NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 holds an interest in 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, through the formation of a joint venture, in which it has a noncontrolling interest, the Company expanded its market strategy to include opportunities to develop cancer centers featuring radiation therapy.
These centers utilize linear accelerators with IMRT (Intensity Modulated Radiation Therapy) and IGRT (Image Guided Radiation Therapy) capabilities. In 2010, the Company formed 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 has not occurred as of December 31, 2020. (See Note C[2])
During 2011, the Company participated in the formation of Boca Oncology Partners RE, LLC (“BOPRE”), for the purpose of acquiring an interest in Boca West, IMP, LLC, (“Boca West, IMP”) which owns a medical office
building. (See Note C[3]).
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 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.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
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 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 (“CBOP”) was organized on September 1, 2017 to acquire the assets and rights in this new center from FOP.
USNC owns a 28.58% interest in CBOP.
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. FOP abandoned its operations at this radiation center on June 28, 2019 due to continued losses at the site and lack of success in good faith efforts to renegotiate the
agreement after several months of discussion. FOP could be considered in default of the agreement and the third-party owner could pursue action against FOP. Due to abandoning the operations of the Miami center as well as continued working capital
deficits, FOP’s ability to continue as a going concern will require FOP to restructure debt, raise new capital, and successfully settle the agreement at the center in Miami, Florida. Since these plans are preliminary and have not been approved at
this date, there is substantial doubt about FOP’s ability to continue as a going concern within the next twelve months from the date these consolidated financial statements are available to be issued.
The Company, through the formation of noncontrolling interests in unconsolidated joint ventures, 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.
The recent outbreak of the novel coronavirus COVID-19 has spread across the globe and has been declared a public health emergency by the World Health Organization and a National Emergency by the President of the United
States. Most states and municipalities in the U.S., including New York, California, and Florida, have taken aggressive measures to reduce the spread of the disease, including limiting non-essential gatherings of people, ceasing all non-essential
travel, ordering certain businesses and government agencies to cease non-essential operations at physical locations and issuing “shelter-in-place” orders, which direct individuals to shelter at their places of residence (subject to limited
exceptions). Across the healthcare industry, resources are being prioritized for the treatment and management of the outbreak. Consequently, there are delays in delivering Gamma Knife and other radiation therapy treatments. In addition, the
COVID-19 pandemic poses the risk that the Company and its employees, contractors, customers, government and third party payors and others may be prevented from conducting business activities for an indefinite period of time, including due to spread
of the disease within these groups or due to shutdowns that have been and may continue to be requested or mandated by governmental authorities.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
While the healthcare treatments that are provided by the Company are generally critical to the well-being of the patients it serves, a sustained COVID-19 pandemic, and continued measures by the government and industry
to contain the pandemic, could negatively impact results for the following reasons: (i) operations at medical facilities, including those operated by the Company, could be subject to reduced operation or prolonged closure; (ii) medical facilities may
defer Gamma Knife and other cancer therapy treatments for non-urgent patient cases in order to allocate resources to the care of patients with COVID-19; (iii) patients may defer or cancel treatments due to real or perceived concerns about the
potential spread of COVID-19 in a medical facility setting; (iv) the outbreak could materially impact operations for a sustained period of time due to the current travel bans and restrictions, quarantines, shelter-in-place orders and shutdowns;
and/or (v) members of the Company’s workforce may become ill or have family members who are ill and are absent as a result, or they may elect not to come to work due to the illness affecting others in our office or facilities.
The occurrence of any of the foregoing events could have a material adverse effect on our business, financial condition and results of operations. The COVID-19 outbreak and mitigation measures have had and may continue
to have an adverse impact on global economic conditions which could have an adverse effect on our business and financial condition. The extent to which the COVID-19 outbreak impacts our results will depend on future developments that are highly
uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact. Although the Company’s contract with its only customer ended in March 2021, the Company is
actively seeking new business ventures and believes that its cash reserves, which are in excess of $2 million at December 31, 2020, will allow the Company the opportunity do so. Such plans include possible new operations or extensions of its
activities in Florida and California, where it has established working relationships with physician groups, hospitals and other organizations. In addition to these activities, the Company has been exploring possible combinations with other existing
businesses that would create a larger operating entity that would better justify the expenses involved in continuing as an independent publicly traded company.
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.
In May 2014 and in subsequent updates, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“Topic 606”) to
clarify the principles for recognizing revenue. Topic 606 replaced Topic 605, which was the revenue recognition standard in effect through December 31, 2017. Topic 606 amended existing revenue recognition guidance and required 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 adopted Topic 606 on January 1, 2018, using the modified retrospective
basis and applied it to the Company’s sole contract with NYU at the date of adoption. The adoption of Topic 606 did not result in any significant changes to our historic revenue accounting. Our revenue is
primarily generated from a leasing arrangement with New York University, which is not within the scope of Topic 606, and from the sale of maintenance services with a single performance obligation, under which revenue is recognized in a similar
manner to the prior revenue standard. No cumulative change to retained earnings was required upon adoption of Topic 606.
As discussed below, following the adoption of Topic 606, we recognized revenue in accordance with two different accounting standards: 1) Topic 606 and 2) Accounting Standards Codification (“ASC”)
Topic 840, Leases (which addresses lease accounting). We adopted ASC Topic 842, Leases which replaced Topic 840, on January 1, 2019. There were no significant changes to our revenue accounting upon adoption of Topic 842 (see significant account
policies, item 17, for further discussion).
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
Under Topic 606, the core principle is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. Topic 606 defines a five-step process to accomplish this objective, including identifying the contract with the customer and the performance obligations
within the contract, determining the transaction price including estimates of any variable consideration, allocating the transaction price to each separate performance obligation, and recognizing revenue as the Company satisfies each performance
obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to a customer and is the unit of account under Topic 606. We recognize revenue when we satisfy a performance obligation by transferring
control over a product or service to a customer.
