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EXCEL - IDEA: XBRL DOCUMENT - UNIVERSITY GENERAL HEALTH SYSTEM, INC. | Financial_Report.xls |
EX-32 - EX-32 - UNIVERSITY GENERAL HEALTH SYSTEM, INC. | d340661dex32.htm |
EX-31.1 - EX-31.1 - UNIVERSITY GENERAL HEALTH SYSTEM, INC. | d340661dex311.htm |
EX-31.2 - EX-31.2 - UNIVERSITY GENERAL HEALTH SYSTEM, INC. | d340661dex312.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2012
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-54064
UNIVERSITY GENERAL HEALTH SYSTEM, INC.
(Exact name of registrant as specified in its charter)
NEVADA | 71-0822436 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
7501 Fannin Street, Houston, Texas |
77054 | |
(Address of principal executive offices) | (Zip Code) |
(713) 375-7100
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 x 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 (§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 x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of May 10, 2012, there were 319,390,226 shares of the registrant's common stock outstanding.
Table of Contents
2
Table of Contents
ITEM 1. | FINANCIAL STATEMENTS |
UNIVERSITY GENERAL HEALTH SYSTEM, INC.
March 31, 2012 | December 31, 2011 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 423,894 | $ | 538,018 | ||||
Accounts receivable, less allowance for doubtful accounts of $8,479,365 and $7,070,327 |
11,480,073 | 10,913,361 | ||||||
Inventories |
1,897,444 | 1,908,177 | ||||||
Receivables from related parties |
584,021 | 658,764 | ||||||
Prepaid expenses and other assets |
960,576 | 1,275,104 | ||||||
|
|
|
|
|||||
Total current assets |
15,346,008 | 15,293,424 | ||||||
Investments in unconsolidated affiliates |
687,323 | 687,323 | ||||||
Property, equipment and leasehold improvements, net |
76,241,012 | 77,012,883 | ||||||
Intangible asset |
1,110,000 | 1,140,000 | ||||||
Goodwill |
18,299,310 | 18,299,310 | ||||||
Other non-current assets, net |
1,964,611 | 2,234,985 | ||||||
|
|
|
|
|||||
Total assets |
$ | 113,648,264 | $ | 114,667,925 | ||||
|
|
|
|
|||||
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT) |
||||||||
Accounts payable |
$ | 10,680,342 | $ | 11,874,720 | ||||
Payables to related parties |
2,507,940 | 2,493,088 | ||||||
Accrued expenses |
8,841,149 | 7,516,940 | ||||||
Accrued acquisition cost |
1,007,380 | 1,007,380 | ||||||
Taxes payable |
4,943,678 | 4,171,826 | ||||||
Deferred revenue |
349,322 | 314,876 | ||||||
Lines of credit |
8,451,025 | 8,451,025 | ||||||
Notes payable, current portion |
27,298,071 | 28,982,331 | ||||||
Notes payable to related parties, current portion |
2,754,455 | 2,798,783 | ||||||
Capital lease obligations, current portion |
5,976,202 | 5,943,685 | ||||||
Capital lease obligations to related party, current portion |
249,154 | 239,409 | ||||||
|
|
|
|
|||||
Total current liabilities |
73,058,718 | 73,794,063 | ||||||
Notes payable, less current portion |
7,840,348 | 8,459,474 | ||||||
Notes payable to related parties, less current portion |
1,910,040 | 1,983,514 | ||||||
Capital lease obligations, less current portion |
215,259 | 34,893 | ||||||
Capital lease obligations to related party, less current portion |
30,732,509 | 30,803,450 | ||||||
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|
|
|
|||||
Total liabilities |
113,756,874 | 115,075,394 | ||||||
Commitments and contingencies |
||||||||
Preferred, par value $0.001, 20,000,000 shares authorized, 3,000 shares issued and outstanding |
3 | 3 | ||||||
Common stock, par value $0.001, 480,000,000 shares authorized, 283,440,226 shares issued and outstanding |
283,440 | 283,440 | ||||||
Additional paid-in-capital |
48,905,461 | 49,078,223 | ||||||
Shareholdersreceivables |
(2,239,068 | ) | (2,219,068 | ) | ||||
Accumulated deficit |
(52,393,589 | ) | (52,883,027 | ) | ||||
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|
|
|
|||||
Total shareholders deficit |
(5,443,753 | ) | (5,740,429 | ) | ||||
Noncontrolling interest |
5,335,143 | 5,332,960 | ||||||
|
|
|
|
|||||
Total equity (deficit) |
(108,610 | ) | (407,469 | ) | ||||
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|
|
|||||
Total liabilities and shareholders equity (deficit) |
$ | 113,648,264 | $ | 114,667,925 | ||||
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|
|
The accompanying notes are an integral part of these financial statements.
3
Table of Contents
UNIVERSITY GENERAL HEALTH SYSTEM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2012 | 2011 | |||||||
Revenues |
||||||||
Patient service revenues, net of contractual adjustments |
$ | 18,014,645 | $ | 15,734,036 | ||||
Provision for doubtful accounts |
(1,396,912 | ) | (290,803 | ) | ||||
|
|
|
|
|||||
Net patient service revenue less provision for bad debts |
16,617,733 | 15,443,233 | ||||||
Senior living revenues |
1,868,433 | | ||||||
Support services revenues |
483,700 | | ||||||
Other revenues |
117,189 | 5,982 | ||||||
|
|
|
|
|||||
Total revenues |
19,087,055 | 15,449,215 | ||||||
Operating expenses |
||||||||
Salaries, wages and benefits |
8,281,991 | 6,134,717 | ||||||
Medical supplies |
2,932,125 | 3,160,635 | ||||||
Management fees (includes related party management fees of $0 and $461,814, respectively) |
| 1,389,655 | ||||||
General and administrative expenses (includes related party expenses of $304,614 and $1,699,635, respectively) |
4,227,502 | 3,484,039 | ||||||
Gain on extinguishment of liabilities |
(96,739 | ) | (1,303,366 | ) | ||||
Depreciation and amortization (includes related party expenses of $171,290 and $171,290, respectively) |
1,725,173 | 1,762,607 | ||||||
|
|
|
|
|||||
Total operating expenses |
17,070,052 | 14,628,287 | ||||||
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|
|
|||||
Operating income |
2,017,003 | 820,928 | ||||||
Other income (expense) |
||||||||
Interest expense, net of interest income of $20,000 for 2012 and $0 for 2011 (includes related party interest expense $616,229 and $653,888, respectively) |
(1,437,965 | ) | (1,179,696 | ) | ||||
Other income |
11,583 | | ||||||
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|
|
|
|||||
Income (loss) before income tax |
590,621 | (358,768 | ) | |||||
Income tax expense |
99,000 | 81,000 | ||||||
|
|
|
|
|||||
Income (loss) before noncontrolling interest |
491,621 | (439,768 | ) | |||||
Net income attributable to noncontrolling interests |
(2,183 | ) | | |||||
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|
|
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Net income (loss) attributable to the Company |
$ | 489,438 | $ | (439,768 | ) | |||
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Basic and diluted income (loss) per share data: |
||||||||
Basic and diluted income (loss) per share |
$ | 0.00 | $ | (0.00 | ) | |||
|
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|
|
|||||
Basic and diluted weighted average shares outstanding |
283,440,226 | 174,728,566 | ||||||
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|
The accompanying notes are an integral part of these financial statements.
4
Table of Contents
UNIVERSITY GENERAL HEALTH SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2012 | 2011 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 491,621 | $ | (439,768 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in ) operating activities: |
||||||||
Depreciation and amortization |
1,725,173 | 1,762,607 | ||||||
Provision for doubtful accounts |
1,396,912 | 290,803 | ||||||
Gain on sales of assets |
(11,583 | ) | | |||||
Gain on extinguishment of liabilities |
(96,739 | ) | (1,303,366 | ) | ||||
Net changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(1,963,624 | ) | (931,820 | ) | ||||
Related party receivables and payables |
89,595 | (387,673 | ) | |||||
Inventories |
10,733 | (148,448 | ) | |||||
Prepaid expenses and other assets |
343,406 | (96,597 | ) | |||||
Accounts payable, accrued expenses and taxes payable |
951,097 | (3,772,955 | ) | |||||
Deferred revenues |
34,446 | | ||||||
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|
|
|
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Net cash provided by (used in) operating activities |
2,971,037 | (5,027,217 | ) | |||||
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Cash flows from investing activities: |
||||||||
Additions to property, equipment and leasehold improvements |
(295,319 | ) | (176,744 | ) | ||||
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|
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Net cash used in investing activities |
(295,319 | ) | (176,744 | ) | ||||
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Cash flows from financing activities: |
||||||||
Redemption of common stock |
| (50,000 | ) | |||||
Distribution to noncontrolling interests |
(172,762 | ) | | |||||
Issuance of common stock |
| 7,120,000 | ||||||
Payments on notes payable |
(2,275,465 | ) | (1,752,559 | ) | ||||
Borrowings under notes payable to related party |
| 2,953,500 | ||||||
Payments on notes payable to related party |
(118,398 | ) | (1,681,646 | ) | ||||
Payments on capital leases |
(162,021 | ) | (3,528,229 | ) | ||||
Payments on capital leases obligation to related party |
(61,196 | ) | (23,925 | ) | ||||
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Net cash (used in) provided by financing activities |
(2,789,842 | ) | 3,037,141 | |||||
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Net decrease in cash and cash equivalents |
(114,124 | ) | (2,166,820 | ) | ||||
Cash and cash equivalents: |
||||||||
Beginning of period |
538,018 | 2,291,754 | ||||||
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End of period |
$ | 423,894 | $ | 124,934 | ||||
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Supplemental disclosures of cash flow information: |
||||||||
Interest paid |
$ | 1,245,269 | $ | 268,426 | ||||
Income taxes paid |
$ | 383,434 | $ | 3,244,931 | ||||
Supplemental noncash investing activities: |
||||||||
Property and equipment additions financed |
$ | 374,904 | $ | | ||||
Supplemental noncash financing activities: |
||||||||
Exchange of debt for common stock in February 2011 |
$ | | $ | 3,500,000 | ||||
Issuance of common stock in February 2011 |
$ | | $ | 2,130,000 | ||||
Issuance of common stock to affiliate for termination of service agreement |
$ | | $ | 1,000,000 |
The accompanying notes are an integral part of these financial statements.
5
Table of Contents
UNIVERSITY GENERAL HEALTH SYSTEM, INC.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of University General Health System, Inc. (the Company) are prepared in accordance with generally accepted accounting principles in the United States of America (GAAP or U.S. GAAP) and include all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the Companys Consolidated Balance Sheet at March 31, 2012, Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011. Although the Company believes the disclosures in these financial statements are adequate to make the interim financial information presented not misleading, certain information relating to the Companys organization and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in this Form 10-Q pursuant to U.S. Securities and Exchange Commission (SEC) rules and regulations. These financial statements should be read in conjunction with the Audited Consolidated Financial Statements and notes thereto filed with the Companys Annual Report on Form 10-K for the year ended December 31, 2011. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results expected for a full year.
Principles of Consolidation and Reporting. The Company presents its financial statements in accordance with generally accepted accounting principles in the United States of America. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation.
Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management bases its estimates on historical experience and on various assumptions which are believed to be reasonable under the circumstances.
Non-controlling Interests in Consolidated Affiliates. The consolidated financial statements include all assets, liabilities, revenues and expenses of less-than-100%-owned affiliates the Company controls. Accordingly, the Company has recorded non-controlling interests in the earnings and equity of such entities. The Company recorded adjustments to non-controlling interests for the allocable portion of income or loss to which the non-controlling interest holders are entitled based upon their portion of the subsidiaries they own. Distributions to holders of non-controlling interest are adjusted to the respective non-controlling interest holders balance.
Accounts Receivable. Accounts receivable primarily consist of amounts due from third-party payors and patients. Receivables from government-related programs (i.e. Medicare and Medicaid) represent the only concentrated groups of credit risk for the Company and management does not believe that there is significant credit risks associated with these receivables. Commercial and managed care receivables consist of receivables from various payors involved in diverse activities and subject to differing economic conditions, and do not represent any concentrated credit risk to the Company. Self-pay revenues are derived primarily from patients who do not have any form of healthcare coverage. The revenues associated with self-pay patients are generally reported at the Companys gross charges. The Company evaluates these patients, after the patients medical condition is determined to be stable, for their ability to pay based upon federal and state poverty guidelines, qualifications for Medicaid or other governmental assistance programs. Accordingly, the accounts receivable reported in the Companys Consolidated Balance Sheets are recorded at net amount expected to be received.
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Table of Contents
UNIVERSITY GENERAL HEALTH SYSTEM, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Accounts receivables are stated at estimated net realizable value. The breakdown of accounts receivable by payer classification as of March 31, 2012 and December 31, 2011 consists of the following:
March 31, 2012 | December 31, 2011 | |||||||
Commercial and managed care providers |
56.5 | % | 54.3 | % | ||||
Government-related programs |
36.4 | % | 34.5 | % | ||||
Self-pay patients |
7.1 | % | 11.2 | % | ||||
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Total |
100.0 | % | 100.0 | % | ||||
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Accounts receivable are based on gross patient receivables of $48,231,877 and $45,726,222, net of contractual adjustments of $28,835,251 and $27,909,614 as of March 31, 2012 and December 31, 2011, respectively. Additionally, the Company had other accounts receivable of $562,812 and $167,080 as of March 31, 2012 and December 31, 2011. The Company maintains allowances for uncollectible accounts for estimated losses resulting from the payors inability to make payments on accounts. The Company assesses the reasonableness of the allowance account based on historic write-offs, the aging of accounts and other current conditions. Furthermore, management continually monitors and adjusts the allowances associated with its receivables. Accounts are reserved as bad debt when collection efforts have been exhausted. Recoveries of receivables previously written off are recorded when received. The allowance for doubtful accounts was $8,479,365 and $7,070,327 as of March 31, 2012 and December 31, 2011, respectively.
