U.S. NeuroSurgical Holdings, Inc. - Annual Report: 2017 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2017
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to .
Commission file number: 0-15586
U.S. NeuroSurgical Holdings, Inc.
(Name of small business issuer in its charter)
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Delaware
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47-5370333
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(State of other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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2400 Research Blvd, Suite 325,
Rockville, Maryland |
20850
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(Address of principal executive offices)
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(Zip Code)
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Issuer's telephone number:
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(301) 208-8998
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Securities registered under Section 12(b) of the Act:
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None
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Securities registered under Section 12(g) of the Act:
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Common Stock, par value $.01 per share
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
Yes ☐ No ☒
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
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Large accelerated filer ☐
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Accelerated filer ☐
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Non-accelerated filer ☐ (Do not check if a smaller reporting company)
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Smaller reporting company ☒
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| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of June 30, 2017, the aggregate market value of issuer's Common Stock held by non-affiliates was approximately $2,027,000, based upon the closing price as reported on the OTC Pink marketplace for that day.
As of April 6, 2018, there were outstanding 7,792,185 shares of the issuer’s Common Stock. $.01 par value.
Documents incorporated by reference: None
FORM 10-K
U.S. NeuroSurgical Holdings, Inc.
Form 10-K for the Fiscal Year Ended December 31, 2016
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U.S. NeuroSurgical Holdings, Inc. owns and operates, through its wholly-owned subsidiaries, stereotactic radiosurgery centers, utilizing gamma knife technology, and holds other interests in radiological treatment facilities. As used herein, unless the context indicates otherwise, the term "Company", "Registrant" and "Holdings" means U.S. NeuroSurgical Holdings, Inc. and its wholly-owned subsidiary, U.S. NeuroSurgical, Inc. (“USN”), and the wholly-owned subsidiaries of USN, U.S. NeuroSurgical Physics, Inc. and USN Corona, Inc.
USN, a Delaware corporation, was formed in July 1993. Until September 1999, USN was a wholly owned subsidiary of GHS, Inc. (“GHS”). Effective September 17, 1999, GHS distributed its shares of USN to the stockholders of GHS.
On September 3, 2015, pursuant to the Agreement and Plan of Reorganization (the “Merger Agreement”), dated as of September 3, 2015, by and among USN, Holdings and U.S. NeuroSurgical Merger Sub, Inc. (“Merger Sub”), the Company adopted a new holding company organizational structure whereby USN is now a wholly owned subsidiary of Holdings. This structure did not result in any changes to the assets or operations of the Company, but management believes that it will create a more flexible framework for possible future transactions and organizational and operational adjustments.
The holding company organizational structure was effected by a merger (the “Merger”) conducted pursuant to Section 251(g) of the Delaware General Corporation Law (the “DGCL”), which provides for the formation of a holding company structure without a vote of the stockholders of the constituent corporations. Because the holding company organizational structure occurred at the parent company level, the remainder of the Company’s subsidiaries, operations and customers were not affected by this transaction.
In order to effect the Merger, USN formed Holdings as its wholly owned subsidiary and Holdings formed Merger Sub as its wholly owned subsidiary. Under the terms of the Merger Agreement, Merger Sub merged with and into USN, with USN surviving the merger and becoming a direct, wholly owned subsidiary of Holdings. Immediately prior to the Merger, Holdings had no assets, liabilities or operations.
Pursuant to the Merger Agreement, all of the outstanding capital stock of USN was converted, on a share for share basis, into capital stock of Holdings. As a result, each former stockholder of USN became the owner of an identical number of shares of capital stock of Holdings, evidencing the same proportional interests in Holdings and having the same designations, rights, powers and preferences, qualifications, limitations and restrictions, as those that the stockholder held in USN.
Following the Merger, Holdings’ common stock continued to trade on the over-the-counter market and continued to be quoted on the OTC Pink marketplace under the same symbol, “USNU.” The conversion of shares of capital stock under the Merger Agreement occurred without an exchange of physical certificates. Accordingly, physical certificates formerly representing shares of outstanding capital stock of USN are deemed to represent the same number of shares of capital stock of Holdings.
Pursuant to Section 251(g) of the DGCL, the provisions of the certificate of incorporation and bylaws of Holdings are substantially identical to those of USN prior to the date on which the Merger Agreement took effect. The authorized capital stock of Holdings, the designations, rights, powers and preferences of such capital stock, and the qualifications, limitations and restrictions thereof are also substantially identical to those of the capital stock of USN immediately prior to the date of the Merger. Further, the directors and executive officers of Holdings are the same individuals who were directors and executive officers, respectively, of USN immediately prior to the date of the Merger.
The Company's executive offices are located at 2400 Research Boulevard, Suite 325, Rockville, Maryland 20850, and its telephone number is (301) 208-8998.
Disclosure Regarding Forward Looking Statements
Statements contained in this Annual Report on Form 10-K that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements are inherently uncertain. Actual performance and results may differ materially from that projected or suggested herein due to certain risks and uncertainties including, without limitation, the timing and ultimate collectability of accounts receivable for gamma knife procedures from different payor groups such as Medicare and private payors; competition; technological obsolescence; government regulation and malpractice liability. Additional information concerning certain risks and uncertainties that could cause actual results to differ materially from that projected or suggested are included in Item 1A, Risk Factors, and may also be identified from time to time in the Company’s filings with the Securities and Exchange Commission (the “SEC”) and the Company’s public announcements, copies of which are available from the SEC or from the Company upon request.
General
The Company and its predecessors have owned and operated stereotactic radiosurgery centers, utilizing gamma knife technology since 1993. The Company currently owns and operates one gamma knife center on the premises of New York University Medical Center (“NYU”) in New York, New York. In January 2009, the Company participated in the opening of a new center, the Southern California Regional Gamma Knife Center, at the San Antonio Regional Hospital (“SARH”) in Upland, California.
Management continues to explore opportunities to organize and participate in additional gamma knife centers. The Company's business strategy is to provide cost-effective approaches that allow hospitals, physicians, and patients access to gamma knife treatment capability, a high capital cost item. The Company provides the gamma knife to medical facilities on a "cost per treatment" basis. The Company’s business model is to own, or hold an interest in, the gamma knife units, and charge the medical facility, where the unit is housed and maintained, based on utilization.
During the fourth quarter of 2007, the Company formed a new wholly owned subsidiary, USN Corona, Inc. (“USNC”), to carry investments in Corona Gamma Knife, LLC and NeuroPartners, LLC. Those business units were formed to develop and manage the gamma knife center at SARH.
The Company's principal target market is medical centers in major health care catchment areas that have physicians experienced with and dedicated to the use of the gamma knife. As it has with the NYU and SARH gamma knife centers, if circumstances support the opening of additional centers, the Company would seek cooperative ventures with these facilities.
In October 2012, the Company’s facility at NYU was totally destroyed as a result of flooding from Hurricane Sandy. The Company finalized arrangements with NYU regarding the restoration of the gamma knife center and the Company’s long term contract with NYU. The location of the restored center, with the new Leksell PERFEXION gamma knife, is in the Tisch Hospital of NYU Langone Medical Center. The center reopened and the first patient was treated on April, 29, 2014.
The Company estimates that, as of December 31, 2017, there were approximately 120 gamma knife treatment centers in the U.S.
During 2010, the Company expanded its market strategy to include opportunities to develop cancer centers featuring radiation therapy. These centers utilize linear accelerators with IMRT (Intensity Modulated Radiation Therapy) and IGRT (Image Guided Radiation Therapy) capabilities. In 2010, the Company formed Florida Oncology Partners, LLC (“FOP”) in partnership with local physicians and other investors. USNC owns a 24% interest in the venture. FOP’s first center was located in Miami, Florida and opened in the second quarter of 2011. The Company entered into an arrangement to sell this center to 21st Century Oncology in December of 2015. The recognition of the sale had not occurred as of December 31, 2017.
In 2011, the Company formed Boca Oncology Partners LLC, in partnership with local physicians and other investors. USNC, owned an 11.25% interest in the venture. The center, located in Boca Raton, Florida, opened in the third quarter of 2012. In February of 2014, the Company and the other partners sold their interest in Boca Oncology Partners, LLC to SFRO Holdings.
In 2015, Medical Oncology Partners LLC (“MOP”), was formed in partnership with local physicians and other investors. MOP was established to acquire a 100% equity interest in United Oncology Medical Associates of Florida, LLC (“UOMA”) USNC was not initially a member of MOP as it was legally not able to participate due to the fact that USNC was not a physician. Paperwork was filed for a waiver and on December 22, 2016 USNC was cleared to become a part owner of MOP. USNC currently owns 35.83% of MOP.
Late in 2016, FOP took initial steps toward the development of a new radiation therapy center in Homestead, Florida. However, late in the third quarter of 2017, it was determined that the business opportunity at this new location should be pursued by a different investor group, and FOP arranged to sell the opportunity to this group. CB Oncology Partners, LLC, (“CBOP”) was organized September 1, 2017 to acquire the rights of the new center from FOP. Beginning in October of 2017, CBOP began paying the remainder of the costs associated with opening the center. The medical center opened and treated its first patient in January of 2018.
In June 2017, FOP entered into an agreement with a third-party owner of a radiation therapy center located in Miami, Florida, whereby FOP took over the operation of the center effective September 22. 2017 for a ten-year initial term, and up to three additional terms of five years each.
The Company is currently exploring other opportunities for the establishment of cancer centers using IMRT and/or IGRT in Florida and other parts of the U.S.
Gamma Knife Technology
The gamma knife is a unique stereotactic radiosurgical device used to treat brain tumors and other malformations of the brain without invasive surgery. The gamma knife delivers a single, high dose of ionizing radiation emanating from 201 cobalt-60 sources positioned about a hemispherical, precision machined cavity. The lesion is first targeted with precision accuracy using advanced imaging and three dimensional treatment planning techniques such as CT Scans, MR Scans, conventional X-rays, or angiography. Each individual beam is focused on a common target producing an intense concentration of radiation at the target site, destroying the lesion while spreading the entry radiation dose uniformly and harmlessly over the patient's skull. The mechanical precision at the target site is +/- 0.1mm (1/10 of 1 millimeter). Because of the steep fall-off in the radiation intensity surrounding the target, the lesion can be destroyed, while sparing the surrounding tissue.
The procedure, performed in a single treatment, sharply reduces hospital stay times and eliminates post-surgical bleeding and infection. When compared with conventional neurosurgery, gamma knife treatment is less expensive. However, not all patients are candidates for radiosurgery since the decision to use the gamma knife depends on the type, size, and location of the lesion.
Linear Accelerators
A linear particle accelerator (LINAC) is a type of particle accelerator that greatly increases the velocity of charged subatomic particles or ions by subjecting the charged particles to a series of oscillating electric potentials along a linear beamline. LINACs accelerate electrons using a tuned-cavity waveguide, in which the RF (radio frequency) power creates a standing wave. Some LINACs have short, vertically mounted waveguides, while higher energy machines tend to have a horizontal, longer waveguide and a bending magnet to turn the beam vertically towards the patient. Medical LINACs use monoenergetic electron beams between 4 and 25 MeV, giving an X-ray output with a spectrum of energies up to and including the electron energy when the electrons are directed at a high-density (such as tungsten) target. The electrons or X-rays can be used to treat both benign and malignant disease.
The intensity of the radiation in IMRT can be changed during treatment to spare more adjoining normal tissue than is spared during conventional radiation therapy. Because of this an increased dose of radiation can be delivered to the tumor using IMRT. IMRT is a type of conformal radiation, which shapes radiation beams to closely approximate the shape of the tumor.
IGRT is used to help better deliver radiation therapy to cancerous tumors. This is very useful since tumors can move between treatments due to differences in organ filling or movements while breathing. IGRT involves conformal radiation treatment guided by specialized imaging tests, such as CT scans, ultrasound or X-rays. These tests are done in the treatment room just before the patient is to receive his or her daily radiation therapy treatment.
New York Gamma Knife Center
The Company’s New York gamma knife treatment center was opened in July 1997 on the campus of NYU Medical Center. The Company installed a new Leksell gamma knife, the PERFEXION model, at the NYU Medical Center in March 2009 in replacement of the older gamma knife equipment. In connection with this upgrade, the Company modified its arrangement with NYU to extend the term for 12 years from March 2009.
In October 2012, the Company’s facility at NYU was totally destroyed as a result of flooding from Hurricane Sandy. The gamma knife had to be removed to prevent any cobalt leakage that might occur due to rusting of the equipment. The removal cost was $525,000. The Company paid a lease settlement of the outstanding principal balance only and received from insurance coverage $930,000 above the lease principal payments and removal costs.
The Company finalized arrangements with NYU regarding the restoration of the gamma knife center and entered into an amendment to the original Gamma Knife Neuroradiosurgery Equipment Agreement. The NYU facility was rebuilt and reopened in the Tisch Hospital of NYU Langone Medical Center. The first patient was treated on April, 29, 2014. The Company expects to generate revenue from the restored gamma knife center under the NYU contract until March 2021.
The Company entered into a six year lease in the amount of $4.7 million for the purchase of the replacement equipment and associated leasehold improvements. The first payment of $78,000 was made on September 1, 2014, including $18,000 of interest, 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 was paid on July 1, 2016.
The major terms of the agreement with NYU continue in effect, terminating at the end of March 2021. The Company is responsible for the maintenance and insurance for the gamma knife equipment at the NYU facility and is reimbursed for use of the gamma knife based on a fee per procedure performed with the equipment. NYU provides the medical and technical staff to operate the facility. At the end of the contract term, costs associated with closing and restoring the NYU facility to its original condition are the responsibility of the Company.
NYU pays the Company a scheduled fee based on the number of patient procedures performed. There were 557 patients treated during the year ended December 31, 2017, whereas in the prior year there were 513 patients treated at the facility. Total revenue in 2017 from NYU was $3,414,000 as opposed to total revenue of $3,212,000 in 2016.
In September 2017, USN and NYU entered into an additional amendment to the Gamma Knife Neuroradiosurgery Equipment Agreement, whereby NYU committed to purchase all of the gamma knife equipment at the NYU Medical Center for a purchase price of $2,400,000, consisting of 41 monthly installments of $50,000 commencing at the end of October 2017 and continuing through the end of February 2021, with a final payment of $350,000 on March 31, 2021. Upon receipt of final payment, title to all the equipment at the center will pass to NYU. Payments received before USN can pass title to the gamma knife equipment to NYU, or before USN has satisfied substantially all of its obligations under the agreement, will be recorded as deferred revenue.