The discussion below addresses our primary types of revenue as categorized by the applicable accounting standards.
NYU Lease revenue:
Prior to October 2018, the Company’s Gamma Knife Neuroradiosurgery Equipment Agreement with NYU (“NYU Agreement”) primarily consisted of an operating lease, and the associated patient revenue from
the use of the gamma knife was primarily operating lease income. Following an amendment to the Company’s lease agreement with NYU, effective August 2016, the Company received a $30,000 minimum lease payment from NYU each month. With the exception of
these fixed payments, the NYU agreement provided 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 recognized 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 were considered deferred revenue. At the end of each reporting period, the Company reviewed its estimated revenue for the contract year and adjusted revenue
for any material changes in the estimate. At the end of the contract year, the revenue was adjusted to the actual amount received or receivable.
In September 2017, USN and NYU entered into an additional amendment to the NYU Agreement, whereby NYU committed to purchase all of the gamma knife equipment at the NYU Medical Center for a purchase
price of $2,400,000, 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 passed to NYU.
In October 2018, USN satisfied its obligation to reload the cobalt, and the NYU agreement was re-evaluated to be a sales-type sublease between USN, the lessor, and NYU, the lessee. At the inception
of a sales-type sublease, the lessor recognizes its gross investment in the sublease, unearned income and sales price. The cost or carrying amount, if different, of the leased property plus any initial direct costs minus the present value of the
unguaranteed residual value accruing to the benefit of the lessor, is charged by the lessor against income in the current period. Management has concluded that all fixed future minimum lease payments (“MLPs”) payable by NYU to USN should be included
in the investment in sublease. These MLPs include fixed monthly payments of $50,000 through February 2021 and $30,000 through March 2021, as well as a final payment of $350,000 in March 2021. The present value of the MLPs was estimated to be
approximately $2,447,000 and was recorded as an investment in sublease effective October 1, 2018. Until the 2021 contract renewal in October of 2020, the patient revenue under the tiered schedule had been considered contingent income under the sales
type lease and was recognized on a systematic basis using an average fee per procedure, until October 2020 The Company has recorded patient revenue based on procedures performed at the applicable billing rate for each procedure since November 1,
2020 (the current contract year) since the Company does not expect to exceed the threshold at which billing rates decrease before the completed sale of the equipment on March 31, 2021.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
NYU Maintenance Revenue:
The NYU agreement, which ended in March 2021, specifies that USN is obligated to maintain the gamma knife equipment in good operating condition. This maintenance obligation is incurred through the
term of the agreement while patient procedures are performed. Usage of the gamma knife machine is directly linked to the maintenance of the machine. USN bills NYU monthly for the maintenance and gamma knife services provided. The portion of the
total contract consideration allocated to the maintenance services was $316,000 for 2020 and $316,000 for 2019, and was recognized ratably over each year.
[3]
|
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.
Accounts receivable only include amounts owed to the Company from the NYU Agreement. The Company considers these accounts receivable to be collectible at December 31, 2020 and 2019. The Company
continuously monitors its relationship with NYU and would provide a charge to income, if necessary, to absorb any expected losses.
[5]
|
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 “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 FOP, MOP, and CBOP have been taken to zero.
In August 2016, the FASB issued 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. Although the ASU is effective in the first quarter of 2018, we early adopted the guidance in the
first quarter of 2017 due to the ongoing applicability of the new standard to the Company’s consolidated financial statements. We 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.
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.
[7]
|
Depreciation and amortization:
|
Up until the determination that the Company’s arrangement with NYU is a sales type lease, effective October 1, 2018, the Company’s gamma knife was depreciated on the straight-line method over an
estimated useful life of 7 years. Leasehold improvements were also amortized on the straight-line method over 7 years, which is the shorter of the 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.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
[8]
|
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.
[9]
|
Capital lease obligations:
|
Effective January 1, 2019, the Company adopted ASU 2016-02, Leases, and the Company’s leases previously classified as capital leases, were determined to be finance leases.
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.
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. (Topic 740) 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 returns. 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, 2020 and 2019. Tax years from January 1, 2017 to the current year remain open for examination by federal and state tax
authorities.
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 2020
and 2019, and therefore, no potential dilution for the periods presented.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
The Company follows the policy of charging the costs of advertising to expense as incurred. There were no advertising costs in 2020 and 2019.
[14]
|
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.
[15]
|
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, 2020 and 2019 because of the short maturity of these financial instruments. The carrying
values of the notes receivable and the obligations under finance leases, approximate fair value because the interest rates on these instruments approximate the market rates at December 31, 2020 and 2019.
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 of amounts due from the medical centers. Historically, credit losses on accounts receivable have not been
significant. At December 31, 2020 and 2019, substantially all of the Company’s accounts receivable were due from one customer, NYU.
In February 2016, the FASB issued ASU 2016-02, Leases (“Topic 842”) to increase transparency and comparability among organizations by requiring (1) recognition of lease assets and
lease liabilities on the balance sheet and (2) disclosure of key information about leasing arrangements. Some changes to the lessor accounting guidance were made to align both of the following: (1) the lessor accounting guidance with certain changes
made to the lessee accounting guidance and (2) key aspects of the lessor accounting model with revenue recognition guidance. Topic 842 was effective for fiscal years and interim periods beginning after December 15, 2018. A modified retrospective
approach is required for adoption for all leases that exist at or commence after the date of initial application with an option to use certain practical expedients.
We adopted the provisions of Topic 842, as amended, as of January 1, 2019. The adoption of Topic 842 had a material impact on the Company’s Consolidated Balance Sheets due to the
recognition of certain right-of-use (“ROU”) assets and lease liabilities. Although a significant amount of our revenue is now accounted for under Topic 842, this guidance did not have a material impact on our Consolidated Statements of Operations or
Cash Flows. Because of the transition method we used to adopt Topic 842, Topic 842 will not be applied to periods prior to adoption and the adoption of Topic 842 had no impact on our previously reported results, or on opening equity at January 1,
2019.