Revenue Recognition
The Company recognizes revenues in the period in which services are performed. The Company derives a significant portion of its revenues from the hospital segment. Accordingly, the revenues reported in the Companys Consolidated Statements of Operations are recorded at the net amount expected to be received.
Hospital Segment
The Company recognizes net patient service revenues in the reporting period in which it performs the service based on its current billing rates (i.e., gross charges), less adjustments and estimated discounts for contractual allowances (principally for patients covered by Medicare, Medicaid, and managed care and other health plans). The Company records gross service charges in its accounting records on an accrual basis using its established rates for the type of service provided to the patient. The Company recognizes an estimated contractual allowance to reduce gross patient charges to the amount it estimates it will actually realize for the service rendered based upon previously agreed to rates with a payor. Such estimated contractual allowances are based primarily upon historical collection rates for various payers, and assumes consistently with regard to patients discharged in similar time periods for the same payor classes. Payors include federal and state agencies, including Medicare and Medicaid, managed care health plans, commercial insurance companies and patients.
The process of estimating contractual allowances requires the Company to estimate the amount expected to be received based on payor contract provisions. The key assumption in this process is the estimated contractual reimbursement percentage, which is based on payor classification and historical paid claims data. Due to the complexities involved in these estimates, actual payments the Company receives could be different from the amounts it estimates and records. If the actual contractual reimbursement percentage under government programs and managed care contracts differed by 1.0% at March 31, 2012 from its estimated reimbursement percentage, net revenues for the three months ended March 31, 2012 would have changed by approximately $0.8 million, and net accounts receivable at March 31, 2012 would have changed by approximately $0.1 million. Final settlements under some of these programs are subject to adjustment based on administrative review and audit by third parties. The Company accounts for adjustments to previous program reimbursement estimates as contractual allowance adjustments and reports them in the periods that such adjustments become known.
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Table of Contents
UNIVERSITY GENERAL HEALTH SYSTEM, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Revenues related to the Companys hospital segment consist primarily of net patient service revenues, which are based on the facilities established billing rates less adjustments and discounts. Summary information for revenues for the three months ended March 31, 2012 and 2011 is as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2012 | 2011 | |||||||
Gross patient service revenues |
$ | 83,941,480 | $ | 60,541,583 | ||||
Less estimated contractual adjustments and discounts |
(65,926,835 | ) | (44,807,547 | ) | ||||
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Revenues before provision for doubtful accounts |
$ | 18,014,645 | $ | 15,734,036 | ||||
Provision for doubtful accounts |
(1,396,912 | ) | (290,803 | ) | ||||
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Net patient service revenues |
$ | 16,617,733 | $ | 15,443,233 | ||||
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The hospital has agreements with third-party payors that provide for payments to the hospital at amounts different from its established rates. Payment arrangements include prospectively-determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Net patient service revenue is reported at the estimated net realizable amount from patients, third-party payors, and others for services rendered, including estimated contractual adjustments under reimbursement agreements with third party payors. Allowances and discounts are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. These allowance and discounts are related to the Medicare and Medicaid programs and managed care contracts.
The following table sets forth the revenues (after contractual adjustments and discounts) and percentages from major payor sources for the Companys hospital segment during the periods indicated:
Three Months Ended | ||||||||||||||||
March 31, | ||||||||||||||||
2012 | Ratio | 2011 | Ratio | |||||||||||||
Commercial and managed care providers |
$ | 10,479,784 | 63.1 | % | $ | 9,381,034 | 60.7 | % | ||||||||
Government-related programs |
6,020,116 | 36.2 | 5,747,781 | 37.2 | ||||||||||||
Self-pay patients |
1,514,745 | 9.1 | 605,221 | 3.9 | ||||||||||||
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Revenues before provision for doubtful accounts |
18,014,645 | 108.4 | 15,734,036 | 101.8 | ||||||||||||
Provision for doubtful accounts |
(1,396,912 | ) | (8.4 | ) | (290,803 | ) | (1.8 | ) | ||||||||
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Net patient service revenue less provision for bad debts |
$ | 16,617,733 | 100.0 | % | $ | 15,443,233 | 100.0 | % | ||||||||
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Senior Living Segment
Revenues related to the Companys Senior Living segment consist primarily of resident fees, entrance fees, community fees and management fees. Resident fee revenue is recorded when services are rendered and consists of fees for basic housing, support services and fees associated with additional services such as personalized assisted living care. Residency agreements are generally non-binding, for a term of one year, with resident fees billed monthly in advance.
The TrinityCare Facilities have residency agreements that require the resident to pay an upfront fee prior to occupying the senior living community. The non-refundable portion of the entrance fee is recorded as deferred revenue and amortized over the estimated stay of the resident based on an actuarial valuation. The refundable portion of a residents entrance fee is generally refundable within a certain number of months or days following contract termination. In such instances, the refundable portion of the fee is not amortized and included in refundable entrance fees and deferred revenue.
All refundable amounts due to residents at any time in the future, including those recorded as deferred revenue are classified as current liabilities. The non-refundable portion of entrance fees expected to be earned and recognized in revenue in one year is recorded as a current liability. The balance of the non-refundable portion is recorded as a long-term liability.
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Table of Contents
UNIVERSITY GENERAL HEALTH SYSTEM, INC.
Notes to Consolidated Financial Statements
(Unaudited)
The majority of community fees received by the TrinityCare Facilities is non-refundable and is recorded initially as deferred revenue. The deferred amounts, including both the deferred revenue and the related direct resident lease origination costs, are amortized over the estimated stay of the resident, which is consistent with the contractual terms of the resident lease. The refundable portion of a residents community fee is generally refundable within a certain number of months or days following the residents move-in into the community. In such instances, the refundable portion of the fee is not amortized and included in refundable community fees and deferred revenue.
TrinityCare Senior Living, LLC provides management services to the TrinityCare Facilities, as well as an assisted living community and two memory care greenhouses in Georgia. Management fee revenue is determined by an agreed upon percentage of gross revenues and recorded as services are provided. Management fee revenue received from the TrinityCare Facilities has been eliminated in consolidation.
Support Services Segment
Billing and coding revenues are generated from revenue cycle management services provided by UGHS Autimis Billing Inc. and UGHS Autimis Coding Inc. to UGH LP and other third-party clients. Fees charged for these services are defined in service agreements and based upon a stated percentage of cash collections. Food and support services revenues are generated from environmental, food and nutrition, and facilities management services by Sybaris Group Inc. to clients in the Houston metropolitan area. Revenue is recognized as services are performed. Billing, coding and food and support services revenue received from the Hospital operating segment has been eliminated in consolidation.
Other Comprehensive Income. The Company has no components of Other Comprehensive Income and, accordingly, no Statement of Comprehensive Income has been included in the accompanying consolidated financial statements.
Recent Accounting Pronouncements. In July 2011, the FASB issued ASU No. 2011-07 Health Care Entities (Topic 954) Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities (ASU 2011-07), which requires the provision for bad debts associated with patient service revenue to be separately displayed on the face of the statement of operations as a component of net revenue. This standard also requires enhanced disclosure of significant changes in estimates related to patient bad debts. ASU 2011-07 requires retrospective application and will be effective for interim and annual reporting periods beginning after December 15, 2011, with early adoption permitted. This pronouncement will change the presentation of the Companys revenues on its statements of operations as well as requiring additional disclosures. The Company adopted ASU 2011-07 during the period ended March 31, 2012. All periods presented in this Form 10-Q have been reclassified in accordance with ASU 2011-7.
NOTE 2 BUSINESS OPERATIONS
University General Health System, Inc. is a diversified, integrated multi-specialty health care provider that delivers concierge physician- and patient-oriented services by providing timely, innovative health solutions that are uniquely competitive, efficient, and adaptive in today's health care delivery environment. The Company currently operates one hospital and two ambulatory surgical centers in the Houston area. The Company also owns a revenue management company, a hospitality service provider and facility management company, three senior living facilities and manages six senior living facilities.
As of May 10, 2012, the Company currently owns or operates the following centers:
| University General Hospital, which is a 69-bed general acute care hospital near Texas Medical Center in Houston, Texas. |
| A hyberbaric wound care center as an HOPD of University General Hospital doing business under the name University General Hospital -Hyperbaric Wound Care Center. |
9
Table of Contents
UNIVERSITY GENERAL HEALTH SYSTEM, INC.
Notes to Consolidated Financial Statements
(Unaudited)
| Baytown Endoscopy Center, which is a 3-bed ambulatory surgery center. The Baytown Endoscopy Center is an HOPD of University General Hospital doing business under the name University General Hospital-Baytown Endoscopy Center. |
| Mainland Surgery Center, which is an ambulatory surgery center in Dickinson, Texas, located approximately 25 miles from University General Hospital. |
| Trinity Oaks senior living community in Pearland, Texas, which is an 80 unit senior living community providing independent living and assisted living services since 2001. |
| Trinity Shores senior living community in Port Lavaca, Texas, which is a 63 unit senior living community providing independent living, assisted living and memory care services since 2007. |
| Trinity Hills senior living community in Knoxville, Tennessee, which is an 87 unit senior living community providing independent living, assisted living and memory care services since 2007. |
| UGHS Autimis Billing, Inc., which is a revenue cycle management company that specializes in serving hospitals, ambulatory surgery centers, outpatient laboratories and free-standing outpatient emergency rooms. |
| UGHS Autimis Coding, Inc., which is a specialized health care coding company that serves hospitals, ambulatory surgery centers, outpatient laboratories and free-standing outpatient emergency rooms. |
| Sybaris Group, Inc., which is a luxury hospitality service provider and facilities management company. |
As of March 31, 2012, the Company operated under three segments of business: Hospital, Senior Living and Support Services. As the Company implements its business plan, the Company expects to operate in complementary business segments, including: hospitals, ancillary services, management services and real estate holdings. The Company intends to aggressively pursue its acquisitions strategy during the remainder of 2012 and beyond.
NOTE 3 GOING CONCERN
The Company had net income of $489,438 and net cash provided by operating activities of $2,971,037 for the three months ended March 31, 2012. In addition, the Company had negative working capital of $57,712,710 and held cash and cash equivalents of $423,894 at March 31, 2012. The negative working capital amounts raise substantial doubt concerning the Companys ability to continue as a going concern for a reasonable period of time.
Management believes that the Companys current level of cash flows will be sufficient to sustain operations in the next twelve months. The Company is currently working with certain vendors to extend repayment terms. Further, management believes that the Company has additional opportunities to raise capital in the public markets and is in current negotiations with investors and banks to raise capital and secure additional financing.
Effective April 30, 2012 the Company completed a private placement transaction for the purchase of 35,950,000 shares of its Common Stock at a price of $0.14 per share from a group of accredited investors, resulting in net proceeds to the Company of approximately $5.0 million. The shares were issued without registration in reliance on the exemption in Section 4(2) of the Securities Act of 1933 Rule 506 of Regulation D thereunder. Effective May 2, 2012 the Company also completed a securities purchase agreement (the Securities Purchase Agreement) with institutional investors (the Purchasers), for the private issuance and sale by the Company to the Purchasers an aggregate of 3,808 shares of the Companys Series C Variable Rate Convertible Preferred Stock (the Preferred Shares) with each Preferred Share initially convertible into approximately 4,545 shares of the Companys common Stock (the Conversion Shares) and warrants to purchase up to an aggregate of 17,309,094 shares of the Companys Common Stock (the Warrants). The Preferred Shares were issued at an original issue discount. As such, for each $1,000 invested, a Purchaser will receive Preferred Shares with an aggregate stated value of $1,120. After deducting for fees and expenses, the aggregate net proceeds from the sale of the Preferred Shares and Warrants was approximately $3.1 million. The Company used these proceeds to pay tax payments and retired certain outstanding loan balances.
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UNIVERSITY GENERAL HEALTH SYSTEM, INC.
Notes to Consolidated Financial Statements
(Unaudited)
There can be no assurance that the plans and actions proposed by management will be successful or that unforeseen circumstances will not require the Company to seek additional funding sources in the future or effectuate plans to conserve liquidity. In addition, there can be no assurance that in the event additional sources of funds are needed they will be available on acceptable terms, if at all. The accompanying financial statements have been prepared on a going concern basis which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
NOTE 4 ACQUISITIONS
TrinityCare
On June 28, 2011, the Company, through wholly-owned subsidiaries, agreed to acquire 100% of the assets and assumed certain of the liabilities of the TrinityCare Facilities and separately agreed to acquire 51% of the ownership interests of TrinityCare Senior Living, LLC ( "TrinityCare Senior Living, LLC"). The acquisitions contemplated by these agreements were completed effective June 30, 2011 (the Closing Date). The TrinityCare Facilities consist of three senior living communities, located in Texas and Tennessee. TrinityCare Senior Living, LLC is a developer of senior living communities and provides management services to the TrinityCare Facilities as well as an assisted living community and two memory care greenhouses in Georgia. The TrinityCare Facilities and TrinityCare Senior Living, LLC are sometimes referred to collectively as TrinityCare. The Company acquired TrinityCare to further its integrated regional diversified healthcare network. The Company has included the financial results of TrinityCare in the consolidated financial statements from the date of acquisition. TrinityCare is included in the Senior Living operating segment.
