Note C - Investment in Unconsolidated Entities

[1]	The Southern California Regional Gamma Knife Center

During 2007, the Company, through a noncontrolling interest in joint ventures, managed the formation of the Southern California Regional Gamma Knife Center at San Antonio Regional Hospital (“SARH”) in Upland, California. Corona Gamma Knife, LLC (“CGK”) is party to a 14-year agreement with SARH to renovate space in the hospital and install and operate a Leksell PERFEXION gamma knife. CGK leases the gamma knife from NeuroPartners LLC, which holds the gamma knife equipment. In addition to returns on its ownership interests, USNC expects to receive fees for management services relating to the facility.

USNC is a 20% owner of NeuroPartners LLC and owns 39% of CGK.

USNC was a 20% guarantor on NeuroPartners LLC’s seven-year lease with respect to the gamma knife equipment and certain leasehold improvements at SARH. In February 2016, NeuroPartners LLC negotiated a new five-year lease to fund the reloading of cobalt and related construction services. The new lease of $1,663,000 included a balance of $668,000 from the prior lease obligations. This new lease 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.

During the years ended December 31, 2018 and 2017, the Company received $0 and $65,000 in repayments of amounts previously advanced to NeuroPartners LLC and CGK and $60,000 and $24,000 in distributions, respectively. Those repayments reduced the amount of losses incurred on prior advances to NeuroPartners LLC and CGK and are included as earnings from investments in unconsolidated entities for the years ended December 31, 2018 and 2017. At December 31, 2017, NeuroPartners LLC and CGK had repaid all of the outstanding advances. For the years ended December 31, 2018 and 2017, the Company’s equity in earnings of NeuroPartners LLC and CGK was $181,000 and $151,000, respectively, but only $80,000 and $0 for the years ended December 2018 and 2017, respectively was recorded due to prior losses and distributions. At December 31, 2018, amounts due from related parties includes $20,000 of distributions receivable from CGK.

The following tables present the aggregation of summarized financial information of NeuroPartners LLC and CGK:

Neuro Partners LLC and CGK Combined Condensed Income Statement Information

	Year Ended December 31,
	2018		2017

Patient revenue	$	1,141,000	$	1,063,000

Net income	$	590,000	$	506,000

USNC’s equity in income of Neuro Partners LLC and CGK	$	181,000	$	151,000

Neuro Partners LLC and CGK Combined Condensed Balance Sheet Information

	December 31,
		2018		2017

Current assets	$	304,000	$	165,000

Noncurrent assets		1,064,000		745,000

Total assets	$	1,368,000	$	910,000

Current liabilities	$	399,000	$	641,000

Noncurrent liabilities		924,000		464,000

Equity (deficit)		45,000		(195,000	)

Total liabilities and equity (deficit)	$	1,368,000	$	910,000

[2]	Florida Oncology Partners

During 2010, through the formation of a joint venture, in which it has a noncontrolling interest, the Company expanded its market strategy to include opportunities to develop cancer centers featuring radiation therapy. These centers utilize linear accelerators with IMRT (Intensity Modulated Radiation Therapy) and IGRT (Image Guided Radiation Therapy) capabilities. In 2010, the Company formed FOP in partnership with local physicians and other investors. USNC owns a 24% interest in the venture. FOP’s first center was located in Miami, Florida and opened in the second quarter of 2011.

During 2011, FOP entered into a seven-year capital lease with Key Bank for $5,800,000. Under the terms of the capital lease, USN agreed to guarantee a maximum of $1,433,000, approximately 25% of the original lease obligation in the event of default. USN was a guarantor jointly with most of the other members of FOP. The guarantee was eliminated upon repayment of the outstanding lease balance in May 2018. At December 31, 2017, the lease balance was $468,000.

In December 2015, FOP entered into an agreement with 21^st Century Oncology for the sale of FOP’s Varian Rapid Arc linear accelerator and other medical equipment at the FOP location. 21^st Century Oncology paid FOP $1,000,000 as a down payment for the equipment and agreed to make monthly payments of $172,000 for the equipment and all monthly payments due under the equipment lease with Key Bank. As of this date, 21^st Century Oncology has not satisfied all of the terms of the agreement. In late May 2017, 21^st Century Oncology filed for Chapter 11 bankruptcy protection and FOP was listed as an unsecured creditor. As a result, since June 2017, FOP has not received the agreed rental payments beyond the monthly payments for the equipment lease. As noted above, the equipment lease was repaid in May 2018 and title to the equipment was transferred to 21^st Century Oncology. In December 2018, FOP was awarded 10,820 shares of 21^st 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 December 31, 2018. FOP will continue to monitor the impact of 21^st Century’s bankruptcy and pursue amounts that it is owed. However, there can be no assurance that 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 $3,660,000 at December 31, 2018, and $4,100,000 at December 31, 2017. 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 has been accounted for as a capital lease and, accordingly, FOP recorded assets and capital lease liabilities totaling $14,321,000 at September 22, 2017. The lease required monthly payments in the first year of $160,000, increasing by 2% each year; currently the payment is $163,200.