The Company determines if an arrangement is a lease at its inception. The Company’s current operating lease relates to office space and is discussed in Note K. The Company’s finance
lease obligations and sales-type sublease are related to the NYU gamma knife. The Company’s previously-recorded capital lease obligations addressed in Note G to the consolidated financial statements were accounted for as finance lease obligations
upon adoption of Topic 842. The sales-type sublease is discussed in Note E.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
Under Topic 842, operating leases result in the recognition of ROU assets and lease liabilities on the balance sheet. ROU assets represent our right to use the leased asset for the lease term and
lease liabilities represent our obligation to make lease payments. Under Topic 842, operating lease ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The
Company’s operating lease does not provide an implicit rate; therefore, upon adoption of Topic 842, the Company used its estimated incremental borrowing rate at the commencement date to determine the present value of lease payments. The operating
lease ROU assets include any initial lease payments made and exclude lease incentives received. The lease terms may include options to extend or terminate the lease that are reasonably certain to be exercised. Lease expense under Topic 842 is
recognized on a straight-line basis over the lease term.
The tables below present financial information associated with our leases as of and for the years ended December 31, 2020 and 2019.
|
Classification
|
|
December 31,
|
|
Assets
|
|
|
2020
|
|
|
2019
|
|
Current
|
|
|
|
|
|
|
|
Finance lease assets
|
Investment in sales-type sublease - current
|
|
$
|
532,000
|
|
|
$
|
888,000
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
|
|
|
|
Finance lease assets
|
Investment in sales-type sublease - net of current portion
|
|
|
-
|
|
|
|
532,000
|
|
Operating lease assets
|
Operating lease right-of-use asset
|
|
|
94,000
|
|
|
|
128,000
|
|
Total leased assets
|
|
|
$
|
626,000
|
|
|
$
|
1,548,000
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
Finance lease liabilities
|
Obligations under finance lease - current portion
|
|
$
|
89,000
|
|
|
$
|
901,000
|
|
Operating lease liabilities
|
Operating lease right-of-use liability - current portion
|
|
|
40,000
|
|
|
|
36,000
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
|
|
|
|
Finance lease liabilities
|
Obligations under finance lease - net of current portion
|
|
|
-
|
|
|
|
89,000
|
|
Operating lease liabilities
|
Operating lease right-of-use liability - net of current portion
|
|
|
66,000
|
|
|
|
106,000
|
|
Total lease liabilities
|
|
|
$
|
195,000
|
|
|
$
|
1,132,000
|
|
|
|
|
|
|
|
|
|
|
|
Lease Cost
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
Selling, general and administrative
|
|
$
|
42,000
|
|
|
$
|
43,000
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease cost
|
|
|
|
|
|
|
|
|
|
Interest on lease liabilities
|
Interest expense
|
|
|
23,000
|
|
|
|
89,000
|
|
|
|
|
|
|
|
|
|
|
|
Sublease income
|
Interest income - sales-type sublease
|
|
|
72,000
|
|
|
|
132,000
|
|
Net lease cost
|
|
|
$
|
(7,000
|
)
|
|
$
|
-
|
|
Maturity of lease liabilities (as of December 31, 2020)
|
|
Operating lease
|
|
|
Finance lease
|
|
2021
|
|
|
45,000
|
|
|
|
90,000
|
|
2022
|
|
|
46,000
|
|
|
|
-
|
|
2023
|
|
|
24,000
|
|
|
|
-
|
|
Total
|
|
$
|
115,000
|
|
|
$
|
90,000
|
|
Less amount representing interest
|
|
|
9,000
|
|
|
|
1,000
|
|
Present value of lease liabilities
|
|
$
|
106,000
|
|
|
$
|
89,000
|
|
Discount rate
|
|
|
5.850
|
%
|
|
|
5.850
|
%
|
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
Note C - Investments in Unconsolidated Entities
[1]
|
The Southern California Regional Gamma Knife Center
|
During 2007, the Company, through a noncontrolling interest in joint ventures, managed the formation of the Southern California Regional Gamma Knife Center at San Antonio Regional Hospital (“SARH”)
in Upland, California. Corona Gamma Knife, LLC (“CGK”) is party to a 14-year agreement with SARH to renovate space in the hospital and install and operate a Leksell PERFEXION gamma knife. CGK leases the gamma knife from NeuroPartners LLC, which
holds the gamma knife equipment. In addition to returns on its ownership interests, USNC expects to receive fees for management services relating to the facility.
USNC is a 20% owner of NeuroPartners LLC and owns 39% of CGK.
USNC was a 20% guarantor on NeuroPartners LLC’s seven-year lease with respect to the gamma knife equipment and certain leasehold improvements at SARH. In February 2016, NeuroPartners LLC negotiated
a new five-year lease to fund the reloading of cobalt and related construction services. The new lease of $1,663,000 included a balance of $668,000 from the prior lease obligations. This new lease was payable over 60 months. The first payment of
$31,000 was paid on April 1, 2016 and the final payment was paid in March 2021. The Company continues to be a 20% guarantor on the new lease and expects any potential obligations from this guarantee would be reduced by the recovery of the related
collateral, and thus expects any exposure from this guarantee to be remote.
Construction of the SARH gamma knife center was completed in December 2008 and the first patient was treated in January 2009. The project has been funded principally by outside investors. While the
Company, through its joint ventures, has led the effort in organizing the business and overseeing the development and operation of the SARH center, its investment to date in the SARH center has been minimal.