The total purchase consideration for the TrinityCare Facilities was $17,898,735, consisting of: 1) $1,407,546 cash payable on August 30, 2011; 2) $2,815,089 in seller subordinated promissory notes payable over two years; and 3) the issuance by UGHS of 14,395,895 shares of its Common Stock, par value $0.001 per share (the "UGHS Common Stock"), valued at $13,676,100. The total purchase consideration was based upon a fair market valuation of TrinityCare determined by the Company, with consideration of the valuation report obtained from a third party appraisal firm. As of March 31, 2012, the outstanding balance of the cash payable for the acquisitions was $1,007,380.
This acquisition was accounted for under the acquisition method of accounting. Accordingly, the Company conducted assessments of net assets acquired and recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while transaction and integration costs associated with the acquisitions were expensed as incurred. The initial accounting for the business combinations is not complete and adjustments to provisional amounts, or recognition of additional assets acquired or liabilities assumed, may occur as more detailed analyses are completed and additional information is obtained about the facts and circumstances that existed as of the acquisition dates.
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UNIVERSITY GENERAL HEALTH SYSTEM, INC.
Notes to Consolidated Financial Statements
(Unaudited)
The following table summarizes the considerations paid for the acquired assets and the preliminary acquisition accounting for the fair values of the assets recognized and liabilities assumed in the Consolidated Balance Sheets at the acquisition date. These balances are subject to change when final asset valuations are obtained and the potential for liabilities has been evaluated.
Assets |
||||
Current assets |
$ | 734,658 | ||
Property and equipment |
29,893,564 | |||
Other noncurrent assets |
2,031,967 | |||
Goodwill |
9,727,426 | |||
|
|
|||
Total assets acquired |
$ | 42,387,615 | ||
|
|
|||
Liabilities |
||||
Accounts payable and accrued expenses |
$ | 827,603 | ||
Deferred revenue |
24,375 | |||
Notes payable, current portion |
6,830,976 | |||
Notes payable, less current portion |
11,655,780 | |||
|
|
|||
Total liabilities assumed |
$ | 19,338,734 | ||
|
|
|||
Assets acquired less liabilities assumed |
$ | 23,048,881 | ||
Less: fair value attributable to noncontrolling interest |
(5,150,146 | ) | ||
|
|
|||
Total purchase consideration |
$ | 17,898,735 | ||
|
|
Goodwill includes goodwill attributable to both the Companys and noncontrolling interest. The fair value of goodwill attributable to noncontrolling interest was estimated to be approximately $5,150,146 and was based on the purchase price the Company paid for its 51% ownership interest of TrinityCare Senior Living, LLC. The goodwill balance is primarily attributable to TrinityCares assembled workforce and the expected synergies and revenue opportunities when combining the senior living communities with the Companys integrated healthcare network.
On June 30, 2011, separate and apart from the TrinityCare acquisitions, the Company through wholly-owned subsidiaries entered into Profit Participation Agreements (Profit Agreements) with one of the minority members (Member) of each of the Sellers of the TrinityCare Facilities. Pursuant to the Profit Agreements, through which the Company granted a 10.0% interest in the net proceeds attributable to any fiscal year during the term of the Profit Agreements for each of the facilities in exchange for specified future and on-going duties and services to be provided by the Member for the benefit of the facility. The Company will estimate and accrue for anticipated profit interest payments for each fiscal year.
Autimis
On June 30, 2011, through wholly-owned subsidiaries, the Company executed asset acquisition agreements with Autimis Billing and Autimis Coding (collectively Autimis), pursuant to which the Company acquired the business assets and properties of Autimis. Autimis Billing is a revenue cycle management company that specializes in serving hospitals, ambulatory surgery centers, outpatient laboratories and free-standing outpatient emergency rooms. Autimis Coding is a specialized health care coding company also serving hospitals, ambulatory surgery centers, outpatient laboratories and free-standing outpatient emergency rooms. Prior to the acquisition, Autimis had provided billing, coding and other revenue cycle management services to UGH since September 2009 under separate service agreements. The Company acquired Autimis to further its integrated regional diversified healthcare network. The Company has included the financial results of Autimis in the consolidated financial statements from the date of acquisition. Autimis is included in the Support Services segment.
The total purchase consideration for Autimis was approximately $8,280,000, consisting of the issuance by UGHS of 9,000,000 shares (the Autimis Stock Consideration) of the Companys Common Stock. Following completion of the Autimis acquisition, Sellers of Autimis owned approximately 3.3% of the Companys outstanding common stock. The total purchase consideration was based upon a fair market valuation of Autimis determined by the Company, with consideration of the valuation report obtained from a third party appraisal firm.
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UNIVERSITY GENERAL HEALTH SYSTEM, INC.
Notes to Consolidated Financial Statements
(Unaudited)
This acquisition was accounted for under the acquisition method of accounting. Accordingly, the Company conducted assessments of net assets acquired and recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while transaction and integration costs associated with the acquisitions were expensed as incurred. The initial accounting for the business combinations is not complete and adjustments to provisional amounts, or recognition of additional assets acquired or liabilities assumed, may occur as more detailed analyses are completed and additional information is obtained about the facts and circumstances that existed as of the acquisition dates.
The following table summarizes the considerations paid for the acquired assets and the preliminary acquisition accounting for the fair values of the assets recognized and liabilities assumed in the Consolidated Balance Sheets at the acquisition date. These balances are subject to change when final asset valuations are obtained and the potential for liabilities has been evaluated.
Assets |
||||
Current assets |
$ | 132,847 | ||
Property and equipment |
92,537 | |||
Intangible asset-software |
1,200,000 | |||
Goodwill |
7,067,321 | |||
|
|
|||
Total assets acquired |
$ | 8,492,705 | ||
|
|
|||
Liabilities |
||||
Accounts payable and accrued expenses |
$ | 212,705 | ||
|
|
|||
Total liabilities assumed |
$ | 212,705 | ||
|
|
|||
Total purchase consideration |
$ | 8,280,000 | ||
|
|
Current assets with aggregate fair value of $132,847 include accounts receivable with fair value of $119,382. The goodwill of $7,067,321 is deductible for income tax purposes. The goodwill balance is primarily attributable to Autimis assembled workforce and the expected synergies and revenue opportunities when combining the revenue cycle management tools of Autimis within the Companys integrated solutions. The Company identified intangible assets associated with software and assigned the fair value of $1,200,000. The estimated useful life associated with software was 10 years.
Sybaris
On December 31, 2011, through wholly-owned subsidiaries, the Company executed asset acquisition agreements with The Sybaris Group, LLC (Sybaris), pursuant to which the Company acquired the business assets and properties of Sybaris. Sybaris is a hospitality service provider and facilities management company. Sybaris provides environmental, food and nutrition, and facilities management services to twelve clients in the Houston metropolitan area, including University General Hospital. The quality of services provided by Sybaris will contribute to the success of the Companys growth strategy and allow it to continue providing concierge-level services to the Companys patients and physicians as the Company expands into new markets, and contribute to its bottom line, which is of paramount interest to its shareholders. The Company has included the financial results of Sybaris in the consolidated financial statements from the date of acquisition. Sybaris is included in the Support Services segment.
The total purchase consideration for Sybaris was approximately $1,400,000, consisting of the issuance by UGHS of 5,000,000 shares (the Sybaris Stock Consideration) of the Companys Common Stock. Following completion of the Sybaris acquisition, Sellers of Sybaris owned approximately 1.8% of the Companys outstanding common stock. The total purchase consideration was based upon a fair market valuation of Sybaris determined by the Company, with consideration of the valuation report obtained from a third party appraisal firm.
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UNIVERSITY GENERAL HEALTH SYSTEM, INC.
Notes to Consolidated Financial Statements
(Unaudited)
This acquisition was accounted for under the acquisition method of accounting. Accordingly, the Company conducted assessments of net assets acquired and recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while transaction and integration costs associated with the acquisitions were expensed as incurred. The initial accounting for the business combinations is not complete and adjustments to provisional amounts, or recognition of additional assets acquired or liabilities assumed, may occur as more detailed analyses are completed and additional information is obtained about the facts and circumstances that existed as of the acquisition dates.
The following table summarizes the considerations paid for the acquired assets and the preliminary acquisition accounting for the fair values of the assets recognized and liabilities assumed in the Consolidated Balance Sheets at the acquisition date. These balances are subject to change when final asset valuations are obtained and the potential for liabilities has been evaluated.
Assets |
||||
Current assets |
$ | 66,841 | ||
Property and equipment |
38,881 | |||
Goodwill |
1,504,563 | |||
|
|
|||
Total assets acquired |
$ | 1,610,285 | ||
|
|
|||
Liabilities |
||||
Accounts payable and accrued expenses |
$ | 140,844 | ||
Notes payable, current portion |
7,126 | |||
Notes payable, less current portion |
62,315 | |||
|
|
|||
Total liabilities assumed |
$ | 210,285 | ||
|
|
|||
Total purchase consideration |
$ | 1,400,000 | ||
|
|
The total current assets with aggregate fair value of $66,841, include cash and prepaid insurance, approximates fair value because of the relatively short maturity of these instruments. The goodwill of $1,504,563 is deductible for income tax purposes. The goodwill balance is primarily attributable to Sybaris assembled workforce and the expected synergies and revenue opportunities when combining the hospitality service and facilities management of Sybaris within the Companys integrated solutions.
The unaudited pro-forma information below for the three months ended March 31, 2012 and 2011 gives effect to these acquisitions as if the acquisitions had occurred on January 1, 2011. The pro-forma financial information is not necessarily indicative of the results of operations if the acquisitions had been effective as of this date.
Three Months Ended | ||||||||
March 31, | ||||||||
2012 | 2011 | |||||||
Revenues |
$ | 19,087,055 | $ | 17,791,612 | ||||
Income from operations |
2,017,003 | 1,446,319 | ||||||
Net income (loss) attributable to the Company |
489,438 | (110,048 | ) | |||||
Basic income (loss) per share |
0.00 | (0.00 | ) |
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UNIVERSITY GENERAL HEALTH SYSTEM, INC.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 5 DEBT OBLIGATIONS
Lines of Credit
On July 9, 2008, UGH LP entered into an Amended and Restated Line of Credit Agreement for a $7,000,000 secured revolving credit facility with interest rate of 6.0% that matures on April 15, 2012. This Amended and Restated Line of Credit Agreement amends and restates the Companys former Line of Credit Agreement of $8,000,000 dated March 27, 2006, which was set to mature on April 30, 2011. On September 1, 2006, UGH GP entered into another line of credit agreement for a $1,500,000 secured revolving credit facility with interest rate of 8.0% originally maturing April 30, 2011. In June 2011, the Company and the financial institution agreed to extend the term of the line of credit from April 30, 2011 to April 15, 2012. Loans under these lines of credit are secured by the Companys accounts receivable, contract rights, general intangibles instruments, cash and cash equivalents and all other asset accounts. The lines of credit contain various terms and conditions, including operational and financial restrictions and limitations, and affirmative covenants. The covenants include financial covenants measured on a quarterly basis which require the Company to maintain maximum leverage and minimum fixed charge ratios as defined in the line of credit agreements. The Company was not in compliance with certain of the financial covenants contained in the lines of credit agreements as of March 31, 2012 and December 31, 2011; however, the financial institution waived such non-compliance covenants. The Company has classified the lines of credit as short-term liabilities at March 31, 2012 and December 31, 2011 in the Consolidated Balance Sheets. As of March 31, 2012 and December 31, 2011, the Company had outstanding balances on the lines of credit of $8,451,025. The Company recognized interest expense on the lines of credit of $134,021 and $122,978 for the three months ended March 31, 2012 and 2011, respectively.
Notes Payable
The Companys third party notes payable consisted of the following:
March 31, 2012 | December 31, 2011 | |||||||
Note payable, maturing on April 15, 2012, interest rate of 6.0% at March 31, 2012 |
$ | 4,350,000 | $ | 5,150,000 | ||||
Note payable, maturing on April 27, 2012, interest rate of 18.0% at March 31, 2012 |
2,000,000 | 2,000,000 | ||||||
Note payable, maturing on June 30, 2012, interest rate of 6.34% at March 31, 2012 |
181,370 | 403,302 | ||||||
Note payable to Siemens, maturing on May 31, 2013, interest rate of 6.0% at March 31, 2012 |
2,753,232 | 3,451,555 | ||||||
Notes payable to Medicare, maturing on October 1, 2013, interest rates ranging from 11.0% to 11.5% at March 31, 2012 |
622,327 | 818,776 | ||||||
Notes payable, due on demand, interest rate of 5.25% at March 31, 2012 |
1,404,063 | 1,404,063 | ||||||
Notes payable, no fixed maturity date, interest rate of 5.0% at March 31, 2012 |
2,150,000 | 2,250,000 | ||||||
Note payable, due on demand, interest rate of 3.25% at March 31, 2012 |
982,079 | 982,079 | ||||||
Various notes payable, due on various dates, interest rates ranging from 0.0% to 6.25% at March 31, 2012 |
30,000 | 132,708 | ||||||
Note payable, maturing on March 31, 2012, interest rate of 6.5% at March 31, 2012 |
386,126 | 434,626 | ||||||
Mortgage payable to Davis-Penn Mortgage Company, maturing on June 1, 2043, interest rate of 5.75% at March 31, 2012 |
6,152,862 | 6,170,366 | ||||||
Mortgage payable to Trustmark National Bank, maturing on May 31, 2012, interest rate of 5.0% at March 31, 2012 |
5,270,950 | 5,311,654 | ||||||
Mortgage payable to Citizens National Bank of Sevierville, maturing on July 13, 2012, interest rate of 6.5% at March 31, 2012 |
5,738,765 | 5,777,268 | ||||||
Subordinated promissory notes issued in connection with TrinityCare acquisition, maturing on June 30, 2013, interest rates of 6% at March 31, 2012 |
2,815,089 | 2,815,089 | ||||||
Various notes payable, bearing interest ranging from 0% to 10.5%, maturing in June 2012 at March 31, 2012 |
301,556 | 340,319 | ||||||
|
|
|
|
|||||
Total debt |
$ | 35,138,419 | $ | 37,441,805 | ||||
Less: current portion |
(27,298,071 | ) | (28,982,331 | ) | ||||
|
|
|
|
|||||
Total debt, less current portion |
$ | 7,840,348 | $ | 8,459,474 | ||||
|
|
|
|
15
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UNIVERSITY GENERAL HEALTH SYSTEM, INC.
