, the Company advanced $305,000 and recorded
allowances of $211,000 against these advances. During the six months ended June 30, 2018, the Company recorded $153,000 in advances and allowances. These charges have been 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
|
Six Months Ended
June 30,
|
||||||||
|
2019
|
2018
|
|||||||
|
Patient revenue
|
$
|
1,347,000
|
$
|
1,057,000
|
||||
|
Net loss
|
$
|
(103,000
|
)
|
$
|
(136,000
|
)
|
||
|
USNC's equity in loss in MOP
|
$
|
(37,000
|
)
|
$
|
(49,000
|
)
|
||
|
Three Months Ended
June 30,
|
||||||||
|
2019
|
2018
|
|||||||
|
Patient revenue
|
$
|
737,000
|
$
|
537,000
|
||||
|
Net loss
|
$
|
(65,000
|
)
|
$
|
(119,000
|
)
|
||
|
USNC's equity in loss in MOP
|
$
|
(23,000
|
)
|
$
|
(43,000
|
)
|
||
MOP Condensed Consolidated Balance Sheet Information
|
June 30,
2019
|
December 31,
2018
|
|||||||
|
Current assets
|
$
|
193,000
|
$
|
41,000
|
||||
|
Noncurrent assets
|
214,000
|
159,000
|
||||||
|
Total assets
|
$
|
407,000
|
$
|
200,000
|
||||
|
Current liabilities
|
$
|
1,326,000
|
$
|
1,002,000
|
||||
|
Noncurrent liabilities
|
19,000
|
33,000
|
||||||
|
Deficit
|
(938,000
|
)
|
(835,000
|
)
|
||||
|
Total liabilities and equity
|
$
|
407,000
|
$
|
200,000
|
||||
Note G - CB Oncology Partners
CBOP was organized September 1, 2017, to acquire the rights of the new center from FOP. USNC has a 24% equity interest in CBOP. Beginning in October of 2017, CBOP began paying the remainder of the costs associated
with opening the center. CBOP had no assets at the end of 2017. The medical center opened and treated its first patient in January of 2018.
The Company has not yet contributed equity to CBOP and, accordingly has not recorded an investment in the entity. The Company to date has advanced $1,914,000 to CBOP to assist with the funding of the build out and
operations of the entity and has recorded an allowance against it of $761,000. During the six months ended June 30, 2019 and 2018, the Company recorded $258,000 and $37,000 in allowances. These charges have been recorded as losses from investments in
unconsolidated entities.
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
|
Six Months Ended
June 30,
|
||||||||
|
2019
|
2018
|
|||||||
|
Patient revenue
|
$
|
748,000
|
$
|
488,000
|
||||
|
Net loss
|
$
|
(573,000
|
)
|
$
|
(501,000
|
)
|
||
|
USNC's equity in loss in CBOP
|
$
|
(139,000
|
)
|
$
|
(121,000
|
)
|
||
|
Three Months Ended
June 30,
|
||||||||
|
2019
|
2018
|
|||||||
|
Patient revenue
|
$
|
335,000
|
$
|
376,000
|
||||
|
Net loss
|
$
|
(340,000
|
)
|
$
|
(160,000
|
)
|
||
|
USNC's equity in loss in CBOP
|
$
|
(83,000
|
)
|
$
|
(38,000
|
)
|
||
CBOP Condensed Balance Sheet Information
|
June 30,
2019
|
December 31,
2018
|
|||||||
|
Current assets
|
$
|
255,000
|
$
|
140,000
|
||||
|
Noncurrent assets
|
-
|
-
|
||||||
|
Total assets
|
$
|
255,000
|
$
|
140,000
|
||||
|
Current liabilities
|
$
|
2,306,000
|
$
|
1,618,000
|
||||
|
Noncurrent liabilities
|
-
|
-
|
||||||
|
Deficit
|
(2,051,000
|
)
|
(1,478,000
|
)
|
||||
|
Total liabilities and equity
|
$
|
255,000
|
$
|
140,000
|
||||
Note H – Income Taxes
The Company’s income tax rate, which includes federal and state income taxes, was approximately 29%, for the six months ended June 30, 2019, and 56% for the six months ended June 30, 2018. The 2018
tax charge includes a $33,000 adjustment to the estimated effective state tax rate and $56,000 of permanent differences arising from the $190,000 of losses from investments in unconsolidated entities. The Company recorded a tax charge of $51,000 and
$179,000 for the six months ended June 30, 2019 and 2018, respectively.
