The accompanying notes to condensed consolidated financial statements are an integral part hereof.
The accompanying notes to condensed consolidated financial statements are an integral part hereof.
The accompanying notes to condensed consolidated financial statements are an integral part hereof.
The accompanying notes to condensed consolidated financial statements are an integral part hereof.
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A - Basis of Preparation
The accompanying condensed consolidated financial statements of U.S. Neurosurgical Holdings, Inc. and subsidiaries (the “Company”) as of June 30, 2016 and 2015, are unaudited. However, in the opinion of management, such statements include all adjustments necessary for a fair statement of the information presented therein. The balance sheet at December 31, 2015 has been derived from the audited financial statements at that date appearing in the Company's Annual Report on Form 10-K.
Pursuant to accounting requirements of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, the accompanying condensed consolidated financial statements and notes do not include all disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. Accordingly, these statements should be read in conjunction with the Company's most recent annual financial statements.
Consolidated results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal years.
Note B – Holding Company Structure
On September 3, 2015, pursuant to the Agreement and Plan of Reorganization (the “Merger Agreement”), dated as of September 3, 2015, by and among U.S. NeuroSurgical, Inc. (“USN”), U.S. NeuroSurgical Holdings, Inc. (“Holdings”) and U.S. NeuroSurgical Merger Sub, Inc. (“Merger Sub”), the Company adopted a new holding company organizational structure whereby USN is now a wholly owned subsidiary of Holdings. This structure did not result in any changes to the assets or operations of the Company, but management believes that it will create a more flexible framework for possible future transactions and organizational and operational adjustments.
The holding company organizational structure was effected by a merger (the “Merger”) conducted pursuant to Section 251(g) of the Delaware General Corporation Law (the “DGCL”), which provides for the formation of a holding company structure without a vote of the stockholders of the constituent corporations. Because the holding company organizational structure occurred at the parent company level, the remainder of the Company’s subsidiaries, operations and customers were not affected by this transaction.
In order to effect the Merger, USN formed Holdings as its wholly owned subsidiary and Holdings formed Merger Sub as its wholly owned subsidiary. Under the terms of the Merger Agreement, Merger Sub merged with and into USN, with USN surviving the merger and becoming a direct, wholly owned subsidiary of Holdings. Immediately prior to the Merger, Holdings had no assets, liabilities or operations.
Pursuant to the Merger Agreement, all of the outstanding capital stock of USN was converted, on a share for share basis, into capital stock of Holdings. As a result, each former stockholder of USN became the owner of an identical number of shares of capital stock of Holdings, evidencing the same proportional interests in Holdings and having the same designations, rights, powers and preferences, qualifications, limitations and restrictions, as those that the stockholder held in USN.
Following the Merger, Holdings’s common stock continued to trade on the over-the-counter market and continued to be quoted on the OTCQB marketplace under the same symbol, “USNU.” The conversion of shares of capital stock under the Merger Agreement occurred without an exchange of physical certificates. Accordingly, physical certificates formerly representing shares of outstanding capital stock of USN are deemed to represent the same number of shares of capital stock of Holdings.
Pursuant to Section 251(g) of the DGCL, the provisions of the certificate of incorporation and bylaws of Holdings are substantially identical to those of USN prior to the date on which the Merger Agreement took effect. The authorized capital stock of Holdings, the designations, rights, powers and preferences of such capital stock, and the qualifications, limitations and restrictions thereof are also substantially identical to those of the capital stock of USN immediately prior to the date of the Merger. Further, the directors and executive officers of Holdings are the same individuals who were directors and executive officers, respectively, of USN immediately prior to the date of the Merger.
Note C – Destruction of Gamma Knife at NYU Medical Center; Replacement and Restoration
USN opened its New York gamma knife treatment center in July 1997 on the campus of New York University (“NYU”) Medical Center. USN installed a new Leksell gamma knife, the PERFEXION model, at the NYU Medical Center in March 2009 in replacement of the older gamma knife equipment. In connection with this upgrade, USN modified its arrangement with NYU to extend the term for 12 years from March 2009.
In October 2012, USN’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. USN paid a lease settlement of the outstanding principal balance only and received from insurance coverage $930,000 above the lease principal payments and removal costs.
USN finalized arrangements with NYU regarding the restored gamma knife center and USN’s long term contract with NYU in early 2014. USN’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.
USN 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. USN entered into a second two year lease in the amount of $250,000 for the cost of the construction required at the relocated site. The first payment of $12,000 was made on November 1, 2014, and the final payment was paid on July 1, 2016.
