The accompanying notes to condensed consolidated financial statements are an intergral part hereof
The accompanying notes to condensed consolidated financial statements are an integral part hereof.
The accompanying notes to condensed consolidated financial statements are an integral part hereof.
The accompanying notes to condensed consolidated financial statements are an integral part hereof
U.S. NEUROSURGICAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A - Basis of Preparation
The accompanying condensed consolidated financial statements of U.S. NeuroSurgical Holdings, Inc. and Subsidiaries (the “Company”) as of June 30, 2019 and 2018, are unaudited. However, in the
opinion of management, such statements include all adjustments necessary for a fair statement of the information presented therein. The Balance Sheet at December 31, 2018 has been derived from the audited financial statements at that date appearing
in the Company's Annual Report on Form 10-K.
Pursuant to accounting requirements of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, the accompanying condensed consolidated financial statements and notes do
not include all disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. Accordingly, these statements should be read in conjunction with the Company's most recent annual
financial statements.
Consolidated results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal years.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”), amending existing revenue recognition guidance and requiring more detailed disclosures to enable users
of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Topic 606 defines a five-step process to accomplish this objective, including identifying the contract
with the customer and the performance obligations within the contract, determining the transaction price including estimates of any variable consideration, allocating the transaction price to each separate performance obligation, and recognizing
revenue as the company satisfies the performance obligation. We adopted the provisions of Topic 606 as of January 1, 2018 on a modified retrospective basis and applied it to the Company's sole contract at the date of adoption. We concluded that the
impact to the manner in which we recognize revenue is immaterial. Our revenue is primarily generated from a leasing arrangement with New York University (“NYU”), which is not within the scope of Topic 606, and from the sale of maintenance services
with a single performance obligation, under which revenue is recognized in a similar manner as compared to the method under the prior revenue standards. The Company recognizes maintenance income ratably over time as patient procedures are performed.
Prior to October 2018, the Company’s agreement with NYU primarily consisted of an operating lease, and the associated patient revenue from the use of the gamma knife was primarily operating lease
income. In October 2018, the agreement was reevaluated to be a sales-type sublease between the Company, the lessor, and NYU, the lessee. The present value of all fixed future minimum lease payments payable by NYU to the Company were recorded as an
investment in sublease effective October 1, 2018. The patient revenue under the tiered schedule (“Note B”) continues to be considered contingent income and is recognized on a systematic basis using an average fee per procedure.
We adopted the provisions of ASU 2016-02, Leases ("Topic 842"), as amended, as of January 1, 2019. The adoption of Topic 842 had a material impact on the Company’s Consolidated Balance Sheets
due to the recognition of certain right-of-use (“ROU”) assets and lease liabilities. Although a significant amount of our revenue is now accounted for under Topic 842, this guidance did not have a material impact on our Consolidated Statements of
Operations or Cash Flows. Because of the transition method we used to adopt Topic 842, Topic 842 will not be applied to periods prior to adoption and the adoption of Topic 842 had no impact on our previously reported results, or on opening equity
at January 1, 2019.
The tables below present financial information associated with our leases. This information is only presented as of, and for the six months ended, June 30, 2019, because, as noted above, we adopted
Topic 842 using a transition method that does not require application to periods prior to adoption.
