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FONR Fonar

Filed: 13 May 21, 5:18pm

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the quarterly period ended MARCH 31, 2021

Commission file number 0-10248

  

 

 

 FONAR CORPORATION

  

(Exact name of registrant as specified in its charter)

  

DELAWARE 11-2464137
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)

 

110 Marcus Drive  Melville, New York

 11747
(Address of principal executive offices) (Zip Code)

 

Registrant's telephone number, including area code: (631) 694-2929 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES _X_ NO ___

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit such files. YES _X_ NO ___

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of accelerated filer, large accelerated filer, smaller reporting company and emerging growth company in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer___ Accelerated filer ___ Non-accelerated filer _X__ Smaller reporting company _X_ Emerging growth company ___

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ___ NO _X_

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the latest practicable date.

 

Class Outstanding at May 5, 2021
Common Stock, par value $.0001  6,554,210 
Class B Common Stock, par value $.0001  146 
Class C Common Stock, par value $.0001  382,513 
Class A Preferred Stock, par value $.0001  313,438 

 

 Page 1 

 


FONAR CORPORATION AND SUBSIDIARIES

 

INDEX

 

 

PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements  
Condensed Consolidated Balance Sheets - March 31, 2021 (Unaudited) and June 30, 2020 3
Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2021 and March 31, 2020 (Unaudited) 6
Condensed Consolidated Statements of Income for the Nine Months Ended March 31, 2021 and March 31, 2020 (Unaudited) 7
Condensed Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2021 and March 31, 2020 (Unaudited) 8
Condensed Consolidated Statements of Changes in Equity for the Nine Months Ended March 31, 2021 and March 31, 2020 (Unaudited) 9
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2021 and March 30, 2020 (Unaudited) 10
Notes to Condensed Consolidated Financial Statements (Unaudited) 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
Item 4. Controls and Procedures 35

 

PART II - OTHER INFORMATION

 
Item 1. Legal Proceedings 36
Item 1A. Risk Factors 36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38
Item 3. Defaults Upon Senior Securities 38
Item 4. Mine Safety Disclosures 38
Item 5. Other Information 38
Item 6. Exhibits 38
Signatures 38

 

 

 

 Page 2 

 

 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

ASSETS

 

  March 31,
2021
 June 30,
2020 *
Current Assets:        
 Cash and cash equivalents $40,809  $36,802 
 Short term investments  32   32 
 Accounts receivable – net  4,308   4,313 
 Accounts receivable - related party  42   6 
 Medical receivable – net  17,021   16,172 
 Management and other fees receivable – net  30,313   27,438 
Management and other fees receivable – related medical practices – net  7,530   6,896 
 Inventories  1,971   1,649 
Contract assets  218   153 
 Income tax receivable  —     671 
 Prepaid expenses and other current assets  1,330   1,758 

 

 Total Current Assets

  103,574   95,890 
         
Accounts receivable  2,790   2,730 
 Deferred income tax asset  17,098   18,810 
 Property and equipment – net  22,133   21,364 
 Right-of-use Asset – operating lease  29,462   31,392 
 Right-of-use Asset – financing lease  1,177   1,326 
 Goodwill  4,269   3,985 
 Other intangible assets – net  4,090   4,109 
 Other assets  659   653 

  

Total Assets

 $185,252  $180,259 

 

*Condensed from audited financial statements.

 

See accompanying notes to condensed consolidated financial statements.

 

 Page 3 

 

 FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  March 31,
2021
 June 30,
2020 *
Current Liabilities:        
Current portion of long-term debt and capital leases $193  $108 
Accounts payable  1,776   1,965 
Other current liabilities  6,252   8,185 
 Unearned revenue on service contracts  4,121   4,105 
 Unearned revenue on service contracts – related party  28   —   
 Operating lease liability - current portion  3,482   3,370 
 Financing lease liability - current portion  201   75 
Customer deposits  1,038   855 
         
Total Current Liabilities  17,091   18,663 
         
Long-Term Liabilities:        
 Unearned revenue on service contracts  2,718   2,656 
 Deferred income tax liability  234   234 
 Due to related medical practices  93   93 
 Operating lease liability – net of current portion  28,288   30,105 
 Financing lease liability – net of current portion  1,099   1,251 
 Long-term debt and capital leases, less current portion  770   865 
 Other liabilities  164   150 
         
Total Long-Term Liabilities  33,366   35,354 

 

Total Liabilities

  50,457   54,017 

 

*Condensed from audited financial statements.

 

See accompanying notes to condensed consolidated financial statements.

 

 Page 4 

 

  FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

  

LIABILITIES AND STOCKHOLDERS’ EQUITY (Continued)

 

STOCKHOLDERS' EQUITY: March 31, 2021 June 30,
2020 *
Class A non-voting preferred stock $.0001 par value; 453 shares authorized at March 31, 2021 and June 30, 2020, 313 issued and outstanding at March 31, 2021 and June 30, 2020 $—    $—   
Preferred stock $.001 par value; 567 shares authorized at March 31, 2021 and June 30, 2020, issued and outstanding – none  —     —   
Common Stock $.0001 par value; 8,500 shares authorized at March 31, 2021 and June 30, 2020, 6,566 and 6,459 issued at March 31, 2021 and June 30, 2020, 6,554 and 6,447 outstanding at March 31, 2021 and June 30, 2020  1   1 
Class B Common Stock (10 votes per share) $.0001 par value; 227 shares authorized at March 31, 2021 and June 30, 2020; .146 issued and outstanding at March 31, 2021 and June 30, 2020  —     —   
 Class C Common Stock (25 votes per share) $.0001 par value; 567 shares authorized at March 31, 2021 and June 30, 2020, 383 issued and outstanding at March 31, 2021 and June 30, 2020  —     —   
 Paid-in capital in excess of par value  185,101   183,076 
 Accumulated deficit  (46,728)  (56,215)
Treasury stock, at cost - 12 shares of common stock at March 31, 2021 and June 30, 2020  (675)  (675)
 Total Fonar Corporation’s Stockholders’ Equity  137,699   126,187 
 Noncontrolling interests  (2,904)  55 
 Total Stockholders' Equity  134,795   126,242 
 Total Liabilities and Stockholders' Equity $185,252  $180,259 

 

*Condensed from audited financial statements.

See accompanying notes to condensed consolidated financial statements.    

 

 Page 5 

 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

  

FOR THE THREE MONTHS

ENDED MARCH 31,

REVENUES 2021 2020
Patient fee revenue – net of contractual allowances and discounts $6,043  $5,713 
Product sales – net  503   92 
Service and repair fees – net  1,914   1,942 
Service and repair fees - related parties – net  28   28 
Management and other fees – net  11,808   11,218 
Management and other fees - related medical practices – net  2,794   2,693 
Total Revenues – Net  23,090   21,686 
COSTS AND EXPENSES        
Costs related to patient fee revenue  2,828   2,840 
Costs related to product sales  152   235 
Costs related to service and repair fees  627   674 
Costs related to service and repair fees - related parties  9   9 
Costs related to management and other fees  7,073   6,004 
Costs related to management and other fees – related medical practices  1,746   1,550 
Research and development  419   535 
Selling, general and administrative  6,114   7,224 
Total Costs and Expenses  18,968   19,071 
Income From Operations  4,122   2,615 
Other Income/(Expense)  144   —   
Interest Expense  (19)  (17)
Investment Income  64   126 
Income Before Provision for Income Taxes and Noncontrolling Interests  4,311   2,724 
Provision for Income Taxes  (12)  (810)
Net Income  4,299   1,914 
Net Income - Noncontrolling Interests  (431)  (653)
Net Income – Attributable to FONAR $3,868  $1,261 
Net Income Available to Common Stockholders $3,634  $1,184 
Net Income Available to Class A Non-Voting Preferred Stockholders $174  $57 
Net Income Available to Class C Common Stockholders $60  $20 
Basic Net Income Per Common Share Available to Common Stockholders $0.55  $0.18 
Diluted Net Income Per Common Share Available to Common Stockholders $0.54  $0.18 
Basic and Diluted Income Per Share – Class C Common $0.16  $0.05 
Weighted Average Basic Shares Outstanding – Common Stockholders  6,554   6,447 
Weighted Average Diluted Shares Outstanding - Common Stockholders  6,682   6,575 
Weighted Average Basic and Diluted Shares Outstanding – Class C Common  383   383 

See accompanying notes to condensed consolidated financial statements. 

 Page 6 

 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

  FOR THE NINE MONTHS ENDED MARCH 31,
REVENUES 2021 2020
Patient fee revenue – net of contractual allowances and discounts $16,372  $17,754 
Product sales – net  534   288 
Service and repair fees – net  5,702   6,044 
Service and repair fees - related parties – net  83   83 
Management and other fees – net  34,362   33,242 
Management and other fees - related medical practices – net  8,181   7,473 
Total Revenues – Net  65,234   64,884 
COSTS AND EXPENSES        
Costs related to patient fee revenue  7,997   8,660 
Costs related to product sales  477   685 
Costs related to service and repair fees  1,861   2,196 
Costs related to service and repair fees - related parties  27   30 
Costs related to management and other fees  18,861   18,203 
Costs related to management and other fees – related medical practices  4,696   4,707 
Research and development  1,243   1,590 
Selling, general and administrative  16,818   15,691 
Total Costs and Expenses  51,980   51,762 
Income From Operations  13,254   13,122 
Other Income/(Expense)  4   1 
Interest Expense  (57)  (57)
Investment Income  251   413 
Income Before Provision for Income Taxes and Noncontrolling Interests  13,452   13,479 
Provision for Income Taxes  (1,974)  (2,849)
Net Income  11,478   10,630 
Net Income - Noncontrolling Interests  (1,991)  (2,966)
Net Income – Attributable to FONAR $9,487  $7,664 
Net Income Available to Common Stockholders $8,915  $7,194 
Net Income Available to Class A Non-Voting Preferred Stockholders $426  $350 
Net Income Available to Class C Common Stockholders $146  $120 
Basic Net Income Per Common Share Available to Common Stockholders $1.37  $1.12 
Diluted Net Income Per Common Share Available to Common Stockholders $1.35  $1.10 
Basic and Diluted Income Per Share – Class C Common $0.38  $0.31 
Weighted Average Basic Shares Outstanding – Common Stockholders  6,489   6,442 
Weighted Average Diluted Shares Outstanding - Common Stockholders  6,617   6,570 
Weighted Average Basic and Diluted  Shares Outstanding – Class C Common  383   383 

 See accompanying notes to condensed consolidated financial statements. 