Previously, the agreement with NYU ended on March 17, 2021 and NYU had an option to purchase the gamma knife equipment at the appraised value of the equipment at that time. In June 2017, the Company obtained an independent estimate of $2,570,000 for the fair value of the equipment in March 2021. The Company believes that the accelerated payments amounting to $2,400,000 represent fair consideration considering all aspects of the transaction.
The Company will continue to be responsible for the maintenance and insurance for the gamma knife equipment at the NYU facility through the contract period and will continue to be reimbursed for use of the gamma knife based on a fee per procedure performed with the equipment. NYU provides the medical and technical staff to operate the facility.
USN retains the obligation to reload the cobalt for the gamma knife at its expense, the cost of which is estimated to be $1,100,000 and is expected to be performed by mid-July 2018. The Company will also bear the cost of site work involved in reloading the cobalt, up to a maximum of $1,088,000, although management believes that the actual cost will be approximately $300,000 less than this amount. The Company believes that it will be able to finance these costs through Elekta, the same entity through which the Company is leasing the gamma knife equipment. With NYU’s commitment to purchase the equipment, provided that the Company fulfills its obligation to reload the cobalt as required under the new arrangement, the Company will be relieved of its obligation to close and restore the NYU facility to its original condition at the end of the contract period.
The Southern California Regional Gamma Knife Center
During 2007, the Company managed the formation of the Southern California Regional Gamma Knife center at SARH in Upland, California. The Company participates in the ownership and operation of the center through its wholly-owned subsidiary, USNC. Corona Gamma Knife, LLC (“CGK”) is party to a 14-year agreement with SARH to renovate space in the hospital and install and operate a Leksell PERFEXION gamma knife. CGK leases the gamma knife from NeuroPartners LLC, which holds the gamma knife equipment. In addition to returns on its ownership interests, USNC expects to receive fees for management services relating to the facility.
USNC is a 20% owner of NeuroPartners LLC and owns 39% of CGK.
USNC was a 20% guarantor on NeuroPartners, LLC’s seven-year lease with respect to the gamma knife equipment and certain leasehold improvements at SARH. In February 2016, NeuroPartners, LLC negotiated a new five year lease to fund the reloading of cobalt and the related construction services. The new lease of $1,663,000 includes a balance of $668,000 from the prior lease obligations. This lease will be paid over 60 months, with the first payment of $31,000 being paid on April 1, 2016, and the final payment being due on March 1, 2021. The Company continues to be a 20% guarantor on the new lease and expects any potential obligations from this guarantee would be reduced by the recovery of the related collateral and thus expects any exposure from this guarantee to be remote.
Construction of the SARH gamma knife center was completed in December 2008 and the first patient was treated in January 2009. The project has been funded principally by outside investors. While the Company has led the effort in organizing the business and overseeing the development and operation of the SARH center, its investment to date in the SARH center has been minimal.
The Company’s share of cumulative losses associated with its investment in NeuroPartners LLC and CGK has exceeded its investment. Due to the loans made to NeuroPartners, LLC and CGK, NeuroPartners, LLC and CGK are considered to be variable interest entities of the Company. However, as the Company is not deemed to be the primary beneficiary of NeuroPartners, LLC and CGK, since it does not have the power to direct the operating activities that most significantly affect NeuroPartners, LLC’s and CGK’s economic performance, these entities are not consolidated, but certain disclosures are provided herein.
During the year ended December 31, 2017, the Company received $65,000 in repayments of amounts previously advanced to NeuroPartners LLC and CGK and $24,000 in distributions. Those repayments reduced the amount of losses incurred on prior advances to NeuroPartners LLC and CGK and are included as additional income from investments in unconsolidated entities for the year ended December 31, 2017. The Company received $70,000 of repayments during the year ended December 31, 2016. At December 31, 2017, NeuroPartners LLC and CGK had repaid all of the outstanding advances. For the years ended December 31, 2017 and 2016, the Company’s equity in earnings of NeuroPartners LLC and CGK was $151,000 and $93,000, respectively, but was not recorded due to prior losses.
Future Gamma Knife Centers
The Company is currently exploring other opportunities for gamma knife centers and centers that provide related healthcare services located near hospitals throughout the United States. Discussions regarding such centers is preliminary and there can be no assurance that any such discussions will result in the opening of new centers.
Florida Oncology Partners
During the quarter ended September 30, 2010, the Company participated in the formation of Florida Oncology Partners, LLC (“FOP”) and Florida Oncology Partners RE, LLC (“FOPRE”) (collectively referred to as “Florida Oncology Partners”), to operate a cancer center located in West Kendall (Miami), Florida. The center diagnoses and treats patients utilizing a Varian Rapid Arc linear accelerator and a GE CT scanner. USNC originally invested $200,000 for a 20% interest in Florida Oncology Partners. The remaining 80% was owned by other outside investors. The center opened and treated its first patient in May 2011. During 2012 and 2013, FOP made several distributions that reduced the Company’s investment significantly. In January of 2015, one of the investors relinquished its ownership interest in both FOP and FOPRE, and that ownership interest was distributed among the remaining members in relationship to the percentage they owned. This distribution resulted in an increase of ownership interest for the Company of 4% in each of FOP and FOPRE. As of January 1, 2015, the Company held a 24% ownership in both FOP and FOPRE.
During 2011, FOP entered into a seven year capital lease with Key Bank for approximately $5,800,000. Under the terms of the capital lease, USN agreed to guarantee a maximum of $1,433,000, approximately 25% of the original lease obligation in the event of default. USN is a guarantor jointly with most of the other members of FOP (except USNC, which is not a named guarantor). The outstanding balance on the lease obligation was $468,000 at December 31, 2017. The Company expects any potential liability from this guarantee to be reduced by the recoveries of the respective collateral, but has recorded a liability of $11,000 associated with this guarantee at December 31, 2017.
In June 2012, FOPRE financed the purchase of the building that is occupied by FOP. The amount of the loan was $1,534,000 to be paid at a monthly rate of approximately $8,500 for 120 months with the final payment due on June 15, 2022. In December 2015, FOPRE sold the building, for a gain on sale of $577,000. The Company’s share of the gain was $139,000. The related mortgage was repaid upon closing of the sale and in May 2017, FOPRE was dissolved.
In December of 2015, FOP entered into an agreement with 21st Century Oncology for the sale of FOP’s Varian Rapid Arc linear accelerator and other medical equipment at the FOP location. 21st Century Oncology paid FOP $1,000,000 as a down payment for the equipment and agreed to make monthly payments of $172,000 for the equipment and all monthly payments due under the equipment lease with Key Bank. As of this date, 21st Century Oncology has not satisfied all of the terms of the agreement. In late May 2017, 21st Century Oncology filed for Chapter 11 bankruptcy protection and FOP was listed as an unsecured creditor. As a result, since June 2017, FOP has not received the agreed additional rental payments beyond the monthly payment for the equipment lease. FOP will continue to monitor the impact of 21st Century’s bankruptcy and pursue amounts that it is owed. However, there can be no assurance that the Company will be successful in these efforts.
Late in 2016, FOP took initial steps toward the development of a new radiation therapy center in Homestead, Florida. In December 2016, FOP entered into a ten-year lease agreement for office space located at 20405 Old Cutler Towne Center. FOP had to deliver an $88,000 letter of credit in conjunction with this office lease which collateral is being held in a restricted certificate of deposit. FOP began incurring architecture costs for planning/refitting the new space. During the first half of 2017, a financing agreement with BB&T Bank for the medical equipment and leasehold improvements was negotiated and then signed on August 31, 2017. In November 2017, the amounts for the equipment and leasehold improvements costs were finalized and paid under this financing agreement for a total loan of $4,106,000 to be paid over 7 years.
Late in the third quarter of 2017, it was determined that the business opportunity at this new location should be pursued by a different investor group, and FOP arranged to sell the opportunity to this group. CB Oncology Partners, LLC, was organized on September 1, 2017 to acquire the assets and rights in this new center from FOP.
In June 2017, FOP entered into an agreement with a third-party owner of a radiation therapy center located in Miami, Florida, whereby FOP took over the operation of the center effective September 22, 2017, for a ten-year initial term, and up to three additional terms of five years each. This agreement has been accounted for as a capital lease and, accordingly, FOP recorded assets and capital lease liabilities totaling $14,321,000 at September 22, 2017. The lease requires monthly payments in the first year of $160,000, increasing by 2% each year.
The Company’s recorded investment in FOP and FOPRE is $0 and $225,000 at December 31, 2017 and 2016, respectively. Amounts due from FOP included in due from related parties total $169,000 and $4,000 at December 31, 2017 and 2016 respectively. In addition, FOP owes $295,000 of principal and $4,000 of accrued interest to the Company under a promissory note bearing interest at 6% per annum entered into in October 2017.
Boca Oncology Partners
During the quarter ended June 30, 2011, the Company participated in the formation of Boca Oncology Partners, LLC (“BOP”), for the purpose of owning and operating a cancer center in Boca Raton, Florida. In June 2011, Boca Oncology Partners RE, LLC (“BOPRE”), an affiliated entity, purchased a 20% interest in Boca West IMP, LLC (“Boca West IMP”), owner of a medical office building in West Boca, Florida in which BOP operates. BOP occupies approximately 6,000 square feet of the 32,000 square foot building. The Company’s wholly-owned subsidiary, USNC, invested $225,000 initially and had a 22.5% interest in BOP and BOPRE.
In January 2012, an additional investor purchased 50% of the partnership reducing the Company’s ownership to 11.25%. The remaining 88.75% was owned by other outside investors. In June 2012, BOPRE purchased an additional 3.75% of Boca West IMP from another investor, bringing its total interest to 23.75%. BOPRE accounts for this investment under the cost method since it does not exercise significant influence over Boca West IMP. Then the members of BOPRE sold 31.5% of BOPRE to a new investor. Since inception there have been a number of capital calls for BOPRE that have not been met by some of the investors. During 2016 and 2017, the investors that have not met their capital calls have had their investment diluted by the amount of the unmet capital calls and their corresponding investment percentage reduced proportionately. After these dilutions, the Company’s record investment percentage has increased from 15.4% to its current value of 21.05% The center opened in August 2012. In February 2014, the Company and other members sold their interests in BOP.
The Company’s recorded investment in BOPRE is $164,000 and $144,000 at December 31, 2017 and 2016.
USNC is a 10% guarantor of 50% of the outstanding balance of Boca West IMP’s ten-year mortgage. This mortgage had an original balance of $3,000,000 and is secured by the medical office building in which BOP operates. The outstanding balance on the mortgage is $2,417,000 at December 31, 2017. Any liability from this guarantee would be mitigated by the recovery from the underlying real estate, and the Company expects its potential exposure from this guarantee to be remote.
Medical Oncology Partners
In April of 2015 Medical Oncology Partners, LLC (“MOP”), was formed in partnership with local physicians and other investors. MOP was established to acquire a 100% equity interest in United Oncology Medical Associates of Florida LLC (“UOMA”). USNC was not a member of MOP at the time of formation as it was not able to participate due to the fact that USNC was not a physician. Nevertheless, USNC wished to eventually obtain an equity interest in MOP and loaned the principal investor in MOP, Dr. Jaime Lozano, a co-investor in FOP, $173,000. Dr. Lozano used these funds, along with an equal amount of his own funds (a total of $345,000), to purchase a 76.67% interest in MOP. Other investors paid a further $105,000 for the remaining equity in MOP. MOP used the $450,000 of financing to acquire a 100% equity interest in UOMA. An application was filed for a waiver to allow USNC to hold an equity interest notwithstanding the physician requirement and on December 22, 2016, USNC was cleared to become a part owner of MOP. Dr. Lozano agreed to exchange half of his membership interest to USNC in return for the settlement of the note to USNC. USNC and Dr. Lozano also agreed to share equally in providing a 5% equity interest in MOP to an additional investor as a consulting fee for services rendered in the administration of MOP and UOMA. At December 22, 2016 USNC owned 35.83% of MOP. The Company has recorded its share of losses of $12,000 for the period from December 22, 2016 to December 31, 2016, against its investment which resulted in a reduction of its investment to $149,000.
Due to increasing costs, continued net losses since April 2015, and reliance on related party and other debt for operating cash flows, the Company determined that the fair value of UOMA is less than its carrying amount. The Company tested its investment for impairment at December 31, 2016 and determined that it was fully impaired. Accordingly, the entire investment balance in MOP, as well as the loans from USN and USNC to MOP and UOMA, have been written off.
The Company has recorded an equity in loss of $181,000 during 2017 due to additional advancements to MOP that have been written off.
CB Oncology Partners
CB Oncology Partners, LLC, (“CBOP”) was organized September 1, 2017, to acquire the rights of the new center from FOP. Beginning in October of 2017, CBOP began paying the remainder of the costs associated with opening the center. The medical center opened and treated its first patient in January of 2018.
Strategy for Participation in Cancer Treatment
As a result of the Company’s experiences over the past few years, the Company has expanded its focus to the broader based cancer treatment market. In order to reduce the risk and broaden its opportunities for profitable growth, the Company, where possible, has been pursuing partnerships with local investors/providers to develop and operate oncology centers that utilize linear accelerators (LINACs) to treat cancers in the whole body. The Company also continues to evaluate opportunities to develop additional gamma knife facilities. FOP, BOP and the Southern California Regional Gamma Knife Center typify this new strategy.
Employees
USN has three full-time employees and relies on consultants for certain services as required from time-to-time. All of its full-time employees are engaged in sales, marketing and administration.
Regulatory Environment
The levels of revenues and profitability of companies involved in the health services industry, such as the Company, may be affected by the continuing efforts of governmental and third party payors to contain or reduce the costs of health care through various means. Although the Company does not believe that its business activities will be materially affected in the foreseeable future, it is not possible to predict the long term effect of recent and future changes in the regulatory environment, or the responses of federal, state or private payors for healthcare goods and services in response to healthcare proposals or legislation.
In March 2010, significant reforms to the healthcare system were adopted in the form of the Patient Protection and Affordable Care Act (the “PPACA”). The PPACA includes provisions that, among other things, reduce and/or limit Medicare reimbursement to certain providers, require all individuals to have health insurance (with limited exceptions) and impose new and/or increased taxes. The Company cannot predict the effects these changes may have on its business, and no assurance can be given that any such changes will not have a material adverse effect on the Company.
