Item 1.
Business.
U.S. NeuroSurgical, Inc. (“USN” or the “Company”) owns and operates stereotactic radiosurgery centers, utilizing gamma knife technology. As used herein, unless the context indicates otherwise, the term "Company", "Registrant" and "USN" means U.S. NeuroSurgical, Inc. and its subsidiaries, U.S. NeuroSurgical Physics, Inc. and USN Corona, Inc. The Company, a Delaware corporation, was formed in July 1993. Through September 9, 1999, the Company was a wholly owned subsidiary of GHS, Inc. (“GHS”). Effective September 17, 1999, GHS distributed its shares of USN to the stockholders of GHS. The Company's executive offices are located at 2400 Research Boulevard, Suite 325, Rockville, Maryland 20850, and its telephone number is (301) 208-8998.
Disclosure Regarding Forward Looking Statements
Statements contained in this Annual Report on Form 10-K that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements are inherently uncertain. Actual performance and results may differ materially from that projected or suggested herein due to certain risks and uncertainties including, without limitation, the outcome of the Company’s discussions and negotiations regarding the reopening of the gamma knife center at New York University Medical Center, the timing and ultimate collectability of accounts receivable for gamma knife procedures from different payor groups such as Medicare and private payors; competition; technological obsolescence; government regulation and malpractice liability. Additional information concerning certain risks and uncertainties that could cause actual results to differ materially from that projected or suggested are included in Item 1A, Risk Factors, and may also be identified from time to time in the Company’s filings with the Securities and Exchange Commission (the “SEC”) and the Company’s public announcements, copies of which are available from the SEC or from the Company upon request.
General
USN was organized in July 1993 to own and operate stereotactic radiosurgery centers, utilizing gamma knife technology. USN currently owns and operates one gamma knife center on the premises of New York University Medical Center (“NYU”) in New York, New York. In January 2009, the Company opened a new center, the Southern California Regional Gamma Knife Center, at the San Antonio Community Hospital (“SACH”) in Upland, California.
Management continues to explore opportunities to organize and participate in additional gamma knife centers. USN's business strategy is to provide cost-effective approaches that allow hospitals, physicians, and patients access to gamma knife treatment capability, a high capital cost item. USN provides the gamma knife to medical facilities on a "cost per treatment" basis. The Company’s business model is to own, or hold an interest in, the gamma knife units, and charge the medical facility, where the unit is housed and maintained, based on utilization.
During the fourth quarter of 2007, USN formed a new wholly owned subsidiary, USN Corona, Inc. (“USNC”), to carry investments in Corona Gamma Knife, LLC and NeuroPartners, LLC. Those subsidiaries were formed to develop and manage the gamma knife center at SACH.
In April 2011, the Company finalized certain transactions and agreements with Midwest Division - RMC, LLC (“RMC”), which owns the property and operates the medical facilities in Kansas City at which one of the Company’s gamma knife centers was located. The Company sold to RMC the gamma knife radiosurgery equipment, along with related supplies and inventory, located at the Kansas City Center for an aggregate purchase price of $250,000.
USN's principal target market is medical centers in major health care catchment areas that have physicians experienced with and dedicated to the use of the gamma knife. As it has with its NYU and SACH gamma knife centers, if circumstances support the opening of additional centers, USN would seek cooperative ventures with these facilities.
In October 2012, the Company’s facility at NYU was totally destroyed as a result of flooding from Hurricane Sandy. The Company has finalized arrangements with NYU and is in the process of completing the preparation of the new location of the Leksell PERFECTION gamma knife in the Tisch Hospital of NYU Langone Medical Center. It is estimated the center will be open and treating patients by the end of April 2014.
USN believes that, as of December 31, 2013, there were approximately 131 gamma knife treatment centers in the U.S.
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 in partnership with local physicians and other investors. USNC owns a 20% interest in the venture. The center is located in Miami, Florida and opened in the second quarter of 2011. The Company invested $200,000 in connection with its interest.
In 2011, the Company formed Boca Oncology Partners LLC, in partnership with local physicians and other investors. USN Corona, Inc., USN’s subsidiary, owns an 11.25% interest in the venture. The center is located in Boca Raton, Florida, and opened in the third quarter of 2012. In January of 2014, the Company and other partners sold their interest in Boca Oncology Partners, LLC to SFRO Holdings.
In January 2013, the Company formed Broward Oncology Partners, LLC with other outside investors to operate a radiation oncology center in Fort Lauderdale, Florida. USNC owns a 12.5% interest in the venture. The center opened in February 2013.
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 US.
Gamma Knife Technology
The gamma knife is a unique stereotactic radiosurgical device used to treat brain tumors and other malformations of the brain without invasive surgery. The gamma knife delivers a single, high dose of ionizing radiation emanating from 201 cobalt-60 sources positioned about a hemispherical, precision machined cavity. The lesion is first targeted with precision accuracy using advanced imaging and three dimensional treatment planning techniques such as CT Scans, MR Scans, conventional X-rays, or angiography. Each individual beam is focused on a common target producing an intense concentration of radiation at the target site, destroying the lesion while spreading the entry radiation dose uniformly and harmlessly over the patient's skull. The mechanical precision at the target site is +/- 0.1mm (1/10 of 1 millimeter). Because of the steep fall-off in the radiation intensity surrounding the target, the lesion can be destroyed, while sparing the surrounding tissue.
The procedure, performed in a single treatment, sharply reduces hospital stay times and eliminates post-surgical bleeding and infection. When compared with conventional neurosurgery, gamma knife treatment is less expensive. However, not all patients are candidates for radiosurgery since the decision to use the gamma knife depends on the type, size, and location of the lesion.
Linear Accelerators
A linear particle accelerator (LINAC) is a type of particle accelerator that greatly increases the velocity of charged subatomic particles or ions by subjecting the charged particles to a series of oscillating electric potentials along a linear beamline. LINACs accelerate electrons using a tuned-cavity waveguide, in which the RF (radio frequency) power creates a standing wave. Some LINACs have short, vertically mounted waveguides, while higher energy machines tend to have a horizontal, longer waveguide and a bending magnet to turn the beam vertically towards the patient. Medical LINACs use monoenergetic electron beams between 4 and 25 MeV, giving an X-ray output with a spectrum of energies up to and including the electron energy when the electrons are directed at a high-density (such as tungsten) target. The electrons or X-rays can be used to treat both benign and malignant disease.
The intensity of the radiation in IMRT can be changed during treatment to spare more adjoining normal tissue than is spared during conventional radiation therapy. Because of this an increased dose of radiation can be delivered to the tumor using IMRT. IMRT is a type of conformal radiation, which shapes radiation beams to closely approximate the shape of the tumor.