 Page 7 

 

 FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

 

For the Three Months Ending March 31, 2021

 

  Common Stock Paid in capital in excess of par value Accumulated Deficit Treasury Stock Non Controlling Interests Total
Balance – December 31, 2020 $1  $185,101  ($50,596) ($675) ($1,955) $131,876 
Issuance of Common Stock  —     —     —             —   
Net income  —     —     3,868   —     —     3,868 
Distributions - Non controlling  —     —     —     —     (1,380)  (1,380)
Income - Non controlling interests  —     —     —     —     431   431 
Balance – March 31, 2021 $1  $185,101  ($46,728) ($675) ($2,904) $134,795 

 

 

For the Three Months Ending March 31, 2020

 

  Common Stock Paid in capital in excess of par value Accumulated Deficit Treasury Stock Non Controlling Interests Total
Balance - December 31, 2019 $1  $183,076  ($58,053) ($675) $734  $125,083 
Net income  —     —     1,261       —     1,261 
Distributions - Non controlling  —     —     —     —     (1,410)  (1,410)
Income - Non controlling interests  —     —     —     —     653   653 
Balance - March 31, 2020 $1  $183,076  ($56,792) ($675) ($23) $125,587 

 

 Page 8 

 

 FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

 

For the Nine Months Ending March 31, 2021

 

  Common Stock Paid in capital in excess of par value Accumulated Deficit Treasury Stock Non Controlling Interests Total
Balance - June 30, 2020 $1  $183,076  ($56,215) ($675) $55  $126,242 
Issuance of Common Stock  —     2,025   —         —     2,025 
Net income  —     —     9,487   —     —     9,487 
Distributions - Non controlling  —     —     —     —     (4,950)  (4,950)
Income - Non controlling interests  —     —     —     —     1,991   1,991 
Balance - March 31, 2021 $1  $185,101  ($46,728) ($675) ($2,904) $134,795 
                         

 

 

 

 

For the Nine Months Ending March 31, 2020

 

  Common Stock Paid in capital in excess of par value Accumulated Deficit Treasury Stock Non Controlling Interests Total
Balance - June 30, 2019 $1  $181,086  ($64,455) ($675) $2,156  $118,112 
Issuance of Common Stock  —     1,990   —         —     1,990 
Net income  —     —     7,664   —     —     7,664 
Distributions - Non controlling  —     —     —     —     (5,145)  (5,145)
Income - Non controlling interests  —     —     —     —     2,966   2,966 
Balance - March 31, 2020 $1  $183,076  ($56,792) ($675) ($23) $125,587 

 

 Page 9 

 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

  

FOR THE NINE MONTHS

ENDED MARCH 31,

  2021 2020
Cash Flows from Operating Activities:        
 Net income $11,478  $10,630 
 Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization  3,100   3,001 
Amortization on right-of-use assets  1,543   2,505 
Provision(Recovery) for bad debts  5,103   1,711 
Deferred income tax – net  1,712   2,481 
Compensatory element of stock issuances  83   —   
Stock issued for costs and expenses  1,941   1,990 
Abandoned patents  1   —   
(Increase) decrease in operating assets, net:        
Accounts, medical and management fee receivables  (9,551)  (6,808)
Notes receivable  36   22 
Contract assets  (65)  372 
Inventories  (323)  23 
Income tax receivable  671   —   
Prepaid expenses and other current assets  424   570 
Other assets  (1)  (142)
Increase (decrease) in operating liabilities, net:        
Accounts payable  (189)  (175)
Other current liabilities  (1,827)  (193)
Operating lease liabilities  (1,168)  (2,216)
Financing lease liabilities  (25)  —   
Customer deposits  183   56 
Other liabilities  14   105 
Net cash provided by operating activities  13,140   13,932 
 Cash Flows from Investing Activities:        
Purchases of property and equipment  (2,942)  (6,601)
         
Purchase of imaging facility  (1,123)  —   
Proceeds of short term investment  —     15,063 
Cost of patents  (108)  (79)
Net cash (used)/provided by in investing activities  (4,173)  8,383 
 Cash Flows from Financing Activities:        
 Repayment of borrowings and capital lease obligations  (73)  (33)
 Proceeds from debt  63   —   
 Distributions to noncontrolling interests  (4,950)  (5,145)
Net cash used in financing activities  (4,960)  (5,178)
 Net Increase in Cash and Cash Equivalents  4,007   17,137 
Cash and Cash Equivalents - Beginning of Period  36,802   13,882 
Cash and Cash Equivalents - End of Period $40,809  $31,019 

 

See accompanying notes to condensed consolidated financial statements.  

 Page 10 

 

 FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021 and 2020

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

  

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Description of Business

 

Effective July 1, 2015, the Company restructured the corporate organization of the management of diagnostic imaging centers segment of our business. The reorganization was structured to more completely integrate the operations of Health Management Corporation of America and HDM. Imperial contributed all of its assets (which were utilized in the business of Health Management Corporation of America) to HDM and received a 24.2% interest in HDM. Health Management Corporation of America retained a direct ownership interest of 45.8% in HDM, and the original investors in HDM retained a 30.0% ownership interest in the newly expanded HDM. The entire management of diagnostic imaging centers business segment is now being conducted by HDM, operating under the name “Health Management Company of America”.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended March 31, 2021, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2021. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K filed on October 1, 2020 for the fiscal year ended June 30, 2020.

 

During March 2020 the global pandemic of COVID-19 has caused turbulence and uncertainty in the United States and international markets and economies which has adversely effected our workforce, liquidity, financial conditions, revenues, profitability and business operations. Generally COVID-19 had caused us to require that much of our workforce work from home and has restricted the ability of our personnel to travel for marketing purposes or to service our customers. The Company experienced a sudden drop in scan volume for a short term period and while the Company is not back to pre-COVID-19 levels, the volume has risen. At the end of fiscal year ending June 30, 2020, the Company was able to enact certain decisions to allow the Company to survive during the global pandemic and from further losses or additional decreases in scan volume. The Company immediately enacted wide scale furloughs, deferment of up to 50% of management salaries, halted variable compensation plans and rent deferrals we negotiated with the majority of all landlords. The Company also received some government stimulus funds from the Paycheck Protection Program (“PPP”) and Medicare advances/stimulus payments. Although we are unable to predict if there will be additional consequences on our operations from the continuing global pandemic of COVID-19, the Company believes with positive cash flows, low debt and cash on hand, it will be able to continue operations going forward.

 

 Page 11 

 

 FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021 and 2020

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The unaudited condensed consolidated financial statements include the accounts of FONAR Corporation, its majority and wholly-owned subsidiaries and partnerships (collectively the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Revenues

 

On July 1, 2018, the Company adopted the new revenue recognition accounting standard issued by the Financial Accounting Standards Board (“FASB”) and codified in the ASC as topic 606 (“ASC 606”). The revenue recognition standard in ASC 606 outlines a single comprehensive model for recognizing revenue as performance obligations, defined in a contract with a customer as goods or services transferred to the customer in exchange for consideration, are satisfied. The standard also requires expanded disclosures regarding the Company’s revenue recognition policies and significant judgments employed in the determination of revenue.

 

Our revenues generally relate to net patient fees received from various payers and patients themselves under contracts in which our performance obligations are to provide diagnostic services to the patients. Revenues are recorded during the period our obligations to provide diagnostic services are satisfied. Our performance obligations for diagnostic services are generally satisfied over a period of less than one day. The contractual relationships with patients, in most cases, also involve a third-party payer (Medicare, Medicaid, managed care health plans and commercial insurance companies, including plans offered through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated with (managed care health plans and commercial insurance companies) the third-party payers. The payment arrangements with third-party payers for the services we provide to the related patients typically specify payments at amounts less than our standard charges and generally provide for payments based upon predetermined rates per diagnostic services or discounted fee-for-service rates. Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms resulting from contract renegotiations and renewals.

 

Business Combination

 

When the qualifications for business combination accounting treatment are met, it requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period of final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.

 

Earnings Per Share

 

Basic earnings per share (“EPS”) is computed based upon the weighted average number of shares of common stock and stock equivalents outstanding, net of common stock. In accordance with ASC topic 260-10, “Participating Securities and the Two-Class method”, the Company used the Two-Class method for calculating basic income per share and applied the if converted method in calculating diluted income per share for the three and nine months ended March 31, 2021 and 2020.

 

Diluted EPS reflects the potential dilution from the exercise or conversion of all dilutive securities into common stock based on the average market price of common shares outstanding during the period. For the three and nine months ended March 31, 2021 and 2020, diluted EPS for common shareholders includes 128 shares upon conversion of Class C Common.