Notes to Consolidated Financial Statements
(Unaudited)
In 2006, the Company entered into a $9,000,000 construction loan with Amegy Bank. Advances under this loan were originally scheduled to mature on March 27, 2007. This loan is secured by the Companys accounts receivable, contract rights, general intangibles instruments, cash and cash equivalents and all other asset accounts. The loan contains various terms and conditions, including operational and financial restrictions and limitations, and affirmative covenants. The covenants include financial covenants measured on a quarterly basis which require the Company to maintain maximum leverage and minimum fixed charge ratios as defined in the loan agreement. In June 2011, the Company and Amegy Bank agreed to extend the terms of the loan to January 15, 2012 and subsequently extended to April 15, 2012, bearing interest rate at 6.0%, modified the monthly payments of the note payable and provided a waiver to the Company for violations of financial covenants. As of May 9, 2012, the Company and Amegy Bank agreed to extend the term of the line of credit from April 15, 2012 to September 15, 2012. As a result, the Company classified the amount due in 2012 as short-term at March 31, 2012 and December 31, 2011. At March 31, 2012 and December 31 2011, the total outstanding balance of these notes was $4,350,000 and $5,150,000, respectively.
Sigma Opportunity Fund, LLC (the Service Provider) purchased 625,000 shares of common stock, par value $0.001 per share, of the Company for an aggregate purchase price of $200,000 in cash. In addition, The Service Provider agreed to finance the acquisition of TrinityCare and provide funds for the retirement of certain debts of the Company which yielded a favorable settlement for the Company. The financing agreement entered into was a $2,000,000 note purchase agreement with the Service Provider on October 27, 2011. The note purchase agreement is securitized by 100% of the assets of the Company. Advances under this note purchase agreement mature April 27, 2012, and bear interest rate at 18.0% per annum. Principal is payable on the maturity date, but under certain conditions may be extended. The note purchase agreement contains certain covenants including limitations on certain indebtedness, limitations on asset sales and liquidations and limitations on certain issuances. At March 31, 2012 and December 31, 2011, $2,000,000 was outstanding under the note purchase agreement. The Company has paid this note purchase agreement in full as of May 3, 2012.
On September 30, 2011, the Company entered into a $714,162 finance agreement with a third-party financial institution, bearing interest at a rate of 6.34% and will be repaid in monthly payments of $61,097 over a period of nine months beginning on October 30, 2011. The purpose of this finance agreement is to purchase general liability and malpractice insurance policies for the Company. As of March 31, 2012 and December 31, 2011, the outstanding balance on this finance agreement was $181,370 and $403,302.
On September 15, 2011, the Company entered into a settlement of litigation with Siemens Medical Solutions. As part of the settlement, the Company agreed to pay Siemens an aggregate of $4,850,000 over a period of 20 months beginning in October 2011 and through May 2013. As of March 31, 2012 and December 31, 2011, the outstanding balance was $2,753,232 and $3,451,555.
The Company entered into various loans due to Medicare related to overpayment for Medicare Services. The loans bear interest rates ranging from 11.0% to 11.5% and will be repaid in monthly installments. As of March 31, 2012 and December 31, 2011, the outstanding balance on this finance agreement was $622,327 and $818,776, respectively.
In December 2006, the Company entered into a $2,000,000 promissory note with a third-party financial institution, bearing interest at a rate of 5.25% and initially was to be repaid in monthly installments over twelve months. The note was modified on December 13, 2007 into two separate notes requiring monthly payments of interest only. The Company agreed to pay these regular monthly payments of all accrued unpaid interest assessed on the outstanding principal balance due as of each payment date. At March 31, 2012 and December 31, 2011, the amount outstanding on these notes was $1,404,063.
On December 22, 2011, the Company entered into a compromise and settlement agreement with Texas Community Bank (Texas Community) with respect to an approximately $2.6 million promissory note. Under the terms of the agreement, Texas Community agreed to reduce the principal balance from $2,401,950 to $2,350,000 and forgive all past due interest, late fees and penalties accruing through the date of the agreement. The agreement further provides that effective January 1, 2012, the interest rate is reduced by 200 basis points (or 2.0%) per year until such amount is paid in full. The negotiations regarding this compromise and settlement agreement were handled by the Board of Directors of the Company. The gain on this transaction was accounted for as a troubled debt restructuring modification of terms pursuant to ASC 470. At March 31, 2012 and December 31, 2011, the amount outstanding on these notes was $2,150,000 and $2,250,000, respectively.
In November 2006, the Company entered into a $1.0 million promissory note with a third-party financial institution, bearing interest at the fixed rate of 3.25% and due on demand. The note was modified on January 8, 2007 requiring monthly payments of interest only. The Company agreed to pay these regular monthly payments of all accrued unpaid interest assessed on the outstanding principal balance due as of each payment date. At March 31, 2012 and December 31, 2011, the amount outstanding on this note was $982,079.
16
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UNIVERSITY GENERAL HEALTH SYSTEM, INC.
Notes to Consolidated Financial Statements
(Unaudited)
In connection with the TrinityCare acquisition, the Company entered into subordinated promissory notes of approximately $2,815,089 with sellers in June 2011. The promissory notes bear interest rate of 6.0% and are payable over two years. At March 31, 2012 and December 31, 2011, the amount outstanding on this note was $2,815,089.
The Company recognized total interest expense on all of its notes payable of $562,619 and $213,132 for the three months ended March 31, 2012 and 2011, respectively. The Company accrued interest payable of $558,303 and $469,285 as of March 31, 2012 and December 31, 2011, respectively.
Total principal payment obligations relating to the Companys third party notes payable for the next five years and thereafter are as follows:
Payments | ||||
2013 |
$ | 27,298,071 | ||
2014 |
1,836,933 | |||
2015 |
81,404 | |||
2016 |
86,210 | |||
2017 |
91,300 | |||
Thereafter |
5,744,501 | |||
|
|
|||
Total |
$ | 35,138,419 | ||
|
|
See further discussion regarding the related party notes payable in Note 7.
NOTE 6 LEASE OBLIGATIONS
Capital Leases
The Company has 11 capital lease obligations with five financing companies and collateralized by underlying assets. The total aggregate net book value of the assets capitalized under these capital lease obligations was $26,683,469 at March 31, 2012. These capital lease obligations have stated interest rates ranging from 3.6% to 17.2%, are payable in 1 to 292 monthly installments, and mature between March 15, 2012 and July 30, 2036. As of March 31, 2012 and December 31, 2011, the Company had capital lease obligations of $37,173,124 and $37,021,438, respectively. Future minimum annual payments, together with the present value of the minimum lease payments under capital leases at March 31, 2012, are summarized as follows:
Related Party | Third Party | |||||||||||
Leases | Leases | Total | ||||||||||
2013 |
$ | 2,323,333 | $ | 7,857,470 | $ | 10,180,803 | ||||||
2014 |
2,323,333 | 169,029 | 2,492,362 | |||||||||
2015 |
2,323,333 | 21,492 | 2,344,825 | |||||||||
2016 |
2,323,333 | 16,119 | 2,339,452 | |||||||||
2017 |
2,323,333 | | 2,323,333 | |||||||||
Thereafter |
54,308,578 | | 54,308,578 | |||||||||
|
|
|
|
|
|
|||||||
Total minimum lease payments |
$ | 65,925,243 | $ | 8,064,110 | $ | 73,989,353 | ||||||
Less amounts representing interest |
34,943,580 | 1,872,649 | 36,816,229 | |||||||||
|
|
|
|
|
|
|||||||
Present value of minimum lease payments |
30,981,663 | 6,191,461 | 37,173,124 | |||||||||
Less current portion |
249,154 | 5,976,202 | 6,225,356 | |||||||||
|
|
|
|
|
|
|||||||
Long-term portion |
$ | 30,732,509 | $ | 215,259 | $ | 30,947,768 | ||||||
|
|
|
|
|
|
17
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UNIVERSITY GENERAL HEALTH SYSTEM, INC.
Notes to Consolidated Financial Statements
(Unaudited)
The Company violated a capital lease debt covenant with a third party and recorded all of the related capital lease obligation of $5,706,156 as a current liability as of March 31, 2012 and December 31, 2011.
See further discussion regarding the related party capital lease obligation in Note 7.
NOTE 7 RELATED PARTY TRANSACTIONS
Receivables from Related Parties
Receivables from related parties include employee advances and advances to affiliates consisted of the following:
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
Receivable from shareholder of UGH GP |
$ | 438,820 | $ | 438,820 | ||||
Receivable from Executive Officer |
145,201 | 145,201 | ||||||
Receivable from Cambridge |
| 74,743 | ||||||
|
|
|
|
|||||
Total receivables from related parties |
$ | 584,021 | $ | 658,764 | ||||
|
|
|
|
Payables to Related Parties
Payables to related parties include advances from employees and amounts due to affiliates for services rendered consisted of the following:
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
Interest on notes payable to shareholders |
1,554,571 | 1,560,581 | ||||||
Payable to Sybaris |
932,507 | 932,507 | ||||||
Payable to Cambridge |
20,862 | | ||||||
|
|
|
|
|||||
Total payables to related parties |
$ | 2,507,940 | $ | 2,493,088 | ||||
|
|
|
|
Related Party Costs and Expenses
The following table summarizes related party costs and expenses that are reflected in the accompanying Consolidated Statements of Operations:
Three Months Ended | ||||||||
March 31, | ||||||||
2012 | 2011 | |||||||
Interest expense |
$ | 616,229 | $ | 653,888 | ||||
Management fees |
| 461,814 | ||||||
General and administrative expense |
304,614 | 1,699,635 | ||||||
Amortization expense |
171,290 | 171,290 | ||||||
|
|
|
|
|||||
Total |
$ | 1,092,133 | $ | 2,986,627 | ||||
|
|
|
|
18
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UNIVERSITY GENERAL HEALTH SYSTEM, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Related Party Capital Lease Obligation
Cambridge Properties (Cambridge) owns the land and building on which the hospital is located. Cambridge is one of the Companys major shareholders. The Company has leased the hospital space from Cambridge pursuant to a Lease Agreement. The Lease Agreement has an initial term of 10 years beginning October 1, 2006, plus tenant's option to renew the term for two additional 10 year periods. In addition to base rent, the Lease Agreement provides that the Company pays its pro-rata share of the operating expenses. The obligations of the Company under the Lease Agreement are secured by the personal guarantees of certain shareholders of the Company. The Company has previously been in litigation with Cambridge concerning monetary default of certain rent obligations under the Lease Agreement. The Company has cured such defaults and makes periodic payment of rent as permitted by current cash flows requirements. Should the Companys relationship with Cambridge deteriorate further, the Company will be required to devote additional resources to protect its rights under the Lease Agreement.
As of March 31, 2012 and December 31, 2011, the Company recorded a related party capital lease obligation of $30,981,663 and $31,042,859, respectively. Additionally, the Company incurred amortization expense of $171,290 related to the hospital for each of the three months ended March 31, 2012 and 2011. The interest expense related to the capital lease obligation was $519,637 and $516,385 for the three months ended March 31, 2012 and 2011, respectively.
The Company had no related party receivable as of March 31, 2012 and $74,743 as of December 31, 2011 from Cambridge principally related to an overpayment of overhead allocation expenses during 2011. The Company had a related party payable of $20,862 at March 31, 2012. During the three months ended March 31, 2012 and 2011, the Company incurred overhead allocation expenses and parking expenses from Cambridge of $214,444 and $258,076, respectively. These expenses were recorded as general and administrative expenses (G&A) in the Consolidated Statements of Operations.
Management Services Agreements
Certain shareholders of the Company have organized APS, a Texas limited liability company, as a service company. APS is one of the Companys major shareholders. The Company and APS have entered into a management services agreement, pursuant to which APS provides management services to the Companys hospital segment for an initial term of five years. Compensation under this agreement was based on 5.0% of net revenue recorded in the financial statements. This agreement with APS was terminated on February 28, 2011. The Company incurred management services fees of $0 and $461,814 for the three months ended March 31, 2012 and 2011, respectively.