|
Classification
|
|
June 30, 2019
|
|
Assets
|
|
|
|
|
Current
|
|
|
|
|
Finance lease assets
|
Investment in sales-type sublease - current
|
|
$
|
858,000
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
Finance lease assets
|
Investment in sales-type sublease - net of current portion
|
|
|
984,000
|
|
Operating lease assets
|
Operating lease right-of-use asset
|
|
|
144,000
|
|
Total leased assets
|
|
|
$
|
1,986,000
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Current
|
|
|
|
|
|
Finance lease liabilities
|
Obligations under finance lease - current portion
|
|
$
|
1,391,000
|
|
Operating lease liabilities
|
Operating lease right-of-use liability - current portion
|
|
|
34,000
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
Finance lease liabilities
|
Obligations under finance lease - net of current portion
|
|
|
323,000
|
|
Operating lease liabilities
|
Operating lease right-of-use liability - net of current portion
|
|
|
125,000
|
|
Total lease liabilities
|
|
|
$
|
1,873,000
|
|
|
|
|
|
|
|
Lease Cost
|
|
|
|
|
|
Operating lease cost
|
Selling, general and administrative
|
|
$
|
21,000
|
|
|
|
|
|
|
|
Finance lease cost
|
|
|
|
|
|
Interest on lease liabilities
|
Interest expense
|
|
|
52,000
|
|
|
|
|
|
|
|
Sublease income
|
Interest income - sales-type sublease
|
|
|
73,000
|
|
Net lease cost
|
|
|
$
|
-
|
|
Maturity of lease liabilities (as of June 30, 2019)
|
|
Operating lease
|
|
|
Finance lease
|
|
2019
|
|
$
|
21,000
|
|
|
$
|
759,000
|
|
2020
|
|
|
43,000
|
|
|
|
923,000
|
|
2021
|
|
|
45,000
|
|
|
|
90,000
|
|
2022
|
|
|
46,000
|
|
|
|
-
|
|
2023
|
|
|
24,000
|
|
|
|
-
|
|
Total
|
|
$
|
179,000
|
|
|
$
|
1,772,000
|
|
Less amount representing interest
|
|
|
20,000
|
|
|
|
58,000
|
|
Present value of lease liabilities
|
|
$
|
159,000
|
|
|
$
|
1,714,000
|
|
Discount rate
|
|
|
5.850
|
%
|
|
|
4.555
|
%
|
Note B – Gamma Knife at NYU Medical Center
U.S. NeuroSurgical, Inc. (“USN”), a wholly-owned subsidiary of U.S. NeuroSurgical Holdings, Inc., opened its New York gamma knife treatment center in July 1997 on the campus of New York University
(“NYU”) Medical Center. USN installed a new Leksell gamma knife, the PERFEXION model, at the NYU Medical Center in March 2009 in replacement of the older gamma knife equipment which it had been leasing to NYU. In connection with this upgrade, USN
modified its arrangement with NYU to extend the term for 12 years from March 2009.
In October 2012, the Company’s facility at NYU was totally destroyed as a result of flooding from Hurricane Sandy. The gamma knife had to be removed to prevent any cobalt leakage that might occur due
to rusting of the equipment. The removal cost was $525,000. The Company paid a lease settlement of the outstanding principal balance only and received from insurance coverage $930,000 above the lease principal payments and removal costs.
The Company finalized arrangements with NYU regarding the restoration of the gamma knife center and entered into an amendment to the original Gamma Knife Neuroradiosurgery Equipment Agreement (“NYU
Agreement”). The NYU facility was rebuilt and reopened in the Tisch Hospital of NYU Langone Medical Center. The first patient was treated on April, 29, 2014. The Company expects to generate revenue from the restored gamma knife center under the NYU
contract until March 2021, at which time the NYU contract ends and title to the gamma knife will transfer to NYU.
The Company is responsible for the maintenance and insurance for the gamma knife equipment at the NYU facility and earns income for use of the gamma knife based on a fee per procedure performed with
the equipment. NYU provides the medical and technical staff to operate the facility.
Note C – The Southern California Regional Gamma Knife Center
During 2007, the Company, through a noncontrolling interest in joint ventures, managed the formation of the Southern California Regional Gamma Knife Center at San Antonio Regional Hospital (“SARH”)
in Upland, California. Corona Gamma Knife, LLC (“CGK”) is party to a 14-year agreement with SARH to renovate space in the hospital and install and operate a Leksell PERFEXION gamma knife. CGK leases the gamma knife from NeuroPartners LLC, which
holds the gamma knife equipment. In addition to returns on its ownership interests, USNC expects to receive fees for management services relating to the facility.
USNC is a 20% owner of NeuroPartners LLC and owns 39% of CGK.
USNC was a 20% guarantor on NeuroPartners LLC’s seven-year lease with respect to the gamma knife equipment and certain leasehold improvements at SARH. In February 2016, NeuroPartners LLC negotiated a new five-year
lease to fund the reloading of cobalt and related construction services. The new lease of $1,663,000 included a balance of $668,000 from the prior lease obligations. This new lease is payable over 60 months. The first payment of $31,000 was paid
on April 1, 2016 and the final payment will be due on March 1, 2021. The Company continues to be a 20% guarantor on the new lease and expects any potential obligations from this guarantee would be reduced by the recovery of the related collateral,
and thus expects any exposure from this guarantee to be remote.
