10-Q 1 fonar_10q.htm FONAR 10-Q ENDED MARCH 31, 2021

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.

 

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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 rel