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 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 21
st
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.
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.
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.
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.
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
. 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.
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.
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.
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 21
st
Century Oncology for the sale of FOP’s Varian Rapid Arc linear accelerator and other medical equipment at the FOP location. 21
st
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, 21
st
Century Oncology has not satisfied all of the terms of the agreement. In late May 2017, 21
st
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 21
st
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
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
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.
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.
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.