At December 31, 2020 and 2019, the Company’s recorded investment of NeuroPartners LLC and CGK was $26,000 and $0, respectively. During the years ended December 31, 2020 and 2019, the Company’s
equity in earnings of NeuroPartners LLC and CGK was $124,000 and $92,000, respectively. At December 31, 2020 and 2019, amounts due from related parties was $9,000 and $31,000, respectively, including $20,000 of distributions receivable at December
31, 2019. These distributions were received in 2020.
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,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Patient revenue
|
|
$
|
1,141,000
|
|
|
$
|
1,020,000
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
391,000
|
|
|
$
|
303,000
|
|
|
|
|
|
|
|
|
|
|
USNC’s equity in income of Neuro Partners LLC and CGK
|
|
$
|
124,000
|
|
|
$
|
92,000
|
|
Neuro Partners LLC and CGK Combined Condensed Balance Sheet Information
|
|
|
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
121,000
|
|
|
$
|
163,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
|
551,000
|
|
|
|
807,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
672,000
|
|
|
$
|
970,000
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
634,000
|
|
|
$
|
380,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities
|
|
|
-
|
|
|
|
593,000
|
|
|
|
|
|
|
|
|
|
|
Equity (deficit)
|
|
|
38,000
|
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity (deficit)
|
|
$
|
672,000
|
|
|
$
|
970,000
|
|
[2]
|
Florida Oncology Partners
|
During 2010, through the formation of a joint venture, in which it has a noncontrolling interest, the Company expanded its market strategy to include opportunities to develop cancer centers featuring
radiation therapy. These centers utilize linear accelerators with IMRT and IGRT capabilities. In 2010, the Company formed FOP in partnership with local physicians and other investors. USNC owns a 24% interest in the venture. FOP’s first center
was located in Miami, Florida and opened in the second quarter of 2011.
During 2011, FOP entered into a seven-year capital lease with Key Bank for $5,800,000. Under the terms of the capital lease, USN agreed to guarantee a maximum of $1,433,000, approximately 25% of the
original lease obligation in the event of default. USN was a guarantor jointly with most of the other members of FOP. The guarantee was eliminated upon repayment of the outstanding lease balance in May 2018.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
In December 2015, FOP entered into an agreement with 21st Century Oncology for the sale of FOP’s Varian Rapid Arc
linear accelerator and other medical equipment at the FOP location. 21st Century Oncology paid FOP $1,000,000 as a down payment for the equipment and agreed to make
monthly payments of $172,000 for the equipment and all monthly payments due under the equipment lease with Key Bank. As of this date, 21st Century Oncology has not
satisfied all of the terms of the agreement. In May 2017, 21st Century Oncology filed for Chapter 11 bankruptcy protection and FOP was listed as an unsecured creditor.
As a result, since June 2017, FOP has not received the agreed rental payments beyond the monthly payments for the equipment lease. As noted above, the equipment lease was repaid in May 2018 and title to the equipment was transferred to 21st Century Oncology. In December 2018, FOP was awarded 10,820 shares of 21st Century
Oncology Holdings Inc. common stock as part of the bankruptcy proceedings. The title to these shares was transferred to USNC during 2020. The market value of these shares is unclear at this time as there is no readily available market for them, and
accordingly, no value has been recorded for these shares at December 31, 2020 by USNC, or December 31, 2019 by FOP. During the year ended December 31, 2020, FOP received a payment of approximately $158,000 from 21st Century Oncology. FOP used these funds to repay $155,000 of previous advances from USNC. FOP will continue to monitor the impact of 21st Century Oncology’s bankruptcy and pursue amounts that it is owed. However, there can be no assurance that FOP will be successful in these efforts.
Late in 2016, FOP took initial steps toward the development of a new radiation therapy center in Homestead, Florida. In December 2016, FOP entered into a ten-year lease agreement for office space
located at 20405 Old Cutler Towne Center. FOP had to deliver an $88,000 letter of credit in conjunction with this office lease which collateral is being held in a restricted certificate of deposit. FOP began incurring architecture costs for
planning/refitting the new space. During the first half of 2017, a financing agreement with BB&T Bank for the medical equipment and leasehold improvements was negotiated and then signed on August 31, 2017. In November 2017, the amounts for the
equipment and leasehold improvements costs were finalized and paid under this financing agreement for a total loan of $4,106,000 to be paid over seven years. Under the terms of the financing agreement, USN agreed to guarantee the amount initially
borrowed. USN is the guarantor with several other members of FOP. The outstanding balance on the financing facility was $3,066,000 at December 31, 2020 and $3,273,000 at December 31, 2019. Effective November 15, 2019, FOP transferred this loan, along
with the equipment acquired with the loan proceeds, to CBOP. The Company expects any potential liability from this guarantee to be reduced by the recoveries of the respective collateral. Late in the third quarter of 2017, it was determined that the
business opportunity at this new location should be pursued by a different investor group, and FOP arranged to sell the opportunity to this group. CBOP was organized on September 1, 2017, to acquire the assets and rights in this new center from FOP.
In June 2017, FOP entered into an agreement with a third-party owner of a radiation therapy center located in Miami, Florida, whereby FOP took over the operation of the center effective September 22,
2017, for a ten-year initial term, and up to three additional terms of five years each. This agreement was accounted for as a capital lease and, accordingly, FOP recorded assets and capital lease liabilities totaling $14,321,000 at September 22,
2017. The lease required monthly payments in the first year of $160,000, increasing by 2% each year; currently the payment is $170,000. FOP abandoned its operations at this radiation center on June 28, 2019 due to continued losses at the site and
lack of success in good faith efforts to renegotiate the agreement after several months of discussion. FOP could be considered in default of the agreement and the third-party owner could pursue action against FOP. Due to the circumstances, FOP
derecognized the associated assets and liabilities and calculated a contingent liability equal to the net liabilities derecognized. FOP has not, however, been released from its contractual obligation to the third-party owner. At December 31, 2020,
FOP was obligated to make a further $17.6 million of lease payments for the period from July 2019 to September 2027, with no payments made since June 2019. Due to abandoning the operations of the Miami center as well as continued working capital
deficits, FOP’s ability to continue as a going concern will require FOP to restructure debt, raise new capital, and successfully settle the agreement at the center in Miami, Florida. Since these plans are preliminary and have not been approved at
this date, there is substantial doubt about FOP’s ability to continue as a going concern within the next twelve months from the date these Consolidated Financial Statements are available to be issued.