 Page 12 

 

 FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021 and 2020

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Earnings Per Share (Continued)

 

  Three months ended
March 31, 2021
 Three months ended
March 31, 2020
  Total Common Stock Class C Common
Stock
 Total Common Stock Class C Common
Stock
Basic            
Numerator: 
Net income available to common stockholders
 $3,868  $3,634  $60  $1,261  $1,184  $20 
Denominator:                        
Weighted average shares outstanding  6,554   6,554   383   6,447   6,447   383 
Basic income per common share $0.59  $0.55  $0.16  $0.20  $0.18  $0.05 
Diluted                        
Denominator:
Weighted average shares outstanding
      6,554   383       6,447   383 
Convertible Class C Stock      128   —         128   —   
Total Denominator for diluted earnings per share      6,682   383       6,575   383 
Diluted income per common share     $0.54  $0.16      $0.18  $0.05 

 

 

  Nine months ended
March 31, 2021
 Nine months ended
March 31, 2020
  Total Common Stock Class C Common
Stock
 Total Common Stock Class C Common
Stock
Basic            
Numerator: 
Net income available to common stockholders
 $9,487  $8,915  $146  $7,664  $7,194  $120 
Denominator:                        
Weighted average shares outstanding  6,489   6,489   383   6,442   6,442   383 
Basic income per common share $1.46  $1.37  $0.38  $1.19  $1.12  $0.31 
Diluted                        
Denominator:
Weighted average shares outstanding
      6,489   383       6,442   383 
Convertible Class C Stock      128   —         128   —   
Total Denominator for diluted earnings per share      6,617   383       6,570   383 
Diluted income per common share     $1.35  $0.38      $1.10  $0.31 

   

 Page 13 

 

  FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021 and 2020

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recent Accounting Pronouncements

 

In December 2019, the FASB issued ASU 2019-12 (“ASU 2019-12”), Income Taxes (Topic 740). ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other areas of the standard. ASU 2019-12 will be effective beginning in the first quarter of 2021. Early adoption is permitted. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. We are current evaluating the impact this ASU will have on our financial statements and related disclosures as well as the timing of the adoption.

 

In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and Other (Topic 350). The amendments in this update simplify the test for goodwill impairment by eliminating Step 2 from the impairment test, which required the entity to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining fair value of assets acquired and liabilities assumed in a business combination. The amendments in this update are effective for public companies for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company adopted the Standard on July 1, 2020 and the impact of adopting this guidance will have no material impact on our Consolidated Financial Statements.

 

FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of March 31, 2021 that will become effective in subsequent periods; however, management does not believe that any of those updates would have significantly affected our financial accounting measures or disclosures had they been in effect during 2021 or 2020, and it does not believe that any of those pronouncements will have a significant impact on our consolidated condensed financial statements at the time they become effective. 

 

Reclassifications 

 

Certain prior year amounts have been reclassified to conform to the current year presentation. The reclassifications did not have any effect on reported consolidated net income for any periods presented. 

 

 Page 14 

 

 FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021 and 2020

(Amounts and shares in thousands, except per share amounts)

   

NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE

 

Receivables, net is comprised of the following at March 31, 2021, and June 30, 2020:

 

  March 31, 2021
  Gross Receivable 

 

Allowance for doubtful accounts

 Net
Accounts receivable $4,823  $515  $4,308 
Accounts receivable - related party $42   —    $42 
Medical receivable $17,021  $—    $17,021 
Management and other fees receivable $45,689  $15,376  $30,313 
Management and other fees receivable from related medical practices ("PC’s") $11,642  $4,112  $7,530 

 

 

  June 30, 2020
  Gross Receivable 

 

Allowance for doubtful accounts

 Net
Accounts receivable $4,828  $515  $4,313 
Accounts receivable - related party $6   —    $6 
Medical receivable $16,172  $—    $16,172 
Management and other fees receivable $38,501  $11,063  $27,438 
Management and other fees receivable from related medical practices ("PC’s") $10,218  $3,322  $6,896 

 

The Company's customers are concentrated in the healthcare industry.

 

Accounts Receivable

 

Credit risk with respect to the Company’s accounts receivable related to product sales and service and repair fees is limited due to the customer advances received prior to the commencement of work performed and the billing of amounts to customers as sub-assemblies are completed. Service and repair fees are billed on a monthly or quarterly basis and the Company does not continue providing these services if accounts receivable become past due. The Company controls credit risk with respect to accounts receivable from service and repair fees through its credit evaluation process, credit limits, monitoring procedures and reasonably short collection terms. The Company performs ongoing credit authorizations before a product sales contract is entered into or service and repair fees are provided.

 

 Page 15 

 

 FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021 and 2020

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

 

 

NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE (Continued)

 

Long Term Accounts Receivable

 

The Company will generate revenue from long-term, non-cancellable contracts to provide service and repair services. Future revenue to be recognized over the following four years as of March 31, 2021 is as follows:

 

 2023  $938 
 2024   937 
 2025   710 
 2026   133 
 Total  $2,718 

 

Medical Receivables

 

Medical receivables are due under fee-for-service contracts from third party payors, such as hospitals, government sponsored healthcare programs, patient’s legal counsel and directly from patients. Substantially all the revenue relates to patients residing in Florida. The carrying amount of the medical receivable is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected. The Company determines allowances for contractual adjustments and uncollectible accounts based on specific agings, specific payor collection issues that have been identified and based on payor classifications and historical experience at each site.

 

Management and Other Fees Receivable

 

The Company's receivables from the related and non-related professional corporations (PC's) substantially consist of fees outstanding under management agreements. Payment of the outstanding fees is dependent on collection by the PC's of fees from third party medical reimbursement organizations, principally insurance companies and health management organizations.

 

Payment of the management fee receivables from the PC’s may be impaired by the inability of the PC’s to collect in a timely manner their medical fees from the third party payors, particularly insurance carriers covering automobile no-fault and workers compensation claims due to longer payment cycles and rigorous informational requirements and certain other disallowed claims. Approximately 64.5% and 72% of the PCs’ net revenues for the three months ended March 31, 2021 and 2020, respectively, were derived from no-fault and personal injury protection claims. Approximately 65.4% and 66% of the PCs’ net revenue for the nine months ended March 31, 2021 and 2020, respectively, were derived from no-fault and personal injury protection claims. The Company considers the aging of its accounts receivable in determining the amount of allowance for doubtful accounts. The Company generally takes all legally available steps to collect its receivables. Credit losses associated with the receivables are provided for in the condensed consolidated financial statements and have historically been within management's expectations. 

 

 Page 16 

 

 FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021 and 2020

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

 

 

NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE (CONTINUED)

 

Management and Other Fees Receivable (Continued)

 

Net revenues from management and other fees charged to the related PCs accounted for approximately 12.1% and 12.4% of the consolidated net revenues for the three months ended March 31, 2021 and 2020, respectively. Net revenues from management and other fees charged to the related PCs accounted for approximately 12.5% and 11.5% of the consolidated net revenues for the nine months ended March 31, 2021 and 2020, respectively.

 

Tallahassee Magnetic Resonance Imaging, PA, Stand Up MRI of Boca Raton, PA and Stand Up MRI & Diagnostic Center, PA (all related medical practices) entered into a guaranty agreement, pursuant to which they cross guaranteed all management fees which are payable to the Company, which have arisen under each individual management agreement. Additional Company managed entities also operate under a guaranty agreement, pursuant to which management fees are payable to the Company.

 

The Company’s patient fee revenue, net of contractual allowances and discounts for the three and nine months ended March 31, 2021 and 2020 are summarized in the following table.

 

  

For the Three Months Ended

March 31,

  2021 2020
Commercial Insurance/ Managed Care $1,083  $1,166 
Medicare/Medicaid  268   280 
Workers' Compensation/Personal Injury  4,048   4,120 
Other  644   147 
Patient Fee Revenue, net of contractual allowances and discounts $6,043  $5,713 

 

 

  

For the Nine Months Ended

March 31,

  2021 2020
Commercial Insurance/ Managed Care $2,995  $3,856 
Medicare/Medicaid  672   821 
Workers' Compensation/Personal Injury  10,977   12,526 
Other  1,728   551 
Patient Fee Revenue, net of contractual allowances and discounts $16,372  $17,754 

 

 Page 17 

 

 FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021 and 2020

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

 

 

NOTE 4 – OPERATING & FINANCING LEASES

 

During February 2016, FASB issued ASU 2016-02, Leases (Topic 842). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based upon the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Lease with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. The standard was effective for us beginning July 1, 2019. We have elected the optional transition method to apply the standard as of the effective date and therefore, we will not apply the standard to the comparative periods presented in the consolidated financial statements. We have also elected the transition package of the practical expedients permitted within the standard which eliminates the requirements to reassess prior conclusions about lease identification, lease classification and indirect costs. The adoption of this guidance had a material impact on the Company’s balance sheet by virtue of including the present value of its future operating lease payments as a liability of $33.3 million and related right-to-use lease assets as of July 1, 2019. At the time of adoption of this guidance we had no significant financing leases.

 

The Company accounts for its various operating leases in accordance with Accounting Standards Codification (‘ASC’) 842 – Lease, as updated by ASU 2016-02. At the inception of a lease, the Company recognizes right-of-use lease assets and related lease liabilities measured at present value of future lease payments on its balance sheet. Lease expense is recognized on a straight-line basis over the term of the lease. Our most common initial term varies in length from 2 to 10 years. Including renewal options negotiated with the landlord, we have a total span of 2 to 16 years at the facilities we lease. The Company reviewed its contracts with vendors and customers, determining that its right-to-use lease assets consisted of only office space operating leases. In determining the right-to-use lease assets and liabilities, the Company did recognize lease extension options which the Company feels would be reasonably exercised. Our incremental borrowing rate (“IBR”) used to discount the stream of operating lease payments is closely related to the interest rates available to the Company.