In addition, the provision of medical services in the United States is dependent on the availability of reimbursement to consumers from third party payors, such as government and private insurance companies. Although patients are ultimately responsible for services rendered, the Company expects that the majority of its revenues will be derived from reimbursements by third party payors. Medicare has authorized reimbursement for gamma knife and other forms of cancer treatment. Over the last several years, such third party payors are increasingly challenging the cost effectiveness of medical products and services and taking other cost containment measures. Therefore, although treatment costs using the gamma knife compare favorably to traditional invasive brain surgery, it is unclear how this trend among third party payors and future regulatory reforms affecting governmental reimbursement will affect procedures in the higher end of the cost scale.
In the future, the Company may establish additional gamma knife or other types of cancer treatment centers. Completion of future centers would require approvals and arrangements with hospitals, health care organizations, or other third parties, including certain regulatory authorities. The Food and Drug Administration has issued the requisite pre-market approval for the gamma knife utilized by the Company. In addition, many states require hospitals to obtain a Certificate of Need (“CON”) before they can acquire a significant piece of medical equipment. Should the Company enter into future ventures such "need" will be demonstrable, but it can have no assurance that CONs will be granted. In addition, the Nuclear Regulatory Commission (the “NRC”) must issue a permit to the Company to permit loading the cobalt at each gamma knife site. While the Company believes that it can obtain an NRC permit for each gamma knife unit, there is no assurance that it will.
Liability Insurance
Although the Company does not directly provide medical services, it has obtained professional medical liability insurance, and has general liability insurance as well. The Company’s professional medical liability and general liability policies have limits of $3 million each. The Company believes that its insurance is adequate for providing treatment facilities and non-medical services, although there can be no assurance that the coverage limits of such insurance will be adequate or that coverage will not be reduced or become unavailable in the future.
Competition
The health care industry, in general, is highly competitive and the Company expects to have substantial competition from other independent organizations, as well as from hospitals in establishing future gamma knife or other types of cancer treatment centers. There are other companies that provide gamma knife or other types of cancer treatment on a "cost per treatment basis". In addition, larger hospitals may be expected to maintain a gamma knife as well as competing technologies as part of their regular inpatient services, which could have the effect of reducing the number of gamma knife procedures performed at such facility. Principal competitive factors include quality and timeliness of test results, ability to develop and maintain relationships with referring physicians, facility location, convenience of scheduling and availability of patient appointment times. The Company believes that cost containment measures will encourage hospitals to seek companies that are providing the technology, instead of incurring the capital cost of establishing their own treatment centers.
Gamma Knife Financing
The gamma knife is an expensive piece of equipment, presently costing from $3.0 to $4.5 million, depending on features. Therefore, the Company's development of new gamma knife centers is dependent on its ability to secure favorable financing. In addition, after a number of years of use, the radioactive cobalt contained in the gamma knife requires replacement. This is also an expensive process. For example, the cobalt for the previous gamma knife in the NYU facility was reloaded in August 2003 and the costs were approximately $800,000.
Gamma Knife Supply and Servicing
To date, the Company has purchased all of its gamma knife equipment from Elekta Instruments, Inc., a subsidiary of AB Elekta of Stockholm, Sweden. Elekta is responsible for the installation and testing of the equipment and the training of the hospital staff in the operation of the equipment. the Company arranges for maintenance services for its gamma knife units, including the necessary services related to cobalt replacement, through Elekta. Any interruption in the supply of equipment or services from Elekta would adversely affect the Company’s ability to maintain its gamma knife treatment centers.
Also, should restrictions be imposed on the operations of Elekta, such as restrictions relating to the handling and disposal of radioactive materials, necessary support services could become more costly and more difficult to obtain.
New Technology/Possible Obsolescence
Gamma knife technology may be subject to technological change. Consequently, the Company will have to rely on the leading gamma knife's manufacturer, Elekta, to introduce improvements or upgrades in order to keep pace with technological change. Any such improvements or upgrades which the Company may be required to introduce will require additional financing. In addition, newly developed techniques and devices for performing brain surgery may render the gamma knife less competitive or obsolete.
Dependence on Hospital, Healthcare Organizations and Others
In establishing new gamma knife centers, the Company must reach an arrangement with a hospital or other medical center for the installation and operation of a gamma knife facility and then to purchase the gamma knife equipment and construct and operate the facility. Before entering into such an agreement, the Company must make an assessment of the economic feasibility of operating the gamma knife at that location. The Company retains no control or influence over the medical staff or decisions regarding the treatment of patients. In that regard, the Company’s economic success is highly dependent on its initial determinations of the viability of the gamma knife’s location. Should the medical center or the physicians at that medical center ultimately use the gamma knife facility for significantly fewer patients than initially projected, the Company could be required to operate the gamma knife center at a loss for an extended period of time.
With respect to other cancer centers in which the Company has an interest, the Company participates with other physician groups and other investors in planning and constructing the facility and purchasing the necessary equipment, such as an IMRT or IGRT. The Company plays a lead role in the initial planning and establishment of those centers, but does not control the day-to-day operations thereafter. The long term success of those centers depends to a significant degree on the operating decisions made by the physicians and administrators at those centers.
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.
In October 2012, the Company’s facility at NYU was totally destroyed as a result of flooding from Hurricane Sandy. The gamma knife had to be removed to prevent cobalt leakage that might occur due to rusting of the equipment.
In addition, the cost of the removal of the damaged equipment was $525,000. The Company paid a lease settlement of the outstanding principal of the loan balance only and received from insurance coverage $930,000 above the lease principal payments and removal costs.
The Company has finalized arrangements with NYU regarding the restored gamma knife center and the Company’s long term contract with NYU. The location of the restored facility, with the new Leksell PERFEXION gamma knife, is in the Tisch Hospital of NYU Langone Medical Center. The center reopened and the first patient was treated on April, 29, 2014. Substantially all of the Company’s revenue for 2017 and 2016 resulted from patients treated at this facility. The Company’s lease with NYU ends in March 2021, and it has agreed to sell its gamma knife to NYU at the end of the lease term.
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. If the Company experiences operating losses in the future, we will be required to seek additional capital to support continued operations and the development of new centers, but we cannot assure you, however, that we will be able to raise such additional capital as and when required.
Stock Price Volatility; Illiquid Trading Market
The Company’s common stock is thinly traded. At present, trades are reported on the OTC Pink marketplace only several days a month. This thin trading and relatively small non-affiliate float lead to a high level of volatility in reported sale prices. Investors in the Company’s Common Stock will have a limited ability to trade shares on the open market and, even if able to sell shares, could suffer significant market losses due to large swings in the prices of the shares.
None
The Company's base facility, from which it conducts substantially all of its administrative operations, is located in Rockville, Maryland and occupies approximately 1,300 square feet. The rent is approximately $46,000 per year. the Company occupies about 3,800 square feet at the NYU Medical Center in New York, New York. Pursuant to the facility agreements with NYU, the Company is not required to pay separate rent for the premises occupied by its gamma knife center. Overhead, including rent, was negotiated in determining the fee paid to the Company for the use of the gamma knife. the Company’s agreement with NYU was extended in 2008 and now expires in 2021.
The Company is subject to lawsuits, investigations and potential claims arising out of the ordinary conduct of its business. The Company is not currently involved in any material litigation.
Not applicable
| Item 5. |
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
|
The Company's Common Stock is traded on the over-the-counter market and quoted on the OTC Pink marketplace.
The following table displays the range of high and low closing prices for the Company’s Common Stock for the period from January 1, 2016 through December 31, 2017.
|
Period
|
High Close
|
Low Close
|
||||||
|
January 1 – March 31, 2016
|
.22
|
.11
|
||||||
|
April 1 - June 30, 2016
|
.20
|
.13
|
||||||
|
July 1 – September 30, 2016
|
.35
|
.13
|
||||||
|
October 1 – December 31, 2016
|
.28
|
.21
|
||||||
|
January 1 – March 31, 2017
|
.36
|
.22
|
||||||
|
April 1 - June 30, 2017
|
.58
|
.25
|
||||||
|
July 1 – September 30, 2017
|
.50
|
.38
|
||||||
|
October 1 – December 31, 2017
|
.48
|
.32
|
||||||
The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.
As of March 27, 2018, there were approximately 67 holders of record of the Company's Common Stock.
To date the Company declared no dividends on its Common Stock and does not anticipate declaring dividends in the foreseeable future.
During the year ended December 31, 2017, the Company did not purchase any of its own equity securities.
Not required for smaller reporting companies.
Results of operations
2017 Compared to 2016
Patient revenue in 2017 was $3,414,000 as compared to $3,212,000 in 2016. This increase in patient revenue was largely due to an increase in the number of patients being seen in 2017, and an additional $210,000 of revenue attributable to the full year effect in 2017 of the $30,000 per month fixed fee, following the installation of the new ICON unit.
Patient expenses in 2017 were $1,467,000 as compared to $1,290,000 in 2016. Patient expenses do not vary materially with the number of procedures performed, but are tied to depreciation, maintenance and other fixed expenses. Maintenance expenses, over extended periods of time, tend to increase with higher usage rates. The increase experienced in 2017 over 2016 was due to the full year of additional depreciation of the new ICON installation and the increased maintenance costs following the installation of this equipment. SG&A decreased 4% from $1,308,000 in 2016 to $1,259,000. This decrease in SG&A resulted from lower insurance costs and professional fees incurred in 2017. There was interest expense of $153,000 in 2017 down from $161,000 in 2016. Income from investments in unconsolidated entities decreased from $638,000 in 2016 to a loss of $101,000 in 2017, due to lower income generated by FOP, following the 21st Century bankruptcy filing, and write offs of advances to FOP, MOP and CBOP. The Company reported net income of $538,000 as compared to $536,000 in the prior year. The Company incurred an income tax benefit of $97,000 in 2017 as compared to a deferred income tax charge of $342,000 in 2016, primarily due to a $295,000 deferred tax benefit in turn due to the effects of lower federal corporate income tax rates on the Company’s net deferred tax liabilities following the enactment of the Tax Cuts and Jobs Act in December 2017.
Liquidity and capital resources
At December 31, 2017, the Company had working capital of $2,372,000 as compared to $1,419,000 at December 31, 2016. This increase was due mostly to higher year end cash balances in turn due to higher revenues in 2017, and higher year end deferred revenue and lower accounts receivable. Total assets decreased by $329,000 from 2016 to 2017 principally due to depreciation and amortization. Cash and cash equivalents at December 31, 2017 were $2,684,000 as compared to $1,962,000 at December 31, 2016.
Net cash provided by operating activities was $2,348,000 in 2017 as compared to $1,861,000 in 2016. Net cash used in financing activities was $1,031,000 in 2017 as compared to $1,000,000 in 2016. Depreciation and amortization was $1,135,000 in 2017 as compared to $1,006,000 in 2016.
For the year ended December 31, 2017, net cash used in investing activities was $595,000 as compared to net cash provided by investing activities of $33,000 in 2016.
Off-balance sheet arrangements
None
Critical accounting policies
Estimates and assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company’s agreement with NYU primarily comprises an operating lease, and patient revenue from the use of the gamma knife is primarily lease income. The Company also recognizes maintenance income ratably as patient procedures are performed. Following an amendment to the Company’s lease agreement with NYU, effective August 2016, the Company receives a $30,000 minimum lease payment per month from NYU. With the exception of these fixed payments, the NYU agreement provides for contingent rental income based on a tiered fee schedule related to the number of patient procedures and associated thresholds, with the rate per procedure decreasing as more procedures are performed. The Company recognizes the contingent rental income and the fixed monthly payments, on a systematic basis using an average fee per procedure calculated by estimating the expected number of procedures per contract year, which runs from November 1, to the following October 31. Any amounts received in excess of the average fee are considered deferred revenue. At the end of each reporting period, the Company reviews its estimated revenue for the contract year and adjusts revenue for any material changes in the estimate. At the end of the contract year, the revenue is adjusted to the actual amount received.
Asset retirement obligations
The Company records liabilities for legal obligations associated with the retirement of tangible long-lived assets based on the estimated future cost of asset retirement obligations discounted to present value, and records a corresponding asset and liability on its consolidated balance sheets. The values ultimately derived are based on many significant estimates, including future decommissioning costs, inflation, cost of capital, and market risk premiums. The nature of these estimates requires the Company to make judgments based on historical experience and future expectations. Revisions to the estimates may be required based on such things as changes to cost estimates or the timing of future cash outlays. Any such changes that result in upward or downward revisions in the estimated obligation will result in an adjustment to the related capitalized asset and corresponding liability on a prospective basis. In 2014 the Company estimated that the cost to remove the gamma knife at the end of the agreement to be approximately $620,000. The estimated costs of these obligations are capitalized as costs of the assets subject to the retirement obligations and amortized over the lives of the assets. The estimated present value of the asset retirement obligation is $517,000 at December 31, 2017.
Investments in unconsolidated entities
The Company accounts for its investments in unconsolidated entities by the equity method. The Company records its share of such earnings (losses) in the consolidated statements of operations as “Income (loss) from investments in unconsolidated entities”. The carrying value of the Company’s investments in unconsolidated entities is recorded in the consolidated balance sheets. The Company records losses of the unconsolidated entities only to the extent of the Company’s interest in and advances to the entities.
Not required for smaller reporting companies.
The financial statements and supplementary data required by this item are set forth in this Annual Report on Form 10-K beginning at page F-1.
None
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We do realize that we are a very small company and as a small company with only the officers and directors participating in the day to day management, with the ability to override controls, each officer and director has multiple positions and responsibilities that would normally be distributed among several employees in larger organizations with adequate segregation of duties to ensure the appropriate checks and balances. Because the Company does not currently have a separate chief financial officer, the President 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 President 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.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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.
All internal control systems, no matter how well designed, have inherent limitations and can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our management, including our President, and assisted by our Lead Director, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. 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 has identified the following material weakness as of December 31, 2017: 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 requirement. Specifically, effective controls were not designed and in place to ensure that the Company maintained, or had access to, appropriate resources with adequate experience and expertise in the area of financial reporting for transactions such as investments in unconsolidated entities, related party receivables, impairments, and income taxes. The Company is in the process of developing efficient approaches to remediate this material weakness.