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 2018 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 606 as of January 1, 2018 on a modified retrospective basis and applied it to the Company's sole contract at the date of adoption. We concluded that the impact to
the manner in which we recognize revenue is immaterial. Our revenue is primarily generated from a leasing arrangement with NYU, which is not within the scope of Topic 606, or from the sale of maintenance services with a single performance obligation,
under which revenue is recognized in a similar manner as compared to the method under prior revenue standards.
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 will 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.
Results of Operations
Three Months ended June 30, 2019 Compared to Three Months ended June 30, 2018
Patient revenue for the three months ended June 30, 2019 and 2018 was $825,000 and $1,121,000, respectively. The lower revenue in 2019 was 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.
Patient expenses for the three months ended June 30, 2019 were $84,000, a decrease of 78% compared to $378,000 reported for the comparable period in the previous year, primarily related to the
elimination of depreciation and amortization expense after October 1, 2018. When the NYU agreement was reclassified as a sublease on October 1, 2018, 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.
Selling, general and administrative expense of $365,000 for the second quarter of 2019 was 6% lower than the $388,000 incurred during the comparable period in 2018, due to lower professional fees.
The Company incurred $25,000 of interest expense in the second quarter of 2019 and $28,000 in the comparable period in 2018 related to the finance lease, due to lower principal balances on the gamma
knife and ICON unit leases, partly offset by a new cobalt reload lease liability.
The Company earned $35,000 and $43,000 of interest income from its investment in a sales-type sublease and advances to unconsolidated entities, respectively, for the three months ended June 30, 2019.
There was no corresponding sublease income for the three months ended June 30, 2018, as the Company’s arrangement with NYU was reclassified as a sales-type sublease effective October 1, 2018. Similarly, the Company’s interest income from advances to
unconsolidated entities increased in 2019, primarily due to higher principal balances.
During the three months ended June 30, 2019, the Company recognized a $513,000 loss from its investment in unconsolidated entities compared to a $160,000 loss during the same period in 2018. The
higher current quarter loss is primarily due to the Company recording allowances totaling $514,000 against advances made to its unconsolidated entities and accrued interest thereon, compared with $160,000 of allowances in the second quarter of 2018.
During the three months ended June 30, 2019, the Company recognized an income tax benefit of $25,000 compared to a $93,000 provision during the same period in 2018. The tax benefit related to the
pretax loss incurred during the period as well as a lower effective rate when compared to the same period in the previous year.
For the three months ended June 30, 2019, the Company reported a net loss of $59,000 as compared to $77,000 in net income for the same period a year earlier. The decrease in net income is largely due
to the loss from the Company’s investments in unconsolidated entities.
Six Months ended June 30, 2019 Compared to Six Months ended June 30, 2018
Patient revenue for the six months ended June 30, 2019 and 2018 was $1,666,000 and $1,986,000, respectively. The lower revenue in 2019 was 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.
Patient expenses for the six months ended June 30, 2019 were $170,000, a decrease of 78% compared to $756,000 reported for the comparable period in the previous year, primarily related to the
elimination of depreciation and amortization expense after October 1, 2018. When the NYU agreement was reclassified as a sublease on October 1, 2018, 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.
Selling, general and administrative expense of $673,000 for the first half of 2019 was 1% higher than the $666,000 incurred during the comparable period in 2018.
The Company incurred $54,000 of interest expense in the first half of 2019 and $60,000 in the comparable period in 2018 related to the finance lease, due to lower principal balances on the gamma
knife and ICON unit leases, partly offset by a new cobalt reload lease liability.
The Company earned $73,000 and $82,000 of interest income from its investment in a sales-type sublease and advances to unconsolidated entities, respectively, for the six months ended June 30, 2019.
There was no corresponding sublease income for the six months ended June 30, 2018, as the Company’s arrangement with NYU was reclassified as a sales-type sublease effective October 1, 2018. Similarly, the Company’s interest income from advances to
unconsolidated entities increased in 2019, primarily due to higher principal balances.