 

A reconciliation of operating and financing lease payments undiscounted cash flows to lease liabilities recognized as of March 31, 2021 is as follows:

 

Twelve Months Ending

March 31,

 

Operating Lease

Payments

 Financing Lease Payments
 2022  $4,873  $244 
 2023   4,825   244 
 2024   4,779   244 
 2025   4,683   244 
 2026   4,316   244 
 Thereafter   17,140   225 
 Present value discount   (8,846)  (145)
 Total lease liability  $31,770  $1,300 

 

 Page 18 

 

 FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021 and 2020

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

 

  

NOTE 5 - INVENTORIES

 

Inventories included in the accompanying condensed consolidated balance sheets consist of the following:

 

  

March 31,

2021

 

June 30,

2020

Purchased parts, components and supplies $1,721  $1,544 
Work-in-process  250   105 
Total Inventories $1,971  $1,649 

 

 

NOTE 6 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

 

Information relating to uncompleted contracts is as follows:

 

  

March 31,

2021

 

June 30,

 2020

Costs incurred on uncompleted contracts $559  $448 
Estimated earnings  653   309 
Subtotal  1,212   757 
Less: Billings to date  994   604 
Contract assets $218  $153 

 

 


NOTE 7 – OTHER INTANGIBLE ASSETS

 

Other intangible assets, net of accumulated amortization, in the accompanying condensed consolidated balance sheets consist of the following:

 

  

March 31,

2021

 

June 30,

2020

Capitalized software development costs $7,005  $7,005 
Patents and copyrights  5,190   5,082 
Non-compete  4,150   4,100 
Customer relationships  3,900   3,800 
Gross Other intangible assets  20,245   19,987 
Less: Accumulated amortization  16,155   15,878 
Other Intangible Assets $4,090  $4,109 

 

  

 Page 19 

 

 FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021 and 2020

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

 

 

NOTE 7 – OTHER INTANGIBLE ASSETS (Continued)

 

Amortization of patents and copyrights for the three months ended March 31, 2021 and 2020 amounted to $45 and $45, respectively.

 

Amortization of non-compete for the three months ended March 31, 2021 and 2020 amounted to $0 and $98, respectively.

 

Amortization of customer relationships for the three months ended March 31, 2021 and 2020 amounted to $48 and $48, respectively.

 

Amortization of patents and copyrights for the nine months ended March 31, 2021 and 2020 amounted to $134 and $139, respectively.

 

Amortization of non-compete for the nine months ended March 31, 2021 and 2020 amounted to $0 and $391, respectively.

 

Amortization of customer relationships for the nine months ended March 31, 2021 and 2020 amounted to $143 and $143, respectively.

 

 

 

NOTE 8 – OTHER CURRENT LIABILITIES

 

Other current liabilities in the accompanying condensed consolidated balance sheets consist of the following:

 

  

March 31,

2021

 

June 30,

2020

Accrued salaries, commissions and payroll taxes $2,980  $4,492 
Litigation accruals  —     443 
Sales tax payable  816   1,353 
Legal and other professional fees  14   113 
Accounting fees  210   120 
Self-funded health insurance reserve  51   87 
Accrued interest and penalty  308   877 
Rent  903   —   
Other  970   700 
Other Current Liabilities $6,252  $8,185 

 

 

 

 NOTE 9 – STOCKHOLDERS EQUITY

 

Common Stock

 

During the nine months ended March 31, 2021, the Company issued 102 shares of common stock for costs and expenses of $1,941 and 4 shares of common stock to employees and consultants as compensation valued at $83.

 

 Page 20 

 

 FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021 and 2020

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

 

NOTE 10 - SEGMENT AND RELATED INFORMATION

 

The Company operates in two industry segments - manufacturing and the servicing of medical equipment and management of diagnostic imaging centers. The accounting policies of the segments are the same as those described in the summary of significant accounting policies as disclosed in the Company’s 10-K as of June 30, 2020. All inter-segment sales are market-based. The Company evaluates performance based on income or loss from operations.

 

Summarized financial information concerning the Company's reportable segments is shown in the following table:

 

  Medical
Equipment
 Management
of Diagnostic
Imaging
Centers
 Totals
For the three months ended March, 31, 2021      
Net revenues from external customers $2,445  $20,645  $23,090 
Inter-segment net revenues $227  $—    $227 
Income from operations $327  $3,795  $4,122 
Depreciation and amortization $67  $1,023  $1,090 
Capital expenditures $18  $799  $817 
             
For the three months ended March 31, 2020            
Net revenues from external customers $2,062  $19,624  $21,686 
Inter-segment net revenues $218  $—    $218 
(Loss) Income from operations $(1,802) $4,417  $2,615 
Depreciation and amortization $91  $907  $998 
Capital expenditures $621  $1,341  $1,962 

 

  Medical
Equipment
 Management
of Diagnostic
Imaging
Centers
 Totals
For the nine months ended March 31, 2021      
Net revenues from external customers $6,319  $58,915  $65,234 
Inter-segment net revenues $665  $—    $665 
(Loss) Income from operations $(242) $13,496  $13,254 
Depreciation and amortization $199  $2,901  $3,100 
Capital expenditures $108  $2,942  $3,050 
             
For the nine months ended March 31, 2020            
Net revenues from external customers $6,415  $58,469  $64,884 
Inter-segment net revenues $656  $—    $656 
(Loss) Income from operations $(3,328) $16,450  $13,122 
Depreciation and amortization $276  $2,725  $3,001 
Capital expenditures $2,375  $4,305  $6,680 
 Page 21 

 

 FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021 and 2020

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

 NOTE 11 – SUPPLEMENTAL CASH FLOW INFORMATION

 

During the nine months ended March 31, 2021 and March 31, 2020, the Company paid $55 and $21 for interest, respectively.

 

During the nine months ended March 31, 2021 and March 31, 2020, the Company paid $261 and $228 for income taxes, respectively.

  

NOTE 12 – COMMITMENTS AND CONTINGENCIES

 

Litigation

 

The Company is subject to legal proceedings and claims arising from the ordinary course of its business, including personal injury, customer contract and employment claims. In the opinion of management, the aggregate liability, if any, with respect to such actions, will not have a material adverse effect on the consolidated financial position or results of operations of the Company.

 

There were no material changes in litigation from that reported in our Form 10-K for the fiscal year ended June 30, 2020.

 

Other Matters

 

In September 2020, the Company entered into a settlement agreement with an unrelated third party for a claim made during March 2018 which was scheduled for arbitration. The settlement was for $1.2 million of which $900 was paid by the Company’s insurance in September 2020. The Company paid the remaining balance of $315 in September 2020.

 

The Company is also delinquent in filing sales tax returns for certain states, for which the Company has transacted business. As of March 31, 2021, the Company has recorded tax obligations of approximately $816 plus interest and penalties of approximately $263. The Company is in the process of determining the regulatory requirements in order to become compliant.

 

The Company maintains a self-funded health insurance program with a stop-loss umbrella policy with a third party insurer to limit the maximum potential liability for individual claims to $110 per person and for a maximum potential claim liability based on member enrollment. With respect to this program, the Company considers historical and projected medical utilization data when estimating its health insurance program liability and related expense. As of March 31, 2021 and June 30, 2020, the Company had approximately $51 and $87, respectively, in reserve for its self-funded health insurance programs. The reserves are included in “Other current liabilities” in the condensed consolidated balance sheets.

 

The Company regularly analyzes its reserves for incurred but not reported claims, and for reported but not paid claims related to its reinsurance and self-funded insurance programs. The Company believes its reserves are adequate. However, significant judgment is involved in assessing these reserves such as assessing historical paid claims, average lags between the claims’ incurred date, reported dates and paid dates, and the frequency and severity of claims. There may be differences between actual settlement amounts and recorded reserves and any resulting adjustments are included in expense once a probable amount is known. There were no significant adjustments recorded in the periods covered by this report.

 

 Page 22 

 


FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021 and 2020

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

 

NOTE 13 - INCOME TAXES

 

In accordance with ASC 740-270, Income Taxes – Interim Reporting, the Company is required at the end of each interim period to determine the best estimate of its annual effective tax rate and apply that rate to year-to-date ordinary income or loss. The resulting tax expense (or benefit) is adjusted for the tax effect of specific events, if any, required to be discretely recognized in the interim period as they occur. For the nine months ended March 31, 2021 and 2020, the Company recorded income tax expense of $1,974 in 2021 as compared to $2,849 in 2020. The 2021 provision is comprised of a current income tax component of $262 and a deferred income tax component of $1,712 and the 2020 provision is comprised of a current income tax component of $368 and a deferred income tax component of $2,481. Obligations for any liability associated with the current income tax provision, has been reduced, primarily resulting from the benefits and utilization of net operating loss carryforwards.

 

ASC topic 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a corporate tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to the interpretation are referred to as unrecognized benefits. A liability is recognized (or amount of net operating loss carryforward or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC topic 740. The Company believes there are no uncertain tax positions in prior years tax filings and therefore it has not recorded a liability for unrecognized tax benefits.

 

In accordance with ASC topic 740, interest costs related to unrecognized tax benefits are required to be calculated (if applicable) and would be classified as “Interest expense, net”. Penalties if incurred would be recognized as a component of “Selling, general and administrative” expenses.

 

The Company files corporate income tax returns in the United States (federal) and in various state and local jurisdictions. In most instances, the Company is no longer subject to federal, state and local income tax examinations by tax authorities for years prior to 2016. 

 

The Company recorded a deferred tax asset of $17,098 and a deferred tax liability of $234 as of March 31, 2021, primarily relating to net operating loss carryforwards of approximately $43,455 available to offset future taxable income through 2031. The net operating losses begin to expire in 2023 for federal tax and state income tax purposes.

 

 Page 23 

 

 FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021 and 2020

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

 

NOTE 13 - INCOME TAXES (Continued)

 

On March 27, 2020 Congress enacted the CARES Act (Coronavirus Aid, Relief and Economic Security Act). The Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding prior and future operation losses, temporary changes to prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections to prior tax legislation for tax depreciation of certain qualified improvement property and enhanced recoverability of AMT tax credits.

 

At the present time, the only impact of the CARES Act to the Company is allowing a full reimbursement of $1,342 of tax credits relating to the alternative minimum tax credits. The Company received the first half payment in June 2020. The balance of alternative minimum tax credits of $671 was received in July 2020. Previously, these credits were to be refunded over a 3 year period.

