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		Six Months Ended June 30,
		2015				2014
Patient revenue		$	498,000			$	562,000
Net loss		$	(69,000	)		$	(25,000	)
USNC's equity in loss of Neuro Partners, LLC and CGK		$	(38,000	)		$	(18,000	)

 

NeuroPartners, LLC and CGK Condensed Balance Sheet Information

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The following tables present the summarized financial information of BOPRE:

BOPRE Condensed Income Statement Information

		Six Months Ended June 30,
		2015				2014
Rental Income		$	-			$	-
Net loss		$	(1,000	)		$	-
USNC's equity in income in BOPRE		$	-			$	-

		Three Months Ended June 30,
		2015				2014
Rental Income		$	-			$	-
Net loss		$	(1,000	)		$	-
USNC's equity in income in BOPRE		$	-			$	-

BOPRE Condensed Balance Sheet Information

		June 30, 2015				December 31, 2014
Current assets		$	33,000			$	61,000
Noncurrent assets			813,000				786,000
Total assets		$	846,000			$	847,000
Current liabilities		$	-			$	-
Noncurrent liabilities			-				-
Equity			846,000				847,000
Total liabilities and equity		$	846,000			$	847,000

 

In early 2013, the Company formed Broward Oncology Partners, LLC (“BROP”) with other outside investors. The Company invested $50,000 for a 12.5% ownership interest in BROP.  BROP operates a radiation oncology center in Fort Lauderdale, Florida under a lease from Tenet Health Services. BROP began operations in February 2013.  In May 2014, the Company and other members sold their interests in BROP.

The Company’s income tax rate, which includes federal and state income taxes, was approximately 38%, for the three and six months ended June 30, 2015. The Company recorded a tax charge of $67,000 for the six months ended June 30, 2015.

 

Item 2.

Management Discussion and Analysis of Financial Condition and Results of Operations.

The condensed consolidated financial statements of U.S. Neurosurgical, Inc. and subsidiaries (“USN” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America.  As such, some accounting policies have a significant impact on amounts reported in the condensed consolidated financial statements.  A summary of those significant accounting policies can be found in Note B to the Consolidated Financial Statements, in our 2014 Annual Report on Form 10-K.  In particular, judgment is used in areas such as determining and assessing possible asset impairments and determination of the asset retirement obligation.

The following discussion and analysis provides information which the Company’s management believes is relevant to an assessment and understanding of the Company’s results of operations and financial condition. This discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere herein.

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

Patient revenue for the three months ended June 30, 2015 was $672,000, a decrease of 9% compared to $737,000 the previous year. This decrease in revenue was due to a new reimbursement agreement with NYU. Patient expenses for the three months ended June 30, 2015 were $306,000 compared to $204,000 for the comparable period in the previous year. This increase in patient expenses was largely due to increased depreciation and a new maintenance agreement, which went into effect as of April 1, 2015. The first year of maintenance was included in the installation of the equipment.

 

Selling, general and administrative expense of $318,000 for the first quarter of 2015 was 3% higher than the $309,000 incurred during the comparable period in 2014.  The increase in SG&A expenses was mostly due to higher insurance expenses, including a new flood policy and a reinstated liability policy due to the reopening of the center.

The Company incurred $36,000 of interest expense in the second quarter of 2015 related to the new capital lease. Interest expense for the same period in 2014 was $52,000. During the second quarter of 2015, the leasing company amended the loan documents to correct an overstatement of interest charged during prior periods. This amendment caused a decrease in interest during the current period.

During the three months ended June 30, 2015, the Company recognized an income tax charge of $19,000. The 2015 tax expense is due to the Company commencing operations at NYU during 2014.

For the three months ended June 30, 2015, the Company reported a net income of $31,000 as compared to a net income of $232,000 for the same period a year earlier. The lower net income is primarily due to lower revenue and higher operating costs.

Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

Patient revenue for the six months ended June 30, 2015 was $1,481,000 compared to $737,000 for the comparable period in the previous year. The increase in revenue is due to the fact that the center was not open during the first quarter of 2014. Patient expenses for the six months ended June 30, 2015 were $561,000 compared to $204,000 during the same period a year earlier. This increase in expenses is largely due to the center not being open during the first quarter of the prior year.

Selling, general and administrative expense of $667,000 for the six months ended June 30, 2015 was 17% higher than the $568,000 incurred during the comparable period in 2014.  The increase in SG&A expenses was mostly due to higher insurance expenses including a new flood policy and reinstated liability policy due to the reopening of the center.

The Company incurred $90,000 of interest expense in the first six months of 2015 related to the new capital lease. Interest expense for the same period in 2014 was $65,000. During the second quarter of 2015, the leasing company amended the loan documents to correct an overstatement of interest previously charged. Overall, however, interest expense was higher than the same period a year earlier due to the new capital leases.

During the six months ended June 30, 2015, the Company recognized an income tax charge of $67,000. The 2015 tax expense is due to the Company commencing operations at NYU during 2014.

For the six months ended June 30, 2015, the Company reported a net income of $111,000 as compared to a net income of $126,000 for the same period a year earlier.

 

At June 30, 2015, the Company had working capital of $266,000 as compared to $455,000 at December 31, 2014.  This decrease was primarily due to the deferral of revenue in accordance with the Company’s amended lease agreement with NYU offset by a higher deferred tax asset. Cash and cash equivalents at June 30, 2015 were $1,260,000 as compared to $1,053,000 at December 31, 2014.

 

With respect to the notes receivable of $210,000 at June 30, 2015, the Company has been in discussions with one of the borrowers regarding the possible future conversion of one of the notes in the principal amount of $172,500 into an equity interest in a future business activity.  As a result, that note receivable has been classified as a non-current asset.