IGRT is used to help better deliver radiation therapy to cancerous tumors. This is very useful since tumors can move between treatments due to differences in organ filling or movements while breathing. IGRT involves conformal radiation treatment guided by specialized imaging tests, such as CT scans, ultrasound or X-rays. These tests are done in the treatment room just before the patient is to receive his or her daily radiation therapy treatment.
New York Gamma Knife Center
USN opened its New York gamma knife treatment center in July 1997 on the campus of NYU Medical Center. The Company installed a new Leksell gamma knife, the PERFEXION model, at the NYU Medical Center in March 2009 in replacement of the older gamma knife equipment. In connection with this upgrade, the Company modified its arrangement with NYU to extend the term for 12 years from March 2009.
In October 2012, the Company’s facility at NYU was totally destroyed as a result of flooding from Hurricane Sandy. The gamma knife had to be removed to prevent any cobalt leakage that might occur due to rusting of the equipment. The emergency 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 has finalized arrangements with NYU regarding the restoration of the gamma knife center and the Company’s long term contract with NYU. The replacement Leksell PERFECTION gamma knife will be located in the Tisch Hospital of NYU Langone Medical Center. It is estimated that the center will be open and treating patients by the end of April 2014.
The Company has a marketing representative to help introduce the gamma knife technology to neurosurgeons in the New York tri-state region. Pursuant to the facility agreement previously in place with NYU, USN was responsible for the maintenance and insurance for the gamma knife equipment at the NYU facility and was 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. NYU pays USN a scheduled fee based on the number of patient procedures performed. For the year ended December 31, 2012, USN derived revenues from the NYU center of approximately $1,942,000 as a result of 224 procedures performed. However, during 2013 the Company had no revenues due to the replacement and rebuilding of the center, 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.
The Southern California Regional Gamma Knife Center
During 2007, the Company managed the formation of the Southern California Regional Gamma Knife center at SACH in Upland, California. The Company participates in the ownership and operation of the center through its wholly-owned subsidiary, USNC. Corona Gamma Knife, LLC (“CGK”) is party to a 14-year agreement with SACH to renovate space in the hospital and install and operate a Leksell PERFEXION gamma knife. CGK leased 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 is a 20% guarantor on NeuroPartners, LLC’s seven-year lease with respect to the gamma knife equipment and certain leasehold improvements at SACH. The outstanding balance on the lease obligations was $2,013,000 at December 31, 2013. In 2016, Neuro Partners, LLC has the option to purchase the gamma knife for $490,000
Construction of the SACH 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 SACH center, its investment to date in the SACH center has been minimal.
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 activities that most significantly affect their economic performance, certain disclosures are required rather than consolidation.
During 2012, the Company did not record its share of the income (loss) of NeuroPartners, LLC and CGK due to the fact that the Company’s share of cumulative losses has exceeded its investment in these entities. During 2013, the Company absorbed some of these losses against the total outstanding receivables of $27,000 from NeuroPartners LLC and CGK due to these losses.
Future Gamma Knife Centers
USN is currently exploring other opportunities for gamma knife centers and centers that provide related healthcare services located near hospitals throughout the United States. Discussions regarding such centers is preliminary and there can be no assurance that any such discussions will result in the opening of new centers.
Florida Oncology Partners
During the quarter ended September 30, 2010, the Company participated in the formation of Florida Oncology Partners, LLC (“FOP”) and Florida Oncology Partners RE, LLC (“FOPRE”) (collectively referred to as “Florida Oncology Partners”), 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 a 20% interest in Florida Oncology Partners. The remaining 80% is owned by other outside investors. The center opened and treated its first patient in May 2011. During 2012 and 2013, FOP made several distributions that reduced the Company’s investment significantly. The Company’s recorded investment in FOP and FOP RE is $151,000 and $135,000 at December 31, 2013 and 2012.
During 2011, Florida Oncology Partners, LLC entered into a capital lease with Key Bank for approximately $5,800,000. Under the terms of the capital lease, USNC agreed to guarantee 25% of the outstanding lease obligation in the event of default. The outstanding balance on the lease obligation was $4,220,000 at December 31, 2013.
In June 2012, FOPRE completed the financing agreement to purchase the building that is occupied by FOP. The amount of the loan was $1,534,275 to be paid at a monthly rate of approximately $8,500 for 120 months with the final payment due on June 15, 2022. USNC is the guarantor of 20% of the outstanding balance of this loan, which was $1,484,000 at December 31, 2013.
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 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 initially 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 under a 5 year note at 7% interest. The remaining 88.75% is owned by other outside investors. In June 2012, BOPRE purchased 3.75% of Boca West IMP from another investor and then sold 31.5% of 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%. The center opened and treated its first patient in August 2012.
Due to the outstanding loans, BOP is considered to be a variable interest entity of the Company. However, as the Company is not deemed to be the primary beneficiary of BOP, since it does not have the power to direct the activities that most significantly affect its economic performance; certain disclosures are required rather than consolidation. The center opened in August 2012.
Since June 2012, the Company’s share of cumulative losses associated with its investment in BOP has exceeded its investment.. During 2013, the Company absorbed losses against $57,000 of outstanding receivables from BOP. The Company’s recorded investment in BOPRE is $134,000 at December 31, 2013 and $112,000 at December 31, 2012.
Broward Oncology Partners
In January 2013, the Company formed Broward Oncology Partners, LLC (“BROP”) with other outside investors. The Company invested $50,000 in late April 2013 for a 12.5% ownership interest in BROP. BROP operates a radiation oncology center in Fort Lauderdale, Florida under a lease from Tenet Health Services. BROP began operations in February 2013. The facility is undergoing renovation and continues to operate on a limited basis during construction.
Revenues for BROP through December 31, 2013 were $522,000 and after expenses BROP has reported loss of $120,000. The Company’s recorded investment in BROP is $35,000.
New Strategy for Participation in Cancer Treatment
As a result of the Company’s experiences over the past few years, the Company has expanded its focus to the broader based cancer treatment market. In order to reduce the risk and broaden its opportunities for profitable growth, the Company, where possible, has been pursuing partnerships with local investors/providers to develop and operate oncology centers that utilize linear accelerators (LINACs) to treat cancers in the whole body. The Company also continues to evaluate opportunities to develop additional gamma knife facilities. FOP, BOP and the Southern California Regional Gamma Knife Center typify this new strategy.