In April of 2016 USN paid a deposit of $248,000 to Elekta for the installation of new ICON imaging technology in the NYU Gamma Knife equipment. This ICON technology is scheduled to be installed during the month of July 2016 and will be completed on or about August 1, 2016. The company will finance an additional amount of approximately $725,000 at an interest rate of approximately 4.5%. The monthly lease payment will be about $20,000. A monthly maintenance agreement will commence a year after the installation date and is estimated to be about $6,000 per month.
In July of 2016 USN entered into an agreement with NYU regarding the installation of the new ICON technology. Following the installation, NYU will adjust the monthly fee structure by adding $30,000 to the monthly payment for the remaining term of the agreement. Afinal payment of $17,000 will be made for the partial month of operations in March 2021.
The major terms of the agreement with NYU continue in effect, terminating at the end of March 2021. USN is responsible for the maintenance and insurance for the gamma knife equipment at the NYU facility and is reimbursed for use of the gamma knife based on a fee per procedure performed with the equipment. NYU provides the medical and technical staff to operate the facility. At the end of the contract term, costs associated with closing and restoring the NYU facility to its original condition are the responsibility of USN.
Note D – 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 its wholly-owned subsidiary, USN Corona, Inc. (“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, negotiated a new five- year lease to fund the reloading of cobalt and the necessary construction to do so. 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 expects any amounts arising from this guarantee to be insignificant.
Construction of the SARH gamma knife center was completed in December 2008 and the first patient was treated in January 2009. The project has been funded principally by outside investors. While the Company has led the effort in organizing the business and overseeing the development and operation of the SARH center, its investment to date in the SARH center has been minimal.
The Company’s share of cumulative losses associated with its investment in NeuroPartners LLC and CGK has exceeded its investment. Due to the outstanding 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, certain disclosures are required rather than consolidation. During the three months ended June 30, 2016, the Company received $20,000 of repayments of amounts previously advanced to NeuroPartners LLC and GCK. Those repayments reduce the amount of loses incurred on prior advances to NeruoPartners LLC and CGK and are included as additional income from investments in unconsolidated entities for the three and six months ended June 30, 2016. The Company has $116,000 of remaining advances to NeuroPartners LLC and CGK at June 30, 2016. For the three months ended June 30, 2016, the Company’s equity in earnings of NeuroPartners LLC and CGK was $9,000, but was not recorded due to prior losses.
The following tables present the aggregation of summarized financial information of NeuroPartners LLC and CGK:
Neuro Partners, LLC and CGK Condensed Income Statement Information
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Patient revenue
|
|
$
|
516,000
|
|
|
$
|
498,000
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
176,000
|
|
|
$
|
(69,000
|
)
|
|
|
|
|
|
|
|
|
|
USNC's equity in earnings (loss) of Neuro Partners, LLC and CGK
|
|
$
|
9,000
|
|
|
$
|
(38,000
|
)
|
|
|
Three Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Patient revenue
|
|
$
|
211,000
|
|
|
$
|
295,000
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
50,000
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
USNC's equity in loss of Neuro Partners, LLC and CGK
|
|
$
|
(9,000
|
)
|
|
$
|
(5,000
|
)
|
NeuroPartners, LLC and CGK Condensed Balance Sheet Information
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
143,000
|
|
|
$
|
66,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
|
980,000
|
|
|
|
394,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,123,000
|
|
|
$
|
460,000
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
567,000
|
|
|
$
|
1,359,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities
|
|
|
1,281,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
(725,000
|
)
|
|
|
(899,000
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
1,123,000
|
|
|
$
|
460,000
|
|
Note E – Florida Oncology Partners
During the quarter ended September 30, 2010, the Company participated in the formation of Florida Oncology Partners, LLC (“FOP”) and Florida Oncology Partners RE, LLC (“FOPRE”), which operates a cancer center located in West Kendall (Miami), Florida. The center diagnoses and treats patients utilizing a Varian Rapid Arc linear accelerator and a GE CT scanner. USNC originally invested $200,000 for 20% ownership interest in FOP and FOPRE. The remaining 80% was owned by other outside investors. In January of 2015, one of the investors was removed from the entities, and his ownership interest was distributed among the remaining members in relationship to the percentage they owned. This distribution resulted in an increase of ownership interest for the Company of 4% in each entity. As of January 1, 2015, the Company has a 24% ownership in both FOP and FOPRE.