 

As we continue to monitor tax implications of the CARES Act and other state and federal stimulus tax legislation, we may make adjustments to our estimates and record additional amounts for tax assets and liabilities.

 

Future ownership changes as determined under Section 382 of the Internal Revenue code could further limit the utilization of net operating loss carryforwards. As of March 31, 2021, no such changes in ownership have occurred.

 

The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible or when such net operating losses can be utilized. The Company considers projected future taxable income, the regulatory environment of the industry and tax planning strategies in making this assessment. At present, the Company believes that it is more likely than not that the benefits from certain deferred tax asset carryforwards, will not all be fully realized. In recognition of this inherent risk, a valuation allowance was established for the partial value of the deferred tax asset, which principally related to research and development tax credits.

 

A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of the remainder of the valuation.

 

 Page 24 

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021 and 2020

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

 

NOTE 14 – ACQUISITION

 

On March 29, 2021, the Company completed the acquisition of certain assets of Rockland Management Group, located in West Yonkers. The Company used an incremental borrowing rate of 4% to value the right to use asset in connection with the assumed operating lease obligation. We made a preliminary fair value determination of the acquired assets and assumed liabilities as follows:

 

Property and equipment $650 
Right to use assets  434 
Intangible assets  150 
Security Deposit  39 
Right to use liability  (434)
Goodwill  284 
Total purchase consideration $1,123 

 

In accordance with ASC 805-10-25-1, Business Combinations – Overall Recognition, the Company recorded the transaction as a business combination. ASC 805-10-25-1 provides the requirements of recording the transaction by applying the acquisition method. The acquisition method requires the Company to determine if the assets and liabilities acquired are a business or not. Under ASC 805-10-25-1, it must be determined if there is a specific acquisition party, acquisition date, identifiable assets acquired and liabilities assumed and you must be able to recognized and measure goodwill or a gain from the purchase. Based upon this guidance, the acquisition had been recorded as a business combination.

 

The net assets acquired and consideration is as follow:

 

Leasehold Improvements $550 
Diagnostic Equipment  100 
Customer Lists  100 
Covenant Not to Compete  50 
Security Deposit  39 
Closing costs - expensed  3 
Goodwill  284 
Cash Consideration Paid $1,126 

 

The results of operations of Rockland Management Group were diminutive and did not affect the pro forma results of operations.

 

NOTE 15 – SUBSEQUENT EVENTS

 

The Company has evaluated events that occurred subsequent to March 31, 2021 and through the date the condensed consolidated financial statements were issued.

 

 Page 25 

 

FONAR CORPORATION AND SUBSIDIARIES

 

Item 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.  

 

For the nine month period ended March 31, 2021, we reported a net income of $11.5 million on revenues of $65.2 million as compared to net income of $10.6 million on revenues of $64.9 million for the nine month period ended March 31, 2020. Operating income increased from $13.1 million for the nine month period ended March 31, 2020 to $13.3 million for the nine month period ended March 31, 2021.

 

For the three month period ended March 31, 2021, we reported a net income of $4.3 on revenues of $23.1 as compared to net income of $1.9 million on revenues of $21.7 million for the three month period ended March 31, 2020.

 

The revenue increase, from $64.9 million for the first nine months of fiscal 2020 to $65.2 million for the first nine months of fiscal 2021, was primarily due to an increase in management and other fees revenues of $1.8 million, from $40.7 million for the first nine months of fiscal 2020 to $42.5 million for the first nine months of fiscal 2021. Revenues from product sales and service and repair fees decreased by 1.5% from $6.4 million for the first nine months of fiscal 2020 to $6.3 million for the first nine months of fiscal 2021.

 

While our revenues increased, our costs and expenses also increased, resulting in our operating income increasing to $13.3 million for the nine months ended March 31, 2021 as compared to $13.1 million for the nine months ended March 31, 2020. In terms of percentages, costs and expenses increased 0.4% from $51.8 million for the first nine months of fiscal 2020 to $52.0 million for the first nine months of fiscal 2021, while revenues increased, from $64.9 million for the first nine months of fiscal 2020 to $65.2 million for the first nine months of fiscal 2021. The increase in costs and expenses was due to a $1.1 million increase in selling, general and administrative expenses, from $15.7 million to $16.8 million, consisting largely of increases in reserves for management fees offset by a decrease in costs related to patient fee revenue of $660,000 from $8.7 million to $8.0 million.

 

Fonar’s wholly owned subsidiary, Health Management Corporation of America (“HMCA”), has the controlling interest, in Health Diagnostics Management, LLC (“HDM”). HMCA presently has a direct ownership interest of 70.0% in HDM, and the investors in HDM have a 30.0% ownership interest. The management of the diagnostic imaging centers business segment is being conducted by HDM, operating under the name “Health Management Company of America”. For the sake of simplicity, HMCA, and HDM are referred to as “HMCA”, unless otherwise indicated.

 

The most significant adverse impact on our Company in fiscal 2020 and the first three quarters of fiscal 2021 has been the COVID-19 pandemic. Although it had seemed the worst had passed, events in the last months of 2020 and beginning of 2021 have shown a spike in new cases, including mutations. Although a vaccine has been developed, its distribution is still in the early stages. This is by no means a problem confined to our Company, but regardless of our best efforts, the impact on our results of operation and financial condition is potentially volatile and severe. Nevertheless, the significant improvement in our results of operations in the third quarter of fiscal 2021 ($4.3 million in net income on revenues of $23.1 million) compared to the third quarter of fiscal 2020 ($1.9 million in net income on revenues of $21.7 million) may indicate that the impact of COVID-19 on our business is decreasing.

   

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 Since March 2020 the global pandemic of COVID-19 has caused turbulence and uncertainty in the United States and international markets and economies which have adversely affected our workforce, liquidity, financial conditions, revenues, profitability and business operations. Generally in the beginning COVID-19 caused us to require that much of our workforce work from home and restricted the ability of our personnel to travel for marketing purposes or to service our customers. The Company experienced a sudden drop in scan volume for a short term period and while the Company is not back to pre-COVID-19 levels, the scan volume has risen. During the fourth quarter of fiscal 2020, the Company was able to enact certain decisions to allow the Company to survive during the global pandemic and prevent further losses or additional decreases in scan volume. Although we are unable to predict if there will be additional consequences on our operations from the continuing global pandemic of COVID-19, particularly in light of recent spikes in new COVID-19 cases, the Company believes with the positive cash flows, low debt and cash on hand, it will be able to continue operations going forward.

 

Forward Looking Statements

 

Certain statements made in this Quarterly Report on Form 10-Q are "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995) regarding the plans and objectives of Management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Our plans and objectives are based, in part, on assumptions involving the expansion of business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statement included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.

 

Results of Operations

 

We operate in two industry segments: the manufacture and servicing of medical (MRI) equipment, which is conducted by Fonar, and diagnostic facilities management services, which is conducted through HMCA.

 

Manufacturing and Service of MRI Equipment

 

Revenues from MRI product sales increased to $534,000 for the first nine months of fiscal 2021 from $288,000 for the first nine months of fiscal 2020. Costs related to product sales decreased from $685,000 for the nine month period ended March 31, 2020 to $477,000 for the nine month period ended March 31, 2021. Economic uncertainty and lower reimbursement rates for MRI scans, have depressed the market for our MRI scanner products, notwithstanding our scanners’ unique technological capabilities (e.g. multi positional scanning). Due to the low sales volumes of our MRI product, period to period comparisons are not necessarily indicative of any trends.

 

Service revenues decreased by 5.6% from $6.1 million for the nine month period ended March 31, 2020 to $5.8 million for the nine month period ended March 31, 2021. Continuing low sales volumes have been a factor ultimately contributing to the decrease in service revenues, as the revenue from new scanners being placed under service agreements, following the expiration of their warranties, is insufficient to replace the revenue lost as a result of older scanners being taken out of service.

  

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Costs relating to providing service were $2.2 million in the first nine months of fiscal 2020 and $1.9 million in the first nine months of fiscal 2021. Because of our ability to monitor the performance of customers’ scanners from our facilities in Melville, New York on a daily basis and to detect and repair any irregularities before more serious and costly problems develop, we have been able to control our costs of providing service.

 

There were approximately $755,000 in foreign revenues for the first nine months of fiscal 2021 as compared to approximately $417,000 in foreign revenues for the first nine months of fiscal 2020, representing an increase in foreign revenues of 81.0%. We do not regard this as a material trend, but as part of a sometimes volatile variation resulting from low sales volumes.

 

We recognize MRI scanner sales revenues on the “percentage of completion” basis, which means the revenues are recognized as the scanner is manufactured. Revenues recognized in a particular quarter do not necessarily reflect new orders or progress payments made by customers in that quarter. We build the scanner as the customer meets certain benchmarks in its site preparation in order to minimize the time lag between incurring costs of manufacturing and our receipt of the cash progress payments from the customer which are due upon delivery. Consequently, there can be a disparity between the revenues recognized in a fiscal period and the number of product sales. Generally, the revenues from a scanner sale are recognized in a fiscal quarter or quarters following the quarter in which the sale was made.

 

Revenues for the medical equipment segment decreased to $6.3 million for the first nine months of fiscal 2021 from $6.4 million for the first nine months of fiscal 2020. Operating losses for our medical equipment segment decreased to an operating loss of $242,000 for the first nine months of fiscal 2021 as compared to an operating loss of $3.3 million for the first nine months of fiscal 2020.

  

Diagnostic Facilities Management Services

 

HMCA revenues increased in the first nine months of fiscal 2021 by 0.8% to $58.9 million from $58.5 million for the first nine months of fiscal 2020. The percentage of our revenues derived from our diagnostic facilities management segment relative to the percentage of our revenues derived from our medical equipment segment increased slightly to 90.3% for the first nine months of fiscal 2021, from 90.1% for the first nine months of fiscal 2020.