Employees
U.S. NeuroSurgical, Inc. has three full-time employees and relies on consultants for certain services as required from time-to-time. All of its full-time employees are engaged in sales, marketing and administration.
Item 1A.
Item 1A.
Risk Factors.
Regulatory Environment
The levels of revenues and profitability of companies involved in the health services industry, such as the Company, may be affected by the continuing efforts of governmental and third party payors to contain or reduce the costs of health care through various means. Although the Company does not believe that its business activities will be materially affected in the foreseeable future, it is not possible to predict the long term effect of recent and future changes in the regulatory environment, or the responses of federal, state or private payors for healthcare goods and services in response to healthcare proposals or legislation.
In March 2010, significant reforms to the healthcare system were adopted in the form of the Patient Protection and Affordable Care Act (the “PPACA”). The PPACA includes provisions that, among other things, reduce and/or limit Medicare reimbursement to certain providers, require all individuals to have health insurance (with limited exceptions) and impose new and/or increased taxes. The Company cannot predict the effects these changes may have on its business, and no assurance can be given that any such changes will not have a material adverse effect on the Company.
In addition, the provision of medical services in the United States is dependent on the availability of reimbursement to consumers from third party payors, such as government and private insurance companies. Although patients are ultimately responsible for services rendered, the Company expects that the majority of its revenues will be derived from reimbursements by third party payors. Medicare has authorized reimbursement for gamma knife and other forms of cancer treatment. Over the last several years, such third party payors are increasingly challenging the cost effectiveness of medical products and services and taking other cost containment measures. Therefore, although treatment costs using the gamma knife compare favorably to traditional invasive brain surgery, it is unclear how this trend among third party payors and future regulatory reforms affecting governmental reimbursement will affect procedures in the higher end of the cost scale.
In the future, the Company may establish additional gamma knife or other types of cancer treatment centers. Completion of future centers would require approvals and arrangements with hospitals, health care organizations, or other third parties, including certain regulatory authorities. The Food and Drug Administration has issued the requisite pre-market approval for the gamma knife utilized by USN. In addition, many states require hospitals to obtain a Certificate of Need (“CON”) before they can acquire a significant piece of medical equipment. Should the Company enter into future ventures such "need" will be demonstrable, but it can have no assurance that CONs will be granted. In addition, the Nuclear Regulatory Commission (the “NRC”) must issue a permit to USN to permit loading the cobalt at each gamma knife site. While the Company believes that it can obtain a NRC permit for each gamma knife unit, there is no assurance that it will.
Liability Insurance
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.
Competition
The health care industry, in general, is highly competitive and the Company expects to have substantial competition from other independent organizations, as well as from hospitals in establishing future gamma knife or other types of cancer treatment centers. There are other companies that provide gamma knife or other types of cancer treatment on a "cost per treatment basis". In addition, larger hospitals may be expected to maintain a gamma knife as well as competing technologies as part of their regular inpatient services, which could have the effect of reducing the number of gamma knife procedures performed at such facility. Principal competitive factors include quality and timeliness of test results, ability to develop and maintain relationships with referring physicians, facility location, convenience of scheduling and availability of patient appointment times. The Company believes that cost containment measures will encourage hospitals to seek companies that are providing the technology, instead of incurring the capital cost of establishing their own treatment centers.
Gamma Knife Financing
The gamma knife is an expensive piece of equipment, presently costing from $3.0 to $4.5 million, depending on features. Therefore, the Company's development of new gamma knife centers is dependent on its ability to secure favorable financing. In addition, after a number of years of use, the radioactive cobalt contained in the gamma knife requires replacement. This is also an expensive process. For example, the cobalt for the previous gamma knife in the NYU facility was reloaded in August 2003 and the costs were approximately $800,000.
Gamma Knife Supply and Servicing
To date, USN has purchased all of its gamma knife equipment from Elekta Instruments, Inc., a subsidiary of AB Elekta of Stockholm, Sweden. In March 2009, the Company installed a new PERFEXION model, at the NYU Medical Center in replacement of the older gamma knife equipment. Elekta is responsible for the installation and testing of the equipment and the training of the hospital staff in the operation of the equipment. USN arranges for maintenance services for its gamma knife units, including the necessary services related to cobalt replacement, through Elekta. Any interruption in the supply of equipment or services from Elekta would adversely affect USN's ability to maintain its gamma knife treatment centers.
Also, should restrictions be imposed on the operations of Elekta, such as restrictions relating to the handling and disposal of radioactive materials, necessary support services could become more costly and more difficult to obtain.
New Technology/Possible Obsolescence
Gamma knife technology may be subject to technological change. Consequently, the Company will have to rely on the leading gamma knife's manufacturer, Elekta, to introduce improvements or upgrades in order to keep pace with technological change. Any such improvements or upgrades which the Company may be required to introduce will require additional financing. In addition, newly developed techniques and devices for performing brain surgery may render the gamma knife less competitive or obsolete.
Dependence on Hospital, Healthcare Organizations and Others
In establishing new gamma knife centers, USN must reach an arrangement with a hospital or other medical centers for the installation and operation of a gamma knife facility and then to purchase the gamma knife equipment and construct and operate the facility. Before entering into such an agreement, USN must make an assessment of the economic feasibility of operating the gamma knife at that location. The Company retains no control or influence over the medical staff or decisions regarding the treatment of patients. In that regard, USN’s economic success is highly dependent on its initial determinations of the viability of the gamma knife’s location. Should the medical center or the physicians at that medical center ultimately use the gamma knife facility for significantly fewer patients than initially projected, the Company could be required to operate the gamma knife center at a loss for an extended period of time.
With respect to other cancer centers in which the Company has an interest, the Company participates with other physician groups and other investors in planning and constructing the facility and purchasing the necessary equipment, such as an IMRT or IGRT. The Company plays a lead role in the initial planning and establishment of those centers, but does not control the day-to-day operations thereafter. The long term success of those centers depends to a significant degree on the operating decisions made by the physicians and administrators at those centers.
Reliance on Business of the New York University Gamma Knife Center; Recent Destruction of Equipment and Discontinuation of Business at NYU
While it is the Company’s objective to expand activities to additional cancer centers that rely on a broad range of diagnostic and radiation treatments, the Company has relied on the NYU gamma knife for substantially all of its revenue. In recent periods, services provided at NYU have represented over 90% of the Company’s revenues. Unless and until the Company is successful in building its activities at other centers and at new locations, disruptions at NYU could have a materially adverse effect on the Company.
In October 2012, the Company’s facility at NYU was totally destroyed as a result of flooding from Hurricane Sandy. The gamma knife had to be removed to prevent cobalt leakage that might occur due to rusting of the equipment.