Changes in Internal Control over Financial Reporting
Management is in the process of reviewing and developing plans to remediate the material weakness identified above. Otherwise, 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 December 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Not applicable.
The directors and executive officers of the Company are as follows:
|
Name
|
Age
|
Position
|
|
Alan Gold
|
73
|
President & Chairman of the Board
|
|
William F. Leimkuhler
|
66
|
Director
|
|
Charles H. Merriman, III
|
83
|
Director
|
|
Susan Greenwald
|
72
|
Vice President and Secretary
|
Alan Gold has served as President and Chairman of the Board of the Company since 1996. Mr. Gold has also been a director of the Company since its formation in 1993. Mr. Gold served as President of GHS from 1983 through May 1999 and director of GHS since its formation through November 1999. Mr. Gold was one of the founders of Global Health Systems, the predecessor of GHS, serving as its President since its formation in July 1983. From 1981 to 1983, he served as Executive Vice President of Libra Group, a company located in Rockville, Maryland, engaged in health care automation, where he was President of Global Health Foundation and Libra Research and Executive Vice President of Libra Technology. From July 1997 through March 1998 Mr. Gold was also an employee of Health Management Systems.
William F. Leimkuhler has served as director of the Company since May 1999. He currently serves as Lead Director of the Company’s Board of Directors. He also served as a director of GHS since its inception in 1984 through November 1999. Since November 2017, Mr. Leimkuhler has served as the Chief Financial Officer of Mutualink, Inc., a provider of communications interoperability solutions for public safety agencies, critical infrastructure, schools and private enterprise. He also serves as General Counsel of Paice LLC, the developer of an advanced hybrid electric powertrain for passenger vehicles, a position he has held since October 1999. In recent years, he has also acted as a consultant to several emerging growth companies on corporate and business development matters. From January 1994 until October 1999, he served as Vice President and General Counsel of Allen & Company Incorporated, an investment banking firm. Mr. Leimkuhler also serves as a director of Argan, Inc. and Northern Power Systems Corp.
Charles H. Merriman, III has served as a director of the Company since May 1999. He also served as a director of GHS from October 1997 to November 1999. Mr. Merriman retired at the close of the year 2001 from service as Senior Vice President and Managing Director of BB&T Capital Markets ("BB&T"), an investment banking enterprise, where he was employed in various capacities since 1972 by BB&T and its predecessor. Mr. Merriman has extensive knowledge of the Company’s primary focus on healthcare and technology.
Susan Greenwald has served as Vice President of Marketing Communications and as Secretary of the Company since May 1999. She performed services for GHS in the same capacity from its inception in 1983 through May 1999. Ms. Greenwald was one of the founders of Global Health Systems, the predecessor of GHS, and served as its Vice President of Marketing Communications since 1983. From 1981 through 1983 she was the Proposal Manager for Libra Technology and Global Health Foundation, sister companies engaged in federal contracting and private enterprise, respectively, in the healthcare information technology business. From July 1997 through February 1998, Ms. Greenwald was an employee of Health Management Systems.
Mr. Gold and Ms. Greenwald are married.
Pursuant to the Company’s bylaws, the Company’s Board of Directors is elected by the stockholders at each annual meeting to serve until the next annual meeting or until their successors are elected and qualified. In the case of a vacancy, a director will be appointed by a majority of the remaining directors then in office to serve the remainder of the term left vacant. Directors do not receive any fees for attending board meetings. Directors are entitled to receive reimbursement for traveling costs and other out-of-pocket expenses incurred in attending board meetings. During the year ended December 31, 2017, the Board of Directors held two meetings, which were attended by all incumbent directors. In view of the small size of the Company’s Board, it does not operate through committees. Instead, the full Board of Directors performs the functions typically performed by the audit, compensation and nominating committees.
Pursuant to the Company’s bylaws, officers of the Company hold office until the first meeting of directors following the next annual meeting of stockholders and until their successors are chosen and qualified.
Section 16 (a) Beneficial Ownership Reporting Compliance
Based solely upon a review of the copies of the forms furnished to the Company, or written representations from certain reporting persons, the Company believes that during the year ended December 31, 2017, all filing requirements applicable to its officers and directors were complied with by such individuals.
The information below sets forth the compensation for the years ended December 31, 2017, 2016, and 2015 for the President of the Company.
|
Summary Compensation Table
|
|||||
|
Name and
|
Annual Compensation
|
||||
|
Principal Position
|
Year
|
Salary
|
|||
|
Alan Gold
|
2017
|
$
|
300,000
|
||
|
President & Chairman
|
2016
|
$
|
300,000
|
||
|
of the Board
|
2015
|
$
|
300,000
|
||
Employee Benefits; Employment Agreement
Mr. Gold is also entitled to reimbursement of up to $1,000 per month for automobile expenses. In addition, as with other full-time employees, Mr. Gold is entitled to participate in Company health and life insurance program. The Company also pays the premiums for an additional policy of life insurance in the amount of $500,000, naming Mr. Gold’s wife as beneficiary.
The Company and Mr. Gold are parties to an employment agreement giving either party the option to terminate employment by giving the other party six-months written notice.
Director Compensation
During 2017, our directors who are not officers or employees were entitled to an annual retainer of $3,000. Mr. Leimkuhler, the Lead Director, received a retainer of $3,000 per month in view of the higher level of activity required of him. Our directors of the Company who are officers or employees do not receive any additional compensation for serving on the Board.
| Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
|
The following table sets forth, as of March 27, 2017, certain information with respect to each beneficial owner of more than 5% of the Company's Common Stock and each director and executive officer of the Company:
|
Name and Address
of Beneficial Owner
|
Number of Shares
Beneficially
Owned (1)
|
Percent of
Class
|
||
|
Alan Gold (2)
|
1,140,246
|
14.6%
|
||
|
2400 Research Blvd.
|
||||
|
Rockville, MD 20850
|
||||
|
William F. Leimkuhler
|
100,000
|
1.3%
|
||
|
43 Salem Straits Road
|
||||
|
Darien, CT 06820
|
||||
|
Charles H. Merriman III
|
130,672
|
1.7%
|
||
|
5507 Cary St. Road
|
||||
|
Richmond, VA 23226
|
||||
|
Stanley S. Shuman (3)
|
2,367,734
|
30.4%
|
||
|
711 Fifth Avenue
|
||||
|
New York, NY 10022
|
||||
|
Allen & Company Incorporated
|
1,578,489
|
20.2%
|
||
|
711 Fifth Avenue
|
||||
|
New York, NY 10022
|
||||
|
All Directors and officers of the Company as a group (2) (four persons)
|
1,370,918
|
17.6%
|
| (1) |
Unless otherwise indicated, all shares are beneficially owned and sole voting and investment power is held by the person named above.
|
| (2) |
Includes 1,140,246 shares held jointly by Mr. Gold and his wife, Susan Greenwald, as joint tenants with right of survivorship.
|
| (3) |
Includes 1,578,489 shares owned by Allen & Company Incorporated, Mr. Shuman disclaims beneficial ownership in such shares, except to the extent of his pecuniary interest therein.
|
None
Audit Fees. Audit Fees represent fees for services rendered in connection with the annual audit and quarterly reviews of the Company’s financial statements. For the years ended December 31, 2017, and 2016, the Company paid $109,000 and $129,000, respectively, to Aronson, LLC for Audit Fees.
Audit-Related Fees. Audit-Related Fees represent fees for services rendered in connection with assurance and related services that are reasonably related to the performance of the audit or review of the financial statements and are not reported as Audit Fees. For the years ended December 31, 2017 and 2016, the Company did not pay or accrue any amounts for Audit Related Fees.
Tax Fees. Tax Fees represent fees for services rendered in connection with tax compliance, tax advice and tax planning. For the years ended December 31, 2017 and 2016, the Company paid $27,000 and $22,000 for Tax Fees to Dixon Hughes Goodman LLP.
All Other Fees. All Other Fees represent fees for services rendered by the Company’s principal accountants other than those described above. For the years ended December 31, 2017 and 2016, the Company did not pay or accrue any amounts for these services.
The Board of Directors has established a policy requiring pre-approval by the Board of Directors of all audit and non-audit services provided by its registered independent public accounting firm. The policy requires the general pre-approval of annual audit services and all other permitted services. All of the audit and non-audit services described above were approved by the Board.
|
(a)
|
(1) Financial Statements and Financial Statement Schedules. The following are filed as part of this report:
|
|
Page No.
|
|
|
Consolidated Financial Statements of the Company
|
F-1
|
|
Reports of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated Balance Sheets as of December 31, 2017 and 2016
|
F-3
|
|
Consolidated Statements of Operations for the years ended December 31, 2017 and 2016
|
F-4
|
|
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2017 and 2016
|
F-5
|
|
Consolidated Statements of Cash Flows for the year ended December 31, 2017 and 2016
|
F-6
|
|
Notes to Consolidated Financial Statements
|
F-7
|
(2) Financial Statement Schedules. All financial statement schedules as required by Item 8 and Item 15 of Form 10-K have been omitted because the information requested is not required, not applicable, or is shown in the Consolidated Financial Statements or Notes thereto.
|
(b)
|
Exhibits:
|
|
3.1
|
Form of Amended and Restated Certificate of Incorporation of U.S. NeuroSurgical, Inc. (“USN”) (incorporated herein by reference to Exhibit 3.1 to our Form 10 Registration Statement as filed July 1, 1999)
|
|
3.2
|
Form of Amended and Restated Bylaws of USN (incorporated herein by reference to Exhibit 3.2 to our Form 10 Registration Statement as filed July 1, 1999)
|
|
4.1
|
Form of Stock Certificate of Common Stock (incorporated herein by reference to Exhibit 4.1 to our Form 10 Registration Statement as filed July 1, 1999)
|
|
10.1
|
Distribution Agreement dated May 27, 1999 between GHS, Inc. (“GHS”) and USN (incorporated herein by reference to Exhibit 10.1 to our Form 10 Registration Statement as filed July 1, 1999)
|
|
10.2
|
Tax Matters Agreement dated May 27, 1999 between GHS and USN (incorporated herein by reference to Exhibit 10.2 to our Form 10 Registration Statement as filed July 1, 1999)
|
|
10.3
|
Assignment and Assumption Agreement dated May 27, 1999 between GHS and USN (incorporated herein by reference to Exhibit 10.3 to our Form 10 Registration Statement as filed July 1, 1999)
|
|
10.4
|
Employment Agreement dated December 14, 1984 between USN and Alan Gold, as amended March 7, 1986 (incorporated by reference to Exhibit 10.3 of GHS’s Registration Statement No. 33-4532-W on form S-18)
|
|
10.5
|
Agreement dated December 29, 1993 between USN and Elekta Instruments, Inc. (incorporated by reference to 10o to GHS’s 1994 Annual Report on Form 10-K)
|
|
10.6
|
Agreement dated August 1, 1996 between USN and DVI, Inc. (incorporated by reference 10j to GHS’s 1997 Annual Report on Form 10-K)
|
|
10.7
|
Gamma Knife Neuroradiosurgery Equipment dated as of November 26, 1996 between New York University on behalf of New York University Medical Center and USN (incorporated herein by reference to Exhibit 10.10 to our Form 10 Registration Statement as filed July 1, 1999)
|
|
21.1
|
List of Subsidiaries (incorporated herein by reference to Exhibit 21.1 to our Form 10 Registration Statement as filed July 1, 1999)
|
|
Certifications of CEO and CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
Certifications of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
*
|
Filed herewith
|
| (c) |
Financial Statement Schedules. None
|
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
U.S. NeuroSurgical Holdings, Inc.
|
|||
|
(Registrant)
|
|||
|
By
|
/s/ Alan Gold
|
||
|
Alan Gold
|
|||
|
President & Chairman of the Board and Principal Financial Officer
|
|||
|
Dated: April 11, 2018
|
|||
In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
April 11, 2018
|
/s/ Alan Gold
|
|
|
Alan Gold
|
||
|
President & Chairman of the Board
|
||
|
April 11, 2018
|
/s/ William F. Leimkuhler
|
|
|
William F. Leimkuhler
|
||
|
Director
|
||
|
April 11, 2018
|
/s/ Charles H. Merriman III
|
|
|
Charles H. Merriman III
|
||
|
Director
|
Contents
|
Page
|
|
|
Consolidated Financial Statements
|
F-1
|
|
F-2
|
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
|
|
F-6
|
|
|
F-7
|
To the Board of Directors and Stockholders
U.S. NeuroSurgical Holdings, Inc.
Rockville, Maryland
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of U.S. NeuroSurgical Holdings, Inc. and Subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2017, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatements of the consolidated financial statements, whether due to error of fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Aronson LLC
We have served as the Company’s auditor since 2014.