 

HMCA’s strategy is to counter the effects of lower reimbursement rates by increasing the scan volume of the facilities it owns or manages by adding additional scanners at current centers and increasing our marketing efforts. As a result of the COVID-19 virus, however, the Company has seen its scan volume decrease. Nevertheless, the Company is continuing its program of adding additional scanners at existing centers and also acquired a new center in New York from a third party at the end of the third quarter of fiscal 2021. If scan volumes decrease further, or remain at lower volumes, the Company, notwithstanding its ample cash reserves, may need to reduce the size of its operations as a last resort.

 

The COVID-19 virus adversely affected our marketing efforts and scan volumes in fiscal 2020. The number of scans performed at our centers and at our client’s centers has still not recovered to pre-COVID-19 levels, decreasing from approximately 139,000 in the first nine months of fiscal 2020 to approximately 131,000 in the first nine months of fiscal 2021. Our scan volume began to decline in late March 2020 as a result of the impact of the pandemic on referral sources, stay-at-home orders and travel restrictions. The scan volumes going forward in fiscal 2021 may be adversely affected by additional spikes in the COVID-19 virus if sufficiently severe, but so far, this has not occurred.

  

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We now manage/own a total of 39 MRI scanners. Twenty-five (25) MRI scanners are located in New York and fourteen (14) are located in Florida. HMCA experienced an operating income of $13.5 million for the first nine months of fiscal 2021 compared to operating income of $16.5 million for the first nine months of fiscal 2020, the decrease being due to greater increase in costs and expenses.

 

The ability of HMCA to maintain its profitability is principally due to HMCA’s success in marketing the scanning services of the facilities managed or owned by HMCA, notwithstanding the decrease in reimbursement rates paid for MRI scans by insurers, Medicare and other government programs and the lockdowns imposed as a result of the COVID-19 virus. The reductions in reimbursement rates are not unique to HMCA or HMCA’s clients but are being experienced by the industry in general.

 

HMCA’s cost of revenues for the first nine months of fiscal 2021 as compared to the first nine months of fiscal 2020 remained constant at $31.6 million.

 

Consolidated

 

For the first nine months of fiscal 2021, our consolidated net revenues increased by 0.5% to $65.2 million from $64.9 million for the first nine months of fiscal 2020, and total costs and expenses increased by 0.4% to $52.0 million from $51.8 million for the first nine months of fiscal 2021 and for the first nine months of fiscal 2020 respectively. As a result, our operating income increased slightly to $13.3 million in the first nine months of fiscal 2021 as compared to $13.1 million in the first nine months of fiscal 2020. An increased selling, general and other administrative costs in particular resulted in the growth of cost and expenses. 

 

Selling, general and administrative expenses increased to $16.8 million in the first nine months of fiscal 2021 from $15.7 million in the first nine months of fiscal 2020. This increase in selling, general and administrative expenses was due mainly to additional reserves taken on Management Fees. Some of these reserves have been taken in the ordinary course of business and some in connection with the impact of the COVID-19 virus. The compensatory element of stock issuances, which is included in selling, general and administrative expenses, increased from $0 for the first nine months of fiscal 2020 to $83,000 for the first nine months of fiscal 2021.

 

Research and development expenses decreased by 21.8% to $1.2 million for the first nine months of fiscal 2021 from $1.6 million for the first nine months of fiscal 2020.

 

Interest expense in the first nine months of fiscal 2021 and 2020 remained constant at $57,000.

 

Inventories increased to $2.0 million at March 31, 2021 as compared to $1.6 million at June 30, 2020.

 

Net management fee and medical receivables increased by 8.6% to $54.9 million at March 31, 2021 from $50.5 million at June 30, 2020 as a result of slower collections and the addition of 2 additional scanners installed in existing locations. The slower collections were primarily due to COVID-19 lockdowns and an increase in no-fault and workers’ compensation revenue, which typically takes longer to collect.

 

The results of operations for the first nine months of fiscal 2021 reflect an increase in revenues from management, patient and other fees, as compared to the first nine months of fiscal 2020 ($58.9 million for the first nine months of fiscal 2021 as compared to $58.5 million for the first nine months of fiscal 2020), and a decrease in MRI equipment segment revenues ($6.3 million as compared to $6.4 million). Revenues were 9.7% from the MRI equipment segment as compared to 90.3% from HMCA, for the first nine months of fiscal 2021, as compared to 9.9% from the MRI equipment segment and 90.1% from HMCA for the first nine months of fiscal 2020.

 

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On March 27, 2020, the CARES Act was signed into law and is intended to provide over $2 trillion in stimulus benefits for the U.S. economy. The CARES Act provides for certain federal income tax changes, including an increase in the interest expense tax deduction limitation, the deferral of the employer portion of Social Security payroll taxes, refundable payroll tax credits, net operating loss carryback periods, alternative minimum tax credit refunds and bonus depreciation of qualified improvement property. The federal income tax changes brought about by the CARES Act are complex and further guidance is expected. We received a cash benefit from the ability to receive a full reimbursement of $1.2 million of tax credits relating to the alternative minimum tax credits in the current year plus additional cash benefits from the deferral of the employer portion of Social Security payroll taxes.

 

As a result of the Patient Protection and Affordable Care Act (PPACA) we have experienced a reduction of reimbursement rates and less interest in our MRI equipment. Any changes to the PPACA may result in further changes in the healthcare industry and our business.

 

We are committed to improving our operating results and dealing with the challenges posed by legislative and regulatory requirements. Nevertheless, factors beyond our control, such as the COVID-19 virus, the timing and rate of market growth, economic conditions, the availability of credit and payor reimbursement rates, or unexpected expenditures and the timing of such expenditures, make it difficult to forecast future operating results.

 

As mentioned, one of the effects of the PPACA on our business has been the reduction in Medicare reimbursement rates for MRI scans. This also has resulted in a reduction in the reimbursement rates by commercial insurers and government programs which tie their reimbursement rates to the Medicare rates. Nevertheless, the patient volume of the scanning centers we manage or own has enabled us to maintain healthy operating results in spite of these challenges. We believe we are pursuing the correct policies to cope with these problems and the problems caused by the COVID-19 pandemic, and to improve the Company’s operating results.

 

Our Upright® MRI (also referred to as the Stand-Up® MRI), together with our works-in-progress, are intended to significantly improve our competitive position.

The Upright® MRI scanner, which operates at 6000 gauss (.6 Tesla) field strength, allows patients to be scanned while standing, sitting, reclining and in multiple flexion and extension positions. It is common in visualizing the spine that abnormalities are visualized in some positions and not others. This enables surgical corrections that heretofore would not have been addressable for lack of visualizing the symptom causing the pathology and therefore, in general enables the treating physician to achieve a better treatment outcome for his patient. A floor-recessed elevator brings the patient to the height appropriate for the targeted image region. A custom-built multi-position adjustable bed will allow patients to sit or lie on their backs, sides or stomachs at any angle. This allows the MRI technologist to ask the patient to position himself/herself in the exact position that generates his/her pain so that images of the patient in the position that explicitly generates the patient’s pain can be nailed down. Full-range-of-motion studies of the joints in virtually any direction are possible, a particularly promising feature for sports injuries.

 

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In addition FONAR has announced the publication of a book “THE CRANIOCERVICAL SYNDROME and MRI” which highlights the unique attributes of FONAR UPRIGHT® MRI Imaging (S. Karger, A.G. based in Basel, Switzerland- www.karger.com/Book/Home/261956), published by S. Karger, an approximately 125 year old company and an academic publisher of scientific and medical journals and books. The seven chapter monograph examines the rapid advances in MRI made possible by the FONAR UPRIGHT® Multi-Position MRI that are transforming the treatment of patients suffering from the craniocervical syndrome (CCS). It is written by leading international experts in the field to practitioners with a better understanding of the subtle anatomy and MRI appearances at the craniocervical junction, along with insight into the clinical significance of cerebrospinal fluid (CSF) flow measurements and its potential role in generating the devastating impairments of the neurodegenerative diseases: Alzheimer’s (5.1 million patients in the United States), childhood and adult Autism (3.0 million), Parkinson’s (1.0 million), Multiple Sclerosis (250,000-350,000) and Amyotrophic Lateral Sclerosis (ALS) (30,000). It calls attention to the revolutionary importance of FONAR’s UPRIGHT® MRI imaging technology and the prospect of significantly relieving the suffering of the above totaled 9.38 million patients afflicted with these disorders.

 

Fonar also announced a major diagnostic breakthrough in multiple sclerosis diagnosis achieved with advanced Upright® MRI. Medical researchers at FONAR published a paper reporting a diagnostic breakthrough in multiple sclerosis (MS), based on observations made possible by the Company’s unique Upright® Multi-Position™ MRI scanner. The findings reveal that the cause of multiple sclerosis may be biomechanical and related to earlier trauma to the neck, which can result in obstruction of the flow of cerebrospinal fluid (CSF), which is produced and stored in the central anatomic structures of the brain known as the ventricles. Since the ventricles produce a large net volume of CSF each day (500 cc), the obstruction can result in a build up of pressure within the ventricles, resulting in leakage of the CSF and the antigenic polypeptides it contains into the surrounding brain tissue. This leakage could be responsible for generating the brain lesions of multiple sclerosis.

 

The paper, titled “The Possible Role of Cranio-Cervical Trauma and Abnormal CSF Hydrodynamics in the Genesis of Multiple Sclerosis," appears in the journal Physiological Chemistry and Physics and Medical NMR (Sept. 20, 2011).

 

This capability of the Fonar Upright® technology has demonstrated its key value on patients with the Arnold-Chiari syndrome [Cerebellar Tonsil Extopia (CTE)], which is believed to affect 200,000 to 500,000 Americans. In this syndrome, brain stem compression and subsequent severe neurological symptoms occur in these patients, because the brain stem descends and is compressed at the base of the skull in the foramen magnum, which is the circular bony opening at the base of the skull where the spinal cord exits the skull. Conventional lie-down MRI scanners cannot make an adequate evaluation of this pathology since the patient's pathology is most visible and the symptoms most acute when the patient is scanned in the upright fully weight-bearing position.