In addition, the cost of the removal of the damaged equipment was $525,000. The Company paid a lease settlement of the outstanding principal of the loan balance only and received from insurance coverage $930,000 above the lease principal payments and emergency removal costs from insurance coverage.
The Company has finalized arrangements with NYU regarding the restoration of the gamma knife center and the Company’s long term contract with NYU. It is in the process of preparing the new location of the Leksell PERFECTION gamma knife in the Tisch Hospital of NYU Langone Medical Center. It is estimated the center will be open and treating patients by the end of April 2014. Assuming the Company is successful in reopening the facility at NYU, it is likely to incur additional costs, some of which may be substantial and will not be covered by insurance.
In addition to the significant loss reported for 2013, these factors will result in an operating loss for the first quarter of 2014.
Availability of Working Capital
To date, we have earned sufficient income from operations to fund periodic operating losses and support efforts to pursue new gamma knife or other types of cancer treatment centers. If the Company experiences operating losses in the future, we will be required to seek additional capital to support continued operations and the development of new centers, but we cannot assure you, however, that we will be able to raise such additional capital as and when required.
Stock Price Volatility; Illiquid Trading Market
The Company’s common stock is thinly traded. At present, trades are reported on the OTC market only several days a month. This thin trading and relatively small non-affiliate float lead to a high level of volatility in reported sale prices. Investors in the Company’s Common Stock will have a limited ability to trade shares on the open market and, even if able to sell shares, could suffer significant market losses due to large swings in the prices of the shares.
Item 1B.
Item 1B.
Unresolved Staff Comments.
None
Item 2.
Item 2.
Properties.
The Company's base facility, from which it conducts substantially all of its administrative operations, is located in Rockville, Maryland and occupies approximately 1,300 square feet. The rent is approximately $39,000 per year. USN occupies about 3,800 square feet at the NYU Medical Center in New York, New York. Pursuant to the facility agreements with NYU, USN is not required to pay separate rent for the premises occupied by its gamma knife center. Overhead, including rent, was negotiated in determining the fee paid to USN for the use of the gamma knife. USN’s agreement with NYU was extended in 2008 and now expires in 2021.
Item 3.
Item 3.
Legal Proceedings.
The Company is subject to lawsuits, investigations and potential claims arising out of the ordinary conduct of its business. The Company is not currently involved in any material litigation.
Item 4.
Item 4.
Mine Safety Disclosures.
Not applicable
PART II
Item 5.
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company's Common Stock is traded on the over-the-counter market and quoted on the OTCQB marketplace. OTCQB is the middle tier of the Pink OTC Market, Inc. OTCQB companies are reporting with the SEC or a U.S. banking regulator.
The following table displays the range of high and low closing prices for the Company’s Common Stock for the period from January 1, 2012 through December 31, 2013.
The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.
As of March 20, 2014, there were approximately 80 holders of record of the Company's Common Stock.
To date the Company declared no dividends on its Common Stock and does not anticipate declaring dividends in the foreseeable future.
During the fourth quarter of 2013, the Company did not purchase any of its own equity securities.
Item 6.
Item 6.
Selected Financial Data.
Not required for smaller reporting companies
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Results of operations
2013 Compared to 2012
There was no patient revenue in 2013 as compared to $1,956,000 in 2012. This decrease in patient revenue was due to the destruction of the gamma knife at the NYU center following Hurricane Sandy in October of 2012
There were no patient expenses in 2013 compared to $675,000 in 2012. Patient expenses do not vary materially with the number of procedures performed, but are tied to depreciation, maintenance and other fixed expenses. The decrease experienced in 2013 over 2012 was due to the fact that the gamma knife was not in service during any part of 2013 and, as a result, there was no maintenance expense during the year. SG&A decreased 4% to $994,000 in 2013 from $1,034,000 in the previous year. This decrease in SG&A resulted from lower insurance costs and professional fees realized in 2013. There was interest expense of $15,000 in 2013 down from $199,000 in 2012. The Company reported net loss of $667,000 in 2013, as compared to net income of $729,000 in the prior year. This large decrease in income was due to the fact the gamma knife was out of service for the year, and as a result there was no revenue.
The Company has finalized arrangements with NYU regarding the restoration of the gamma knife center and the Company’s long term contract with NYU. The replacement Leksell PERFECTION gamma knife will be located in the Tisch Hospital of NYU Langone Medical Center. The suite is currently under construction and it is estimated that the center will be open and treating patients by the end of April 2014. Due to this timing, the Company will report a loss for the first quarter of 2014.
Liquidity and capital resources
At December 31, 2013 the Company had working capital of $1,081,000 compared to $2,184,000 at December 31, 2012 This decrease was due to the destruction of the NYU gamma knife and the loss of revenue while the Company was under negotiations and subsequent construction. Total assets decreased by $3,213,000 from 2012 to 2013, principally as a result of the disposal of the gamma knife and the use of working capital throughout the year. Cash and cash equivalents at December 31, 2013 were $1,414,000 as compared to $1,450,000 at December 31, 2012.
Net cash used by operating activities was $980,000 in 2013 as compared to $861,000 provided by operating activities for 2012 and net cash used in financing activities was $2,271,000 in 2013 as compared to the $431,000 in 2012. Again, these amounts were affected to a significant degree by the activity surrounding the destruction of the NYU gamma knife and the insurance recovery. Depreciation and amortization was $0 in 2013 as compared to $426,000 in 2012.
For the year ended December 31, 2013, net cash provided by investing activities was $3,215,000 as compared to $190,000 in 2012. The 2013 amount included investments in BROP and BOP RE but the majority was due to the proceeds from insurance recoveries. The 2012 amount was due to $190,000 in distributions from FOP and FOPRE.
Due to the disruption caused by the flooding from Hurricane Sandy, and the subsequent move of the facility, the Company will not receive revenues from the NYU center for the first quarter of 2014, and the Company will incur significant expenditures in connection with the installation of the gamma knife and the reopening of the facility.
Off-balance sheet arrangements
None
Critical accounting policies
Estimates and assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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. For example, during the last quarter of 2012, the Company increased the liability for asset retirement obligations by $425,000 based on the projected costs for the emergency removal of the NYU gamma knife destroyed by flooding from Hurricane Sandy. The estimated costs of these obligations are capitalized as costs of the assets subject to the retirement obligations and amortized over the lives of the assets.