Food Services, Plant Operations & Management, Environmental and Other Services Agreement
Prior to the acquisition of Sybaris, certain shareholders of the Company had organized Sybaris Group, LLC (Sybaris), a Texas limited liability company, as a service company. The Company and Sybaris have entered into a management services agreement, pursuant to which Sybaris provides food services, plant operations and management, environmental and other services to the hospital for an initial term of five years. Compensation under this agreement is based on (i) expense reimbursement for direct costs incurred by Sybaris, (ii) a general expense allowance of six percent (6.0%) of the direct costs incurred by Sybaris and (iii) a service fee of four percent (4.0%) of the direct costs incurred by Sybaris. Amounts payable to Sybaris under this agreement are adjusted annually based on cost of living and other customary adjustments.
On December 31, 2011, the Company, through wholly-owned subsidiaries, acquired certain assets and assumed certain of the liabilities of Sybaris. All accounts receivable of the Seller are specifically excluded from the acquisition and a majority of the accounts receivable balance is owed by the Company. The Company believes the terms of the transaction between Sybaris and the Company are fair, reasonable and reflects fair market value. The Company recorded $1,014,559 services fees to Sybaris for the three months ended March 31, 2011, which were recorded as general and administrative expenses and included in the Consolidated Statements of Operations. At March 31, 2012 and December 31, 2011, the Company had related party payables to Sybaris of $932,507.
Other Related Party Transactions
The Company also makes advances to and receives advances from certain other entities. As of March 31, 2012 and December 31, 2011, a shareholder of the Company owes $438,820 for advance. The advance is non-interest bearing and due upon demand and collaterized by shares of the Company with value in excess of amounts owed.
The Company received and issued non-interest bearing advances from an executive officer for working capital purposes. At March 31, 2012 and December 31, 2011, the Company had receivables of $145,201 from an executive officer, respectively.
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UNIVERSITY GENERAL HEALTH SYSTEM, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Certain shareholders of the Company have organized Sigma Consulting LLC (Sigma), a Texas limited liability company, as a service company. Sigma provided information technology consulting services to UGH LP, and for the three months ended March 31, 2012 and 2011, UGH LP incurred total service expenses of $90,170 and $65,202, respectively, which were recorded as general and administrative expenses in the Consolidated Statements of Operations. The Company believes that these payments to Sigma are fair and reasonable.
Notes Payable to Related Parties
Notes payable to related parties consist of the following:
March 31, 2012 | December 31, 2011 | |||||||
Note payable to a shareholder, due on demand, interest rate of 10.0% |
$ | 1,923,000 | $ | 1,923,000 | ||||
Notes payable to shareholder, due on demand, non-interest bearing |
29,962 | 84,962 | ||||||
Trinity notes payable to a shareholder, due on demand, non-interest bearing |
258,094 | 263,499 | ||||||
Note payable to a shareholder, due on demand, interest rate of 15.0% |
134,000 | 154,000 | ||||||
Note payable to a shareholder,maturing in 2017, non-interest bearing |
350,000 | 370,000 | ||||||
Note payable to a shareholder, maturing in 2017, interest rate of 2.43%, with a discount of $90,561 and $112,791 at March 31, 2012 and December 31, 2011 , respectively |
1,269,439 | 1,286,836 | ||||||
Subordinated promissory notes payable to shareholders, maturing in 2028, interest rate of 15.0% |
700,000 | 700,000 | ||||||
|
|
|
|
|||||
Total notes payable to related parties |
$ | 4,664,495 | $ | 4,782,297 | ||||
Less: current portion |
2,754,455 | 2,798,783 | ||||||
|
|
|
|
|||||
Notes payable to related parties, less current portion |
$ | 1,910,040 | $ | 1,983,514 | ||||
|
|
|
|
Future principal payment obligations related to the Companys related party notes payable at March 31, 2012 are as follows:
Principle | ||||
Payments | ||||
2013 |
$ | 2,754,455 | ||
2014 |
387,167 | |||
2015 |
222,496 | |||
2016 |
227,955 | |||
2017 |
233,549 | |||
Thereafter |
838,873 | |||
|
|
|||
Total |
$ | 4,664,495 | ||
|
|
On October 5, 2006, the Company entered into a $2,000,000 loan agreement with Dr. Spiegel, bearing interest at a rate of 10.0%, and which is due on demand. Dr. Spiegel beneficially owns more than ten percent (10%) of the Companys common stock. The purpose of this loan agreement is to support the Companys working capital. As of March 31, 2012 and December 31, 2011, the outstanding balance on this loan agreement was $1,923,000.
In 2008, UGH LP entered into Subscription Agreements with certain partners, pursuant to which UGH LP sold to the partners in the aggregate of nine units (9) of limited partner interests for $900,000 of the Partnerships 15.0% Subordinated Promissory Notes due 2028. As of March 31, 2012 and December 31, 2011, the total outstanding balance of these notes was $700,000, respectively.
The Company recognized total interest expense on all of its related party notes payable and capital lease of $616,229 and $653,888 for the three months ended March 31, 2012 and 2011, respectively. Total accrued interest on notes payable to related parties was $1,554,571 and $1,560,581 at March 31, 2012 and December 31, 2011, respectively.
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UNIVERSITY GENERAL HEALTH SYSTEM, INC.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 8 COMMITMENTS AND CONTINGENCIES
Litigation
From time to time, the Company may become involved in litigation relating to claims arising out of its operations in the normal course of business. The Company is not involved in any pending legal proceeding or litigation and, to the best of the Companys knowledge, no governmental authority is contemplating any proceeding to which the Company is a party or to which any of its properties is subject, which would reasonably be likely to have a material adverse effect on the Company, except for the following:
Prexus
On December 4, 2009, Prexus Health Consultants, LLC and its affiliate, Prexus Health LLC (collectively, Prexus), sued UGH LP and Ascension Physician Solutions, LLC ("APS") in the 270th District Court of Harris County, Texas, Cause No. 2009-77474, seeking (i) $224,863 for alleged breaches of a Professional Services Agreement (the PSA) under which Prexus provided billing, coding and transcription services, (ii) $608,005 for alleged breaches of a Consulting Services Agreement (the CSA) under which Prexus provided professional management and consulting services, and (iii) lost profit damages for the remaining term of the agreements (UGH LP and APS terminated these contracts effective September 9, 2009). Prexus subsequently added additional claims seeking lost profits and other damages for alleged tortious interference of Prexus contracts. In October 2010, UGH LP and APS filed counterclaims against Prexus seeking $1,687,242 in damages caused by Prexus breach of the CSA.
On October 11, 2011, the trial court judge entered judgment against UGH LP for approximately $2,900,000, including $2,100,000 in lost profits. The judgment also awarded additional amounts for pre-judgment and post-judgment interest. UGH LP timely appealed the lost profits portion of the judgment and has suspended enforcement of the judgment pending the result of the appeal. The Company believes the appellate court is likely to reduce the amount of the judgment to $861,000 which is the amount of unpaid fees to Prexus prior to the effective date of termination. As a result, the Company accrued this amount plus $139,000 for attorney fees and estimated post judgment interest as of March 31, 2012, which is included in the Consolidated Balance Sheets.
Siemens
On June 29, 2010, Siemens Medical Solutions USA, Inc. (Siemens) sued UGH LP in the 215th District Court of Harris County, Texas, Cause No. 2010-40305, seeking approximately $7,000,000 for alleged breaches of (i) a Master Equipment Lease Agreement dated August 1, 2006 and related agreements (the Lease Agreements), pursuant to which UGH LP leased certain radiology equipment and (ii) an Information Technology Agreement dated March 31, 2006 and related agreements (the IT Agreements) pursuant to which Siemens agreed to provide an information technology system, software and related services. On November 22, 2010 UGH LP filed counterclaims against Siemens seeking approximately $5,850,000 against Siemens for breach of contract, negligent representation and breach of warranty based on Siemens breach of the Lease Agreements and the IT Agreements. On February 28, 2011, the court signed an order granting partial summary judgment in favor of Siemens and against UGH LP as to UGH LP's liability for breach of the Lease Agreements, but not as to damages sought by Siemens.
On September 15, 2011, the parties to the Siemens litigation reached a settlement of the pending litigation. As part of the settlement, UGH LP agreed to pay Siemens an aggregate of $4,850,000 over a period of 20 months beginning in October 2011 through May 2013. The Company will have an on-going relationship with Siemens. As of March 31, 2012 and December 31, 2011 the Company accrued the present value of this unpaid claim of $2,753,232 and $3,451,555 in the Consolidated Balance Sheets.
UGH LP is currently in a dispute with Siemens regarding the settlement agreement entered into on September 15, 2011. Specifically UGH LP disputes the entry of the agreed judgment securing the settlement as a result of an alleged breach of the settlement agreement. UGH LP has filed a timely appeal and suspended enforcement of the agreement judgment pending such appeal.
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UNIVERSITY GENERAL HEALTH SYSTEM, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Internal Revenue Service
UGH LP currently owes the Internal Revenue Service (the IRS) past due payroll taxes. Until paid in full, statutory penalties and interest will continue to accrue. The IRS has filed tax liens covering such amounts with various governmental authorities and has taken other actions to collect these balances. UGH LP is working with IRS representatives on payment arrangements to satisfy these balances on an amicable basis. In August 2011, UGH LP entered into an installment agreement with the IRS pursuant to which UGH LP paid $165,000 per month towards satisfaction of the outstanding balance for various quarters in 2009. In March 2012, this agreement was terminated and the outstanding balance thereafter has been paid in full. At March 31, 2012 and December 31, 2011, the Company accrued $4,943,678 and $4,171,826, respectively.
Management Service Agreements
Kingwood Neighborhood Emergency Center
On February 25, 2011, UGH LP entered into agreements to establish the emergency room operations of Kingwood Neighborhood Emergency Center (Emergency Center) as a hospital outpatient department (HOPD) of UGH, and the Emergency Center was opened on April 25, 2011. UGH conducts these operations pursuant to real estate and equipment subleases with Emergency Center.
Emergency Center and UGH LP also entered into a management services agreement whereby the Emergency Center provides ongoing administrative and management services to UGH LP for this department. All agreements have an initial term of two years beginning February 25, 2011, plus automatic renewal options for additional one year periods. In consideration for such services, UGH LP pays an agreed percentage of all revenue received for each Emergency Center patient less the lease expenses and other expenses for these operations as defined in the agreement.
UGH LP also retains an exclusive right of first refusal for the purchase of the Emergency Center business during the term of the management services agreement and 12 months following any termination of that agreement. Effective February 10, 2012, both parties have mutually agreed to terminate this agreement.
NOTE 9 EQUITY
Common Stock Offerings
On March 28, 2011, pursuant to an Agreement and Plan of Reorganization (Reorganization Agreement) executed on March 10, 2011, UGH GP and UGH LP (collectively UGH Partnerships) were acquired by SeaBridge Freight Corp. (SeaBridge), a publicly reporting Nevada corporation, in a reverse merger (Merger) in exchange for the issuance of shares of common stock, a majority of the common stock, to the former partners of the UGH Partnerships. Approximately 90 physicians are former owners of UGH and are now our shareholders. At the same time, SeaBridge changed its name to University General HealthSystem, Inc.
On February 15, 2011, prior to the closing of the Merger, the Company entered into Subscription Agreements with certain strategic accredited investors (the Purchasers), pursuant to which the Company sold to the Purchasers in the aggregate 56,805,787 shares of common stock at a purchase price of approximately $0.13 per share. The aggregate purchase price paid by the Purchasers for the common stock was $7,250,000 and included a stock subscription receivable of $152,000, which is non-interest bearing due on demand. The Company used the proceeds to pay tax payments, certain outstanding loan balances, and certain capital lease settlements, and for working capital purposes. Pursuant to the terms of the Merger, these shares are subject to lock-up leak-out resale restrictions that limit the number of shares that may be resold to 1/24 of such shares per month (on a non-cumulative basis) over the 24 month period beginning six months following the closing date of the Merger.
On February 28, 2011, prior to the Merger, the Company entered into Executive Unit Agreements with certain key executives (the Executives), pursuant to which the Company sold to the Executives in the aggregate 22,040,000 shares of common stock (Executive Securities) at a purchase price of approximately $0.09 per share, and Executives entered into promissory notes with the Company for the same amount. The aggregate purchase price paid by the Executives for the common stock was $2,000,000 subject to the Executive Unit Agreements. The shares purchased by each of the Executives are subject to repurchase by the Company if, prior to February 28, 2013, the Executives employment with the Company is terminated for cause (as defined in the Executive Unit Agreement) or the Executive resigns from his or her employment without good reason (as defined in the Executive Unit Agreement).
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UNIVERSITY GENERAL HEALTH SYSTEM, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Pursuant to the terms of the Merger, these shares are subject to lock-up leak-out resale restrictions that limit the number of shares that may be resold to 1/24 of such shares per month (on a non-cumulative basis) over the 24 month period beginning six months following the closing date of the Merger. The Company used the proceeds for working capital purposes. The promissory notes are due on March 1, 2021. The promissory notes bear interest rate at 4.0%, and the accrued interest shall be paid in full on the date on which the final principal payments on these notes are made. The executives shall prepay a portion of the promissory notes equal to the amount of all cash proceeds the Executives receive in connection with his ownership, disposition, transfer or sales of the Executive Securities.
At March 31, 2012, the outstanding stock subscription receivable balance was $2,152,000 and accrued $87,068 of interest income related to these notes.
Debt Exchange Agreements
On February 28, 2011 prior to the Merger, the Company entered into Debt Exchange Agreements with certain key creditors (the Creditors), pursuant to which the Creditors cancelled and released the Company from its obligations totaling $3,500,000 and received 40,600,587 shares of common stock at a purchase price of approximately $0.09 per share. Pursuant to the terms of the Merger, these shares are subject to lock-up leak-out resale restrictions that limit the number of shares that may be resold to 1/24 of such shares per month (on a non-cumulative basis) over the 24 month period beginning six months following the closing date of the Merger.