 

A combined study of 1,200 neck pain patients published in “Brain Injury” (July 2010) by eight university medical centers reported that cerebellar tonsil ectopia (CTE) of 1mm or greater was found and visualized 2.5 times (250%) more frequently when patients who had sustained automobile whiplash injuries were scanned upright rather than lying down.

 

The Upright® MRI has also demonstrated its value for patients suffering from scoliosis. Scoliosis patients have been typically subjected to routine x-ray exams for years and must be imaged upright for an adequate evaluation of their scoliosis. Because the patient must be standing for a complete evaluation of the extent of the patient’s scoliosis, an x-ray machine has been the only modality that could provide that service. The Upright® MRI is the only MRI scanner which allows the patient to stand during the MRI exam. Fonar has developed an RF receiver and scanning protocol that for the first time allows scoliosis patients to obtain diagnostic pictures of their spines without the risks of x-rays. A study by the National Cancer Institute (2000) of 5,466 women with scoliosis reported a 70% increase in breast cancer resulting from 24.7 chest x-rays these patients received on the average in the course of their scoliosis treatment.

 

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The Upright® MRI examination of scoliosis enables the needed imaging evaluation of the degree of spine scoliosis without exposing the patient to the risk of breast cancer from x-radiation. Currently scoliosis affects more than 3,000,000 American women.

  

In addition, the University of California, Los Angeles (UCLA) reported their results of their study of 1,302 patients utilizing the Fonar Upright® MRI at the 22nd Annual Meeting of the North American Spine Society on October 23, 2007. The UCLA study showed the superior ability of the Fonar Upright® MRI to detect spine pathology, including spondylolisthesis, disc herniations and disc degeneration, as compared to visualizations of the spine produced by traditional single position static MRIs.

 

The UCLA study by MRI of 1,302 back pain patients when they were in the Fonar Upright® MRI and examined in a full range of flexion and extension positions made possible by Fonar’s new Upright® technology established that significant “misses” of pathology were occurring with static single position MRI imaging. At L4-5, the vertebral level responsible for 49.8% of lumbar disc herniations, 35.1% of the spondylolistheses (vertebral instabilities) visualized by the Upright® MRI, were being missed by static single position MRI (510 patients). Since this vertebral segment is responsible for the majority of all disc herniations, the finding may reveal a significant cause of failed back surgeries. The UCLA study further showed the “miss-rate” of vertebral instabilities by static only MRI was even higher, 38.7%, at the L3-4 vertebral segment. Additionally, the UCLA study showed that MRI examinations of the cervical spine that did not perform extension images of the neck “missed” disc bulges 23.75% of the time (163 patients).

 

The UCLA study further reported that they were able to quantitatively measure the dimensions of the central spinal canal with the “highest accuracy” using the FONAR Upright® MRI thereby enabling the extent of spinal canal stenosis that existed in patients to be measured. Spinal canal stenosis gives rise to the symptom complex intermittent neurogenic claudication manifest as debilitating pain in the back and lower extremities, weakness and difficulties in ambulation and leg paresthesias. Spinal canal stenosis is a spinal compression syndrome separate and distinct from the more common nerve compression syndrome of the spinal nerves as they exit the vertebral column through the bony neural foramen.

 

The Fonar Upright® MRI can also be useful for MRI directed emergency neuro-surgical procedures as the surgeon would have unhindered access to the patient’s head when the patient is supine with no restrictions in the vertical direction. This easy-entry, mid-field-strength scanner could prove ideal for trauma centers where a quick MRI-screening within the first critical hour of treatment will greatly improve patients’ chances for survival and optimize the extent of recovery.

 

 MRI has brought a new dimension to MEDICAL TREATMENT, the power to VISUALIZE ANATOMIC DETAIL in the body's VITAL SOFT TISSUES (brain, heart, kidney, liver, spleen, lungs, pancreas, intestines) plus MRI's new power to non-invasively QUANTIFY (e.g. measure T1, T2, diffusion, chemical spectra) and the response of these VITAL TISSUES to treatment.

 

Liquidity and Capital Resources

 

Cash and cash equivalents, and short term investments increased by 10.9% from $36.8 million at June 30, 2020 to $40.8 million at March 31, 2021.

 

Cash provided by operating activities for the first nine months of fiscal 2021 was $13.1 million. Cash provided by operating activities was attributable principally to net income of $11.5 million, depreciation and amortization of $3.1 million, amortization on right-to-use assets of $1.5 million, provision for bad debts of $5.1 million and deferred income tax of $1.7 million, offset by an increase in accounts, management fee receivables and medical receivables of $9.6 million, a decrease in other current liabilities of $1.8 million and a decrease in operating lease liabilities of $1.2 million. 

 

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Cash used by investing activities for the first nine months of fiscal 2021 was $4.2 million. Cash used by investing activities was attributable during the first nine months of fiscal 2021 consisted of expenditure for acquisition of $1.1 million for an existing MRI center, patent costs of $108,000 and the purchase of property and equipment of $2.9 million.

 

Cash used in financing activities for the first nine months of fiscal 2021 was $5.0 million. The principal uses of cash in financing activities during the first nine months of fiscal 2021 were the repayment of principal on long-term debt and capital lease obligations of $73,000 and distributions to non-controlling interests of $5.0 million, offset by the proceeds from debt of $63,000.

 

 

Total liabilities decreased by 6.6% to $50.5 million at March 31, 2021 from $54.0 million at June 30, 2020. “Other” current liabilities decreased by 23.6% to $6.3 million at March 31, 2021 from $8.2 million at June 30, 2020. Long-term debt and capital lease obligations decreased from $2.1 million at June 30, 2020 to $1.9 million at March 31, 2021. The current portion of our unearned revenue on service contracts remained constant from $4.1 million at June 30, 2020 and March 31, 2021. Customer deposits increased from $855,000 at June 30, 2020 to $1.0 million at March 31, 2021 as a result of an increase in services performed.

 

As of March 31, 2021, the total of $6.3 million in “other” current liabilities included accrued salaries and payroll taxes of $3.0 million, and sales taxes of $816,000 plus accrued interest and penalties of $308,000.

 

Our working capital increased to $86.5 million at March 31, 2021 from $77.2 million at June 30, 2020. This resulted from an increase in current assets ($95.9 million at June 30, 2020 as compared to $103.6 million at March 31, 2021), and a decrease in current liabilities from $18.7 million at June 30, 2020 to $17.1 million at March 31, 2021. This results from the Company’s care in selecting investments and capital expenditures.

 

The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible or when such net operating losses can be utilized. The Company considers projected future taxable income, the regulatory environment of the industry, and tax planning strategies in making this assessment. At the present, the Company believes that it is more likely than not that the benefits from certain deferred tax asset carryforwards, will not all be fully realized. In recognition of this inherent risk, a valuation allowance was established for the partial value of the deferred tax asset, (principally related to research and development tax credits and allowance for doubtful accounts). A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of any portion or all of the valuation allowance.

 

The Company’s effective income tax rate is based on expected income, statutory rates and tax planning opportunities available in the various jurisdictions in which it operates. For interim financial reporting, the Company estimates the annual income tax rate based on projected taxable income for the full year and records a quarterly income tax provision or benefit in accordance with the anticipated annual rate. The Company refines the estimates of the year’s taxable income on a periodic basis as new information becomes available, including actual year-to-date financial results. This continual estimation process often results in a change to the expected effective income tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected income tax rate. Significant judgment is required in determining the effective tax rate and in evaluating tax positions.

 

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In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, (Topic 606). ASU 2014-09 requires an entity to recognize as revenue the amount that reflects the consideration which it expects to be entitled in exchange for goods and services as it transfers control to its customers. It also requires more detailed disclosures to enable users of the financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company earns revenue from the sale of scanners, maintenance contracts, product upgrades, patient services and management fees. Under the new guidance, the reporting for patient services revenue is now reported differently. All other streams of revenue were not impacted by the new guidance. The primary change for healthcare providers under the new guidance relates to revenue generated from patient services, with patient responsibility for payment. Under the new guidance, the Company is required to report an implicit price concession (both initially and for the subsequent changes in estimates) as a reduction of revenues as opposed to bad debt expense as a component of operating expenses. The Company now records any changes in expectation of collection amounts due to patient specific events that suggests that the patient no longer has the ability and intent to pay the amount due through the bad debt expense, as that is more indicative of a change in the customer’s credit worthiness as opposed to change in the transaction price.

 

The new standard supersedes most current revenue guidance, including industry-specific guidance. The guidance became effective for the Company on July 1, 2018 and as part of adopting the standard, the Company identified revenue streams of like contracts to allow for ease of implementation. The Company used primarily a portfolio approach to apply the new model to classes of customers with similar characteristics. The impact of adopting the new standard on our total revenue; and income from operations was not material. While the adoption of ASU 2014-09 did impact the presentation of net operating revenues in our Consolidated Statements of Operations and impacts certain disclosures, it did not materially impact our financial position, results of operations or cash flows. There was no cumulative effect of a change in accounting principle recorded related to the adoption of ASU 2014-09 on July 1, 2018.

 

On March 27, 2020 Congress enacted the CARES Act (Coronavirus Aid, Relief and Economic Security Act). The Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding prior and future operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections to prior tax legislation for tax depreciation of certain qualified improvement property and the creation of refundable employee retention credits. At the present time, the only impact of the CARES Act to the Company is allowing a full reimbursement of $1.2 million of tax credits relating to the alternative minimum tax credits in the current year. Before the CARES Act, these credits were to be refunded over a period of 3 years. We will also realize a cash benefit from the deferral of Social Security payroll taxes.