Net cash provided by operating activities for the six months ended June 30, 2015 was $1,240,000 as compared to $660,000 used in operating activities in the same period a year earlier. The increase was primarily due to cash inflows from the operation of the new gamma knife center, net of working capital requirements. Accounts receivable decreased $5,000 for the six months ended June 30, 2015 as compared to an increase the previous year due to the reopening of the NYU gamma knife facility.

With respect to financing activities, the Company paid $353,000 towards its capital lease during the first six months of 2015, compared with net borrowings from short-term loans of $462,000 in the same period a year earlier.

The Company entered into a six year lease in the amount of $4.7 million for the purchase of the replacement Leksell PERFXION gamma knife at the NYU Medical Center. The first payment of $78,000 was made on September 1, 2014, and the final payment is due on May 1, 2020. The Company entered into a second two year lease in the amount of $250,000 for the cost of the construction required at the relocated site. The first payment of $12,000 was made on November 1, 2014, and the final payment is due on July 1, 2016. The agreement with NYU to operate the gamma knife facility continues through March 2021.

 

We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.  The following factors, as well as the factors listed under the caption “Risk Factors” in Annual Report on our Form 10-K for the fiscal year ended December 31, 2014, have affected or could affect our actual results and could cause such results to differ materially from those expressed in any forward-looking statements made by us.  Investors should carefully consider these risks and speculative factors inherent in and affecting our business and an investment in our common stock.

Reliance on Business of the New York University Gamma Knife Center; Recent Destruction of Equipment and Discontinuation of Business at NYU.  While it is the Company’s objective to expand activities to additional cancer centers that rely on a broad range of diagnostic and radiation treatments, the Company has relied on the NYU gamma knife for substantially all of its revenue.  In recent periods, services provided at NYU have represented over 90% of the Company’s revenues.  Unless and until the Company is successful in building its activities at other centers and at new locations, disruptions at NYU could have a materially adverse effect on the Company.

 

Availability of Working Capital.  To date, we have earned sufficient income from operations to fund periodic operating losses and support efforts to pursue new gamma knife or other types of cancer treatment centers.

The Securities and Exchange Commission encourages companies to disclose forward looking information so that investors can better understand a company's future prospects and make informed investment decisions.  This document contains such "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements anticipating future growth in revenues and cash flow.  Words such as "anticipates," "estimates," "expects," "projects," "targets," "intends," "plans," "believes," "will be," "will continue," "will likely result," and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify such forward-looking statements.  Those forward-looking statements are based on management's present expectations about future events.  As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances, and the Company is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of such changes, new information, future events or otherwise.

The Company operates in a highly competitive and rapidly changing environment and in businesses that are dependent on our ability to: achieve profitability; increase revenues; sustain our current level of operations; maintain satisfactory relations with business partners; attract and retain key personnel; maintain and expand our strategic alliances; and protect our intellectual property.  The Company's actual results could differ materially from management's expectations because of changes in such factors.  New risk factors can arise and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.  Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Investors should also be aware that while the Company might, from time to time, communicate with securities analysts, it is against the Company's policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, investors should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, the Company has a policy against issuing or confirming financial forecasts or projections issued by others.  Thus, to the extent that reports issued by securities analysts or others contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.

In addition, the Company’s overall financial strategy, including growth in operations, maintaining financial ratios and strengthening the balance sheet, could be adversely affected by increased interest rates, construction delays or other transactions, economic slowdowns and changes in the Company’s plans, strategies and intentions.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4.

Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, as appropriate, to allow timely decisions regarding required disclosure.  Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  We do realize that we are a very small company and as a small company with only the officers and directors participating in the day to day management, with the ability to override controls, each officer and director has multiple positions and responsibilities that would normally be distributed among several employees in larger organizations with adequate segregation of duties to ensure the appropriate checks and balances.  Because the Company does not currently have a separate chief financial officer, the Chief Executive Officer performs these functions with the support of one of the Company’s outside directors who assists in the reporting and disclosure process (the “Lead Director”).

Our management evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report.  Based upon that evaluation the Company’s Chief Executive Officer concluded that the Company’s disclosure controls and procedures were not effective as of the end of the period covered by this report for the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended, to be recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, due to the material weakness in internal control over financial reporting described below.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934).  Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.  The Company’s internal control over financial reporting includes those policies and procedures that:

 

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.

Our management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2015 In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. A material weakness is a control deficiency, or a combination of control deficiencies in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the assessment described above, management identified the following material weakness as of June 30, 2015: the Company did not maintain sufficient qualified personnel with the appropriate level of knowledge, experience and training in the application of accounting principles generally accepted in the United States of America and in internal controls over financial reporting commensurate with its financial reporting requirements. Specifically, effective controls were not designed and in place to ensure that the Company maintained, or had access to, appropriate resources with adequate experience and expertise in the area of financial reporting for transactions such as lease financing, investments in unconsolidated entities, income taxes and guarantee obligations. The Company is in the process of developing efficient approaches to remediate this material weakness.  To do this in a cost-effective manner, considering the current extent of the Company’s operations, management is making arrangements with consultants and advisors to assist on an as-needed basis.

While there have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2015, management is in the process of developing plans to remediate the material weakness identified above.

 

Item 1.

Legal Proceedings

None

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5.

Other Information

Not applicable.

Item 6.

Exhibits

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	U.S. Neurosurgical, Inc.
	(Registrant)
Date:  August 14, 2015	By:	/s/ Alan Gold
		Alan Gold
		Director, President and
		Chief Executive Officer and
		Principal Financial Officer of the Registrant

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