The Company’s recorded investment in FOP at December 31, 2020 and 2019 has been reduced to zero due to losses incurred in prior years. No equity in earnings has been recorded by the Company for the
years ended December 31, 2020 and 2019, due to FOP’s deficit at December 31, 2020 and 2019.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
Amounts due from FOP at December 31, 2019 total $649,000 of outstanding principal less $588,000 of allowances, for a net receivable balance of
$61,000, included in due from related parties on the accompanying Consolidated Balance Sheet. These balances accrued interest at 6% per annum. During the year ended December 31, 2020, the Company wrote off all remaining amounts due from FOP and
accrued interest thereon, resulting in a $78,000 loss. During the year ended December 31, 2020, FOP repaid $155,000 of the amounts due to the Company. At December 31, 2019, total accrued interest was $68,000. The Company has recorded a full
allowance against the accrued interest at December 31, 2019. The Company recorded amounts written off and increases in the allowances as a component of loss from investments in unconsolidated entities and as a deduction in interest income for
interest earned.
Because of loans made to FOP, FOP is considered a variable interest entity of the Company. However, as the Company is not deemed to be the primary
beneficiary of FOP, since it does not have the power to direct the operating activities that most significantly affect FOP’s economic performance, the entity is not consolidated, but certain disclosures are provided herein.
The following tables present the summarized financial information of FOP:
FOP Condensed Income Statement Information
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Patient revenue
|
|
$
|
-
|
|
|
$
|
1,922,000
|
|
|
|
|
|
|
|
|
|
|
Rental Income
|
|
$
|
-
|
|
|
$
|
543,000
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(212,000
|
)
|
|
$
|
(1,377,000
|
)
|
|
|
|
|
|
|
|
|
|
USNC’s equity in loss of FOP
|
|
|
|
|
|
|
|
|
|
|
$
|
(51,000
|
)
|
|
$
|
(334,000
|
)
|
FOP Condensed Balance Sheet Information
|
|
|
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
7,000
|
|
|
$
|
165,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
|
1,091,000
|
|
|
|
1,202,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,098,000
|
|
|
$
|
1,367,000
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
4,068,000
|
|
|
$
|
4,003,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities
|
|
|
969,000
|
|
|
|
1,091,000
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
(3,939,000
|
)
|
|
|
(3,727,000
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
1,098,000
|
|
|
$
|
1,367,000
|
|
[3]
|
Boca Oncology Partners
|
During the quarter ended June 30, 2011, the Company, through the formation of a joint venture, in which it had a noncontrolling interest,
participated in the formation of Boca Oncology Partners, LLC (“BOP”), for the purpose of owning and operating a cancer center in Boca Raton, Florida. In June 2011, BOPRE, an affiliated entity, purchased a 20% interest in Boca West IMP, owner of a
medical office building in West Boca, Florida in which BOP operates. BOP occupies 6,000 square feet of the 32,000 square foot building. The Company invested $225,000 initially and had a 22.5% interest in
BOP and BOPRE. In February 2014, the Company and other members sold their interests in BOP.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
In June 2012, BOPRE purchased an additional 3.75% of Boca West IMP from another investor bringing its total interest to 23.75%. BOPRE accounts for
this investment under the cost method since it does not exercise significant influence over Boca West, IMP.
During the years ended December 31, 2018 and 2017, several investors relinquished part of their ownership interest in BOPRE, and those interests
were distributed among the remaining investors in relationship to their percentages owned. As a result, the Company now holds a 21.22% ownership interest in BOPRE, which it accounts for under the equity method. The Company’s recorded investment in
BOPRE is $134,000 and $179,000 at December 31, 2020 and 2019, respectively, which is net of $58,000 of distributions received from BOPRE during the year ended December 31, 2020.
USNC was 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. In April 2020, the partners of Boca West IMP refinanced the mortgage in order to recover some of the cash that was invested before the building was completely occupied
and removed USNC as a guarantor.
The following tables present the summarized financial information of BOPRE:
BOPRE Condensed Income Statement Information
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Rental Income
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
63,000
|
|
|
$
|
46,000
|
|
|
|
|
|
|
|
|
|
|
USNC’s equity in income in BOPRE
|
|
$
|
13,000
|
|
|
$
|
11,000
|
|
BOPRE Condensed Balance Sheet Information
|
|
|
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
27,000
|
|
|
$
|
64,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
|
757,000
|
|
|
|
935,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
784,000
|
|
|
$
|
999,000
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
784,000
|
|
|
|
999,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
784,000
|
|
|
$
|
999,000
|
|
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
[4]
|
Medical Oncology Partners
|
In April 2015, MOP, was formed in partnership with local physicians and other investors. MOP was established to acquire a 100% equity interest in
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. During the year ended December 31, 2020, USNC contributed $125,000 of capital to MOP all of which was written off. For the year ended December 31, 2020 and 2019, the Company’s equity in loss of MOP
was $450,000 and $156,000, respectively, but was not recorded due to prior losses.
At December 31, 2019 amounts due from MOP and UOMA total $1,126,000 of outstanding principal less $796,000 of allowances, for a net receivable of
$330,000, all of which is included in due from related parties on the accompanying Consolidated Balance Sheet. During the year ended December 31, 2020, the Company wrote off all remaining amounts due from MOP and UOMA and accrued interest thereon,
resulting in a $686,000 loss. Increases in these allowances and amounts written off have been recorded as losses from investments in unconsolidated entities.