Construction of the SARH gamma knife center was completed in December 2008 and the first patient was treated in January 2009. The project has been funded principally by outside investors. While the
Company, through its joint ventures, has led the effort in organizing the business and overseeing the development and operation of the SARH center, its investment to date in the SARH center has been minimal.
For the six months ended June 30, 2019 and 2018, the Company’s equity in earnings of NeuroPartners LLC and CGK was $45,000 and $65,000, respectively. The Company did not record the $65,000 equity in
earnings for the six months ended June 30, 2018 due to prior losses incurred by NeuroPartners, LLC and CGK. During the six months ended June 30, 2019, the Company’s share of the combined equity in NeuroPartners LLC and CGK became positive, and the
Company recorded $44,000 of equity in earnings. At June 30, 2019, amounts due from related parties include $8,000 in receivables from CGK. The Company’s recorded investment in NeuroPartners LLC and CGK is $45,000 at June 30, 2019 and $0 at December
31, 2018.
The following tables present the aggregation of summarized financial information of NeuroPartners LLC and CGK:
NeuroPartners LLC and CGK Condensed Combined Income Statement Information
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Patient Revenue
|
|
$
|
489,000
|
|
|
$
|
510,000
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
147,000
|
|
|
$
|
227,000
|
|
|
|
|
|
|
|
|
|
|
USNC's equity in earnings of NeuroPartners, LLC and CGK
|
|
$
|
45,000
|
|
|
$
|
65,000
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Patient Revenue
|
|
$
|
189,000
|
|
|
$
|
299,000
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22,000
|
|
|
$
|
170,000
|
|
|
|
|
|
|
|
|
|
|
USNC's equity in earnings of NeuroPartners LLC and CGK
|
|
$
|
1,000
|
|
|
$
|
52,000
|
|
NeuroPartners LLC and CGK Condensed Combined Balance Sheet Information
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
418,000
|
|
|
$
|
304,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
|
936,000
|
|
|
|
1,064,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,354,000
|
|
|
$
|
1,368,000
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
399,000
|
|
|
$
|
399,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities
|
|
|
763,000
|
|
|
|
924,000
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
192,000
|
|
|
|
45,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
1,354,000
|
|
|
$
|
1,368,000
|
|
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 June 30, 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 $3,394,000 at June 30, 2019, and $3,919,000 at June 30, 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. FOP terminated its operations at this radiation center on June 28, 2019 due to continued losses at the site and
lack of success in good faith efforts to renegotiate the agreement after several months of discussion. FOP could be considered in default of the agreement and the third-party owner could pursue action against FOP. Due to the circumstances, FOP
derecognized the associated assets and liabilities and calculated a contingent liability equal to the net liabilities derecognized. FOP has not, however, been released from its contractual obligation to the third-party owner. At June 30, 2019, FOP
was obligated to make a further $17.6 million of lease payments for the period from July 2019 to September 2027. The derecognition of these assets and liabilities and the recording of the contingent liability had no effect on FOP’s net loss for the
six months ended June 30, 2019. Due to the termination of operations of the Miami center as well as continued working capital deficits, FOP’s ability to continue as a going concern will require FOP to restructure debt or raise new capital. Since
these plans are preliminary and have not been approved at this date, there is substantial doubt about FOP’s ability to continue as a going concern within the next twelve months from the date these financial statements are available to be issued.