Rockville, Maryland
April 11, 2018
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
|
December 31,
|
||||||||
|
2017
|
2016
|
|||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$
|
2,684,000
|
$
|
1,962,000
|
||||
|
Accounts receivable
|
767,000
|
891,000
|
||||||
|
Due from related parties
|
169,000
|
7,000
|
||||||
|
Short term loan receivable
|
299,000
|
-
|
||||||
|
Elekta refund due
|
-
|
12,000
|
||||||
|
Other current assets
|
67,000
|
71,000
|
||||||
|
Total current assets
|
3,986,000
|
2,943,000
|
||||||
|
Other assets:
|
||||||||
|
Notes receivable
|
38,000
|
38,000
|
||||||
|
Investments in unconsolidated entities
|
164,000
|
447,000
|
||||||
|
Total other assets
|
202,000
|
485,000
|
||||||
|
Property and equipment:
|
||||||||
|
Gamma knife (net of accumulated depreciation of $2,637,000 in 2017 and $1,808,000 in 2016)
|
2,700,000
|
3,484,000
|
||||||
|
Leasehold improvements (net of accumulated amortization of $1,111,000 in 2017 and $805,000 in 2016)
|
1,027,000
|
1,332,000
|
||||||
|
Total property and equipment
|
3,727,000
|
4,816,000
|
||||||
|
TOTAL ASSETS
|
$
|
7,915,000
|
$
|
8,244,000
|
||||
|
LIABILITIES
|
||||||||
|
Current liabilities:
|
||||||||
|
Obligations under capital lease - current portion
|
$
|
972,000
|
$
|
936,000
|
||||
|
Deferred tax liability- current portion
|
-
|
245,000
|
||||||
|
Accounts payable and accrued expenses
|
208,000
|
86,000
|
||||||
|
Deferred revenue
|
370,000
|
257,000
|
||||||
|
Income tax payable
|
64,000
|
-
|
||||||
|
Total current liabilities
|
1,614,000
|
1,524,000
|
||||||
|
Obligations under capital lease - net of current portion
|
1,666,000
|
2,733,000
|
||||||
|
Deferred tax liability - net of current portion
|
675,000
|
591,000
|
||||||
|
Guarantee liability
|
11,000
|
11,000
|
||||||
|
Asset retirement obligations
|
517,000
|
491,000
|
||||||
|
Total liabilities
|
4,483,000
|
5,350,000
|
||||||
|
STOCKHOLDERS’ EQUITY
|
||||||||
|
Common stock - par value $.01; 25,000,000 shares authorized;7,792,185 shares issued and outstanding at December 31, 2017 and 2016.
|
78,000
|
78,000
|
||||||
|
Additional paid-in capital
|
3,100,000
|
3,100,000
|
||||||
|
Retained earnings (accumulated deficit)
|
254,000
|
(284,000
|
)
|
|||||
|
Total stockholders' equity
|
3,432,000
|
2,894,000
|
||||||
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
|
7,915,000
|
$
|
8,244,000
|
||||
See accompanying notes to the consolidated financial statements
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
|
Years Ended December 31,
|
||||||||
|
2017
|
2016
|
|||||||
|
Revenue
|
$
|
3,414,000
|
$
|
3,212,000
|
||||
|
Costs and expenses:
|
||||||||
|
Patient expenses
|
1,467,000
|
1,290,000
|
||||||
|
Selling, general and administrative
|
1,259,000
|
1,308,000
|
||||||
|
Total
|
2,726,000
|
2,598,000
|
||||||
|
Operating income
|
688,000
|
614,000
|
||||||
|
Interest expense
|
(153,000
|
)
|
(161,000
|
)
|
||||
|
Interest income
|
7,000
|
5,000
|
||||||
|
(Loss) income from investments in unconsolidated entities, net
|
(101,000
|
) |
638,000
|
|||||
|
Impairment loss
|
- |
(218,000
|
)
|
|||||
|
Income before income taxes
|
441,000
|
878,000
|
||||||
|
Provision for income tax benefit (expense)
|
97,000
|
(342,000
|
)
|
|||||
|
Net income
|
$
|
538,000
|
$
|
536,000
|
||||
|
Basic and diluted net income per share
|
$
|
0.07
|
$
|
0.07
|
||||
|
Weighted average common shares outstanding
|
7,792,185
|
7,794,685
|
||||||
See accompanying notes to the consolidated financial statements
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
|
Common Stock
|
||||||||||||||||||||
|
Number
of
Shares
|
Amount
|
Additional
Paid-In
Capital
|
Retained Earnings
(Accumulated
Deficit)
|
Total
|
||||||||||||||||
|
Balance - December 31, 2015
|
7,797,185
|
$
|
78,000
|
$
|
3,100,000
|
$
|
(820,000
|
)
|
$
|
2,358,000
|
||||||||||
|
Cancellation of shares
|
(5,000
|
)
|
-
|
-
|
-
|
-
|
||||||||||||||
|
Net income for the year ended December 31, 2016
|
-
|
-
|
-
|
536,000
|
536,000
|
|||||||||||||||
|
Balance - December 31, 2016
|
7,792,185
|
$
|
78,000
|
$
|
3,100,000
|
$
|
(284,000
|
)
|
$
|
2,894,000
|
||||||||||
|
Net income for the year ended December 31, 2017
|
-
|
-
|
-
|
538,000
|
538,000
|
|||||||||||||||
|
Balance - December 31, 2017
|
7,792,185
|
$
|
78,000
|
$
|
3,100,000
|
$
|
254,000
|
$
|
3,432,000
|
|||||||||||
See accompanying notes to the consolidated financial statements
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
|
Years Ended December 31,
|
||||||||
|
2017
|
2016
|
|||||||
|
Cash flows from operating activities:
|
||||||||
|
Net income
|
$
|
538,000
|
$
|
536,000
|
||||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
|
Depreciation and amortization
|
1,135,000
|
1,006,000
|
||||||
|
Loss (income) from investments in unconsolidated entities, net
|
101,000 |
|
(638,000
|
)
|
||||
|
Distributed earnings from unconsolidated entities
|
274,000
|
500,000
|
||||||
|
Impairment loss
|
-
|
218,000
|
||||||
|
Consulting fee - settled through transfer of equity interest in MOP
|
-
|
12,000
|
||||||
|
Accrued interest from notes receivable
|
(4,000
|
)
|
-
|
|||||
|
Accretion of asset retirement obligations
|
26,000
|
25,000
|
||||||
|
Change in guarantee liability
|
-
|
(4,000
|
)
|
|||||
|
Deferred income taxes
|
(161,000
|
)
|
342,000
|
|||||
|
Changes in:
|
||||||||
|
Accounts receivable
|
124,000
|
(265,000
|
)
|
|||||
|
Elekta refund due
|
12,000
|
(12,000
|
)
|
|||||
|
Other current assets
|
4,000
|
27,000
|
||||||
|
Accounts payable and accrued expenses
|
122,000
|
6,000
|
||||||
|
Deferred revenue
|
113,000
|
108,000
|
||||||
|
Income tax payable
|
64,000
|
-
|
||||||
|
Net cash provided by operating activities
|
2,348,000
|
1,861,000
|
||||||
|
Cash flows from investing activities:
|
||||||||
|
Repayment of amounts advanced to unconsolidated entities
|
64,000
|
71,000
|
||||||
|
Advances to unconsolidated entities
|
(593,000
|
)
|
-
|
|||||
|
Advances made under short term loans
|
-
|
(34,000
|
)
|
|||||
|
Purchase of gamma knife equipment
|
(46,000
|
)
|
-
|
|||||
|
Investments in unconsolidated entities
|
(20,000
|
)
|
(5,000
|
)
|
||||
|
Decrease of due from related parties
|
-
|
1,000
|
||||||
|
Net cash (used in) provided by investing activities
|
(595,000
|
)
|
33,000
|
|||||
|
Cash flows from financing activities:
|
||||||||
|
Repayment of capital lease obligations
|
(1,031,000
|
)
|
(1,000,000
|
)
|
||||
|
Net cash used in financing activities
|
(1,031,000
|
)
|
(1,000,000
|
)
|
||||
|
Net change in cash and cash equivalents
|
722,000
|
894,000
|
||||||
|
Cash and cash equivalents - beginning of year
|
1,962,000
|
1,068,000
|
||||||
|
Cash and cash equivalents - end of year
|
$
|
2,684,000
|
$
|
1,962,000
|
||||
|
Supplemental disclosures of cash flow information:
|
||||||||
|
Cash paid for:
|
||||||||
|
Interest
|
$
|
143,000
|
$
|
172,000
|
||||
|
Supplemental disclosure of of noncash investing and financing activities:
|
||||||||
|
Increase in gamma knife equipment through a capital lease obligation
|
$
|
-
|
$
|
879,000
|
||||
|
Reduction in capital lease liability and leasehold improvements due to sales tax refund applied to lease
|
$
|
-
|
$
|
42,000
|
||||
|
Increase in investment in unconsolidated entities through settlement of a loan receivable
|
$
|
-
|
$
|
161,000
|
||||
|
Distribution from unconsolidated entity recorded as short term loan receivable
|
$
|
295,000
|
$
|
-
|
||||
See accompanying notes to the consolidated financial statements
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
Note A – Organization and Business
U.S. NeuroSurgical Holdings, Inc. owns and operates, through its wholly-owned subsidiaries, stereotactic radiosurgery centers, utilizing gamma knife technology, and holds other interests in radiological treatment facilities. As used herein, unless the context indicates otherwise, the term "Company", "Registrant" and "Holdings" means U.S. NeuroSurgical Holdings, Inc. and its wholly-owned subsidiary, U.S. NeuroSurgical, Inc. (“USN”), and the wholly-owned subsidiaries of USN, U.S. NeuroSurgical Physics, Inc. and USN Corona, Inc.
U.S. NeuroSurgical, Inc. a Delaware corporation, was organized in July 1993 for the purpose of owning and operating stereotactic radiosurgery centers, utilizing the gamma knife technology. USN owns one gamma knife center on the premises of New York University Medical Center (“NYU”) in New York, New York. Management continues to explore opportunities to organize and participate in additional gamma knife centers. USN's business strategy is to provide a mechanism whereby hospitals, physicians, and patients can have access to gamma knife treatment capability, a high capital cost item. USN provides the gamma knife to medical facilities on a "cost per treatment" basis. USN holds an interest in the gamma knife unit and is reimbursed by the facility where it is housed, based on utilization.
During the fourth quarter of 2007, USN formed a wholly-owned subsidiary, USN Corona, Inc. (“USNC”), to carry investments in Corona Gamma Knife, LLC and NeuroPartners, LLC. Those investments were formed to develop and manage a gamma knife center at San Antonio Regional Hospital in Upland, California. (See Note C[1])
During 2010, USN expanded its market strategy to include opportunities to develop cancer centers featuring radiation therapy. These centers utilize linear accelerators with IMRT (Intensity Modulated Radiation Therapy) and IGRT (Image Guided Radiation Therapy) capabilities. In 2010, the Company formed Florida Oncology Partners, LLC (“FOP”) in partnership with local physicians and other investors. USNC owns a 24% interest in the venture. FOP’s first center was located in Miami, Florida and opened in the second quarter of 2011. The Company entered into an arrangement to sell the center to 21st Century Oncology in December 2015. The sale had not occurred as of December 31, 2017. (See Note C[2])
In April 2015 Medical Oncology Partners LLC (“MOP”), was formed in partnership with local physicians and other investors. MOP was established to acquire a 100% equity interest in United Oncology Medical Associates of Florida, LLC (“UOMA”). USNC was not a member of MOP at the time of its formation, as it was not able to participate in MOP’s formation due to the fact that USNC was not a physician. An application was filed for a waiver and on December 22, 2016 USNC was cleared to become a part owner of MOP. USNC currently owns 35.83% of MOP. (See Note C[4])
On September 3, 2015, pursuant to the Agreement and Plan of Reorganization (the “Merger Agreement”), dated as of September 3, 2015, by and among USN, Holdings and U.S. NeuroSurgical Merger Sub, Inc. (“Merger Sub”), the Company adopted a new holding company organizational structure whereby USN is now a wholly owned subsidiary of Holdings. This structure did not result in any changes to the assets or operations of the Company, but management believes that it will create a more flexible framework for possible future transactions and organizational and operational adjustments.
The holding company organizational structure was effected by a merger (the “Merger”) conducted pursuant to Section 251(g) of the Delaware General Corporation Law (the “DGCL”), which provides for the formation of a holding company structure without a vote of the stockholders of the constituent corporations. Because the holding company organizational structure occurred at the parent company level, the remainder of the Company’s subsidiaries, operations and customers were not affected by this transaction.
In order to effect the Merger, USN formed Holdings as its wholly owned subsidiary and Holdings formed Merger Sub as its wholly owned subsidiary. Under the terms of the Merger Agreement, Merger Sub merged with and into USN, with USN surviving the merger and becoming a direct, wholly owned subsidiary of Holdings. Immediately prior to the Merger, Holdings had no assets, liabilities or operations.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
Pursuant to the Merger Agreement, all of the outstanding capital stock of USN was converted, on a share for share basis, into capital stock of Holdings. As a result, each former stockholder of USN became the owner of an identical number of shares of capital stock of Holdings, evidencing the same proportional interests in Holdings and having the same designations, rights, powers and preferences, qualifications, limitations and restrictions, as those that the stockholder held in USN.
Following the Merger, Holdings’ common stock continued to trade on the over-the-counter market and continued to be quoted on the OTC Markets under the same symbol, “USNU.” The conversion of shares of capital stock under the Merger Agreement occurred without an exchange of physical certificates. Accordingly, physical certificates formerly representing shares of outstanding capital stock of USN are deemed to represent the same number of shares of capital stock of Holdings.
Pursuant to Section 251(g) of the DGCL, the provisions of the certificate of incorporation and bylaws of Holdings are substantially identical to those of USN prior to the date on which the Merger Agreement took effect. The authorized capital stock of Holdings, the designations, rights, powers and preferences of such capital stock, and the qualifications, limitations and restrictions thereof are also substantially identical to those of the capital stock of USN immediately prior to the date of the Merger. Further, the directors and executive officers of Holdings are the same individuals who were directors and executive officers, respectively, of USN immediately prior to the date of the Merger.
Late in 2016, FOP took initial steps toward the development of a new radiation therapy center in Homestead, Florida. However, late in the third quarter of 2017, it was determined that the business opportunity at this new location should be pursued by a different investor group, and FOP arranged to sell the opportunity to this group. CB Oncology Partners, LLC was organized on September 1, 2017 to acquire the assets and rights in this new center from FOP.
In June 2017, FOP entered into an agreement with a third-party owner of a radiation therapy center located in Miami, Florida, whereby FOP took over the operation of the center effective September 22. 2017 for a ten-year initial term, and up to three additional terms of five years each.
The Company is currently exploring other opportunities for the establishment of cancer centers using IMRT and/or IGRT in Florida and other parts of the U.S.
Note B - The Company and its Significant Accounting Policies
| [1] |
Basis of presentation and consolidation:
|
The consolidated financial statements include the accounts of Holdings and its wholly-owned subsidiaries, USN, USNC and U.S. NeuroSurgical Physics, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.
| [2] |
Cash and cash equivalents:
|
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
| [3] |
Investments in unconsolidated entities:
|
The Company accounts for its investments in unconsolidated entities by the equity method. The Company records its share of such earnings (loss) in the Consolidated Statement of Operations as “Income (loss) from investments in unconsolidated entities”. The carrying value of the Company’s investments in unconsolidated entities is recorded in the Consolidated Balance Sheets. The Company records losses of the unconsolidated entities only to the extent of the Company’s interest in and advances to the entities. As such, the recorded balance of Corona Gamma Knife, LLC and NeuroPartners, LLC, FOP, MOP, and CBOP have been taken to zero.