Due to loans made to MOP and UOMA, MOP and UOMA are considered to be variable interest entities of the Company. However, as the Company is not
deemed to be the primary beneficiary of MOP or UOMA, since it does not have the power to direct the operating activities that most significantly affect MOP’s or UOMA’s economic performance, the entities are not consolidated, but certain disclosures
are provided herein.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
The following table presents the summarized financial information of MOP:
MOP Condensed Consolidated Income Statement Information
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Patient revenue
|
|
$
|
2,104,000
|
|
|
$
|
2,669,000
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,256,000
|
)
|
|
$
|
(435,000
|
)
|
|
|
|
|
|
|
|
|
|
USNC’s equity in loss in MOP
|
|
$
|
(450,000
|
)
|
|
$
|
(156,000
|
)
|
MOP Condensed Consolidated Balance Sheet Information
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
204,000
|
|
|
$
|
247,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
|
701,000
|
|
|
|
807,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
905,000
|
|
|
$
|
1,054,000
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
2,736,000
|
|
|
$
|
1,907,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities
|
|
|
410,000
|
|
|
|
427,000
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
(2,241,000
|
)
|
|
|
(1,280,000
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and deficit
|
|
$
|
905,000
|
|
|
$
|
1,054,000
|
|
CBOP was organized September 1, 2017, to acquire the rights of the new center from FOP. USNC originally had 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.
Effective November 15, 2019, FOP transferred to, and CBOP assumed, a loan with BB&T bank, that it had entered into in order to finance the
purchase of equipment and build out of the new center, as well as the associated property and equipment. In addition, CBOP and BB&T agreed to reduce the monthly loan repayments for the next nine months, and to extend the term of the loan from
November 2024 to July 2025. In July 2020 CBOP and BB&T further agreed to reduce the monthly payments for the life of the loan and extended the loan to July of 2027.
In June 2020, CBOP made a $500,000 capital call to its members. UNSC converted previously-made advances totaling $121,000 into equity in CBOP to
meet its capital requirement, and other members contributed $212,000 in cash. The remaining capital contributions are not expected to be met and, accordingly, the Company’s equity interest in CBOP increased to 28.58% in June 2020.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
Amounts due from CBOP at December 31, 2020, total $2,154,000 of outstanding principal, less $1,251,000 of allowances, for a
net receivable of $903,000 all of which is included in due from related parties on the accompanying Consolidated Balance Sheet. At December 31, 2019, CBOP owed the Company $2,207,000, of which $1,207,000 had been reserved for a net receivable of
$1,000,000 all of which is included in due from related parties on the accompanying Consolidated Balance Sheet. These balances accrue interest at 6% per annum. Interest earned by the Company from the amounts owed by CBOP totaled $125,000 and
$103,000 for the years ended December 31, 2020 and 2019 respectively. At December 31, 2020 and 2019, total accrued interest was $273,000 and $148,000, respectively, all of which has been fully reserved for. The Company recorded increases in the
allowance as a component of loss from investments in unconsolidated entities and as a deduction in interest income for interest earned.
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
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Patient revenue
|
|
$
|
1,795,000
|
|
|
$
|
1,637,000
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(730,000
|
)
|
|
$
|
(418,000
|
)
|
|
|
|
|
|
|
|
|
|
USNC’s equity in loss of CBOP
|
|
$
|
(195,000
|
)
|
|
$
|
(101,000
|
)
|
CBOP Condensed Balance Sheet Information
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
385,000
|
|
|
$
|
380,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
|
4,271,000
|
|
|
|
4,869,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,656,000
|
|
|
$
|
5,249,000
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
3,181,000
|
|
|
$
|
3,026,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities
|
|
|
3,684,000
|
|
|
|
4,019,000
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
(2,209,000
|
)
|
|
|
(1,796,000
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and deficit
|
|
$
|
4,656,000
|
|
|
$
|
5,249,000
|
|
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
Note D - Agreement with New York University on Behalf of New York University Medical Center
In November 1996, USN entered into a Gamma Knife Neuroradiosurgery Equipment Agreement with NYU, (the “NYU Agreement”) 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 were 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.
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 $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.
The Company entered into a six-year lease of $4.7 million for the purchase of the replacement equipment and associated leasehold improvements. The Company entered into
a second two-year lease of $250,000 for the cost of the construction required at the relocated site which was repaid in July 2016.
In 2016, USN entered into an agreement with Elekta for the installation of new ICON imaging technology for the NYU Gamma Knife equipment with a total cost, including
sales taxes, of $816,000. This ICON technology was installed during the month of July 2016 and the gamma knife center reopened on August 5, 2016. The Company entered into a four-year lease for $879,000 to finance the acquisition of the ICON
technology and associated installation costs. A monthly maintenance agreement commenced a year after the installation date for $6,000 per month. The two parties also agreed for USN to receive a fixed monthly payment of $30,000 for the remaining
term of the agreement through March 2021.
In September 2017, USN and NYU entered into an additional amendment to the NYU Agreement, whereby NYU committed to purchase all of the gamma knife equipment at the NYU
Medical Center for a purchase price of $2,400,000, with 41 monthly installments of $50,000 from October 2017 through February 2021, and a final payment of $350,000 on March 31, 2021. Previously, the NYU agreement ended on March 17, 2021 and NYU had
an option to purchase the gamma knife equipment at the estimated future value of the equipment at that time. In June 2017, the Company obtained an independent estimate of $2,570,000 for the estimated future fair value of the equipment in March
2021. The Company believes that the accelerated payments amounting to $2,400,000 represent fair consideration considering all aspects of the transaction.
