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, 2020 and 2019, are unaudited. However, in the opinion
of management, such statements include all adjustments necessary for a fair statement of the information presented therein. The Consolidated Balance Sheet at December 31, 2019 has been derived from the audited Consolidated 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
Consolidated Financial Statements.
Consolidated results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal years.
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”), amending existing 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. 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 the performance obligation. We adopted the provisions of Topic 606 as of January 1, 2018 on a modified retrospective basis and applied it to the Company’s sole contract at the
date of adoption. We concluded that the impact to the manner in which we recognize revenue is immaterial. Our revenue is primarily generated from a leasing arrangement with New York University (“NYU”), 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 as compared to the method under the prior revenue standards. The Company recognizes maintenance income ratably over time
as patient procedures are performed.
Prior to October 2018, the Company’s agreement with NYU primarily consisted of an operating lease, and the associated patient revenue from the use of the gamma knife was primarily operating lease
income. In October 2018, the agreement was reevaluated to be a sales-type sublease between the Company, the lessor, and NYU, the lessee. The present value of all fixed future minimum lease payments payable by NYU to the Company were recorded as an
investment in sublease effective October 1, 2018. The patient revenue under the tiered schedule (“Note B”) continues to be considered contingent income and is recognized on a systematic basis using an average fee per procedure.
We adopted the provisions of ASU 2016-02, Leases (“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 tables below present financial information associated with our leases.
Reclassifications:
Certain balances for the six months ended June 30, 2019 have been reclassified to conform with the 2020 presentation. These reclassifications had no effect on previously reported net income or cash
flows.
Note B – Gamma Knife at NYU Medical Center
U.S. NeuroSurgical, Inc. (“USN”), a wholly-owned subsidiary of U.S. NeuroSurgical Holdings, Inc., opened its New York gamma knife treatment center in July 1997 on the campus of 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 which it had been leasing to NYU. In connection with this upgrade, USN modified its arrangement with
NYU to extend the term for 12 years from March 2009.
In October 2012, the Company’s facility at NYU was totally destroyed as a result of flooding from Hurricane Sandy. The gamma knife had to be removed to prevent any cobalt leakage that might occur due
to rusting of the equipment. The removal cost was $525,000. The Company paid a lease settlement of the outstanding principal balance only and received from insurance coverage $930,000 above the lease principal payments and removal costs.
The Company finalized arrangements with NYU regarding the restoration of the gamma knife center and entered into an amendment to the original Gamma Knife Neuroradiosurgery Equipment Agreement (“NYU
Agreement”). The NYU facility was rebuilt and reopened in the Tisch Hospital of NYU Langone Medical Center. The first patient was treated on April 29, 2014. The Company expects to generate revenue from the restored gamma knife center under the NYU
contract until March 2021, at which time the NYU contract ends and title to the gamma knife will transfer to NYU.
The Company is responsible for the maintenance and insurance of the Gamma Knife equipment at the NYU facility and earns income 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.
Note C – 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 is payable 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, 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 June 30, 2020 and December 31, 2019, the Company’s recorded investment of NeuroPartners LLC and CGK was $114,000 and $0, respectively. For the six months ended June 30, 2020 and 2019, the Company’s
equity in earnings of NeuroPartners LLC and CGK was $114,000 and $45,000 respectively. At June 30, 2020 and December 31, 2019, amounts due from related parties was $0 and $23,000, respectively, including $20,000 of distributions receivable at December
31, 2019. These distributions were received in 2020.
The following tables present the aggregation of summarized financial information of NeuroPartners LLC and CGK:
NeuroPartners LLC and CGK Condensed Combined Income Statement Information
NeuroPartners LLC and CGK Condensed Combined Balance Sheet Information
Note D – 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(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 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.
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 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 June 30, 2020 or December 31, 2019. 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 $3,179,000 at June 30, 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 CB Oncology Partners, LLC (“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 $166,000. 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 June 30, 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 Condensed Consolidated Financial Statements are available to be issued.
The Company’s recorded investment in FOP at June 30, 2020 and December 31, 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 six months ended June 30, 2020 and the year ended December 31, 2019, due to FOP’s deficit at June 30, 2020 and December 31, 2019.
Amounts due from FOP at June 30, 2020 total $502,000 of outstanding principal, of which $493,000 has been reserved, for a net receivable balance of $9,000, all of which is included in due from related
parties on the accompanying Consolidated Balance Sheet. 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 accrue interest at 6% per annum. During the three months ended June 30, 2020, FOP repaid $155,000 of the amounts due to the Company. At June 30, 2020 and December 31, 2019, total accrued interest
was $92,000 and $68,000 respectively. The Company has recorded a full allowance against the accrued interest at June 30, 2020 and December 31, 2019. The Company recorded 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
FOP Condensed Balance Sheet Information
Note E – Boca Oncology Partners
During the quarter ended June 30, 2011, the Company, through the formation of a joint venture, in which it has 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, 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 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.
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, at June 30, 2020. The Company’s recorded investment in BOPRE is $136,000 and $179,000 at
June 30, 2020 and December 31, 2019, respectively, which is net of $43,000 of distributions during the six months ended June 30, 2020.
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. In May 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. The outstanding balance on the mortgage is $3,149,000 at June 30,
2020 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
BOPRE Condensed Balance Sheet Information
Note F - 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.
During the six months ended June 30, 2020, USNC contributed $36,000 of capital to MOP all of which was written off.
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
six months ended June 30, 2020 and 2019, the Company’s equity in loss of MOP was $249,000 and $37,000, respectively, but was not recorded due to prior losses.
Amounts due from MOP and UOMA at June 30, 2020 total $1,277,000 of outstanding principal, less $1,043,000 of allowances for a net receivable of $234,000, all of which is included in due from related
parties on the accompanying Consolidated Balance Sheet. 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. Increases in these allowances 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.
The following table presents the summarized financial information of MOP:
MOP Condensed Consolidated Income Statement Information
MOP Condensed Consolidated Balance Sheet Information
Note G - CB Oncology Partners
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.
Amounts due from CBOP at June 30, 2020, total $2,159,000 of outstanding principal, less $1,251,000 of allowances, for a net receivable of $907,000 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. These balances accrue interest at 6% per annum. Interest earned by the Company from the amounts owed by
CBOP totaled $32,000 and $44,000 for the six months ended June 30, 2020 and 2019 respectively. At June 30, 2020 and December 31, 2019, total accrued interest was $211,000 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
CBOP Condensed Balance Sheet Information
Note H – Income Taxes
The Company’s income tax rate, which includes federal and state income taxes, was approximately 25%, for the six months ended June 30, 2020, and 29% for the six months ended June 30, 2019. The
Company recorded a tax charge of $73,000 and $51,000 for the six months ended June 30, 2020 and 2019, respectively.