In August 2016, the Financial Accounting Standards Board ("FASB") issued Account Standards Update (“ASU”) 2016-15, Classification of Certain Cash Receipts and Cash Payments, which in part requires entities to assess whether distributions of cash from unconsolidated entities represent a return on the investment or a return of the investment, to appropriately classify the distributions in the statement of cash flows. We have made an accounting policy election to use the cumulative earnings approach to determine that the distributions were returns on the investment and accordingly classified them as operating cash flows. Under the cumulative earnings approach, distributions received from the unconsolidated entity are presumed to be a return on the investment unless the distributions received by the investor, less distributions received in prior periods that were deemed to be returns of investment, exceed cumulative equity in earnings recognized by the investor. Although the ASU is effective in the first quarter of 2018, we have early adopted the guidance in the first quarter of 2017 due to the ongoing applicability of the new standard to the Company’s financial statements and have retrospectively adjusted our 2016 cash flow statement to conform to the 2017 presentation. This adjustment results in an increase in net cash provided by operating activitites, and a decrease in net cash provided by investing activities, of $500,000, compared with the amounts previously reported for the the year ended December 31, 2016.
| [4] |
Revenue recognition:
|
The Company’s agreement with NYU primarily comprises an operating lease, and patient revenue from the use of the gamma knife is primarily lease income. The Company also recognizes maintenance income ratably as patient procedures are performed. Following an amendment to the Company’s lease agreement with NYU, effective August 2016, the Company receives a $30,000 minimum lease payment from NYU each month. With the exception of these fixed payments, the NYU agreement provides only for contingent rental income based on a tiered fee schedule related to the number of patient procedures and associated thresholds, with the rate per procedure decreasing as more procedures are performed. The Company recognizes the contingent rental income and the fixed monthly payments on a systematic basis using an average fee per procedure calculated by estimating the expected number of procedures per contract year which runs from November 1, to the following October 31. Any amounts received in excess of the average fee are considered deferred revenue. At the end of each reporting period, the Company reviews its estimated revenue for the contract year and adjusts revenue for any material changes in the estimate. At the end of the contract year, the revenue is adjusted to the actual amount received.
In September 2017, USN and NYU entered into an additional amendment to the Gamma Knife Neuroradiosurgery Equipment Agreement, whereby NYU committed to purchase all of the gamma knife equipment at the NYU Medical Center for a purchase price of $2,400,000, consisting of 41 monthly installments of $50,000 commencing at the end of October 2017 and continuing through the end of February 2021, with a final payment of $350,000 on March 31, 2021. Upon receipt of final payment, title to all the equipment at the center will pass to NYU. Payments received before USN can pass title to the gamma knife equipment to NYU, or before USN has satisfied substantially all of its obligations under the agreement, will be recorded as deferred revenue. This agreement also requires USN to reload the cobalt in the gamma knife and to reimburse NYU for certain costs it will incur due to the cobalt reload. Such costs are expected to be no more than $2,000,000 and to be incurred during the second or third quarter of 2018.
The Company also recognizes maintenance income ratably as patient procedures are performed.
Lease income for 2017 and 2016 was $3,150,000 and $2,967,000 respectively. Maintenance income for 2017 and 2016 was $264,000 and $245,000, respectively.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. We will adopt this ASU on January 1, 2018 the date that the new standard is effective. While we are currently evaluating the impact on the Company’s consolidated financial statements and related disclosures, we do not expect adoption of the ASU to have a material impact on the Company’s consolidated financial statements.
| [5] |
Long-lived assets:
|
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
| [6] |
Depreciation and amortization:
|
The gamma knife is being depreciated on the straight-line method over an estimated useful life of 7 years. Leasehold improvements are being amortized on the straight-line method over 7 years, the shorter of useful life, or the life of the NYU Agreement. Office furniture and computers are being depreciated on the straight-line method over their estimated useful lives ranging from 3 to 7 years. Depreciation expense for 2017 and 2016 was $830,000 and $710,000 respectively. Amortization expense for 2017 and 2016 was $305,000 and $296,000 respectively.
| [7] |
Capital leases:
|
Capital lease obligations are amortized ratably over the original term of the lease agreement, beginning with the earlier of the date the leased assets are placed in service or the effective date of the lease as defined in the lease agreement.
| [8] |
Guarantees:
|
The Company recognizes a liability at the fair value of the obligation at the inception of a financial guarantee contract. The initial liability is subsequently reduced as the Company is released from exposure under the guarantee. If it becomes probable that the Company will have to perform on a guarantee, a separate liability is accrued if it is reasonably estimable, based on the facts and circumstances at that time. The Company reverses the fair value liability only when there is no further exposure under the guarantee.
| [9] |
Income taxes:
|
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets or liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce tax assets to amounts more likely than not to be realized.
The Company has adopted the accounting provisions for Accounting for Uncertainty in Income Taxes. This accounting provision provides a comprehensive model for how the Company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on its tax return. If applicable, the Company records interest and penalties as a component of income tax expense, The Company had no uncertain material tax positions at December 31, 2017 and 2016. Tax years from January 1, 2014 to the current year remain open for examination by federal and state tax authorities.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
In November 2015, FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. Previously, entities were required to separately present deferred tax assets and deferred tax liabilities as current and noncurrent in a classified balance sheet. The ASU was effective in the first quarter of 2017. We adopted the guidance related to balance sheet classification on a prospective basis. Prior periods were not retrospectively adjusted.
| [10] |
Earnings per share:
|
Earnings per share are computed by dividing earnings available to common stockholders by the weighted average shares outstanding for the period. There were no common stock equivalents during 2017 and 2016, and therefore, no potential dilution for the periods presented.
| [11] |
Advertising costs:
|
The Company follows the policy of charging the costs of advertising to expense as incurred. There were no advertising costs in 2017 and 2016.
| [12] |
Allowance for doubtful accounts:
|
The Company evaluates each of its accounts receivable individually and provides a charge to income that is appropriate, in the opinion of management, to absorb probable credit losses. The Company considers all accounts receivable to be collectible at December 31, 2017 and 2016.
| [13] |
Estimates and assumptions:
|
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
| [14] |
Fair values of financial instruments:
|
The estimated fair value of financial instruments has been determined based on available market information and appropriate valuation methodologies. The carrying amounts of cash and cash equivalents, accounts receivable, other current assets, due from or to related parties, and accounts payable approximate fair value at December 31, 2017 and 2016 because of the short maturity of these financial instruments. The carrying values of the notes receivable and the obligations under capital leases, approximate fair value because the interest rates on these instruments approximate the market rates at December 31, 2017 and 2016.
| [15] |
Credit risk:
|
At times, the Company may have cash and cash equivalents at a financial institution in excess of insured limits. The Company places its cash and cash equivalents with high credit quality financial institutions whose credit ratings are monitored by management to minimize credit risk. Accounts receivable consist primarily of amounts due from the medical centers. Historically, credit losses on accounts receivable have not been significant. At December 31, 2017 and 2016, substantially all of the Company’s accounts receivable were due from one customer, NYU.
| [16] |
Asset retirement obligations:
|
The Company records liabilities for legal obligations associated with the retirement of tangible long-lived assets based on the estimated future cost of asset retirement obligations discounted to present value and records a corresponding asset and liability on its consolidated balance sheets. The values ultimately derived are based on many significant estimates, including future decommissioning costs, inflation, cost of capital, and market risk premiums. The nature of these estimates requires the Company to make judgments based on historical experience and future expectations. Revisions to the estimates may be required based on such things as changes to cost estimates or the timing of future cash outlays. Any such changes that result in upward or downward revisions in the estimated obligation will result in an adjustment to the related capitalized asset and corresponding liability on a prospective basis.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
Note C - Investment in Unconsolidated Entities
| [1] |
The Southern California Regional Gamma Knife Center
|
During 2007, the Company managed the formation of the Southern California Regional Gamma Knife Center at San Antonio Regional Hospital (“SARH”) in Upland, California. The Company participates in the ownership and operation of the center through USNC. Corona Gamma Knife, LLC (“CGK”) is party to a 14-year agreement with SARH to renovate space in the hospital and install and operate a Leksell PERFEXION gamma knife. CGK leases the gamma knife from NeuroPartners LLC, which holds the gamma knife equipment. In addition to returns on its ownership interests, USNC expects to receive fees for management services relating to the facility.
USNC is a 20% owner of NeuroPartners LLC and owns 39% of CGK.
USNC was a 20% guarantor on NeuroPartners LLC’s seven-year lease with respect to the gamma knife equipment and certain leasehold improvements at SARH. In February 2016, NeuroPartners LLC negotiated a new five- year lease to fund the reloading of cobalt and related construction services. The new lease of $1,663,000 includes a balance of $668,000 from the prior lease obligations. This new lease will be paid over 60 months. The first payment of $31,000 was paid on April 1, 2016 and the final payment will be due on March 1, 2021. The Company continues to be a 20% guarantor on the new lease and expects any potential obligations from this guarantee would be reduced by the recovery of the related collateral, and thus expects any exposure from this guarantee to be remote.
Construction of the SARH gamma knife center was completed in December 2008 and the first patient was treated in January 2009. The project has been funded principally by outside investors. While the Company has led the effort in organizing the business and overseeing the development and operation of the SARH center, its investment to date in the SARH center has been minimal.
The Company’s share of cumulative losses associated with its investment in NeuroPartners LLC and CGK has exceeded its investment. Due to loans made to NeuroPartners LLC and CGK, NeuroPartners LLC and CGK are considered to be variable interest entities of the Company. However, as the Company is not deemed to be the primary beneficiary of NeuroPartners LLC and CGK, since it does not have the power to direct the operating activities that most significantly affect NeuroPartners LLC’s and CGK’s economic performance, these entities are not consolidated, but certain disclosures are provided herein.
During the year ended December 31, 2017, the Company received $65,000 in repayments of amounts previously advanced to NeuroPartners LLC and CGK and $24,000 in distributions. Those repayments and distributions reduced the amount of losses incurred on prior advances to NeuroPartners LLC and CGK and are included as additional income from investments in unconsolidated entities for the year ended December 31, 2017. The Company received $70,000 of similar repayments during the year ended December 31, 2016. At December 31, 2017, NeuroPartners LLC and CGK have repaid all of the outstanding advances. For the years ended December 31, 2017 and 2016, the Company’s equity in earnings of NeuroPartners LLC and CGK was $151,000 and $93,000, respectively, but was not recorded due to prior losses.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
The following tables present the aggregation of summarized financial information of NeuroPartners LLC and CGK:
|
Neuro Partners LLC and CGK Combined Condensed Income Statement Information
|
||||||||
|
Year Ended
December 31,
|
||||||||
|
2017
|
2016
|
|||||||
|
Patient revenue
|
$
|
1,063,000
|
$
|
982,000
|
||||
|
Net income
|
$
|
506,000
|
$
|
298,000
|
||||
|
USNC's equity in income of Neuro Partners LLC and CGK
|
$
|
151,000
|
$
|
93,000
|
||||
|
Neuro Partners LLC and CGK Combined Condensed Balance Sheet Information
|
||||||||
|
December 31,
|
||||||||
|
2017
|
2016
|
|||||||
|
Current assets
|
$
|
165,000
|
$
|
93,000
|
||||
|
Noncurrent assets
|
745,000
|
876,000
|
||||||
|
Total assets
|
$
|
910,000
|
$
|
969,000
|
||||
|
Current liabilities
|
$
|
641,000
|
$
|
449,000
|
||||
|
Noncurrent liabilities
|
464,000
|
1,121,000
|
||||||
|
Deficit
|
(195,000
|
)
|
(601,000
|
)
|
||||
|
Total liabilities and deficit
|
$
|
910,000
|
$
|
969,000
|
||||
| [2] |
Florida Oncology Partners
|
During 2010, the Company expanded its market strategy to include opportunities to develop cancer centers featuring radiation therapy. These centers utilize linear accelerators with IMRT (Intensity Modulated Radiation Therapy) and IGRT (Image Guided Radiation Therapy) capabilities. In 2010, the Company formed Florida Oncology Partners, LLC (“FOP”) in partnership with local physicians and other investors. USNC owns a 24% interest in the venture. FOP’s first center was located in Miami, Florida and opened in the second quarter of 2011. During the quarter ended September 30, 2010, the Company participated in the formation of Florida Oncology Partners RE, LLC (“FOPRE”), which owned a building previously occupied by FOP. The center diagnoses and treats patients utilizing a Varian Rapid Arc linear accelerator and a GE CT scanner. USNC originally invested $200,000 for 20% ownership interest in FOP and FOPRE. The remaining 80% was owned by other outside investors. In January of 2015 one of the investors relinquished its ownership interest in both FOP and FOPRE, and that interest was distributed among the remaining members in relationship to their percentages owned. This distribution resulted in an increase of ownership interest for the Company of 4% in each of FOP and FOPRE. As of January 1, 2015, the Company holds a 24% ownership in both FOP and FOPRE.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
During 2011, Florida Oncology Partners, LLC entered into a seven-year capital lease with Key Bank for approximately $5,800,000. Under the terms of the capital lease, USN agreed to guarantee a maximum of $1,433,000, approximately 25% of the original lease obligation in the event of default. USN is a guarantor jointly with most of the other members of FOP (except USNC, which is not a named guarantor). The outstanding balance on the lease obligation was $468,000 at December 31, 2017. The Company expects any potential liability from this guarantee to be reduced by the recoveries of the respective collateral but has recorded a liability of $11,000 associated with this guarantee at December 31, 2017.
In June 2012, FOPRE financed the purchase of the building that was occupied by FOP. The amount of the loan was $1,534,000 and was to be paid at a monthly rate of approximately $8,500 for 120 months with the final payment due on June 15, 2022. In December 2015, FOPRE sold the building, for a gain on sale of $577,000. The Company’s share of the gain was $139,000. The related mortgage was repaid upon closing of the sale and FOPRE has ceased operations. In May 2017, FOPRE was dissolved.
In December of 2015, FOP entered into an agreement with 21st Century Oncology for the sale of FOP’s Varian Rapid Arc linear accelerator and other medical equipment at the FOP location. 21st Century Oncology paid FOP $1,000,000 as a down payment for the equipment and agreed to make monthly payments of $172,000 for the equipment and all monthly payments due under the equipment lease with Key Bank. As of this date, 21st Century Oncology has not satisfied all of the terms of the agreement. In late May 2017, 21st Century Oncology filed for Chapter 11 bankruptcy protection and FOP was listed as an unsecured creditor. As a result, since June 2017, FOP has not received the agreed rental payments beyond the monthly payments for the equipment lease. FOP will continue to monitor the impact of 21st Century’s bankruptcy and pursue amounts that it is owed. However, there can be no assurance that the Company will be successful in these efforts.