The Company continues to be responsible for the maintenance and insurance for the gamma knife equipment at the NYU facility through the contract period and continues
to be reimbursed for use of the gamma knife based on a fee per procedure performed with the equipment. NYU provides the medical and technical staff to operate the facility.
With the September 2017 amendment, the Company became obligated to reload the cobalt for the gamma knife at its own expense and bear the cost of site work involved in
reloading the cobalt, up to a maximum of $1,088,000. In July 2018, USN entered into an agreement with Elekta for the cobalt reload on the NYU gamma knife equipment with a cost, including sales taxes, of $925,000.
This cobalt reload occurred in July 2018, and the gamma knife center reopened on August 6, 2018. The Company obtained lease financing of $833,000 to partially finance the reload of the cobalt, and paid the remaining balance directly to Elekta. In
addition, the Company incurred costs of $578,000 to install the new cobalt to be paid directly to the contractor. All cobalt related costs were finalized by October 1, 2018 and totaled $1,503,000. As a result of the Company satisfying its
obligation to reload the cobalt, the agreement with NYU met the criteria to be classified as a sales type lease. In addition, the Company is now no longer obligated to restore the NYU facility to its original condition. Accordingly, all related
assets and the asset retirement obligation were derecognized effective October 1, 2018.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
NYU Revenue Recognition:
The Company derived patient revenue from the NYU center of $3,173,000 and $3,070,000 in 2020 and 2019, respectively, consisting of lease revenue of $2,857,000 and
$2,754,000 and maintenance revenue of $316,000 for both 2020 and 2019.
NYU Accounts Receivable and Contract Balances:
Accounts receivable presented in the Company’s Consolidated Balance Sheet represents an unconditional right to consideration from NYU. The NYU Agreement is primarily a
leasing arrangement and does not have other contract assets or contract liabilities, other than associated deferred revenue.
Accounts receivable total $346,000 and $356,000 at December 31, 2020 and 2019 respectively.
Note E – Investment in Sublease
The September 2017 amendment to the NYU Agreement provided for NYU 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 passes to NYU. This amendment also required USN to reload the cobalt in the gamma knife and to reimburse NYU for certain costs NYU incurred due to the cobalt reload.
Effective October 1, 2018, USN completed the reload of the cobalt and associated costs for a total cost of $1,503,000. With the removal of the cobalt contingency, the
NYU agreement was reevaluated to be a sales-type sublease between USN, the lessor, and NYU, the lessee. At the inception of a sales-type sublease, the lessor recognizes its gross investment in the sublease, unearned income and sales price. The
initial sales price of $2,400,000 at September 2017 was valued at $2,447,000 at October 1, 2018, using the present value of future cash flows. The cost or carrying amount, if different, of the leased property plus any initial direct costs minus the
present value of the unguaranteed residual value accruing to the benefit of the lessor, is charged by the lessor against income in the current period.
The monthly fixed payments under the NYU Agreement amortize the investment in sublease until title passed to NYU on March 31, 2021. The NYU Agreement requires NYU to
make monthly fixed payments of $30,000 and $50,000 through February 2021 with a final fixed payment of $380,000 ($30,000 and $350,000) in March 2021.
Future minimum lease payments to be received as of December 31, 2020 under the investment in sublease are as follows:
Year Ending
December 31,
|
|
|
|
|
|
|
|
2021
|
|
|
540,000
|
|
|
|
|
540,000
|
|
Less interest
|
|
|
(8,000
|
)
|
Present value of net minimum obligation
|
|
$
|
532,000
|
|
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
Note F – Property and Equipment
Effective October 1, 2018, when the NYU agreement was determined to be a to be a sales-type sublease between USN, the lessor, and NYU, the lessee, all of the property
and equipment held by the Company was derecognized (Note E). As a result, no assets included in property and equipment remain on the Company’s Consolidated Balance Sheets at December 31, 2020 and 2019.
Note G - Obligations Under Finance Leases
In 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. This lease became payable as a result of damage sustained at the NYU facility in October 2012, due to flooding from Hurricane Sandy, 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, the related construction costs and the removal costs of the
old equipment for approximately $4.7 million at an interest rate of 4.49% to be repaid beginning in May 2014 over 72 months with no payments for the first three months and $78,000 monthly payments thereafter through May 2020. The Company entered
into another capital lease in 2014 to finance a further $250,000 of installation and construction costs, which was repaid over 24 months. In 2016, the Company entered into a capital lease in the amount of $879,000 at an interest rate of 4.45% to
finance the installation of the ICON technology for the NYU Gamma Knife equipment to be repaid over 48 months with $20,000 monthly payments beginning October 2016 through September 2020. In October 2018, the Company entered into a capital lease in
the amount of $833,000 at an interest rate of 5.85% to partially finance the reload of the cobalt to be repaid over 30 months with $30,000 monthly payments from October 2018 through March 2021.
As discussed in Note B, the Company adopted Topic 842 on January 1, 2019. Upon adoption of Topic 842, the capital lease obligations are accounted for as finance lease
obligations with no significant change to how the obligations were accounted for.
The obligations under the finance leases are as follows:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Finance leases - Gamma Knife
|
|
$
|
89,000
|
|
|
$
|
990,000
|
|
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
(89,000
|
)
|
|
|
(901,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
89,000
|
|
Effective October 1, 2018, when the NYU agreement was determined to be a to be a sales-type sublease between USN, the lessor, and NYU, the lessee, all of the leased
property and equipment held by the Company was derecognized (Note E). As a result, no leased assets included in property and equipment remain on the Company’s Consolidated Balance Sheets at December 31, 2020 and 2019.