The Company’s recorded investment in FOP at December 31, 2018 and 2017 has been reduced to zero due to FOP recording distributions of $950,000 in the fourth quarter of 2017 and losses incurred in 2018. The Company’s equity in earnings from FOP was $132,000 for the year ended December 31, 2017. No equity in earnings has been recorded by the Company for the year ended December 31, 2018, due to FOP’s deficit at December 31, 2018.

Amounts due from FOP included in due from related parties total $223,000 and $169,000 at December 31, 2018 and, 2017 respectively. In addition, in October 2017, FOP entered into a promissory note payable agreement with the Company. Under this facility, borrowings accrue at 6% per annum. At December 31, 2018, FOP owes $735,000 of principal and $30,000 of accrued interest to the Company. During 2018, the Company provided an allowance of $218,000 against the promissory note receivable, reducing its carrying amount to $517,000 at December 31, 2018. This impairment charge has been included in loss from unconsolidated entities for 2018. There was no corresponding expense in 2017. At December 31, 2017, FOP owed $299,000 of principal and $2,000 of accrued interest to the Company. The $436,000 in additional loans during 2018 assisted with the funding of operations of the radiation therapy center in Miami.

Because of loans made to FOP, FOP is considered to be a variable interest entity of the Company. However, as the Company is not deemed to be the primary beneficiary of FOP, since it does not have the power to direct the operating activities that most significantly affect FOP’s economic performance, the entity is not consolidated, but certain disclosures are provided herein.

The following tables present the summarized financial information of FOP:

FOP Condensed Income Statement Information

	Year Ended December 31,

	2018			2017

Patient revenue	$	2,953,000		$	678,000

Rental Income	$	1,252,000		$	2,517,000

Net (loss) income	$	(1,918,000	)	$	525,000

USNC’s equity in (loss) income of FOP	$	(465,000	)	$	132,000

FOP Condensed Balance Sheet Information

	December 31,
		2018			2017

Current assets	$	401,000		$	664,000

Noncurrent assets		16,570,000			18,961,000

Total assets	$	16,971,000		$	19,625,000

Current liabilities	$	3,974,000		$	3,228,000

Noncurrent liabilities		15,360,000			16,842,000

Equity		(2,363,000	)		(445,000	)

Total liabilities and equity	$	16,971,000		$	19,625,000

[3]	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, 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 December 31, 2018. The Company held a 21.05% interest in BOPRE at December 31, 2017. The Company’s recorded investment in BOPRE is $168,000 and $164,000 at December 31, 2018 and 2017, respectively.

USNC is a 10% guarantor of 50% of the outstanding balance of Boca West IMP’s ten-year mortgage. This mortgage had an original balance of $3,000,000 and is secured by the medical office building in which BOP operates. The outstanding balance on the mortgage is $2,303,000 and $2,417,000 at December 31, 2018 and 2017, respectively. Any liability from this guarantee would be mitigated by the recovery from the underlying real estate, and the Company expects its potential exposure from this guarantee to be remote.

The following tables present the summarized financial information of BOPRE:

BOPRE Condensed Income Statement Information

	Years Ended December 31,

	2018			2017

Rental Income	$	-		$	-

Net loss	$	(4,000	)	$	(7,000	)

USNC’s equity in loss in BOPRE	$	(1,000	)	$	(1,000	)