Investments in unconsolidated entities
The Company accounts for its investments in unconsolidated entities by the equity method. The Company records its share of such earnings (losses) in the consolidated statements of operations as “Income (loss) from investments in unconsolidated entities”. The carrying value of the Company’s investments in unconsolidated entities is recorded in the consolidated balance sheets. The Company records losses of the unconsolidated entities only to the extent of the Company’s interest in and advances to entities.
Item 7A.
Item 7A.
Qualitative and Quantitative Disclosures About Market Risk.
Not required for smaller reporting companies
Item 8.
Item 8.
Financial Statements and Supplementary Data.
The financial statements and supplementary data required by this item are set forth in this Annual Report on Form 10-K beginning at page.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We do realize that we are a very small company and as a small company with only the officers and directors participating in the day to day management, with the ability to override controls, each officer and director has multiple positions and responsibilities that would normally be distributed among several employees in larger organizations with adequate segregation of duties to ensure the appropriate checks and balances. Because the Company does not currently have a separate chief financial officer, the President performs these functions with the support of one of the Company’s outside directors who assists in the reporting and disclosure process (the “Lead Director”).
Our management evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Company’s President concluded that the Company’s disclosure controls and procedures were not effective as of the end of the period covered by this report for the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended, to be recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, due to the material weakness in internal control over financial reporting described below.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations and can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our management, including our President, and assisted by our Lead Director, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. A material weakness is a control deficiency, or a combination of control deficiencies in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the assessment described above, management has identified the following material weakness as of December 31, 2013: the Company did not maintain sufficient qualified personnel with the appropriate level of knowledge, experience and training in the application of accounting principles generally accepted in the United States of America and in internal controls over financial reporting commensurate with its financial reporting requirements. Specifically, effective controls were not designed and in place to ensure that the Company maintained, or had access to, appropriate resources with adequate experience and expertise in the area of financial reporting for transactions such as investments in unconsolidated entities, income taxes and guarantee obligations. The Company is in the process of developing efficient approaches to remediate this material weakness.
Changes in Internal Control over Financial Reporting
Management is in the process of reviewing and developing plans to remediate the material weakness identified above. Otherwise, there have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
Item 9B.
Other Information.
Not applicable.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
The directors and executive officers of the Company are as follows:
Alan Gold has served as President and Chairman of the Board of USN since 1996. Mr. Gold has also been a director of USN since its formation in 1993. Mr. Gold served as President of GHS from 1983 through May 1999 and director of GHS since its formation through November 1999. Mr. Gold was one of the founders of Global Health Systems, the predecessor of GHS, serving as its President since its formation in July 1983. From 1981 to 1983, he served as Executive Vice President of Libra Group, a company located in Rockville, Maryland, engaged in health care automation, where he was President of Global Health Foundation and Libra Research and Executive Vice President of Libra Technology. From July 1997 through March 1998 Mr. Gold was also an employee of Health Management Systems.
William F. Leimkuhler has served as director of USN since May 1999. He currently serves as Lead Director of USN’s Board of Directors. He also served as a director of GHS since its inception in 1984 through November 1999. Mr. Leimkuhler is currently General Counsel & Director of Business Development for Paice Corporation, the developer of an advanced hybrid electric powertrain for passenger vehicles, a position he has held since October 1999. He also acts as a consultant on corporate and business development matters to several emerging growth companies. From January 1994 until October 1999, he served as Vice President and General Counsel of Allen & Company Incorporated, an investment banking firm. Mr. Leimkuhler also serves as a director of Argan, Inc.
Charles H. Merriman, III has served as a director of USN since May 1999. He also served as a director of GHS from October 1997 to November 1999. Mr. Merriman retired at the close of the year 2001 from service as Senior Vice President and Managing Director of BB&T Capital Markets ("BB&T"), an investment banking enterprise, where he was employed in various capacities since 1972 by BB&T and its predecessor. Mr. Merriman has extensive knowledge of USN’s primary focus on healthcare and technology.
Susan Greenwald has served as Vice President of Marketing Communications and as Secretary of USN since May 1999. She performed services for GHS in the same capacity from its inception in 1983 through May 1999. Ms. Greenwald was one of the founders of Global Health Systems, the predecessor of GHS, and served as its Vice President of Marketing Communications since 1983. From 1981 through 1983 she was the Proposal Manager for Libra Technology and Global Health Foundation, sister companies engaged in federal contracting and private enterprise, respectively, in the healthcare information technology business. From July 1997 through February 1998, Ms. Greenwald was an employee of Health Management Systems.
Mr. Gold and Ms. Greenwald are married.
Pursuant to the Company’s bylaws, the Company’s Board of Directors is elected by the stockholders at each annual meeting to serve until the next annual meeting or until their successors are elected and qualified. In the case of a vacancy, a director will be appointed by a majority of the remaining directors then in office to serve the remainder of the term left vacant. Directors do not receive any fees for attending board meetings. Directors are entitled to receive reimbursement for traveling costs and other out-of-pocket expenses incurred in attending board meetings. During the year ended December 31, 2013, the Board of Directors held one meeting, which was attended by all incumbent directors. In view of the small size of the Company’s Board, it does not operate through committees. Instead, the full Board of Directors performs the functions typically performed by the audit, compensation and nominating committees.
Pursuant to the Company’s bylaws, officers of the Company hold office until the first meeting of directors following the next annual meeting of stockholders and until their successors are chosen and qualified.
Section 16 (a) Beneficial Ownership Reporting Compliance
Based solely upon a review of the copies of the forms furnished to the Company, or written representations from certain reporting persons, the Company believes that during the year ended December 31, 2013, all filing requirements applicable to its officers and directors were complied with by such individuals.
Item 11.
Item 11.
Executive Compensation.
The information below sets forth the compensation for the years ended December 31, 2013, 2012, and 2011, for the President of the Company.
Employee Benefits; Employment Agreement
Mr. Gold is also entitled to reimbursement of up to $1,000 per month for automobile expenses. In addition, as with other full-time employees, Mr. Gold is entitled to participate in Company health and life insurance program. The Company also pays the premiums for an additional policy of life insurance in the amount of $500,000, naming Mr. Gold’s wife as beneficiary.
The Company and Mr. Gold are parties to an employment agreement giving either party the option to terminate employment by giving the other party six-months written notice.
Director Compensation
During 2013, our directors who are not officers or employees were entitled to an annual retainer of $3,000. Mr. Leimkuhler, the Lead Director, received a retainer of $3,000 per month in view of the higher level of activity required of him. Our directors of the Company who are officers or employees do not receive any additional compensation for serving on the Board.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth, as of March 20, 2014, certain information with respect to each beneficial owner of more than 5% of the Company's Common Stock and each director and executive officer of the Company:
(1) Unless otherwise indicated, all shares are beneficially owned and sole voting and investment power is held by the person named above.