Future payments as of December 31, 2020 on the finance leases are as follows:
Year Ending
December 31,
|
|
|
|
|
|
|
|
2021
|
|
$
|
90,000
|
|
|
|
|
90,000
|
|
Less interest
|
|
|
(1,000
|
)
|
Present value of net minimum obligation
|
|
$
|
89,000
|
|
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
Note H – 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 $620,000. Effective October 1, 2018, when the NYU agreement was determined to be a sales-type sublease between USN, the lessor, and NYU, the lessee, the asset retirement obligation was derecognized (Note E). As a result,
no asset retirement obligation remains on the Company’s Consolidated Balance Sheets at December 31, 2020 and 2019.
Note I - Concentrations
The Company derives substantially all of its revenue from NYU. (See Note D)
Note J – Taxes
The components of the provision for (benefit from) income taxes are as follows:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Current taxes:
|
|
|
|
|
|
|
Federal
|
|
$
|
211,000
|
|
|
$
|
271,000
|
|
State
|
|
|
95,000
|
|
|
|
69,000
|
|
Current taxes
|
|
|
306,000
|
|
|
|
340,000
|
|
Deferred taxes:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
12,000
|
|
|
$
|
(288,000
|
)
|
State
|
|
|
5,000
|
|
|
|
(43,000
|
)
|
Deferred taxes
|
|
|
17,000
|
|
|
|
(331,000
|
)
|
Income tax provision
|
|
$
|
323,000
|
|
|
$
|
9,000
|
|
A reconciliation of the tax provision calculated at the statutory federal income tax rate with amounts reported follows:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Income tax at the federal statutory rate
|
|
$
|
180,000
|
|
|
$
|
32,000
|
|
State income tax, net of federal taxes
|
|
|
52,000
|
|
|
|
10,000
|
|
Permanent differences and other
|
|
|
16,000
|
|
|
|
(7,000
|
)
|
Change in estimated effective state tax rate
|
|
|
(4,000
|
)
|
|
|
(26,000
|
)
|
Change in valuation allowance
|
|
|
79,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
323,000
|
|
|
$
|
9,000
|
|
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
Items which give rise to deferred tax assets and liabilities are as follows:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred tax asset:
|
|
|
|
|
|
|
Basis differences in unconsolidated entities, including advances and loans
|
|
|
|
|
|
|
to those entities.
|
|
$
|
561,000
|
|
|
$
|
569,000
|
|
Excess of book depreciation over tax depreciation
|
|
|
192,000
|
|
|
|
-
|
|
Net operating loss
|
|
|
34,000
|
|
|
|
-
|
|
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
|
|
|
-
|
|
|
|
18,000
|
|
Valuation allowance
|
|
|
(79,000
|
)
|
|
|
-
|
|
|
|
|
708,000
|
|
|
|
587,000
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Deferred gain on disposal of gamma knife
|
|
|
(634,000
|
)
|
|
|
(526,000
|
)
|
Excess of tax depreciation over book depreciation
|
|
|
-
|
|
|
|
(44,000
|
)
|
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
|
|
|
(74,000
|
)
|
|
|
-
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
17,000
|
|
The Company files income tax returns in the U.S. federal jurisdiction, the State of Maryland, the State of Florida , the State of California, 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 2017.
Note K – Commitments and Contingencies
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.
As discussed in Note B, we adopted Topic 842 as of January 1, 2019. Upon adoption of Topic 842, the Company’s office lease remained an operating lease and a lease
liability in the amount of $176,000 was recognized based on the present value of the remaining minimum lease payments, discounted using the Company’s incremental borrowing rate. The related lease ROU asset was recorded in the amount of $161,000,
reflecting the present value of future minimum lease payments, adjusted for deferred rent. As of December 31, 2020, the lease liability and the lease ROU asset amounted to $106,000 and $94,000, respectively. Total operating lease expense for
the years ended December 31, 2020 and 2019 was $42,000 and $43,000, respectively.
The maturities of the operating lease liability as of December 31, 2020 were as follows:
Year Ending
December 31,
|
|
|
|
|
|
|
|
2021
|
|
|
45,000
|
|
2022
|
|
|
46,000
|
|
2023
|
|
|
24,000
|
|
|
|
|
115,000
|
|
Less interest
|
|
|
(9,000
|
)
|
Present value of net minimum obligation
|
|
$
|
106,000
|
|
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
Capital Lease Obligations (Notes D and G):
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 in October 2012.
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 was made in May 2020.
The Company entered into a second capital lease in 2014 to finance an additional $250,000 of installation and construction costs, which was repaid
in July 2016.
In April 2016 the Company obtained lease financing of $879,000 to finance the acquisition of the ICON technology for the NYU Gamma Knife and
associated installation costs. Monthly lease payments of $20,000 began in October 2016, and the final payment was made in September 2020.
In October 2018, the Company entered into an additional capital lease in the amount of $833,000 to partially finance the reload of the cobalt to be
repaid over 30 months with the final payment due in March 2021.
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
increased from $20,000 to $26,000 effective August 2017, due to the addition of the ICON maintenance agreement and is in effect for 5 years.
USNC is a 20% guarantor on NeuroPartners, LLC’s lease, terminating March 2021, with respect to the gamma knife equipment, cobalt reload and
associated construction, and certain leasehold improvements located at the Southern California Regional Gamma Knife Center at SARH in Upland, California. The outstanding balance on the lease obligations was $60,000 and $421,000 at December 31, 2020
and 2019, respectively.
Holdings is a guarantor of the full amount of the outstanding loan with BB&T Bank entered into in 2017, as described In Note C[2]. The
outstanding balance on this loan was $3,066,000 and $3,273,000 at December 31, 2020 and 2019, respectively.
USNC was 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 Company was released from this guaranty when the mortgage was refinanced in April of 2020.
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 at December 31, 2020 and 2019. See Note C for further discussion of investments in unconsolidated entities.
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 L - 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
for each of the years ended December 31, 2020 and 2019.
F-29