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Item 2.
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Management Discussion and Analysis of Financial Condition and Results of Operations.
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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 2020 Annual Report on Form 10-K. In particular, judgment is used in areas such as determining and assessing possible asset impairments, including investments in, and advances, to unconsolidated entities.
We adopted the provisions of Topic 842 as of January 1, 2019. The adoption of Topic 842 had a material impact on the Company’s Consolidated Balance Sheets due to the recognition of the ROU assets
and lease liabilities. Although a significant amount of our revenue is now accounted for under Topic 842, this guidance did not have a material impact on our Consolidated Statements of Operations or Cash Flows. Because of the transition method we
used to adopt Topic 842, Topic 842 was not applied to periods prior to adoption and the adoption of Topic 842 had no impact on our previously reported results.
The following discussion and analysis provides information which the Company’s management believes is relevant to an assessment and understanding of the Company’s results of operations and
financial condition. This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto appearing elsewhere herein.
Recent events
The recent outbreak of the novel coronavirus COVID-19 has spread across the globe and has been declared a public health emergency by the World Health Organization and a National Emergency by the
President of the United States. 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 approximate $2.6 million at September 30, 2021, 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 September 30, 2021, Compared to Three Months Ended September 30, 2020
Patient revenue for the three months ended September 30, 2021, and 2020 was $0 and $662,000, 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 September 30, 2021, were $0, as compared to $81,000 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 $268,000 for the third quarter of 2021 was 10% lower than the $297,000 incurred during the comparable period in 2020, due to audit-related fees during
the three months ended September 30, 2021 and 2020.
The Company incurred $0 interest expense in the third quarter of 2021 and $5,000 in the comparable period in 2020 related to finance leases. Interest expense decreased due to repayment of principal
balances on the gamma knife, ICON unit, and Cobalt reload leases prior to April 1, 2021.
The Company earned $0 and $16,000 of interest income from its investment in a sales-type sublease for the three months ended September 30, 2021 and 2020, respectively.
During the three months ended September 30, 2021, the Company recognized a $77,000 loss from its investment in unconsolidated entities compared to a $56,000 loss during the same period in 2020. The
higher current quarter loss is primarily due to an increase of advances made to its unconsolidated entities and associated allowances.
During the three months ended September 30, 2021, the Company recognized an income tax provision of $8,000 compared to an income tax provision of $75,000 during the same period in 2020. The lower
tax expense is primarily due to the effects of the NYU contract ending in March 2021 and those impacts were recognized earlier in the year.
For the three months ended September 30, 2021, the Company reported a net loss of $344,000 as compared to net income of $164,000 for the same period a year earlier. The lower net income was
primarily due to the lack of revenues due to the sale of the NYU gamma knife in 2021.
Nine Months Ended September 30, 2021, Compared to Nine Months Ended September 30, 2020
Patient revenue for the nine months ended September 30, 2021, and 2020 was $1,061,000 and $2,005,000, 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 nine months ended September 30, 2021, were $86,000 as compared to $276,000 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 $815,000 for the first nine months of 2021 was 13% lower than the $941,000 incurred during the comparable period in 2020, offset by a $100,000 gain on
termination of the NYU contract and the cancellation of the flood insurance policy for the NYU facility at March 31, 2021.
The Company incurred $3,000 of interest expense for the nine months ended of 2021 and $24,000 in the comparable period in 2020 related to finance leases. Interest expense decreased due to lower
principal balances on the gamma knife, ICON unit, and Cobalt reload leases.
The Company earned $8,000 and $60,000 of interest income from its investment in a sales-type sublease for the nine months ended September 30, 2021, and 2020, respectively.
During the nine months ended September 30, 2021, the Company recognized a $350,000 loss from its investment in unconsolidated entities compared to a $292,000 loss during the same period in 2020.
The higher current year loss is primarily due to an increase of advances made to its unconsolidated entities and associated allowances.
During the nine months ended September 30, 2021, the Company recognized an income tax provision of $202,000 compared to an income tax provision of $148,000 during the same period in 2020. The
higher tax expense in 2021 is primarily due to the annualized effects of the NYU contract ending in March 2021, forecasted taxable losses for the rest of the year, and the tax effect of a valuation allowance expected to be necessary for any
deferred tax asset at the end of the year.