(2) Includes 1,140,246 shares held jointly by Mr. Gold and his wife, Susan Greenwald, as joint tenants with right of survivorship.
(3) Includes 1,578,489 shares owned by Allen & Company Incorporated, Mr. Shuman disclaims beneficial ownership in such shares, except to the extent of his pecuniary interest therein.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
None
Item 14.
Item 14.
Principal Accounting Fees and Services.
Audit Fees. Audit Fees represent fees for services rendered in connection with the annual audit and quarterly reviews of the Company’s financial statements. For the years ended December 31, 2013, and 2012, the Company paid $104,000 and $86,000, respectively, for Audit Fees to Dixon Hughes Goodman LLP. No amounts were billed by Aronson, LLC during 2013 for the 2013 audit.
Audit-Related Fees. Audit-Related Fees represent fees for services rendered in connection with assurance and related services that are reasonably related to the performance of the audit or review of the financial statements and are not reported as Audit Fees. For the years ended December 31, 2013 and 2012, the Company did not pay or accrue any amounts for Audit Related Fees.
Tax Fees. Tax Fees represent fees for services rendered in connection with tax compliance, tax advice and tax planning. For the years ended December 31, 2013 and 2012, the Company paid $11,000 and $13,000 for Tax Fees to Dixon Hughes Goodman LLP.
All Other Fees. All Other Fees represent fees for services rendered by the Company’s principal accountants other than those described above. For the years ended December 31, 2013 and 2012, the Company did not pay or accrue any amounts for these services.
The Board of Directors has established a policy requiring pre-approval by the Board of Directors of all audit and non-audit services provided by its registered independent public accounting firm. The policy requires the general pre-approval of annual audit services and all other permitted services. All of the audit and non-audit services described above were approved by the Board.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules.
(a) (1) Financial Statements and Financial Statement Schedules. The following are filed as part of this report:
(2) Financial Statement Schedules. All financial statement schedules as required by Item 8 and Item 15 of Form 10-K have been omitted because the information requested is not required, not applicable, or is shown in the Consolidated Financial Statements or Notes thereto.
(b) Exhibits:
(b)
Exhibits:
__________
* Filed herewith
(c) Financial Statement Schedules. None
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
U.S. NeuroSurgical, Inc.
Rockville, Maryland
We have audited the accompanying consolidated balance sheet of U.S. NeuroSurgical, Inc. and Subsidiaries (the "Company") as of December 31, 2013, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended December 31, 2013. The Company's management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2013, and the results of its operations and its cash flows for the year ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note D to the consolidated financial statements, in October 2012 the Company's facility at New York University Medical Center ("NYU") was totally destroyed as a result of flooding from Hurricane Sandy. The Company derived substantially all of its patient revenue from NYU for the year ended December 31, 2012. The Company has finalized an agreement with NYU and is in the process of preparing the new facility.
Aronson LLC
Rockville, Maryland
April 14, 2014
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
U.S. NeuroSurgical, Inc.
Rockville, Maryland
We have audited the accompanying consolidated balance sheet of U.S. NeuroSurgical, Inc. and Subsidiaries (the "Company") as of December 31, 2012, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended December 31, 2012. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2012, and the results of its operations and its cash flows for the year ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America
As discussed in Note D to the consolidated financial statements, in October 2012 the Company's facility at New York University Medical Center ("NYU") was totally destroyed as a result of flooding from Hurricane Sandy. The Company derived substantially all of its patient revenue from NYU for the year ended December 31, 2012.
Dixon Hughes Goodman LLP
Raleigh, North Carolina
April 1, 2013
Consolidated Balance Sheets
See accompanying notes to the consolidated financial statements
Consolidated Statements of Operations
See accompanying notes to the consolidated financial statements
Consolidated Statements of Stockholders' Equity
See accompanying notes to the consolidated financial statements
Consolidated Statements of Cash Flows
See accompanying notes to the consolidated financial statements
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
Note A - Organization and Business
U.S. NeuroSurgical, Inc. (“USN” or the “Company”), a Delaware corporation, was organized in July 1993 for the purpose of owning and operating stereotactic radiosurgery centers, utilizing the gamma knife technology. USN owned 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 owned the gamma knife unit, and was reimbursed by the facility where it was 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 Community 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 in partnership with local physicians and other investors. USNC owns a 20% interest in the venture. The center is located in Miami and opened in the second quarter of 2011. (See Note C[2])
In 2011, the Company formed Boca Oncology Partners, in partnership with local physicians and other investors. USNC initially owned a 22.5% interest in the venture. Following a sale of 50% of the Company’s interest in 2012 the Company’s interest in Boca Oncology Partners decreased to 11.25%. The center is located in Boca Raton, Florida, and was opened in the third quarter of 2012. (See Note C[3])
In early 2013, the Company formed Broward Oncology Partners, LLC (“BROP”) with other outside investors. The Company invested $50,000 for a 12.5% ownership interest in BROP. BROP operates a radiation oncology center in Fort Lauderdale, Florida under a lease from Tenet Health Services. BROP began operations in February 2013. The facility is undergoing renovation and continues to operate on a limited basis during construction.
(See Note C[4])
On October 29, 2012, the Company’s facility at NYU was totally destroyed as a result of flooding from Hurricane Sandy. The Company has finalized arrangements with NYU regarding the restoration of the gamma knife center and the Company’s long term contract with NYU. It is in the process of preparing the new location of the Leksell PERFECTION gamma knife in the Tisch Hospital of NYU Langone Medical Center. It is estimated the center will be open and treating patients by the end of April 2014. (See Note D)
Note B - The Company and its Significant Accounting Policies
[1]
Basis of presentation and consolidation:
The consolidated financial statements include the accounts of USN and its wholly-owned subsidiaries, U.S. NeuroSurgical Physics, Inc. and USNC. 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, 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, NeuroPartners, LLC and Boca Oncology Partners. LLC have been taken to zero.
[4]
Revenue recognition:
Patient revenue is recognized when the gamma knife procedure is rendered.
[5]
Long-lived assets:
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
[6]
Depreciation and amortization:
The gamma knife was being depreciated on the straight-line method over an estimated useful life of seven years. The related costs incurred to reload the cobalt were being amortized on a straight-line method over an estimated useful life of five years. Leasehold improvements were being amortized on the straight-line method over 7 to 20 years, the shorter of useful life, or the life of the leases. 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 2013 and 2012 was $0 and $414,000, respectively. Amortization expense for 2013 and 2012 was $0 and $12,000, respectively.
