Note D – Florida Oncology Partners

During 2010, through the formation of a joint venture, in which it has a noncontrolling interest, the Company expanded its market strategy to include opportunities to develop cancer centers featuring radiation therapy. These centers utilize linear accelerators with IMRT (Intensity Modulated Radiation Therapy) and IGRT (Image Guided Radiation Therapy) capabilities. In 2010, the Company formed 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 approximately $5,800,000. Under the terms of the capital lease, USN agreed to guarantee a maximum of $1,433,000, approximately 25% of the original lease obligation in the event of default. USN was a guarantor jointly with most of the other members of FOP. The guarantee was eliminated upon repayment of the outstanding lease balance in May 2018.

In December 2015, FOP entered into an agreement with 21st Century Oncology for the sale of FOP’s Varian Rapid Arc linear accelerator and other medical equipment at the FOP location. 21st Century Oncology paid FOP $1,000,000 as a down payment for the equipment and agreed to make monthly payments of $172,000 for the equipment and all monthly payments due under the equipment lease with Key Bank. As of this date, 21st Century Oncology has not satisfied all of the terms of the agreement. In late May 2017, 21st Century Oncology filed for Chapter 11 bankruptcy protection and FOP was listed as an unsecured creditor. As a result, since June 2017, FOP has not received the agreed rental payments beyond the monthly payments for the equipment lease. As noted above, the equipment lease was repaid in May 2018 and title to the equipment was transferred to 21st Century Oncology. In December 2018, FOP was awarded 10,820 shares of 21st Century Oncology Holdings Inc. common stock as part of the bankruptcy proceedings. The market value of these shares is unclear at this time as there is no readily available market for them, and accordingly, no value has been recorded for these shares at March 31, 2019. FOP will continue to monitor the impact of 21st 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 $3,528,000 at March 31, 2019, and $4,046,000 at March 31, 2018. 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 March 31, 2019 and December 31, 2018 has been reduced to zero due to distributions and losses incurred. Amounts due from FOP included in due from related parties total $223,000 at March 31, 2019 and December 31, 2018. 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 March 31, 2019, FOP owed $833,000 of principal and $40,000 of accrued interest to the Company. At December 31, 2018, FOP owed $735,000 and $30,000 of accrued interest to the Company; the Company provided an allowance of $218,000 against this promissory note receivable, reducing its carrying amount to $517,000 at December 31, 2018. During the three months ended March 31, 2019, the Company increased this allowance by $49,000 to $267,000, resulting in a carrying amount for the promissory note of $566,000 at March 31, 2019. The additional loans 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

	Three Months Ended March 31,
	2019			2018

Patient revenue	$	1,031,000		$	600,000

Rental income	$	181,000		$	482,000

Net loss	$	(182,000	)	$	(468,000	)

USNC’s equity in loss of FOP	$	(44,000	)	$	(113,000	)

FOP Condensed Balance Sheet Information

		March 31, 2019			December 31, 2018

Current assets	$	874,000		$	401,000

Noncurrent assets		16,094,000			16,570,000

Total assets	$	16,968,000		$	16,971,000

Current liabilities	$	4,542,000		$	3,974,000

Noncurrent liabilities		14,966,000			15,360,000

Deficit		(2,540,000	)		(2,363,000	)

Total liabilities and deficit	$	16,968,000		$	16,971,000