Late in 2016, FOP took initial steps toward the development of a new radiation therapy center in Homestead, Florida. In December 2016, FOP entered into a ten-year lease agreement for office space located at 20405 Old Cutler Towne Center. FOP had to deliver an $88,000 letter of credit in conjunction with this office lease which collateral is being held in a restricted certificate of deposit. FOP began incurring architecture costs for planning/refitting the new space. During the first half of 2017, a financing agreement with BB&T Bank for the medical equipment and leasehold improvements was negotiated and then signed on August 31, 2017. In November 2017, the amounts for the equipment and leasehold improvements costs were finalized and paid under this financing agreement for a total loan of $4,106,000 to be paid over 7 years.
Late in the third quarter of 2017, it was determined that the business opportunity at this new location should be pursued by a different investor group, and FOP arranged to sell the opportunity to this group. CB Oncology Partners, LLC, was organized on September 1, 2017 to acquire the assets and rights in this new center from FOP.
In June 2017, FOP entered into an agreement with a third-party owner of a radiation therapy center located in Miami, Florida, whereby FOP took over the operation of the center effective September 22, 2017, for a ten-year initial term, and up to three additional terms of five years each. This agreement has been accounted for as a capital lease and, accordingly, FOP recorded assets and capital lease liabilities totaling $14,321,000 at September 22, 2017. The lease requires monthly payments in the first year of $160,000, increasing by 2% each year.
The Company’s recorded investment in FOP and FOPRE is $0 and $225,000 at December 31, 2017 and 2016, respectively. The Company’s investment in FOP at December 31, 2017 has been reduced to zero due to FOP recording distributions of $950,000 in the fourth quarter of 2017. Amounts due from FOP included in due from related parties total $169,000 and $4,000 at December 31, 2017 and 2016 respectively. In addition, FOP owes $299,000 of principal and accrued interest to the Company under a promissory note bearing interest at 6% per anum entered into in October 2017.
Due to loans made to FOP, FOP is considered to be a variable interest entity of the Company. However, as the Company is not deemed to be the primary beneficiary of FOP, since it does not have the power to direct the operating activities that most significantly affect FOP's economic performance, the entity is not consolidated, but certain disclosures are provided herein.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
The following tables present the summarized financial information of FOP and FOPRE:
|
FOP and FOPRE Condensed Combined Income Statement Information
|
||||||||
|
Year Ended
December 31,
|
||||||||
|
2017
|
2016
|
|||||||
|
Patient revenue
|
$
|
678,000
|
$
|
-
|
||||
|
Rental Income
|
$
|
2,517,000
|
$
|
4,053,000
|
||||
|
Net income
|
$
|
525,000
|
$
|
2,355,000
|
||||
|
USNC's equity in income of FOP and FOPRE
|
$
|
132,000
|
$
|
571,000
|
||||
|
FOP Condensed Balance Sheet Information
|
||||||||
|
December 31,
|
||||||||
|
2017
|
2016
|
|||||||
|
Current assets
|
$
|
664,000
|
$
|
630,000
|
||||
|
Noncurrent assets
|
18,961,000
|
1,798,000
|
||||||
|
Total assets
|
$
|
19,625,000
|
$
|
2,428,000
|
||||
|
Current liabilities
|
$
|
3,228,000
|
$
|
1,411,000
|
||||
|
Noncurrent liabilities
|
16,842,000
|
469,000
|
||||||
|
Equity
|
(445,000
|
)
|
548,000
|
|||||
|
Total liabilities and equity
|
$
|
19,625,000
|
$
|
2,428,000
|
||||
|
FOPRE had no significant assets or liabilities at December 31, 2016.
|
||||||||
| [3] |
Boca Oncology Partners
|
During the quarter ended June 30, 2011, the Company participated in the formation of Boca Oncology Partners, LLC (“BOP”), for the purpose of owning and operating a cancer center in Boca Raton, Florida. In June 2011, Boca Oncology Partners RE, LLC (“BOPRE”), an affiliated entity, purchased a 20% interest in Boca West IMP, LLC (“Boca West IMP”), owner of a medical office building in West Boca, Florida in which BOP operates. BOP occupies approximately 6,000 square feet of the 32,000 square foot building. The Company’s wholly-owned subsidiary, USNC invested $225,000 initially and had a 22.5% interest in BOP and BOPRE.
In January 2012, an additional investor purchased 50% of the partnership reducing the Company’s ownership to 11.25%. The remaining 88.75% was owned by other outside investors. In June 2012, BOPRE purchased an additional 3.75% of Boca West IMP from another investor bringing its total interest to 23.75%. BOPRE accounts for this investment under the cost method since it does not exercise significant influence over Boca West, IMP. Then the members of BOPRE sold 31.5% of their interests in BOPRE to a new investor, and USNC’s investment in BOPRE was reduced to 15.4%.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
During the years ended December 31, 2016 and 2017, several investors relinquished part of their ownership interest in BOPRE, and those interests were distributed among the remaining investors in relationship to their percentages owned. As a result, the Company holds a 21.05% ownership interest in BOPRE at December 31, 2017. The center operated by BOP opened in August 2012.
In February 2014, the Company and other members sold their interests in BOP.
The Company’s recorded investment in BOPRE is $164,000 and $144,000 at December 31, 2017 and 2016, respectively.
USNC is a 10% guarantor of 50% of the outstanding balance of Boca West IMP’s ten-year mortgage. This mortgage had an original balance of $3,000,000 and is secured by the medical office building in which BOP operates. The outstanding balance on the mortgage is $2,417,000 at December 31, 2017. Any liability from this guarantee would be mitigated by the recovery from the underlying real estate, and the Company expects its potential exposure from this guarantee to be remote.
The following tables present the summarized financial information of BOPRE:
|
BOPRE Condensed Income Statement Information
|
||||||||
|
Years Ended December 31,
|
||||||||
|
2017
|
2016
|
|||||||
|
Rental Income
|
$
|
-
|
$
|
-
|
||||
|
Net income
|
$
|
(7,000
|
)
|
$
|
(3,000
|
)
|
||
|
USNC's equity in loss in BOPRE
|
$
|
(1,000
|
)
|
$
|
(1,000
|
)
|
||
|
BOPRE Condensed Balance Sheet Information
|
||||||||
|
December 31,
|
||||||||
|
2017
|
2016
|
|||||||
|
Current assets
|
$
|
17,000
|
$
|
10,000
|
||||
|
Noncurrent assets
|
920,000
|
872,000
|
||||||
|
Total assets
|
$
|
937,000
|
$
|
882,000
|
||||
|
Current liabilities
|
$
|
-
|
$
|
-
|
||||
|
Noncurrent liabilities
|
-
|
-
|
||||||
|
Equity
|
937,000
|
882,000
|
||||||
|
Total liabilities and equity
|
$
|
937,000
|
$
|
882,000
|
||||
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
| [4] |
Medical Oncology Partners
|
In April 2015 Medical Oncology Partners, LLC (“MOP”), was formed in partnership with local physicians and other investors. MOP was established to acquire a 100% equity interest in United Oncology Medical Associates of Florida, LLC (“UOMA”). USNC was not a member of MOP at the time of formation as it was not able to participate due to the fact that USNC was not a physician. Nevertheless, USNC wished to eventually obtain an equity interest in MOP and loaned Dr. Jaime Lozano, the principal investor in MOP and a co-investor in FOP, $173,000. Dr. Lozano used these funds, along with an equal amount of his own funds (a total of $345,000), to purchase a 76.67% interest in MOP. Other investors paid a further $105,000 for the remaining equity in MOP. MOP used the $450,000 of financing to acquire a 100% equity interest in UOMA. An application was filed for a waiver to allow USNC to hold an equity interest notwithstanding the physician requirement and on December 22, 2016, USNC was cleared to become a part owner of MOP. Dr. Lozano agreed to exchange half of his membership interest to USNC in settlement of the note to USNC. USNC and Dr. Lozano also agreed to share equally in providing a 5% equity interest in MOP to an additional investor as a consulting fee for services rendered in the administration of MOP and UOMA. At December 22, 2016 USNC owned 35.83% of MOP with an initial carrying value of $161,000. The Company recorded its share of losses of $12,000 for the period from December 22, 2016 to December 31, 2016, against its investment which resulted in a reduction of its equity investment to $149,000.
Due to increasing costs, continued net losses since April 2015, and reliance on related party and other debt for operating cash flows, the fair value of UOMA is less than its carrying amount. The Company tested its investment for impairment at December 31, 2016 and determined that the investment was impaired and an impairment loss was recorded against the entire equity balance in MOP, as well as loans from USN and USNC to MOP and UOMA. For the year ended December 31, 2017, the Company’s equity in loss of MOP was $97,000 but was not recorded due to prior losses.
Due to loans made to MOP, MOP is considered to be a variable interest entity of the Company. However, as the Company is not deemed to be the primary beneficiary of MOP, since it does not have the power to direct the operating activities that most significantly affect MOP's economic performance, the entity is not consolidated, but certain disclosures are provided herein.
The following table presents the summarized financial information of MOP:
|
MOP Condensed Consolidated Income Statement Information
|
||||||||
|
Year Ended
December 31, 2017
|
Period from
December 22. 2016 to
December 31, 2016
|
|||||||
|
Patient revenue
|
$
|
1,298,000
|
$
|
6,000
|
||||
|
Net loss
|
$
|
(272,000
|
)
|
$
|
(34,000
|
)
|
||
|
USNC's equity in loss in MOP
|
$
|
(97,000
|
)
|
$
|
(12,000
|
)
|
||
|
MOP Condensed Consolidated Balance Sheet Information
|
||||||||
|
December 31, 2017
|
December 31, 2016
|
|||||||
|
Current assets
|
$
|
41,000
|
$
|
15,000
|
||||
|
Noncurrent assets
|
108,000
|
52,000
|
||||||
|
Total assets
|
$
|
149,000
|
$
|
67,000
|
||||
|
Current liabilities
|
$
|
693,000
|
$
|
305,000
|
||||
|
Noncurrent liabilities
|
-
|
-
|
||||||
|
Deficit
|
(544,000
|
)
|
(238,000
|
)
|
||||
|
Total liabilities and deficit
|
$
|
149,000
|
$
|
67,000
|
||||
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
| [5] |
CB Oncology Partners
|
CB Oncology Partners, LLC, (“CBOP”) was organized September 1, 2017 to acquire the rights of the new center from FOP. The Company has a 24% equity interest in CBOP. Beginning in October of 2017, CBOP began paying the remainder of the costs associated with opening the center. CBOP had no assets at the end of 2017. The medical center opened and treated its first patient in January of 2018.
Due to loans made to CBOP, CBOP is considered to be a variable interest entity of the Company. However, as the Company is not deemed to be the primary beneficiary of CBOP, since it does not have the power to direct the operating activities that most significantly affect CBOP's economic performance, the entity is not consolidated, but certain disclosures are provided herein.
The following table presents the summarized financial information of CBOP:
|
CBOP Condensed Income Statement Information
|
||||
|
Year Ended
December 31,
2017 |
||||
|
Patient revenue
|
$
|
-
|
||
|
Net loss
|
$
|
(248,000
|
)
|
|
|
USNC's equity in loss of CBOP
|
$
|
(60,000
|
) | |
|
CBOP Condensed Balance Sheet Information
|
||||
|
December 31,
2017 |
||||
|
Current assets
|
$
|
-
|
||
|
Noncurrent assets
|
-
|
|||
|
Total assets
|
$
|
-
|
||
|
Current liabilities
|
$
|
248,000
|
||
|
Noncurrent liabilities
|
-
|
|||
|
Deficit
|
(248,000
|
)
|
||
|
Total liabilities and deficit
|
$
|
-
|
||
Note D - Agreement with New York University on Behalf of New York University Medical Center (NYU)
In November 1996, USN entered into a Neuroradiosurgery Equipment Agreement (the “NYU agreement”) with NYU for a period of seven years (the “term”), with an option for NYU to extend the term for successive three-year periods or to purchase the gamma knife equipment at an appraised market value price. USN had the ability to negotiate the purchase price and upon failure of the parties to agree could request that the facility be closed. All costs associated with closing and restoring the facility to its original condition are the responsibility of USN. The NYU agreement, among other matters, required USN to provide (i) the use of the gamma knife equipment to NYU, (ii) training necessary for the proper operation of the gamma knife equipment, (iii) sufficient supplies for the equipment, (iv) the repair and maintenance of the equipment, (v) all basic hardware and software upgrades to the equipment and, (vi) an uptime guarantee. In return, NYU paid USN a scheduled fee based on the number of patient procedures performed. The Company derived patient revenue from the NYU center of $3,414,000 and $3,212,000, for 2017 and 2016 respectively. Lease income for 2017 and 2016 was $3,150,000 and $2,967,000 respectively. Maintenance income for 2017 and 2016 was $264,000 and $245,000, respectively.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
In 2004, the NYU agreement was extended through March 2009. In 2008, the NYU agreement was extended for an additional 12 years through March 2021. To secure this extension, USN agreed to install a new gamma knife PERFEXION model. The new equipment and certain space improvements, costing approximately $3,742,000 in total, was financed through a seven-year lease arrangement. The amendment provides for a payment to USN of a flat fee for each patient procedure performed.
In October 2012, the Company’s facility at NYU was totally destroyed as a result of flooding from Hurricane Sandy. The gamma knife had to be removed to prevent any cobalt leakage that might occur due to rusting of the equipment. The removal cost was $525,000. The Company paid a lease settlement of the outstanding principal balance only and received from insurance coverage $930,000 above the lease principal payments and emergency removal costs.
The Company finalized arrangements with NYU regarding the restored gamma knife center and entered into an amendment to the Gamma Knife Neuroradiosurgery Equipment Agreement. The Company’s new facility, with the Leksell PERFEXION gamma knife, is located in the Tisch Hospital of NYU Langone Medical Center. The facility reopened and began receiving patients at the end of April 2014.