[7]
Capital leases:
Capital lease obligations are amortized ratably over the original term of the lease agreement, beginning with the earlier of the date the leased assets are placed in service or the effective date of the lease as defined in the lease agreement.
[8]
Guarantees:
The Company recognizes a liability at the fair value of the obligation at the inception of a financial guarantee contract. The initial liability is subsequently reduced as the Company is released from exposure under the guarantee. The Company amortizes the guarantee liability to the related income statement line item over the relevant time period, if one exists, based on the facts and circumstances surrounding each type of guarantee. If it becomes probable that the Company will have to perform on a guarantee, a separate liability is accrued if it is reasonably estimable, based on the facts and circumstances at that time. The Company reverses the fair value liability only when there is no further exposure under the guarantee.
[9]
Income taxes:
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets or liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce tax assets to amounts more likely than not to be realized.
The Company has adopted the accounting provisions for Accounting for Uncertainty in Income Taxes. This accounting provision provides a comprehensive model for how the Company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on its tax return. If applicable, the Company records interest and penalties as a component of income tax expense, The Company had no uncertain material tax positions at December 31, 2013 and 2012.
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
[10]
Earnings per share:
Earnings per share are computed by dividing earnings available to common stockholders by the weighted average shares outstanding for the period. There were no common stock equivalents during 2013 and 2012, and therefore, no potential dilution for the periods presented.
[11]
Advertising costs:
The Company follows the policy of charging the costs of advertising to expense as incurred. There were no advertising costs in 2013 and 2012.
[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.
[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, accounts receivable, other current assets and accounts payable approximate fair value at December 31, 2013 and 2012 because of the short maturity of these financial instruments. The carrying values of the obligations under capital leases approximate fair value because the interest rates on these instruments approximate the market rates at December 31, 2013 and 2012.
[15]
Credit risk:
At times, the Company may have cash and cash equivalents at a financial institution in excess of insured limits. The Company places its cash and cash equivalents with high credit quality financial institutions whose credit ratings are monitored by management to minimize credit risk. Accounts receivable consist primarily of amounts due from the medical centers. Historically, credit losses on accounts receivable have not been significant.
[16]
Asset retirement obligations:
The Company records liabilities for legal obligations associated with the retirement of tangible long-lived assets based on the estimated fair value of such liabilities. The estimated costs of these obligations are capitalized as costs of the assets subject to the retirement obligations and amortized over the lives of the assets.
[17]
Reclassifications:
Certain prior year balances have been reclassified to conform to current year presentation.
U.S. NEUROSURGICAL, 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 Community Hospital (“SACH”) 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 SACH to renovate space in the hospital and install and operate a Leksell PERFEXION gamma knife. CGK leased 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. USNC also owned initially 27% of CGK, but increased its ownership to 44% during 2011 to accommodate a member who desired to transfer his interest. Subsequently, in the first quarter of 2012, USNC sold a portion of its ownership to a new member, resulting in a decrease in its ownership in CGK to 39%.
Construction of the SACH 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 SACH center, its investment to date in the SACH 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 2013, the Company absorbed losses against the total outstanding receivables of $27,000 from NeuroPartners LLC and CGK due to these losses. Amounts due from NeuroPartners LLC and CGK included in due from related parties total $0 and $3,000 at December 31, 2013 and 2012, respectively.
The following tables present the aggregation of summarized financial information of NeuroPartners LLC and CGK:
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
Neuro Partners LLC and CGK Combined Condensed Income Statement Information
Neuro Partners LLC and CGK Combined Condensed Balance Sheet Information
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
[2] 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% is owned by other outside investors. The center opened and treated its first patient in May 2011. During 2012 and 2013, FOP made several distributions that reduced the Company’s investment significantly. The Company’s investment in FOP and FOPRE is $151,000 and $135,000 at December 31, 2013 and 2012. Amounts due from FOP and FOPRE included in due from related parties total $40,000 and $83,000 at December 31, 2013 and 2012, respectively.
The following tables present the aggregation of summarized financial information of FOP and FOPRE:
FOP and FOPRE Combined Condensed Income Statement Information
FOP and FOPRE Combined Condensed Balance Sheet Information
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
[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 Company loaned the proceeds of $56,250 back to BOP as a 5 year note at 7% interest. The remaining 88.75% is 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 is considered to be a variable interest entity of the Company. However, as the Company is not deemed to be the primary beneficiary of BOP, since it does 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.
Since June 2012, the Company’s share of cumulative losses associated with its investment in BOP has exceeded its investment. During 2013, the Company absorbed losses against $57,000 of outstanding receivables from BOP. Amounts due from BOP and BOPRE included in due from related parties total $200,000 and $207,000 at December 31, 2013 and 2012, respectively. The Company’s recorded investment in BOPRE is $134,000 and $112,000 at December 31, 2013 and 2012 respectively.
In February 2014, the Company and other members sold their interests in BOP (Note K).
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
The following tables present the aggregation of summarized financial information of BOP and BOPRE:
BOP and BOPRE Combined Condensed Income Statement Information
BOP and BOPRE Combined Condensed Balance Sheet Information
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
[4]
Broward Oncology Partners
In early 2013, the Company formed Broward Oncology Partners, LLC (“BROP”) with other outside investors. The Company invested $50,000 for a 12.5% ownership interest in BROP. BROP operates a radiation oncology center in Fort Lauderdale, Florida under a lease from Tenet Health Services. BROP began operations in February 2013. The facility is undergoing renovation and continues to operate on a limited basis during construction.
Revenues for BROP through December 31, 2013 were $522,000 and after expenses BROP has reported a loss of $120,000. The Company’s recorded investment in BROP is $35,000. The Company accounts for this investment under the equity method since it exercises significant influence over BROP. Amounts due from BROP included in due from related parties total $63,000 at December 31, 2013.
The following table represents the summarized financial information for BROP:
Broward Oncology Partners, LLC Condensed Income Statement Information
Broward Oncology Partners, LLC Condensed Balance Sheet Information
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
Note D - Agreement With New York University on Behalf of New York University Medical Center (NYU)
During November 1996, USN entered into a neuroradiosurgery equipment agreement (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 may negotiate the purchase price and upon failure of the parties to agree may 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 $0 and $1,942,000, for 2013 and 2012 respectively.