Issuance of Common Stock to Affiliate for Termination of Service Agreement
Certain shareholders of the Company organized APS as a hospital management company. In September 2006, UGH LP and APS have entered into a Management Services Agreement (the "Management Agreement"), pursuant to which APS provided management services to UGH LP. In consideration for such services, UGH LP was obligated to pay APS a management fee of 5.0% of the net revenues of the Hospital. Net revenues are defined in the Management Agreement as the Hospital's gross revenues, less adjustments for special contractual rates, charity work and an allowance for uncollectible accounts, all determined in accordance with generally accepted accounting principles.
On February 28, 2011, prior to the Merger, UGH LP terminated the management services agreement with APS by issuing 11,600,000 shares of common stock to APS valued at a purchase price of $1,000,000. Pursuant to the terms of the Merger, these shares are subject to lock-up leak-out resale restrictions that limit the number of shares that may be resold to 1/24 of such shares per month (on a non-cumulative basis) over the 24 month period beginning six months following the closing date of the Merger.
Series B Preferred Stock
On March 10, 2011, the Company issued 3,000 shares of Series B Preferred Stock to Hassan Chahadeh, which, except as otherwise required by law, has the number of votes equal to the number of votes of all outstanding shares of capital stock plus one additional vote so that such shareholder shall always constitute a majority of the Companys voting rights. Therefore, Hassan Chahadeh retains the voting power to approve all matters requiring shareholder approval and has significant influence over the Companys operations. This preferred issuance has no economic value.
Issuance of Common Stock in connection with the TrinityCare acquisition
On June 28, 2011, the Company issued 12,895,895 shares of its common stock in connection with the acquisition of Trinity Care at a price of $0.95 per share. On the closing date, 9,978,090 shares were delivered to the sellers of TrinityCare and 2,917,805 shares were deposited into an escrow account to be released to the sellers one year after the closing date, subject to certain performance measurement criteria specified in the acquisition agreements. These Escrow Shares were released and delivered to the sellers of TrinityCare on October 14, 2011.
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UNIVERSITY GENERAL HEALTH SYSTEM, INC.
Notes to Consolidated Financial Statements
(Unaudited)
On July 1, 2011, the Company amended the purchase agreement for the TrinityCare LLC acquisition to increase the purchase price payable to the sellers. The Company issued an additional 1,500,000 shares of its common stock at a price of $0.95 per share.
Sigma Opportunity Fund, LLC purchased from the Company 625,000 shares of common stock, par value $0.001 per share, of the Company for an aggregate purchase price of $200,000 in cash. In addition to assist in the financing of the acquisition of the TrinityCare, and the retirement of certain debt, the Company entered into a note purchase agreement with Sigma Opportunity Fund, LLC (the Service Provider) on October 27, 2011.
Issuance of Common Stock in connection with the Autimis acquisition
On June 30, 2011, the Company issued 9,000,000 shares of its common stock in connection with the acquisition of Autimis at a price of $0.92 per share.
Exchange of Profit Interest for Common Stock
Effective August 10, 2009, the Company entered into an agreement with a debtor to terminate and replace an existing note payable with 1.0% of the Companys Profit Interest, and a term note payable of $20,000 monthly payment for 99 months. At March 28, 2011, in conjunction with the merger, the 1.0% profit interest was exchanged for 2,204,000 shares of common stock of the Company. Pursuant to the terms of the Merger, these shares are subject to lock-up leak-out resale restrictions that limit the number of shares that may be resold to 1/24 of such shares per month (on a non-cumulative basis) over the 24 month period beginning six months following the closing date of the Merger.
Issuance of Common Stock in connection with the Sybaris acquisition
On December 31, 2011, the Company issued 5,000,000 shares of its common stock in connection with the acquisition of Sybaris at a price of $0.28 per share.
Distributions of Noncontrolling Interests
During the three months ended March 31, 2012, the Company distributed cash to holders of noncontrolling interests of $172,762.
NOTE 10 GAIN ON EXTINGUISHMENT OF LIABILITIES
In the three months ended March 31, 2012 and 2011, the Company settled certain accounts payable with vendors, and reduced the accounts payable owed to those vendors. For the three months ended March 31, 2012 and 2011, the Company recognized a gain on extinguishment of liabilities of $96,739 and $1,303,366, respectively.
NOTE 11 INCOME TAX
No provision for federal income taxes has been recognized for the three months ended March 31, 2012 and 2011 as the Company has net operating loss carryforwards for income tax purposes.
The Company is subject to a tax mandated by the State of Texas based on a defined calculation of gross margin (the margin tax). The margin tax is calculated by applying a tax rate to a base that considers both revenue and expenses and therefore has the characteristics of an income tax. As a result, the Company recorded $99,000 and $81,000 in state income tax expense for the three months ended March 31, 2012 and 2011, respectively
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UNIVERSITY GENERAL HEALTH SYSTEM, INC.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 12 SEGMENT INFORMATION
Under ASC Topic No. 280, Segment Reporting, operating segments are defined as components of an enterprise about which separate financial statement is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Companys chief operating decision-making group is composed of the chief executive officer, chief financial officers and members of senior management.
The Company operates in three lines of business(i) as a hospital, (ii) as a senior living care community, and (iii) as a support services company. These segments were determined based on the way that the Companys chief operating decision makers organize the Companys business activities for making operating decisions and assessing performance.
Before the second quarter of 2011, the Company reported one operating segment, the Hospital. As a result of the acquisitions of TrinityCare and Autimis in June 2011 and Sybaris in December 2011, the Company changed its reportable segments as follows:
(i) | Hospital. The Company provides a full array of services including inpatient and outpatient medical treatments and surgeries, heart catheterization procedures, physical therapy, diagnostic imaging and respiratory therapy, as well as other ancillary services. The Company also provides 24-7 emergency services and comprehensive inpatient services including critical care and cardiovascular services. |
(ii) | Senior Living. Senior living communities offer housing and 24-hour assistance with activities of daily life to mid-acuity frail and elderly residents. The Company also operates memory care services specially designed for residents with Alzheimers disease and progressive dementia. |
(iii) | Support Services. The Company provides billing, coding and other revenue cycling management services to University General Hospital, its 69-bed acute care hospital in Houston, as well as other clients not affiliated with the Company. The Companys food and support services group provides a number of interrelated service including food, hospitality and facility services for businesses and healthcare facilities. |
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UNIVERSITY GENERAL HEALTH SYSTEM, INC.
Notes to Consolidated Financial Statements
(Unaudited)
The following table presents selected financial information for the Companys operating segments:
For the Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Revenues |
||||||||
Hospital |
$ | 16,685,117 | $ | 15,449,215 | ||||
Senior living |
1,918,238 | | ||||||
Support Services |
1,924,918 | | ||||||
Intersegment revenues |
(1,441,218 | ) | | |||||
|
|
|
|
|||||
Total revenues |
$ | 19,087,055 | $ | 15,449,215 | ||||
|
|
|
|
|||||
Depreciation and amortization |
||||||||
Hospital |
$ | 1,421,917 | $ | 1,762,607 | ||||
Senior living |
262,384 | | ||||||
Support Services |
40,872 | | ||||||
|
|
|
|
|||||
Total depreciation and amortization |
$ | 1,725,173 | $ | 1,762,607 | ||||
|
|
|
|
|||||
Operating income from operations |
||||||||
Hospital |
$ | 1,865,825 | $ | 820,928 | ||||
Senior living |
150,767 | | ||||||
Support Services |
411 | | ||||||
Intersegment income |
| | ||||||
|
|
|
|
|||||
Total operating income |
$ | 2,017,003 | $ | 820,928 | ||||
|
|
|
|
|||||
As of March 31, 2012 |
As of December 31, 2011 |
|||||||
Total segment assets |
||||||||
Hospital |
$ | 61,368,686 | $ | 62,233,413 | ||||
Senior living |
42,011,579 | 42,416,144 | ||||||
Support Services |
10,267,999 | 10,018,368 | ||||||
|
|
|
|
|||||
Total assets |
$ | 113,648,264 | $ | 114,667,925 | ||||
|
|
|
|
NOTE 13 SUBSEQUENT EVENTS
On April 13, 2012, through wholly-owned subsidiaries, the Company completed the assets acquisition of Baytown Endoscopy Center, LLC (the Baytown Center). The Baytown Center is a three-bed ambulatory surgery center which operates as a hospital outpatient department (HOPD) of the Companys hospital segment. Primary procedures at the Baytown Center include gastroenterology and pain management. The Baytown Center is co-managed with Jacinto Medical Group, P.A., which is a prominent multi-specialty group of physicians operating in Baytown. The Company expects the Baytown Center to contribute approximately $12 million in net patient revenue, along with projected Earnings before Interest, Tax, Depreciation and Amortization (EBITDA) of $5 million, during its first year of operations. Baytown Center is included in the hospital segment. The Company paid $161,915 in total consideration for the assets. The transaction was financed primarily with issuing a one-year promissory note payable. The purchase included assets and assumption of certain equipment financing commitments.
Effective April 30, 2012 the Company completed a private placement transaction for the purchase of 35,950,000 shares of its Common Stock at a price of $0.14 per share from a group of accredited investors, resulting in net proceeds to the Company of approximately $5.0 million. The shares were issued without registration in reliance on the exemption in Section 4(2) of the Securities Act of 1933 Rule 506 of Regulation D thereunder. The Company used these proceeds to pay tax payments and retired certain outstanding loan balances.
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UNIVERSITY GENERAL HEALTH SYSTEM, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Effective May 2, 2012 the Company also completed a securities purchase agreement (the Securities Purchase Agreement) with institutional investors (the Purchasers), for the private issuance and sale by the Company to the Purchasers an aggregate of 3,808 shares of the Companys Series C Variable Rate Convertible Preferred Stock (the Preferred Shares) with each Preferred Share initially convertible into approximately 4,545 shares of the Companys common Stock (the Conversion Shares) and warrants to purchase up to an aggregate of 17,309,094 shares of the Companys Common Stock (the Warrants). The Preferred Shares were issued at an original issue discount. As such, for each $1,000 invested, a Purchaser will receive Preferred Shares with an aggregate stated value of $1,120. After deducting for fees and expenses, the aggregate net proceeds from the sale of the Preferred Shares and Warrants was approximately $3.1 million. The Company used these proceeds to pay tax payments and retired certain outstanding loan balances.
On May 2, 2012, the Company announced the signing of an Asset Purchase Agreement between the Company and a diagnostic imaging and physical therapy center that are located in the northern portion of the Houston metropolitan area. The transaction is expected to close on or before May 31, 2012, subject to customary closing conditions. The diagnostic imaging and physical therapy centers will each become hospital outpatient departments of the Companys University General Hospital.
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ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this quarterly report including, without limitation, statements in the Managements Discussion and Analysis of Financial Condition and Results of Operations included in this quarterly report on Form 10-Q, regarding our financial condition, estimated working capital, business strategy, the plans and objectives of our management for future operations and those statements preceded by, followed by or that otherwise include the words expects or does not expect, is expected, anticipates or does not anticipate, plans, estimates, approximately, believes, continue, forecast, ongoing, pending, potential, seeks, views, or intends, or stating that certain actions, events or results may, must, could, would, might, should or will be taken, occur or be achieved are not statements of historical fact and may be forward-looking statements. Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors which could cause actual events or results to differ from those expressed or implied by the forward-looking statements, including, without limitation:
| risks related to environmental laws and regulations and environmental risks; |
| risks related to changes in and the competitive nature of the healthcare industry; |
| risks related to stock price and volume volatility; |
| risks related to our ability to access capital markets; |
| risks related to our ability to successfully implement our business and acquisition strategies; |
| risks related to our issuance of additional shares of common stock. |
Readers should consider the risks and uncertainties described in our Annual Report on Form 10-K for the year ended December 31, 2011 (Form 10-K). Readers should carefully review the Form 10-K in its entirety including, but not limited to, our financial statements and the notes thereto and the risks and uncertainties described in Item 1ARisk Factors of the Form 10-K. Forward-looking statements contained in this Form 10-Q are as of the date of this Form 10-Q. We do not undertake to update its forward-looking statements.
General
University General Health System, Inc. (we, UGHS or the Company) is a diversified, integrated multi-specialty health care provider that delivers concierge physician- and patient-oriented services by providing timely, innovative health solutions that are uniquely competitive, efficient, and adaptive in today's health care delivery environment. We currently operate one hospital and two ambulatory surgical centers in the Houston area. We also own a revenue management company, a hospitality service provider and facility management company, three senior living facilities and manage six senior living facilities. We plan to complete additional complementary acquisitions during the remainder of 2012 and future years in Houston and other markets.
Our current business was founded in 2005 to establish University General Hospital in Houston, Texas (UGH), a 69-bed physician-owned general acute care hospital, including six intensive care unit beds and 11 intermediate care unit beds. The hospital provides inpatient, outpatient and ancillary services including inpatient surgery, outpatient surgery, heart catheterization procedures, physical therapy, diagnostic imaging and respiratory therapy. UGH provides 24-7 emergency services and comprehensive inpatient services including critical care and cardiovascular services. We formed University General Hospital, LP (UGH LP) as a Texas limited partnership to own and operate UGH and formed University Hospital Systems, LLP as a Delaware limited liability partnership (UGH GP) to act as the general partner of UGH LP. UGH commenced business operations as a general acute care hospital on September 27, 2006.