The Company entered into a six-year lease in the amount of $4.7 million for the purchase of the replacement equipment and associated leasehold improvements. The first payment of $78,000 was made on September 1, 2014, including $18,000 of interest, 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 was made in July 2016.
In April 2016 USN entered into an agreement with Elekta for the installation of new ICON imaging technology for the NYU Gamma Knife equipment with a total cost, including sales taxes, of approximately $816,000. This ICON technology was installed during the month of July 2016 and the gamma knife center reopened on August 5, 2016. The Company has obtained lease financing of approximately $879,000 at an interest rate of approximately 4.45% to finance the acquisition of the ICON technology and associated installation costs totaling approximately $63,000. The monthly lease payment is approximately $20,000 which commenced October 2016, with the final payment scheduled for September 2020. A monthly maintenance agreement will commence a year after the installation date and is estimated to be about $6,000 per month.
In July 2016, USN and NYU entered into an amendment to the Gamma Knife Neuroradiosurgery Equipment Agreement relating to the newly installed ICON imaging technology, increasing the monthly payment due to the Company by $30,000 for the remaining term of the agreement. A final payment of $17,000 will be made for the partial month of operations at the end of the term in March 2021.
In September 2017, USN and NYU entered into an additional amendment to the Gamma Knife Neuroradiosurgery Equipment Agreement, whereby NYU committed to purchase all of the gamma knife equipment at the NYU Medical Center for a purchase price of $2,400,000, consisting of 41 monthly installments of $50,000 commencing at the end of October 2017 and continuing through the end of February 2021, with a final payment of $350,000 on March 31, 2021. Upon receipt of final payment, title to all the equipment at the center will pass to NYU. Payments received before USN can pass title to the gamma knife equipment to NYU, or before USN has satisfied substantially all of its obligations under the agreement, will be recorded as deferred revenue.
Previously, the agreement with NYU ended on March 17, 2021 and NYU had an option to purchase the gamma knife equipment at the appraised value of the equipment at that time. In June 2017, the Company obtained an independent estimate of $2,570,000 for the fair value of the equipment in March 2021. The Company believes that the accelerated payments amounting to $2,400,000 represent fair consideration considering all aspects of the transaction.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
The Company will continue to be responsible for the maintenance and insurance for the gamma knife equipment at the NYU facility through the contract period and will continue to be reimbursed for use of the gamma knife based on a fee per procedure performed with the equipment. NYU provides the medical and technical staff to operate the facility.
USN retains the obligation to reload the cobalt for the gamma knife at its expense, the cost of which is estimated to be $1,100,000 and is expected to be performed by mid-July 2018. The Company will also bear the cost of site work involved in reloading the cobalt, up to a maximum of $1,088,000, although management believes that the actual cost will be approximately $300,000 less than this amount. The Company believes that it will be able to finance these costs through Elekta, the same entity through which the Company is leasing the gamma knife equipment. With NYU’s commitment to purchase the equipment, provided that the Company fulfills its obligation to reload the cobalt as required under the new arrangement, the Company will be relieved of its obligation to close and restore the NYU facility to its original condition at the end of the contract period.
Note E - Obligation Under Capital Lease
In March 2009, the Company installed a PERFEXION model gamma knife at the NYU center with a seven-year lease from Elekta Capital. The amount financed, covering the cost of the new gamma knife equipment and certain space improvements, was approximately $3,742,000 in total. The monthly payment was $63,000 per month, at an implicit interest rate of approximately 11%. This lease became payable as a result of the damage at the NYU facility in October 2012, and the remainder of the balance due was paid in January 2013. In 2013, the Company entered into a modification of the above capital lease agreement to finance the new gamma knife installation and related construction costs and the removal costs of the old equipment for approximately $4.7 million to be repaid over 72 months with no payments for the first three months. The remaining removal costs of the old equipment of $525,000 were reclassified to the capital lease obligation at December 31, 2013 since they were paid by Elekta Capital (Note F). The Company entered into a capital lease in 2014 to finance a further $250,000 of installation and construction costs. The balance was repaid over 24 months with the final payment paid in July 2016. In April of 2016, the Company entered into an additional capital lease in the amount of $879,000 for the installation of the ICON technology for the NYU Gamma Knife equipment.
The obligations under the capital leases are as follows:
|
December 31,
|
||||||||
|
2017
|
2016
|
|||||||
|
Capital leases - Gamma Knife
|
$
|
2,638,000
|
$
|
3,669,000
|
||||
|
Less current portion
|
(972,000
|
)
|
(936,000
|
)
|
||||
|
$
|
1,666,000
|
$
|
2,733,000
|
|||||
The following is an analysis of the leased assets included in property and equipment:
|
December 31,
|
||||||||
|
2017
|
2016
|
|||||||
|
Capitalized costs
|
$
|
5,182,000
|
$
|
5,203,000
|
||||
|
Less - accumulated depreciation
|
(2,577,000
|
)
|
(1,772,000
|
)
|
||||
|
Capitalized lease equipment and improvements- reported as property and equipment - net
|
$
|
2,605,000
|
$
|
3,431,000
|
||||
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
Depreciation expense for assets under capital leases totaled 804,000 and $696,000 for the years ended December 31, 2017 and 2016.
Future payments as of December 31, 2017 on the equipment leases and loans are as follows:
|
Year Ending
December 31,
|
||||
|
2018
|
$
|
1,062,000
|
||
|
2019
|
1,160,000
|
|||
|
2020
|
564,000
|
|||
|
2,786,000
|
||||
|
Less interest
|
(148,000
|
)
|
||
|
Present value of net minimum obligation
|
$
|
2,638,000
|
||
Note F – Asset Retirement Obligations
When the agreement with NYU relating to the restored gamma knife was finalized in 2014, the Company estimated the cost to remove the gamma knife at the end of the agreement in 2021 to be approximately $620,000. The estimated present value of this liability is $517,000 at December 31, 2017 and $491,000 at December 31, 2016.
|
2017
|
2016
|
|||||||
|
Asset retirement obligations, start of year
|
$
|
491,000
|
$
|
466,000
|
||||
|
Accretion of liability
|
26,000
|
25,000
|
||||||
|
Asset retirement of obligations, end of the year
|
$
|
517,000
|
$
|
491,000
|
||||
Note G - Concentrations
The Company derives substantially all of its revenue from NYU. (See Note D)
Note H – Taxes
The components of the provision for income taxes are as follows:
|
Year Ended December 31,
|
||||||||
|
2017
|
2016
|
|||||||
|
Current taxes:
|
||||||||
|
Federal
|
$
|
55,000
|
$
|
-
|
||||
|
State
|
9,000
|
-
|
||||||
|
Current taxes
|
64,000
|
-
|
||||||
|
Deferred taxes:
|
||||||||
|
Federal
|
$
|
(247,000
|
)
|
$
|
312,000
|
|||
|
State
|
86,000
|
30,000
|
||||||
|
Deferred taxes
|
(161,000
|
)
|
342,000
|
|||||
|
(Benefit from) provision for income taxes
|
$
|
(97,000
|
)
|
$
|
342,000
|
|||
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
A reconciliation of the tax provision calculated at the statutory federal income tax rate with amounts reported follows:
|
Year Ended December 31,
|
||||||||
|
2017
|
2016
|
|||||||
|
Income tax at the federal statutory rate
|
$
|
149,000
|
$
|
299,000
|
||||
|
State income tax, net of federal taxes
|
23,000
|
29,000
|
||||||
|
Permanent differences
|
13,000
|
14,000
|
||||||
|
Benefit of federal tax rate decrease
|
(295,000
|
)
|
-
|
|||||
|
Other
|
13,000
|
-
|
||||||
|
Income tax (benefit) provision
|
$
|
(97,000
|
)
|
$
|
342,000
|
|||
Items which give rise to deferred tax assets and liabilities are as follows:
|
December 31,
|
||||||||
|
2017
|
2016
|
|||||||
|
Deferred tax asset:
|
||||||||
|
Net operating loss
|
$
|
-
|
$
|
342,000
|
||||
|
Excess of book depreciation over tax depreciation
|
40,000
|
-
|
||||||
|
40,000
|
342,000
|
|||||||
|
Deferred tax liability:
|
||||||||
|
Basis difference in unconsolidated entities
|
(115,000
|
)
|
(31,000
|
)
|
||||
|
Deferred gain on disposal of gamma knife
|
(524,000
|
)
|
(716,000
|
)
|
||||
|
Excess of tax depreciation over book depreciation
|
-
|
(186,000
|
)
|
|||||
|
Net effect of conversion from the accrual basis of accounting to the cash basis of accounting for tax purposes primarily related to accounts receivable, prepaid expense, deferred revenue, and accounts payable
|
(76,000
|
)
|
(245,000
|
)
|
||||
|
Net deferred tax liability
|
$
|
(675,000
|
)
|
$
|
(836,000
|
)
|
||
The 2017 Tax Cuts and Jobs Act was signed into law on December 22, 2017. The 2017 Tax Cuts and Jobs Act significantly revises U.S. corporate income taxes by, among other things, lowering the statutory corporate tax rate from 35% to 21%. We recorded a provisional tax benefit for the impact of the 2017 Tax Cuts and Jobs Act of approximately $295,000. This amount is comprised of the remeasurement of net deferred tax liabilities resulting from the permanent reduction in the U.S. statutory corporate tax rate to 21% from 35%.
The Company files income tax returns in the U.S. federal jurisdiction, the State of Maryland, and the State of New York. With few possible exceptions, the Company is no longer subject to U.S. or state income tax examinations by tax authorities for years before 2014.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
Note I– Commitments and Contingencies
| [1] |
Leases:
|
The Company leases office space under an operating lease which was renewed in February 2018 and expires June 2023. The terms of the lease include an escalation clause for a portion of certain operating expenses. At December 31, 2017, the Company was required to make future minimum rental payments totaling $11,000. Following the lease renewal, the annual future minimum rental payments under operating leases are as follows:
|
Year Ending December 31,
|
||||
|
2018
|
$
|
28,000
|
||
|
2019
|
42,000
|
|||
|
2020
|
43,000
|
|||
|
2021
|
45,000
|
|||
|
2022
|
46,000
|
|||
|
Thereafter
|
24,000
|
|||
|
$
|
228,000
|
|||
Rent expense was approximately $46,000 for 2017 and $43,000 for 2016.
| [2] |
Gamma Knives:
|
In 2009, the Company installed a new gamma knife PERFEXION model at the NYU Medical Center. This new equipment and certain space improvements, costing approximately $3,742,000 in total, were financed through a seven-year lease arrangement. This PERFEXION equipment was recorded as a total loss as a result of flooding from Hurricane Sandy. See Notes D and E.
In early 2014, the Company entered into a six-year lease in the amount of $4.7 million for the purchase of the replacement equipment and associated leasehold improvements. The first payment of $78,000 was made on September 1, 2014, including $18,000 of interest, and the final payment is due on May 1, 2020.
The Company entered into a second capital lease in 2014 to finance an additional $250,000 of installation and construction costs. The first payment of $12,468 was made November 1, 2014. The final payment was made in July 2016
In April 2016 the Company obtained lease financing of approximately $879,000 at an interest rate of approximately 4.45% to finance the acquisition of the ICON technology for the NYU Gamma Knife and associated installation costs. Monthly lease payments of approximately $20,000 began in October 2016, and the final payment is due in September 2020.
To maintain efficient operation, the Company is required to reload cobalt for each gamma knife every 5 to 10 years.
| [3] |
Maintenance Contract:
|
The new gamma knife installed in April 2014 included a one-year warranty. The new maintenance agreement began in April of 2015. The monthly payment has increased from approximately $20,000 to $26,000 effective August 2017, due to the addition of the ICON maintenance agreement and is in effect for 5 years.
| [4] |
Guarantee of Lease Obligations:
|
USNC is a 20% guarantor on NeuroPartners, LLC’s seven-year lease with respect to the gamma knife equipment and certain leasehold improvements at the Southern California Regional Gamma Knife Center at SARH in Upland, California, where the equipment is located. The outstanding balance on the lease obligations was $1,121,000 and $1,436,000 at December 31, 2017 and 2016, respectively. In February of 2016, NeuroPartners, LLC negotiated a new lease to fund the reloading of cobalt and the necessary construction to do so. The new lease of $1,663,000 includes the balance of the prior lease obligations. This lease will be paid over 60 months and the first payment was made in April 2016.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
USN is also a guarantor for a maximum of $1,433,000, approximately 25% of the original lease amount, on FOP’s LLC’s seven-year lease. It is a guarantor jointly with most of the other members (except USNC who is not a named guarantor) of FOP. The outstanding balance on the lease obligation was $468,000 and $1,528,000 at December 31, 2017 and 2016, respectively.
Holdings is a guarantor for the full amount of the outstanding loan with BB&T Bank entered into in 2017, as described in Note C[2]. The other investors in FOP also guarantee this loan. The outstanding balance on this loan was $4,100,000 at December 31, 2017.
The Company expects any potential obligations from these guarantees to be reduced by the recoveries of the respective collateral and has recorded a liability of $11,000 associated with the FOP guarantee. See Note C for further discussion of investments in unconsolidated entities.
| [5] |
Guarantee of Mortgages:
|
USNC is a 10% guarantor on 50% of the outstanding balance of Boca West IMP’s ten-year mortgage. This mortgage had an original balance of $3,000,000 and is secured by the medical office building in which BOP operates. The outstanding balance on the mortgage is $2,417,000 and $2,527,000 at December 31, 2017 and 2016, respectively. The Company expects any potential obligations from this guarantee to be reduced by the recovery of the real estate collateral and expects any amounts arising from this guarantee to be insignificant.
| [6] |
Product liability:
|
Although USN does not directly provide medical services, it has obtained professional medical liability insurance, and has general liability insurance as well. USN’s professional medical liability and general liability policies have limits of $3 million each. The Company believes that its insurance is adequate for providing treatment facilities and non-medical services, although there can be no assurance that the coverage limits of such insurance will be adequate or that coverage will not be reduced or become unavailable in the future.
Note J - Employees' IRA Plans
The Company has established a Company IRA covering all employees. The plan allows participants to make pre-tax contributions and the Company may, at its discretion, match certain percentages of the employee contribution. Amounts contributed to the plan are deposited into a trust fund administered by independent trustees. The Company made a discretionary matching IRA contribution of $14,000 and $10,000 for 2017 and 2016, respectively.
F-24