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 emergency 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 has finalized an agreement with NYU and is in the process of preparing the new location of the Leksell PERFEXION gamma knife in the Tisch Hospital of NYU Langone Medical Center. In early 2014, the Company has also entered into a modification of its original capital lease agreement to finance the new gamma knife installation and related construction costs and the removal costs of the old equipment for approximately $4.5 million to be repaid over 72 months. It is estimated the center will be open and treating patients by the end of April 2014.
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
The Company incurred the following income statement items in relation to Hurricane Sandy which are included in the other income/expense section:
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 $4.5 million to be repaid over 72 months. The lease terms will be finalized, and the lease payments will commence once the new facility has opened. 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 obligations under the capital leases are as follows:
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
Note F - Asset Retirement Obligations
During 2003, the Company recorded asset retirement obligations of $200,000 based upon estimated amounts, consisting principally of removal of gamma knives, disposal of regulated materials and the restoration of facilities at NYU and RMC. Such liabilities have been measured historically using current information, current assumptions and current interest rates and have been recorded with a corresponding increase in the carrying value of the gamma knives. The Company was amortizing such costs over the lives of the respective useful lives from inception. During 2011, when the Company sold the equipment at RMC, the asset retirement obligation was reduced to $100,000. During the last quarter of 2012, the Company increased the liability by $425,000 due to projected costs for the emergency removal of the NYU gamma knife destroyed by flooding from Hurricane Sandy. In 2013, the Company modified its original capital lease agreement to finance the new NYU gamma knife and its related construction as well as the remaining costs to remove the old equipment (Note D). Therefore, the asset retirement obligation at December 31, 2013 was reclassified to
capital lease obligations (Note E).
Note G - Concentrations
For the year ended December 31, 2012, the Company derived substantially all of its revenue from NYU. Due to the destruction of the gamma knife at NYU the Company received no revenue during 2013. As of March 2014 the new gamma knife has been installed and the facility is due to begin treating patients in April 2014.
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
Note H - Taxes
A reconciliation of the tax (benefit) provision calculated at the statutory federal income tax rate with amounts reported follows:
Items which give rise to deferred tax assets and liabilities are as follows:
A full valuation allowance had been provided at December 31, 2013, due principally to the evidence that it was more likely than not that the deferred tax assets would not be realized because certain loss carryforwards would not be utilized prior to expiration. The changes in the valuation allowance are as follows:
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
At December 31, 2013, the Company had loss carryforwards of $2,320,000, which may be offset against future taxable income. If not used, the carryforwards will begin to expire in 2025.
The Company files income tax returns in the U.S. federal jurisdiction and the State of Maryland. With few possible exceptions, the Company is no longer subject to U.S. or state income tax examinations by tax authorities for years before 2010.
Note I- Commitments and Contingencies
[1] Leases:
The Company leases office space under an operating lease which was renewed March 2013, and expires March 2018. The terms of the lease include an escalation clause for a portion of certain operating expenses. At December 31, 2013, the annual future minimum rental payments under operating leases are as follows:
Rent expense was approximately $40,000 and $47,000 for 2013 and 2012, respectively.
[2] Gamma Knives:
In 2009, the Company installed a new gamma knife PERFEXION model at the NYU Medical Center. This new equipment and certain space improvements, costing approximately $3,742,000 in total, were financed through a seven-year lease arrangement. This PERFEXION equipment was recorded as a total loss as a result of flooding from Hurricane Sandy. See Notes D and E.
To maintain efficient operation, the Company is required to reload cobalt for each gamma knife every 5 to 10 years.
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
[3] Maintenance Contract:
In September 2010, the Company entered into a maintenance agreement with Elekta, the supplier of the gamma knife PERFEXION model, for 5 years. The monthly payment for this maintenance agreement is $20,000. As of December 2012, this maintenance agreement has been cancelled due to the total loss of the NYU equipment as a result of flooding from Hurricane Sandy.
[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 SACH in Upland, California, where the equipment is located. The outstanding balance on the lease obligations was $2,013,000 and $2,896,000 at December 31, 2013 and 2012, respectively. In 2014, NeuroPartners, LLC has the option to purchase the gamma knife for $490,000.
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 with respect to the oncology equipment at its West Kendall, Florida cancer center. 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 $4,220,000 and $4,977,000 at December 31, 2013 and 2012, respectively.
USNC is also a 14.06% guarantor on BOP’s five-year lease with respect to the oncology equipment at Boca Raton, Florida cancer center. The outstanding balance on the lease obligation was $1,321,000 and $1,607,000 at December 31, 2013 and 2012, respectively. Upon the sale of BOP, which occurred in February 2014 (Note K), USNC was indemnified by the buyer from any losses arising from the guarantee.
The Company expects any potential obligations from these guarantees to be reduced by the recoveries of the respective collateral and expects any amounts arising from these guarantees to be insignificant.
[5] Guarantee of Mortgages:
USN is a 20% guarantor on FOPRE’s ten-year mortgage. This mortgage had an original balance of $1,534,000 and is secured by the commercial condominiums in which FOP operates. The outstanding balance on the mortgage is $1,484,000 and $1,514,000 at December 31, 2013 and 2012, 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.
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 $2,823,000 and $2,911,000 at December 31, 2013 and 2012, respectively. The Company expects any potential obligations from this guarantee to be reduced by the recovery of the real estate collateral and expects any amounts arising from this guarantee to be insignificant.
[6] Product liability:
Although USN does not directly provide medical services, it has obtained professional medical liability insurance, and has general liability insurance as well. USN’s professional medical liability and general liability policies have limits of $3 million each. The Company believes that its insurance is adequate for providing treatment facilities and non-medical services, although there can be no assurance that the coverage limits of such insurance will be adequate or that coverage will not be reduced or become unavailable in the future.
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
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 for both 2013 and 2012.
Note K - Subsequent Events
In February 2014, the Company and certain other investors sold their interest in Boca Oncology Partners, LLC to SFRO Holdings. All obligations related to the capital lease and related guarantee were fully indemnified by the new owner. All loans made by the Company to Boca Oncology Partners, LLC were paid in full. Boca Onology Partners, LLC received $1,251,255 from SFRO. After partner equity in the company as well as various loans made to the Company were repaid, the proceed from the sale was $470,000. The Company’s estimated gain from the sale of Boca Oncology Partners, LLC is $106,000.
On March 1, 2014, the Company received approximately $460,000 from certain other investors as short term construction loans. The loans are repayable within one year at an interest rate of 10% per annum.
In April of 2014 the new gamma knife center is due to open at the NYU facility. In early 2014, the Company entered into a modification of its original capital lease agreement to finance the new gamma knife installation and related construction costs and the removal costs of the old equipment for approximately $4.5 million to be repaid over 72 months (Notes D and E).