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On March 31, 2011, we formed UGHS Hospitals, Inc., UGHS Ancillary Services, Inc., UGHS Management Services, Inc., and UGHS Real Estate, Inc. Effective June 30, 2011, we completed the acquisitions of the three senior living communities: Trinity Oaks of Pearland, Texas, Trinity Shores of Port Lavaca, Texas, and Trinity Hills of Knoxville, Tennessee. UGHS also acquired 51.0% of the ownership interests of TrinityCare Senior Living, LLC (TrinityCare), a developer and manager of senior living communities. As UGHS majority-owned subsidiary, TrinityCare continues to manage the three existing senior living communities, and will continue to develop additional communities across the United States and internationally. Additionally, effective June 30, 2011, UGHS acquired specialized health care billing, coding and other revenue cycle management companies, Autimis, LLC, and Autimis Medical Billing, LLC.
On December 31, 2011, we completed the acquisition of Sybaris Group, LLC (Sybaris), a luxury hospitality service provider and facility management company. The acquisition of Sybaris will allow us to grow more rapidly and leverage the scalability of our business model. In connection with the acquisition of Sybaris, we changed our Revenue Management operating segment name to Support Services, Inc. (Support Services) and additionally Sybaris changed its name to Sybaris Group, Inc. and is included in the Support Services operating segment. We have included the financial results of Sybaris in the consolidated financial statements from the date of acquisition.
As of March 31, 2012, we conducted operations through our wholly-owned subsidiaries, UGHS Hospitals, Inc., UGHS Ancillary Services, Inc., UGHS Management Services, Inc., UGHS Real Estate, Inc., UGHS Senior Living of Pearland, LLC, UGHS Senior Living of Port Lavaca, LLC, UGHS Senior Living of Knoxville, LLC, UGHS Autimis Billing, Inc., UGHS Coding, Inc. and Sybaris Group, Inc.
We made progress on a number of our strategic initiatives during the three months ended March 31, 2012. During the first quarter, our hospital segment earned national recognition for distinction in Bariatric Surgery by Blue Cross and Blue Shield of Texas for demonstrating better overall quality of care and patient results in bariatric surgery. Blue Distinction is a national designation awarded by Blue Cross and Blue Shield companies to medical facilities that have demonstrated expertise in delivering quality healthcare in the areas of bariatric surgery, cardiac care, complex and rare cancers, knee and hip replacement, spine surgery or transplants. To earn this designation, University General Hospital was evaluated based on objective, evidence-based selection criteria established with input from expert physicians and medical organizations. The goal of Blue Distinction is to identify medical facilities that deliver better overall quality and medical outcomes for specific types of specialty care, thereby helping patients and doctors make more informed hospital choices.
In addition, during the three months ended March 31, 2012, we entered into a three-year agreement with Vital Weight Control, Inc. (NeWeigh) in order to expand the bariatric services offered by University General Hospital. NeWeigh, a patient advocacy group, is a pioneer in comprehensive weight loss programs in the Houston area. Founded in 1991, NeWeighs mission was to provide a multi-disciplinary program to assist people who desired treatment for morbid obesity. NeWeighs services include motivational support; access to psychological and dietary counseling; non-medical, medical and surgical treatment options; and pre- and post-operative support groups. Additionally, NeWeigh offers assistance to those who are seeking insurance approval for treatment of this condition. Based upon historical data, we anticipate that University General Hospital will increase the number of bariatric surgeries and other related procedures once the NeWeigh program is fully implemented, resulting in an increase in revenue for the hospital. Moreover, no additional immediate outlay of capital is anticipated by us, as University General Hospital is fully equipped for bariatric procedures at the present time.
The financial information, discussion and analysis that follow should be read in conjunction with our Consolidated Financial Statements as included in the Form 10-K.
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Results of Operations
The following table contains our consolidated and segments results of operations for the three months ended March 31, 2012 and 2011:
Three Months Ended March 31, (1) | ||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||
Amount | % of Revenues | Amount | % of Revenues | Variance | ||||||||||||||||
Revenues |
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Hospital |
$ | 16,685,117 | 87.4 | % | $ | 15,449,215 | 100.0 | % | $ | 1,235,902 | ||||||||||
Senior living |
1,918,238 | 10.0 | N/A | N/A | 1,918,238 | |||||||||||||||
Support services |
483,700 | 2.5 | N/A | N/A | 483,700 | |||||||||||||||
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Total Revenues |
19,087,055 | 100.0 | 15,449,215 | 100.0 | 3,637,840 | |||||||||||||||
Operating expenses |
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Salaries, wages and benefits |
8,281,991 | 43.4 | 6,134,717 | 39.7 | 2,147,274 | |||||||||||||||
Medical supplies |
2,932,125 | 15.4 | 3,160,635 | 20.5 | (228,510 | ) | ||||||||||||||
Management fees (includes related party management fees of $0 and $461,814, respectively) |
| | 1,389,655 | 9.0 | (1,389,655 | ) | ||||||||||||||
General and administrative expenses (includes related party expenses of $304,614 and $1,699,635, respectively) |
4,227,502 | 22.1 | 3,484,039 | 22.6 | 743,463 | |||||||||||||||
Gain on extinguishment of liabilities |
(96,739 | ) | (0.5 | ) | (1,303,366 | ) | (8.4 | ) | 1,206,627 | |||||||||||
Depreciation and amortization (includes related party expenses of $171,290 and $171,290, respectively) |
1,725,173 | 9.0 | 1,762,607 | 11.4 | (37,434 | ) | ||||||||||||||
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Total operating expenses |
17,070,052 | 89.4 | 14,628,287 | 94.7 | 2,441,765 | |||||||||||||||
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Operating income |
2,017,003 | 10.6 | 820,928 | 5.3 | 1,196,075 | |||||||||||||||
Other income (expense) |
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Interest expense, net of interest income of $20,000 for 2012 and $0 for 2011 (includes related party interest expense $616,229 and $653,888, respectively) |
(1,437,965 | ) | (7.5 | ) | (1,179,696 | ) | (7.6 | ) | (258,269 | ) | ||||||||||
Other income |
11,583 | 0.1 | | | 11,583 | |||||||||||||||
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Income (loss) before income tax |
590,621 | 3.1 | (358,768 | ) | (2.3 | ) | 949,389 | |||||||||||||
Income tax expense |
99,000 | 0.5 | 81,000 | 0.5 | 18,000 | |||||||||||||||
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Income (loss) before noncontrolling interest |
491,621 | 2.6 | (439,768 | ) | (2.8 | ) | 931,389 | |||||||||||||
Net income attributable to noncontrolling interests |
(2,183 | ) | (0.0 | ) | | | (2,183 | ) | ||||||||||||
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Net income (loss) attributable to the Company |
$ | 489,438 | 2.6 | % | $ | (439,768 | ) | (2.8 | )% | $ | 929,206 | |||||||||
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(1) | Percentages may not foot due to rounding. |
Consolidated Results of Operations
Our revenues for the three months ended March 31, 2012 increased $3.7 million, or 24.0%, to $19.1 million as compared to $15.4 million for the three months ended March 31, 2011. The revenues increase was primarily attributable to a 6.3% increase in our average daily census. The average daily census for the three months ended March 31, 2012 was 34 as compared to 32 for the three months ended March 31, 2011. This increase in net patient revenues was also driven by the continued development of the physician-centric, integrated health delivery system strategy. The acquisitions of TrinityCare, Autimis and Sybaris contributed to additional revenues of approximately $2.4 million for the three months ended March 31, 2012.
Salaries, wages and benefits for the three months ended March 31, 2012 increased approximately $2.2 million, or 36.1%, to $8.3 million from $6.1 million for the three months ended March 31, 2011. As a percentage of revenues, salaries, wages and benefits increased to 43.4% in the three months ended March 31, 2012 from 39.7% in the three months ended March 31, 2011. The increase in the salaries, wages and benefits rate was primarily due to the acquisitions of TrinityCare, Autimis and Sybaris of approximately $2.1 million.
Medical supplies expense for the three months ended March 31, 2012 decreased approximately $0.2 million, or 6.5%, to $2.9 million from $3.1 million for the three months ended March 31, 2011. On an adjusted patient day (APD) basis, medical expenses for the three months ended March 31, 2012 decreased approximately by 24.8% or $486 per APD from $646 per APD for the three months ended March 31, 2011. As a percentage of revenues, our medical supplies expense decreased to 15.4% in the three months ended March 31, 2012 as compared to 20.5% in the three months ended March 31, 2011. Medical supplies rate decreased in the three months ended March 31, 2012 due to an increase in net revenues, coupled with a decrease in the number of surgeries performed as compared to the three months ended March 31, 2011. Surgeries for the three months ended March 31, 2012 were 1,515 compared to 1,618 for the comparable prior year period.
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We have terminated all of our remaining management services agreements during the first quarter of 2012. Management fees for the three months ended March 31, 2011 was $1.4 million.
General and administrative (G&A) expenses for the three months ended March 31, 2012 increased approximately $0.8 million, or 22.9%, to $4.3 million from $3.5 million for the three months ended March 31, 2011. The increase in G&A expenses was due to the acquisitions of TrinityCare, Autimis and Sybaris of approximately $1.4 million, offset by a decrease in a hospital segment by approximately $0.6 million. As a percentage of revenues, G&A expenses improved to 22.1% in the three months ended March 31, 2012 from 22.6% in the three months ended March 31, 2011 due to increased net revenue.
During the three months ended March 31, 2012 and 2011, we settled certain accounts payable with vendors, and reduced the accounts payable owed to those vendors. For the three months ended March 31, 2012 and 2011, we recognized a gain on extinguishment of liabilities of $0.1 million and $1.3 million, respectively.
Depreciation and amortization expense remained consistent at $1.7 million for the three months ended March 31, 2012 compared to the three months ended March 31, 2011, as a result of some assets being fully depreciated in the current quarter as compared to prior quarter, offset by an increase of approximately $0.3 million in the acquisitions of TrinityCare, Autimis and Sybaris.
Net interest expense was $1.4 million during the three months ended March 31, 2012 as compared to $1.2 million during the three months ended March 31, 2011. Interest expense is primarily comprised of interest on borrowings under the lines of credit, amortization of debt issue costs, interest on financing lease obligations, related party notes and debt obligations. The increase in interest expense in the first quarter of 2012, as compared to the prior year first quarter, was attributable to an increase in our outstanding debt balance in the fourth quarter and debt assumed from the acquisition of TrinityCare and Sybaris.
We are subject to a tax mandated by the State of Texas based on a defined calculation of gross margin (the margin tax). The margin tax is calculated by applying a tax rate to a base that considers both revenue and expenses and therefore has the characteristics of an income tax. As a result, we recorded $99,000 and $81,000 in state income tax expense for the three months ended March 31, 2012 and 2011, respectively.
As a result of the foregoing, our net income was $0.5 million for the three months ended March 31, 2012 as compared to a net loss of $0.4 million for the three months ended March 31, 2011.
Segment Results of Operations
Hospital
Our revenues for the three months ended March 31, 2012 increased by $1.3 million, or 8.4%, to $16.7 million as compared to $15.4 million for the three months ended March 31, 2011. The revenues increase was primarily attributable to a 6.3% increase in our average daily census. The average daily census for the three months ended March 31, 2012 was 34 as compared to 32 for the three months ended March 31, 2011. This increase in net patient revenues was also driven by the continued development of the physician-centric, integrated health delivery system strategy.
Our provision for doubtful accounts during the three months ended March 31, 2012 increased $1.1 million to 7.8% of net revenue before the provision for doubtful accounts as compared to 1.8% of net revenue before the provision for doubtful accounts during the three months ended March 31, 2011. This change was primarily due to an increase in self-pay patients in the mix of patients that we serve.
We adopted the provisions of Accounting Standards Update No. 2011-07, Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities (ASU 2011-07), during the period ended March 31, 2012. ASU 2011-07 requires health care entities to change the presentation of the statement of operations by reclassifying the provision for doubtful accounts from an operating expense to a deduction from patient service revenues. All periods presented have been reclassified in accordance with ASU 2011-07.
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Our days revenues outstanding were 62 days at March 31, 2012 as compared to 59 days at December 31, 2011. To calculate our days revenues outstanding, we divide our average accounts receivable net of allowance for doubtful accounts by our net revenues per day. Our net revenues per day is calculated by dividing our revenues for the periods by the number of calendar days in the periods.
Salaries, wages and benefits for the three months ended March 31, 2012 increased approximately $0.1 million, or 1.6%, to $6.2 million from $6.1 million for the three months ended March 31, 2011. As a percentage of revenues, salaries, wages and benefits decreased to 37.5% in the three months ended March 31, 2012 from 39.7% in the three months ended March 31, 2011. The decrease in the salaries, wages and benefits rate was primarily due to increased net revenue as compared to the three months ended March 31, 2011.
Medical supplies expense for the three months ended March 31, 2012 decreased approximately $0.2 million, or 6.5%, to $2.9 million from $3.1 million for the three months ended March 31, 2011. On an adjusted patient day (APD) basis, medical expenses for the three months ended March 31, 2012 decreased approximately by 24.8% or $486 per APD from $646 per APD for the three months ended March 31, 2011. As a percentage of revenues, our medical supplies expense decreased to 17.6% in the three months ended March 31, 2012 as compared to 20.5% in the three months ended March 31, 2011. Medical supplies decreased in the three months ended March 31, 2012 due to an increase in net revenues, coupled with a decrease in the number of surgeries performed as compared to the three months ended March 31, 2011. Surgeries for the three months ended March 31, 2012 were 1,515 compared to 1,618 for the comparable prior year period.