For the nine months ended September 30, 2021, the Company reported a net loss of $378,000 as compared to net income of $384,000 for the same period a year earlier. The lower net income was
primarily due to the lack of revenues due to the sale of the NYU gamma knife in 2021, and higher income tax expense.
Liquidity and Capital Resources
At September 30, 2021, the Company had working capital of $2,214,000 as compared to $2,597,000 at December 31, 2020. Cash and cash equivalents at September 30, 2021 were $2,567,000 as compared to
$2,030,000 at December 31, 2020.
Net cash provided by operating activities for the nine months ended September 30, 2021, was $442,000 as compared to $522,000 in the same period a year earlier. The $80,000 lower net cash inflow in
2021 was primarily due the NYU contract ending in March 2021.
With respect to investing activities, the Company made $374,000 of advances to unconsolidated entities during the nine months ended September 30, 2021, compared with $337,000 of loans and advances
in the same period a year earlier to FOP, CBOP, and MOP to assist with business operations and working capital requirements. During the first nine months of 2020, the Company made $36,000 of capital contributions to unconsolidated entities with no
corresponding payments in the first nine months of 2021. The Company also received $532,000 in principal payments under the NYU sales-type sublease in 2021, compared to $660,000 during the first nine months of 2020.
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 had been receiving fixed monthly
payments of $50,000 through February 2021, and $30,000 through March 2021, as well as a final payment of $350,000 in March 2021. The 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.
Recent Acquisition
As reported on October 6, 2021, U.S. NeuroSurgical, Inc.(“USN”), a wholly-owned subsidiary of the Company, acquired all of the outstanding shares of capital stock of Elite Health Plan, Inc., a
California corporation (“Elite Health”) and, in exchange therefor, the former holders of Elite Health were issued newly-issued shares of USN, which following the transaction represent 15% of the outstanding shares of USN. USN currently holds
substantially all of the assets and operations of the Company. The Company agreed with the former Elite Health shareholders that if there is no trading market for the shares of USN after six months from the closing of the transaction, such holders
may request that the Company take steps that would give such holders access to the public trading market, which could be accomplished at the Company’s election through an exchange of such holders’ shares of USN for shares of the Company.
Elite Health is a private company with 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. Because of the
collective experience of its founders and affiliates as physicians, software executives, and health plan administrators, we believe that Elite Health will be positioned to bring to southern California a comprehensive and cost-effective solution for
these communities.
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. Elite Health founders and affiliates also have considerable experience with healthcare record based software and the proposed will endeavor to utilize
the latest advances in information systems, including Artificial Intelligence (AI) and data analytics, in its processes to enhance each patient experience and control medical costs.
The Company and Elite Health understand that the keys to success with a managed care organization are delivering comprehensive patient care and containing costs. In addition to developing a plan
to obtain necessary approvals, gaining access to a competent network of providers and enrolling a critical level of subscribers, it will be necessary for the plan to provide high quality patient care efficiently and cost effectively. There can be
no assurance that the Company and Elite Health will be effective in doing so.
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, 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.
Termination of Business Activity at the New York
University Gamma Knife Center. While it is the Company’s objective to expand activities to
additional cancer centers that rely on a broad range of diagnostic and radiation treatments, the Company had 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. The Company’s lease with NYU ended in March 2021, and it has transferred ownership of its gamma knife to NYU. The future of the Company will depend on whether it is able to achieve success with other existing and
new operations, and this will depend to a significant degree on whether it is able to identify and secure new business opportunities and achieve profitable operations at those businesses in the near term.
Plans for Development and Growth of Elite
Health. The Company recently acquired all of the outstanding stock of Elite Health in exchange for shares of USN, which holds substantially all of the Company’s assets
and operations. Elite Health currently has no revenue and will not be in a position to generate revenue for an indefinite period while it seeks to obtain a license to operate a Medicare Advantage Plan in California. The plan for the development
and growth of Elite Health will require the investment of significant time and financial resources. The success of Elite Health will depend on obtaining all necessary approvals and gaining access to a competent network of providers and enrolling
a critical level of subscribers. Furthermore, to be financially successful, it will be necessary for the Elite Health’s operation to provide high quality patient care efficiently and cost effectively. There can be no assurance that the Company
and Elite Health will be successful in accomplishing these objectives.
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.
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Item 4.
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Controls and Procedures
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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 September 30, 2021. 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 September 30, 2021: 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 September 30, 2021, management is in the process of developing plans to remediate the material weakness identified above.