 

On June 30, 2020, we entered into a $701,000 loan agreement under the Paycheck Protection Program (PPP) under the CARES Act that provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses. The Company applied for this additional loan exclusively for the Florida locations during June 2020 due to the fact that the COIVD-19 virus was increasing in Florida. The loans and accrued interest are forgivable after 24 weeks as long as the proceeds are used for eligible purposes, including payroll, benefits, rent and utilities and maintains certain payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the 24 week period. The Company believes that most it not all of the loan proceeds will be forgiven, however there is no assurance that it will be forgiven until approval is received.

 

Fonar has not committed to making any significant capital expenditures for the remainder of the 2021 fiscal year with the exception of placing a scanner at a facility located in New York.

 

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Critical to our business plan are the improvement and expansion of the MRI facilities managed or owned by HMCA, and increasing the number of scans performed at those facilities. In addition, our business plan calls for a continuing commitment to providing our customers with enhanced equipment service and maintenance capabilities and delivering state-of-the-art, innovative and high quality equipment and upgrades at competitive prices.

 

Management is seeking to promote wider market recognition of Fonar’s scanner products, and to increase demand for Upright® scanning at the facilities HMCA owns or manages. Given the liquidity and credit constraints in the markets, the uncertainty resulting from the Patient Protection and Affordable Care Act or its repeal or modification, and the impact of the COVID-19 virus on the economy in general, the sale of medical equipment has and may continue to suffer.

 

The Company believes that its business plan has been responsible for the past eight consecutive fiscal years and first nine months of fiscal 2021 profitability and that its capital resources will be adequate to support operations through at least March 31, 2022. The future effects on our business of healthcare legislation, the impact of the COVID-19 virus, the Deficit Reduction Act, the 2.3% excise tax on sales of medical equipment, reimbursement rates, public health conditions and the general economic and business climate are not known at the present time. Nevertheless, there is a possibility of adverse consequences to our business operations from these causes. Although the Company cannot predict the full effect of COVID-19 for the first fiscal quarter or any later period, the Company believes that it has adequate revenues, cash reserves and other assets that will enable it to continue to operate until at least March 31, 2022.

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The Company maintains its funds in liquid accounts. None of our investments are in fixed rate instruments.

 

All of our revenue, expense and capital purchasing activities are transacted in United States dollars.

  

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

We carried out an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon our evaluation, our chief executive officer and chief financial officer have concluded that the Company’s internal control over financial reporting was effective as of March 31, 2021, in ensuring that material information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the same time periods specified in the Securities and Exchange Commission rules and forms.

 

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Changes in Internal Control over Financial Reporting

 

There were no changes in our system of internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

PART II – OTHER INFORMATION

 

Item 1 – Legal Proceedings: There were no material changes in litigation from that reported in our Form 10-K for the fiscal year ended June 30, 2020 and Form 10-Q for the nine month fiscal period ended March 31, 2021.

 

Item 1A – Risk Factors: An investment in the securities of the Company is subject to various risks, the most significant of which are summarized below.

 

1. Reduced Reimbursement Rates. Most of our revenues are derived from our scanning center business conducted by HMCA. Our scanning center clients and the Florida facilities owned by HMCA are experiencing lower reimbursement rates from Medicare, other government programs and private insurance companies. To date, the impact of these reductions has been countered by increasing scanning volume, increased reimbursement rates with other payors, and reducing our operating expenses, thereby maintaining profitability in this business segment. There is, however, no assurance that we will be able to continue to do so, particularly in light of the COVID-19 pandemic, which has resulted in a decrease in scan volume.

 

2. Demand for MRI Scanners. The reduced reimbursement rates and COVID-19 pandemic, also affects our sales of MRI scanners negatively. With lower revenue projections, fewer prospective customers will be able to operate, and others are likely to demand lower prices for scanners. Although the reduced reimbursements may not affect foreign demand, a lower number of sales in the aggregate could reduce economies of scale and consequently, profit margins. The demand for MRI scanners could be further reduced by any downturn in the domestic or international economy resulting from the COVID-19 virus.

 

3. Manufacturing Competition. Many if not most of our competing scanner manufacturers have significantly greater financial resources, production capacity, and other resources than we do. Such competitors would include General Electric, Siemens, Hitachi and Phillips. Although Fonar is the only company which can manufacture and sell the unique Stand-Up® (Upright®) MRI scanner, potential customers must be convinced that the purchase of a Fonar scanner is their best choice. We believe that with time, that objective will be reached, particularly with customers scanning patients having neck, back, knee and various orthopedic issues who would benefit from being scanned in weight-bearing positions.

 

4. Dependence on Referrals. HMCA derives substantially all of its revenue, directly or indirectly, from fees charged for the diagnostic imaging services performed at the facilities. We depend on referrals of patients from unaffiliated physicians and other third parties to the facilities we manage or own for the MRI scanning services performed. If these physicians and other third parties were to reduce the number of patients they refer or discontinue referring patients, scan volumes could decrease, which would have the effect of reducing our net revenue, from both management and scanning fees, and operating margins.

 

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5. Pressure to Control Healthcare Costs. One of the principal objectives of health maintenance organizations and preferred provider organizations is to control the cost of healthcare services. Healthcare providers participating in managed care plans may be required to refer diagnostic imaging tests to certain providers depending on the plan in which a covered patient is enrolled. In addition, managed care contracting has become very competitive. The expansion of health maintenance organizations, preferred provider organizations and other managed care organizations in New York or Florida could have a negative impact on the utilization and pricing of services performed at the facilities HMCA manages or owns to the extent these organizations exert control over patients’ access to diagnostic imaging services, selections of the provider of such services and reimbursement rates for those services. Pressure to reduce healthcare costs results from government action, such as the reduction of Medicare reimbursements for MRI scans. This provides an additional basis to lower reimbursement levels from private payors, who often base their reimbursement rates on the Medicare rates.

 

6. Scanning Facility Competition. The market for diagnostic imaging services is highly competitive. The facilities we manage or own compete for patients on the basis of reputation, location and the quality of diagnostic imaging services. Groups of radiologists, established hospitals, clinics and other independent organizations that own and operate imaging equipment are the principal competitors.

 

7. Eligibility Changes to Insurance Programs. Due to potential decreased availability of healthcare through private employers, the number of patients who are uninsured or participate in governmental programs may increase. Healthcare reform legislation may increase the participation of individuals in the Medicaid program in states that elect to participate in the expanded Medicaid coverage, subject to any changes which may result from efforts to repeal and replace the PPACA. A shift in payor mix from managed care and other private payors to government payors or an increase in the number of uninsured patients may result in a reduction in the rates of reimbursement or an increase in uncollectible receivables or uncompensated care, with a corresponding decrease in net revenue. Policies now being offered under various insurance plans are expected to reduce demand for MRI scans as they become less affordable. Changes in the eligibility requirements for governmental programs such as the Medicaid program and state decisions on whether to participate in the expansion of such programs also could increase the number of patients who participate in such programs and the number of uninsured patients. Even for those patients who remain in private insurance plans, changes to those plans could increase patient financial responsibility, resulting in a greater risk of uncollectible receivables. These factors and events could have a material adverse effect on our business, financial condition, and results of operations.

 

8. Possible changes in Florida Insurance Law. On April 30, 2021 the Florida State Senate and House passed a bill that replaces the current Florida Personal Injury Protection (“PIP”) law with one that instead requires mandatory bodily injury coverage with a Medical Payment option. The bill was passed on the last day of the legislative session and must still be signed or vetoed by the Governor. Passage of the bill may adversely affect the ability of facilities owned or managed by HMCA to collect scanning fees. It is too early to determine the extent of the bills’ effect on our business.

 

9. Federal and state privacy and information security laws. We must comply with numerous federal and state laws and regulations governing the collection, dissemination, access, use, security and privacy of Protected Health Information (‘PHI’), including Health Insurance Portability and Accountability Act (‘HIPAA’) and its implementing privacy and security regulations, as amended by the federal Health Information Technology for Economic and Clinical Health (‘HITECH’) Act and collectively referred to as HIPAA. If we fail to comply with applicable privacy and security laws, regulations and standards, properly maintain the integrity of our data, protect our proprietary rights to our systems, or defend against cybersecurity attacks, our business, reputation, results of operations, financial position and cash flows could be materially and adversely affected.

 

Information security risks have significantly increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct our operations, and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties, including foreign state agents. Our operations rely on the secure processing, transmission and storage of confidential, proprietary and other information in our computer systems and networks.

 

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10. COVID-19. Although we believe we have taken the proper steps and have been making a good recovery from the impact of COVID-19 virus, any increase in new cases and mutations of COVID-19, may have an economic and medical impact that would materially and adversely affect our business. The mitigating effect of new vaccines is promising but cannot yet be determined.

 

11. Other changes in Domestic and Worldwide Economic Conditions. We are subject to risk arising from adverse changes in general domestic and global economic and other conditions, including a prolonged period of the COVID-19 pandemic, recessions or economic slowdowns and disruptions of credit markets. Turbulence and uncertainty in the United States and international markets and economies may adversely affect our workforce, liquidity, financial condition, revenues, profitability and business operations generally.

 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds: None

 

Item 3 - Defaults Upon Senior Securities: None

 

Item 4 - Mine Safety Disclosure: Not Applicable

 

Item 5 - Other Information: None 

  

Item 6 - Exhibits and Reports on Form 8-K:

 

 a) 

Exhibit 31.1 Certification. See Exhibits

 

 b) 

Exhibit 32.1 Certification. See Exhibits

 

 c) Report on Form 8-K filed on February 16, 2021, Item 2.02: Results of Operations and Financial Condition for the fiscal quarter ended December 31, 2020.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

FONAR CORPORATION

(Registrant)

 

________________

By: /s/ Timothy Damadian

Timothy Damadian

President and

Principal Executive Officer

 

________________

/s/ Raymond V. Damadian

Raymond V. Damadian

Chairman of the Board,

Treasurer and

Acting Principal Financial Officer

 

 

Dated: May 13, 2021

 

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