During the six months ended June 30, 2019, the Company recognized a $746,000 loss from its investment in unconsolidated entities compared to a $190,000 loss during the same period in 2018. The higher
current period loss is primarily due to the Company recording allowances totaling $790,000 against advances made to its unconsolidated entities, and accrued interest thereon, compared with $190,000 of allowances in the six months ended June 30, 2018.
During the six months ended June 30, 2019, the Company recognized an income tax charge of $51,000 compared to $179,000 during the same period in 2018. The higher effective rate for 2018 includes a
$33,000 adjustment to the estimated effective state tax rate and $56,000 of permanent items arising from the $190,000 of losses from investments in unconsolidated entities.
For the six months ended June 30, 2019, the Company reported net income of $127,000 as compared to $139,000 for the same period a year earlier. Lower patient revenue was offset by lower patient
expenses. Higher interest income was offset by higher losses from investment in unconsolidated entities. Lower pretax income was offset by lower effective tax rates.
Liquidity and Capital Resources
At June 30, 2019, the Company had working capital of $905,000 as compared to $2,180,000 at December 31, 2018 following the reclassification of amounts due from related parties from current to other
assets. Cash and cash equivalents at June 30, 2019 were $1,618,000 as compared to $1,519,000 at December 31, 2018.
Net cash provided by operating activities for the six months ended June 30, 2019 was $942,000 as compared to $1,324,000 in the same period a year earlier. Net income for the six months ended June 30,
2019 and 2018 was comparable at $127,000 and $139,000, respectively. The main cause of the lower cash inflows from operating activities in the six months ended June 30, 2019 compared with the corresponding period last year, was the net collection of
$243,000 of accounts receivable last year compared with a net increase in receivables of $93,000 this year. During the six months ended June 30, 2019, $746,000 in losses from investments in unconsolidated entities were recorded as compared to
$190,000 in losses in the same period a year earlier, which was largely offset by $570,000 of depreciation and amortization of property and equipment last year, with none this year.
With respect to investing activities, the Company made $928,000 of advances to FOP, CBOP, and MOP and received $351,000 of loan repayments from FOP during the six months ended June 30, 2019, compared
with $1,276,000 of advances in the same period a year earlier to assist with new business operations and working capital requirements. The Company also received $407,000 in principal payments under the NYU sales-type sublease in 2019. There were no
corresponding payments in 2018.
With respect to financing activities, the Company paid $673,000 towards its capital lease obligations during the six months ended June 30, 2019, compared with $453,000 in 2018.
The Company entered into a six year lease 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.
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.
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, 2018, 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; Recent Destruction of Equipment and Discontinuation of Business at NYU. 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.
Availability of Working Capital. To date, we have earned sufficient income from operations to fund periodic operating losses and support
efforts to pursue new gamma knife or other types of cancer treatment centers.
Disclosure Regarding Forward Looking Statements
The Securities and Exchange Commission encourages companies to disclose forward looking information so that investors can better understand a company's future prospects and make informed investment
decisions. This document contains such "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements anticipating future growth in revenues and cash flow. Words such as
"anticipates," "estimates," "expects," "projects," "targets," "intends," "plans," "believes," "will be," "will continue," "will likely result," and words and terms of similar substance used in connection with any discussion of future operating or
financial performance identify such forward-looking statements. Those forward-looking statements are based on management's present expectations about future events. As with any projection or forecast, they are inherently susceptible to uncertainty
and changes in circumstances, and the Company is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of such changes, new information, future events or otherwise.
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.
Not applicable.
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 June 30, 2019. 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 June 30, 2019: 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 and 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 June 30, 2019, management is in the process of developing plans to remediate the material weakness identified above.
None
Not applicable.
Not applicable.
Not applicable.
Not applicable.
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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.
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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.
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101 Interactive Data Files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 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.
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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.
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U.S. NeuroSurgical Holdings, Inc.
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(Registrant)
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Date: August 14, 2019
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By:
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/s/ Alan Gold
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Alan Gold
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Director, President and
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Chief Executive Officer and Principal Financial
Officer of the Registrant
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