The center opened and treated its first patient in May 2011. During 2012 and 2013, FOP made several distributions that reduced the Company’s investment significantly. The Company’s recorded investment in FOP and FOPRE is $236,000 and $225,000 at June 30, 2016 and December 31, 2015, respectively. Amounts due from FOP and FOPRE included in due from related parties total $0 and $21,000 at June 30, 2016 and December 31, 2015 respectively.
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. 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 $2,026,000 at June 30, 2016. The Company expects any potential obligations from this guarantee would be reduced by the recoveries of the respective collateral and has recorded a liability of $11,000 associated with this guarantee at June 30, 2016.
In June 2012, FOPRE completed the financing agreement to purchase the building that is 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.
In December of 2015, FOP entered into an agreement with 21
st
Century Oncology for the purchase of FOP’s Varian machine and other medical equipment. 21
st
Century Oncology paid FOP $1,000,000 as a down payment for the machine and other medical equipment and is currently making monthly payments of $172,000 for the machine, and making all monthly payments due under the capital lease, until such time as the sale is finalized. 21
st
Century has not to date satisfied all of the terms of the rental agreement and since May 1, 2016 has been paying an additional $30,000 in penalties each month. These payments have been recorded as rental income under an operating lease.
The following tables present the aggregation of summarized financial information of FOP and FOPRE:
FOP and FOPRE Condensed Income Statement Information
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Patient revenue
|
|
$
|
-
|
|
|
$
|
1,263,000
|
|
|
|
|
|
|
|
|
|
|
Rental Income
|
|
$
|
2,087,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,314,000
|
|
|
$
|
153,000
|
|
|
|
|
|
|
|
|
|
|
USNC's equity in income
of FOP and FOPRE
|
|
$
|
318,000
|
|
|
$
|
38,000
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Patient revenue
|
|
$
|
-
|
|
|
$
|
679,000
|
|
|
|
|
|
|
|
|
|
|
Rental Income
|
|
$
|
1,073,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
680,000
|
|
|
$
|
191,000
|
|
|
|
|
|
|
|
|
|
|
USNC's equity in income of FOP and FOPRE
|
|
$
|
163,000
|
|
|
$
|
46,000
|
|
FOP and FOPRE Condensed Balance Sheet Information
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
774,000
|
|
|
$
|
1,024,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
|
2,435,000
|
|
|
|
3,066,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,209,000
|
|
|
$
|
4,090,000
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
1,385,000
|
|
|
$
|
1,848,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities
|
|
|
1,009,000
|
|
|
|
1,529,000
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
815,000
|
|
|
|
713,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
3,209,000
|
|
|
$
|
4,090,000
|
|
Note F – 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 Company loaned the proceeds of $56,250 back to BOP as a 5 year note at 7% interest. 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. The proceeds of $28,000 were loaned to BOP and USNC’s investment in BOPRE was reduced to 15.4%.
Although the Company reduced its investment to 11.25% of BOP and 15.4% of BOPRE, the Company continues to account for these investments under the equity method due to its participation in the management of the administration and accounting functions of BOP and BOPRE. Due to the outstanding loans made to BOP, BOP was considered to be a variable interest entity of the Company. However, as the Company was not deemed to be the primary beneficiary of BOP, since it did not have the power to direct the operating activities that most significantly affect BOP’s economic performance, certain disclosures are required rather than consolidation. The center opened in August 2012.
In February 2014, the Company and other members sold their interests in BOP.
The Company’s recorded investment in BOPRE is $139,000 at June 30, 2016 and December 31, 2015.
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 $2,580,000 at June 30, 2016. The Company expects any potential obligations from this guarantee would be reduced by the recovery of the real estate and expects any amounts arising from this guarantee to be insignificant.
The following tables present the summarized financial information of BOPRE:
BOPRE Condensed Income Statement Information
|
|
Three and Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Rental Income
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,000
|
)
|
|
$
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
USNC's equity in earnings
in BOPRE
|
|
$
|
-
|
|
|
$
|
-
|
|
BOPRE Condensed Balance Sheet Information
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
39,000
|
|
|
$
|
40,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
|
837,000
|
|
|
|
837,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
876,000
|
|
|
$
|
877,000
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
876,000
|
|
|
|
877,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
876,000
|
|
|
$
|
877,000
|
|
Note G – Income Taxes
The Company’s income tax rate, which includes federal and state income taxes, was approximately 37%, for the six months ended June 30, 2016. The Company recorded a tax charge of $223,000 for the six months ended June 30, 2016.