We have terminated all of our remaining management services agreements during the first quarter of 2012. Management fees for the three months ended March 31, 2011 was $1.4 million.
General and administrative expenses for the three months ended March 31, 2012 decreased approximately $0.6 million, or 17.1%, to $2.9 million from $3.5 million for the three months ended March 31, 2011. The decrease in G&A expenses was due to the benefits of the acquisitions of Autimis and Sybaris which provided hospitality services, facilities management and revenue management services. These expenses were eliminated in the Consolidated Statements of Operations.
Depreciation and amortization expense for the three months ended March 31, 2012 decreased by $0.4 million, or 22.2%, to $1.4 million as compared to $1.8 million for the three months ended March 31, 2011. The decrease in depreciation and amortization expense resulted from assets being fully depreciated in the current year first quarter as compared to the prior year period.
Net interest expense was $1.1 million in current year first quarter as compared to $1.2 million in the prior year first quarter. Interest expense is primarily comprised of interest on borrowings under the lines of credit, amortization of debt issue costs, interest on financing lease obligations, related party notes and debt obligations. The decrease in interest expense was due to a lower average outstanding amount on note during the current year first quarter.
Operating income of the hospital segment was approximately $1.9 million for the current year first quarter, as compared to the operating income of $0.8 million for the year prior year first quarter. The increase in operating income was due to improved leveraging of expenses from higher revenues. In addition, the decrease in net operating expense was driven by the services costs provided by the support services segment, coupled with no management fees incurred in this period as compared to the prior year period.
Senior Living
Senior living net revenues for the three months ended March 31, 2012 were approximately $1.9 million. This reflects average revenue per unit occupied of $2,987. This is a blended rate of assisted living dominant facilities which includes independent living and memory care units. The senior living properties reported continued stable occupancy, with an overall occupancy in excess of 92% for the three months ended March 31, 2012. Overall occupancy and revenues were not negatively impacted by the significant downturn in the macroeconomic environment, including the high unemployment levels and poor housing markets which affect private pay occupancy.
For the three months ended March 31, 2012, salaries and benefit expense was $0.8 million, G&A expense was $0.7 million, depreciation and amortization was $0.3 million and interest expenses was $0.3 million. The income from operations was approximately $0.2 million.
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Support Services
Support services segment revenues for the three months ended March 31, 2012 were approximately $0.5 million. The net operating expense was $0.5 million for the three months ended March 31, 2012.
Liquidity and Capital Resources
Our primary cash requirements are paying our operating expenses, servicing our debt, capital expenditures on our existing properties, acquisitions and distributions to non-controlling interests. Our primary cash sources are cash flows from operating activities, issuances of debt and equity securities.
Key components of our cash flows for the current year and prior year are summarized below:
Three Months Ended March 31, |
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2012 | 2011 | |||||||
Net cash provided by (used in): |
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Operating activities |
$ | 2,971,037 | $ | (5,027,217 | ) | |||
Investing activities |
(295,319 | ) | (176,744 | ) | ||||
Financing activities |
(2,789,842 | ) | 3,037,141 |
During the current year first quarter, we generated $3.0 million in cash from operating activities. Net income, adjusted for non-cash expenses and income, provided cash of approximately $3.5 million. Net changes in operating assets and liabilities used net cash of approximately $0.5 million, which primarily included a $1.0 million increase in accounts payable, accrued expenses and tax payable, offset by a $1.9 million increase in accounts receivable and a decrease of $0.4 million in prepaid expenses and other assets.
During the prior year first quarter, the cash used in operating activities was $5.0 million. Net loss, adjusted for non-cash expenses and income, provided cash of approximately $0.4 million. Net change in operating assets and liabilities used net cash of approximately $5.4 million, which primarily included a $4.2 million decrease in accounts payable, accrued expenses, tax payable and related party receivables and payables. This decrease was partially offset by an approximately $0.9 million in accounts receivable and a $0.3 million increase in inventories and prepaid expenses and other assets.
The cash used in investing activities was approximately $0.3 million for the current year first quarter, compared to $0.2 million for the prior year first quarter. The increase in cash used in investing activities was primarily attributable to additional purchases of property and equipment as compared to the prior year.
The cash used in financing activities was approximately $2.8 million for the current year first quarter, compared to cash provided of approximately $3.0 million for the prior year period. The decrease over the prior year was primarily caused by higher payments on short-term notes payable. Additionally, during the current year first quarter, we did not incur any new borrowings and capital raise.
As of March 31, 2012, we had a negative working capital of approximately $58.0 million compared to a negative of approximately $58.5 million as of December 31, 2011. We are a highly leveraged company with debt service requirements. Our short-term debt totaled approximately $38.7 million at March 31, 2012. The negative working capital amounts raise substantial doubt concerning the Companys ability to continue as a going concern for a reasonable period of time.
Effective April 30, 2012 the Company completed a private placement transaction for the purchase of 35,950,000 shares of its Common Stock at a price of $0.14 per share from a group of accredited investors, resulting in net proceeds to the Company of approximately $5.0 million. The shares were issued without registration in reliance on the exemption in Section 4(2) of the Securities Act of 1933 Rule 506 of Regulation D thereunder. Effective May 2, 2012 the Company also completed a securities purchase agreement (the Securities Purchase Agreement) with institutional investors (the Purchasers), for the private issuance and sale by the Company to the Purchasers an aggregate of 3,808 shares of the Companys Series C Variable Rate Convertible Preferred Stock (the Preferred Shares) with each Preferred Share initially convertible into approximately 4,545 shares of the Companys common Stock (the Conversion Shares) and warrants to purchase up to an aggregate of 17,309,094 shares of the Companys Common Stock (the Warrants). The Preferred Shares were issued at an original issue discount. As such, for each $1,000 invested, a Purchaser will receive Preferred Shares with an aggregate stated value of $1,120. After deducting for fees and expenses, the aggregate net proceeds from the sale of the Preferred Shares and Warrants was approximately $3.1 million. The Company used these proceeds to pay tax payments and retired certain outstanding loan balances.
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We intend to complete a series of transactions comprising a refinancing and restructuring plan (the "Restructuring Plan") of certain current debt obligations that is expected to involve (i) the refinancing loans with certain financial institutions, (ii) the completion of a new revolving line of credit secured by the hospital's accounts receivable, (iii) work-outs of certain of our accounts payable with our trade creditors and equipment providers, as many of these accounts are in default, and (iv) work-outs of taxes payable with the Internal Revenue Service and other taxing authorities. Management believes that this can be achieved by the end of 2012, while there can be no assurances that the restructuring plan will be completed on terms acceptable to us or at all.
Inflation
The healthcare industry is labor-intensive. Wages and other expenses increase during periods of inflation and when labor shortages in marketplaces occur. In addition, suppliers pass along rising costs to us in the form of higher prices. Private insurers pass along their rising costs in the form of lower reimbursement to us. Our ability to pass on these increased costs in increased rates is limited because of increasing regulatory and competitive pressures and the fact that the majority of our revenues are fee-based. Accordingly, inflationary pressures could have a material adverse effect on our results of operations.
Recent Accounting Standards
Disclosure concerning recent accounting standards is incorporated by reference to Note 1 of our Consolidated Financial Statements (Unaudited) contained in this Form 10-Q.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
None.
ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Disclosure and control procedures are also designed to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosures.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that there are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their desired control objectives. Additionally, in evaluating and implementing possible controls and procedures, management is required to apply its reasonable judgment.
Based on the evaluation described above, our Chief Executive Officer and Chief Financial Officer have concluded that, our disclosure controls and procedures were ineffective as of March 31, 2012.
The material weaknesses relate to inadequate staffing within our accounting department, lack of consistent policies and procedures within our newly formed operating segments, and inadequate monitoring of controls, including our lack of an audit committee.
Planned Remediation Efforts to Address Material Weakness
To mitigate these weaknesses, we are in the process of implementing an on-going process to identify and resolve critical vacancies in an expeditious manner. We are also in the process of designing and implementing controls to correct identified internal control deficiencies and conducting ongoing evaluations to ensure all deficiencies have been identified. We believe that after a sufficient period of operation of the controls implemented to remediate the control deficiencies.
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Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 1. | LEGAL PROCEEDINGS |
From time to time, we may become involved in litigation relating to claims arising out of its operations in the normal course of business. We are not involved in any pending legal proceeding or litigation and, to the best of our knowledge, no governmental authority is contemplating any proceeding to which we are a party or to which any of our properties is subject, which would reasonably be likely to have a material adverse effect on us, except for the following:
Prexus
On December 4, 2009, Prexus Health Consultants, LLC and its affiliate, Prexus Health LLC (collectively, Prexus), sued UGH LP and Ascension Physician Solutions, LLC ("APS") in the 270th District Court of Harris County, Texas, Cause No. 2009-77474, seeking (i) $224,863 for alleged breaches of a Professional Services Agreement (the PSA) under which Prexus provided billing, coding and transcription services, (ii) $608,005 for alleged breaches of a Consulting Services Agreement (the CSA) under which Prexus provided professional management and consulting services, and (iii) lost profit damages for the remaining term of the agreements (UGH LP and APS terminated these contracts effective September 9, 2009). Prexus subsequently added additional claims seeking lost profits and other damages for alleged tortious interference of Prexus contracts. In October 2010, UGH LP and APS filed counterclaims against Prexus seeking $1,687,242 in damages caused by Prexus breach of the CSA.
On October 11, 2011, the trial court judge entered judgment against UGH LP for approximately $2,900,000, including $2,100,000 in lost profits. The judgment also awarded additional amounts for pre-judgment and post-judgment interest. UGH LP timely appealed the lost profits portion of the judgment and has suspended enforcement of the judgment pending the result of the appeal. We believe the appellate court is likely to reduce the amount of the judgment to $861,000 which is the amount of unpaid fees to Prexus prior to the effective date of termination. As a result, we accrued this amount plus $139,000 for attorney fees and estimated post judgment interest as of March 31, 2012, which is included in the Consolidated Balance Sheets.
Siemens
On June 29, 2010, Siemens Medical Solutions USA, Inc. (Siemens) sued UGH LP in the 215th District Court of Harris County, Texas, Cause No. 2010-40305, seeking approximately $7,000,000 for alleged breaches of (i) a Master Equipment Lease Agreement dated August 1, 2006 and related agreements (the Lease Agreements), pursuant to which UGH LP leased certain radiology equipment and (ii) an Information Technology Agreement dated March 31, 2006 and related agreements (the IT Agreements) pursuant to which Siemens agreed to provide an information technology system, software and related services. On November 22, 2010 UGH LP filed counterclaims against Siemens seeking approximately $5,850,000 against Siemens for breach of contract, negligent representation and breach of warranty based on Siemens breach of the Lease Agreements and the IT Agreements. On February 28, 2011, the court signed an order granting partial summary judgment in favor of Siemens and against UGH LP as to UGH LP's liability for breach of the Lease Agreements, but not as to damages sought by Siemens.
On September 15, 2011, the parties to the Siemens litigation reached a settlement of the pending litigation. As part of the settlement, UGH LP agreed to pay Siemens an aggregate of $4,850,000 over a period of 20 months beginning in October 2011 through May 2013. We will have an on-going relationship with Siemens. The outstanding balance of this settlement was 2,753,232 and $3,451,555 as of March 31, 2012 and December 31, 2011.
UGH LP is currently in a dispute with Siemens regarding the settlement agreement entered into on September 15, 2011. Specifically UGH LP disputes the entry of the agreed judgment securing the settlement as a result of an alleged breach of the settlement agreement. UGH LP has filed a timely appeal and suspended enforcement of the agreement judgment pending such appeal.
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ITEM 1A. | RISK FACTORS |
There have not been any material changes from the risk factors as previously disclosed in the Form 10-K.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
ITEM 5. | OTHER INFORMATION |
None.
ITEM 6. | EXHIBITS |
The following documents are the exhibits to this Form 10-Q. For convenient reference, each exhibit is listed according to the Exhibit Table of Item 601 of Regulation S-K.
Exhibit No. |
Description | |
31.1* | Rule 13a-14(a)/15d-14(a) Certification, executed by Hassan Chahadeh, Chairman of the Board of Directors, Chief Executive Officer and President of University General Health System Inc. | |
31.2* | Rule 13a-14(a)/15d-14(a) Certification, executed by Michael L. Griffin, Chief Financial Officer of University General Health System Inc. | |
32* | Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350), executed by Hassan Chahadeh, Chairman of the Board of Directors and Chief Executive Officer of University General Health System, Inc., and by Michael L. Griffin, Chief Financial Officer of University General Health System, Inc. | |
101.INS ** | XBRL Instance Document | |
101.SCH** | XBRL Taxonomy Extension Schema | |
101.CAL** | XBRL Taxonomy Extension Calculation Linkbase | |
101.DEF** | XBRL Taxonomy Extension Definition Linkbase | |
101.LAB** | XBRL Taxonomy Extension Label Linkbase | |
101.PRE * | XBRL Taxonomy Extension Presentation Linkbase |
* | Filed electronically herewith. |
** | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
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Table of Contents
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNIVERSITY GENERAL HEALTH SYSTEM, INC. | ||
May 10, 2012 | /s/ Hassan Chahadeh | |
(Date) | Hassan Chahadeh | |
Chief Executive Officer | ||
(Principal Executive Officer) | ||
May 10, 2012 | /s/ Michael L. Griffin | |
(Date) | Michael L. Griffin | |
Chief Financial Officer | ||
(Principal Financial Officer) |
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