BOPRE Condensed Balance Sheet Information

	December 31,
		2018		2017

Current assets	$	18,000	$	17,000

Noncurrent assets		935,000		920,000

Total assets	$	953,000	$	937,000

Current liabilities	$	-	$	-

Noncurrent liabilities		-		-

Equity		953,000		937,000

Total liabilities and equity	$	953,000	$	937,000

[4]	Medical Oncology Partners

In April 2015, MOP, was formed in partnership with local physicians and other investors. MOP was established to acquire a 100% equity interest in UOMA. USNC was not a member of MOP at the time of formation as it was not able to participate due to the fact that USNC was not a physician. Nevertheless, USNC wished to eventually obtain an equity interest in MOP and loaned Dr. Jaime Lozano, the principal investor in MOP and a co-investor in FOP, $173,000. Dr. Lozano used these funds, along with an equal amount of his own funds (a total of $345,000), to purchase a 76.67% interest in MOP. Other investors paid a further $105,000 for the remaining equity in MOP. MOP used the $450,000 of financing to acquire a 100% equity interest in UOMA. An application was filed for a waiver to allow USNC to hold an equity interest notwithstanding the physician requirement and on December 22, 2016, USNC was cleared to become a part owner of MOP. Dr. Lozano agreed to exchange half of his membership interest to USNC in settlement of the note to USNC. USNC and Dr. Lozano also agreed to share equally in providing a 5% equity interest in MOP to an additional investor as a consulting fee for services rendered in the administration of MOP and UOMA. At December 22, 2016, USNC owned 35.83% of MOP with an initial carrying value of $161,000. The Company recorded its share of losses of $12,000 for the period from December 22, 2016 to December 31, 2016, against its investment which resulted in a reduction of its equity investment to $149,000.

Due to increasing costs, continued net losses since April 2015, and reliance on related party and other debt for operating cash flows, the fair value of UOMA is less than its carrying amount. The Company tested its investment for impairment at December 31, 2016 and determined that the investment was impaired, and an impairment loss was recorded against the entire equity balance in MOP, as well as loans from USN and USNC to MOP and UOMA. For the years ended December 31, 2018 and 2017, the Company’s equity in loss of MOP was $101,000 and $97,000 respectively but was not recorded due to prior losses.

During the years ended December 31, 2018 and 2017, the Company recorded $245,000 and $223,000 respectively of allowances against advances to MOP. These charges 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 a 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

	Years Ended December 31,

	2018			2017

Patient revenue	$	2,257,000		$	1,298,000

Net loss	$	(282,000	)	$	(272,000	)

USNC’s equity in loss in MOP	$	(101,000	)	$	(97,000	)

MOP Condensed Consolidated Balance Sheet Information

	December 31,
		2018			2017

Current assets	$	41,000		$	41,000

Noncurrent assets		159,000			108,000

Total assets	$	200,000		$	149,000

Current liabilities	$	1,002,000		$	693,000

Noncurrent liabilities		33,000			-

Deficit		(835,000	)		(544,000	)

Total liabilities and deficit	$	200,000		$	149,000

5]	CB Oncology Partners

CBOP was organized September 1, 2017, to acquire the rights of the new center from FOP. USNC has a 24% equity interest in CBOP. Beginning in October of 2017, CBOP began paying the remainder of the costs associated with opening the center. CBOP had no assets at the end of 2017. The medical center opened and treated its first patient in January of 2018.

The Company has not yet contributed equity to CBOP and, accordingly has not recorded an investment in the entity. The Company advanced $143,000 to CBOP during the year ended December 31, 2017, and further advanced $1,258,000 during the year ended December 31, 2018, to assist with the funding of the build out and initial operations of the entity. The Company has recorded an allowance against these receivables at December 31, 2018, totaling $503,000, primarily comprising its share of equity in losses to date. The remaining advances have a carrying value of $898,000 at December 31, 2018.

Due to loans made to CBOP, CBOP is considered to be a variable interest entity of the Company. However, as the Company is not deemed to be the primary beneficiary of CBOP, since it does not have the power to direct the operating activities that most significantly affect CBOP’s economic performance, the entity is not consolidated, but certain disclosures are provided herein.

The following table presents the summarized financial information of CBOP:

CBOP Condensed Income Statement Information

	Years Ended December 31,

	2018			2017

Patient revenue	$	956,000		$	-

Net loss	$	(1,230,000	)	$	(248,000	)

USNC’s equity in loss of CBOP	$	(298,000	)	$	(60,000	)

CBOP Condensed Balance Sheet Information

	December 31,

		2018			2017

Current assets	$	140,000		$	-

Noncurrent assets		-			-

Total assets	$	140,000		$	-

Current liabilities	$	1,618,000		$	248,000

Noncurrent liabilities		-			-

Deficit		(1,478,000	)		(248,000	)

Total liabilities and deficit	$	140,000		$	-