The Company’s recorded investment in FOP at June 30, 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 $120,000 and $223,000 at June 30, 2019 and December 31, 2018, 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
June 30, 2019, FOP owed $600,000 of principal and $53,000 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 six months ended June 30, 2019, the Company increased this allowance by $305,000 to $523,000, resulting in a carrying amount for the promissory note
of $77,000 at June 30, 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
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Patient Revenue
|
|
$
|
1,922,000
|
|
|
$
|
2,306,000
|
|
|
|
|
|
|
|
|
|
|
Rental Income
|
|
$
|
362,000
|
|
|
$
|
890,000
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(591,000
|
)
|
|
$
|
109,000
|
|
|
|
|
|
|
|
|
|
|
USNC's equity in (loss) earnings of FOP
|
|
$
|
(143,000
|
)
|
|
$
|
26,000
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Patient revenue
|
|
$
|
891,000
|
|
|
$
|
1,706,000
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
181,000
|
|
|
$
|
408,000
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(409,000
|
)
|
|
$
|
577,000
|
|
|
|
|
|
|
|
|
|
|
USNC's equity in (loss) earnings of FOP
|
|
$
|
(99,000
|
)
|
|
$
|
139,000
|
|
FOP Condensed Balance Sheet Information
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
586,000
|
|
|
$
|
401,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
|
3,835,000
|
|
|
|
16,570,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,421,000
|
|
|
$
|
16,971,000
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
4,530,000
|
|
|
$
|
3,974,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities
|
|
|
2,840,000
|
|
|
|
15,360,000
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
(2,949,000
|
)
|
|
|
(2,363,000
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and deficit
|
|
$
|
4,421,000
|
|
|
$
|
16,971,000
|
|
Note E – Boca Oncology Partners
During the quarter ended June 30, 2011, the Company, through the formation of a joint venture, in which it has a noncontrolling interest, participated in the formation of Boca Oncology Partners, LLC
(“BOP”), for the purpose of owning and operating a cancer center in Boca Raton, Florida. In June 2011, Boca Oncology Partners RE, LLC (“BOPRE”), an affiliated entity, purchased a 20% interest in Boca West IMP, LLC, (“Boca West IMP”), owner of a
medical office building in West Boca, Florida in which
BOP operates. BOP occupies 6,000 square feet of the 32,000 square foot building. The Company invested $225,000 initially and had a 22.5% interest in BOP
and BOPRE. In February 2014, the Company and other members sold their interests in BOP.
In June 2012, BOPRE purchased an additional 3.75% of Boca West IMP from another investor bringing its total interest to 23.75%. BOPRE accounts for this investment under the cost method since it does
not exercise significant influence over Boca West, IMP.
During the years ended December 31, 2018 and 2017, several investors relinquished part of their ownership interest in BOPRE, and those interests were distributed among the remaining investors in
relationship to their percentages owned. As a result, the Company now holds a 21.22% ownership interest in BOPRE, which it accounts for under the equity method, at June 30, 2019. The Company’s recorded investment in BOPRE is $168,000 at June 30, 2019
and December 31, 2018.
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 $2,262,000 and $2,303,000 at June 30, 2019 and December 31, 2018, 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
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Rental Income
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
-
|
|
|
$
|
(4,000
|
)
|
|
|
|
|
|
|
|
|
|
USNC's equity in loss of BOPRE
|
|
$
|
-
|
|
|
$
|
(1,000
|
)
|
|
|
Three Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
-
|
|
|
$
|
(4,000
|
)
|
|
|
|
|
|
|
|
|
|
USNC's equity in loss of BOPRE
|
|
$
|
-
|
|
|
$
|
(1,000
|
)
|
BOPRE Condensed Balance Sheet Information
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
25,000
|
|
|
$
|
18,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
|
928,000
|
|
|
|
935,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
953,000
|
|
|
$
|
953,000
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
953,000
|
|
|
|
953,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
953,000
|
|
|
$
|
953,000
|
|
Note F - Medical Oncology Partners
In April 2015, Medical Oncology Partners, LLC (“MOP”), was formed in partnership with local physicians and other investors. MOP was established to acquire a 100% equity interest in United Oncology
Medical Associates of Florida, LLC (“UOMA”). USNC was not a member of MOP at the time of formation as it was not able to participate due to the fact that USNC was not a physician. Nevertheless, USNC wished to eventually obtain an equity interest in
MOP and loaned Dr. Jaime Lozano, the principal investor in MOP and a co-investor in FOP, $173,000. Dr. Lozano used these funds, along with an equal amount of his own funds (a total of $345,000), to purchase a 76.67% interest in MOP. Other investors
paid a further $105,000 for the remaining equity in MOP. MOP used the $450,000 of financing to acquire a 100% equity interest in UOMA. An application was filed for a waiver to allow USNC to hold an equity interest notwithstanding the physician
requirement and on December 22, 2016, USNC was cleared to become a part owner of MOP. Dr. Lozano agreed to exchange half of his membership interest to USNC in settlement of the note to USNC. USNC and Dr. Lozano also agreed to share equally in
providing a 5% equity interest in MOP to an additional investor as a consulting fee for services rendered in the administration of MOP and UOMA. At December 22, 2016, USNC owned 35.83% of MOP with an initial carrying value of $161,000. The Company
recorded its share of losses of $12,000 for the period from December 22, 2016 to December 31, 2016, against its investment which resulted in a reduction of its equity investment to $149,000.
Due to increasing costs, continued net losses since April 2015, and reliance on related party and other debt for operating cash flows, the fair value of UOMA is less than its carrying amount. The
Company tested its investment for impairment at December 31, 2016 and determined that the investment was impaired, and an impairment loss was recorded against the entire equity balance in MOP, as well as loans from USN and USNC to MOP and UOMA. For
the six months ended June 30, 2019 and 2018, the Company’s equity in loss of MOP was $37,000 and $49,000 respectively but was not recorded due to prior losses.
The Company to date has advanced $794,000 to MOP and has recorded $708,000 in allowances against these advances. During the six months ended June 30, 2019, the Company advanced $305,000 and recorded
allowances of $211,000 against these advances. During the six months ended June 30, 2018, the Company recorded $153,000 in advances and allowances. 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 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
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Patient revenue
|
|
$
|
1,347,000
|
|
|
$
|
1,057,000
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(103,000
|
)
|
|
$
|
(136,000
|
)
|
|
|
|
|
|
|
|
|
|
USNC's equity in loss in MOP
|
|
$
|
(37,000
|
)
|
|
$
|
(49,000
|
)
|
|
|
Three Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Patient revenue
|
|
$
|
737,000
|
|
|
$
|
537,000
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(65,000
|
)
|
|
$
|
(119,000
|
)
|
|
|
|
|
|
|
|
|
|
USNC's equity in loss in MOP
|
|
$
|
(23,000
|
)
|
|
$
|
(43,000
|
)
|
MOP Condensed Consolidated Balance Sheet Information
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
193,000
|
|
|
$
|
41,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
|
214,000
|
|
|
|
159,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
407,000
|
|
|
$
|
200,000
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
1,326,000
|
|
|
$
|
1,002,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities
|
|
|
19,000
|
|
|
|
33,000
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
(938,000
|
)
|
|
|
(835,000
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
407,000
|
|
|
$
|
200,000
|
|
Note G - 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 to date has advanced $1,914,000 to CBOP to assist with the funding of the build out and
operations of the entity and has recorded an allowance against it of $761,000. During the six months ended June 30, 2019 and 2018, the Company recorded $258,000 and $37,000 in allowances. These charges have been recorded as losses from investments in
unconsolidated entities.
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
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Patient revenue
|
|
$
|
748,000
|
|
|
$
|
488,000
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(573,000
|
)
|
|
$
|
(501,000
|
)
|
|
|
|
|
|
|
|
|
|
USNC's equity in loss in CBOP
|
|
$
|
(139,000
|
)
|
|
$
|
(121,000
|
)
|
|
|
Three Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Patient revenue
|
|
$
|
335,000
|
|
|
$
|
376,000
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(340,000
|
)
|
|
$
|
(160,000
|
)
|
|
|
|
|
|
|
|
|
|
USNC's equity in loss in CBOP
|
|
$
|
(83,000
|
)
|
|
$
|
(38,000
|
)
|
CBOP Condensed Balance Sheet Information
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
255,000
|
|
|
$
|
140,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
255,000
|
|
|
$
|
140,000
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
2,306,000
|
|
|
$
|
1,618,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
(2,051,000
|
)
|
|
|
(1,478,000
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
255,000
|
|
|
$
|
140,000
|
|
Note H – Income Taxes
The Company’s income tax rate, which includes federal and state income taxes, was approximately 29%, for the six months ended June 30, 2019, and 56% for the six months ended June 30, 2018. The 2018
tax charge includes a $33,000 adjustment to the estimated effective state tax rate and $56,000 of permanent differences arising from the $190,000 of losses from investments in unconsolidated entities. The Company recorded a tax charge of $51,000 and
$179,000 for the six months ended June 30, 2019 and 2018, respectively.