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FORM 10-Q

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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

 

 For the quarterly period ended DECEMBER 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 ☒ 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 ☒ 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 ☒ Smaller reporting company  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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading symbol   Name of each exchange on which registered
Common Stock   FONR   NASDAQ Capital Market

 

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 February 4, 2022
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 - December 31, 2021 (Unaudited) and June 30, 2021   3
       
  Condensed Consolidated Statements of Income for the Three Months Ended December 31, 2021 and December 31, 2020 (Unaudited)   6
       
  Condensed Consolidated Statements of Income for the Six Months Ended December 31, 2021 and December 31, 2020 (Unaudited)   7
       
  Condensed Consolidated Statements of Changes in Equity for the Three Months Ended December 31, 2021 and December 31, 2020 (Unaudited)   8
       
  Condensed Consolidated Statements of Changes in Equity for the Six Months Ended December 31, 2021 and December 31, 2020 (Unaudited)   9
       
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2021 and December 31, 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   25
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk   33
       
  Item 4. Controls and Procedures   34
       
PART II - OTHER INFORMATION   34
     
  Item 1. Legal Proceedings   34
       
  Item 1A. Risk Factors   34
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   36
       
  Item 3. Defaults Upon Senior Securities   36
       
  Item 4. Mine Safety Disclosures   36
       
  Item 5. Other Information   36
       
  Item 6. Exhibits   37
       
  Signatures   37

 

Page 2

 

 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(UNAUDITED)

 

ASSETS

 

           
   December 31,
2021
  June 30,
2021 *
Current Assets:          
Cash and cash equivalents  $44,851   $44,460 
Short term investments   32    32 
Accounts receivable – net   4,106    4,526 
Accounts receivable - related party   60    12 
Medical receivable – net   18,775    17,901 
Management and other fees receivable – net   32,136    30,948 
Management and other fees receivable – related medical practices – net   8,293    7,814 
Inventories   2,099    1,663 
Prepaid expenses and other current assets   1,249    1,227 
Total Current Assets   111,601    108,583 
           
Accounts receivable – long term   2,316    2,880 
Deferred income tax asset   13,522    15,959 
Property and equipment – net   21,819    21,850 
Right-of-use Asset – operating lease   34,767    30,133 
Right-of-use Asset – financing lease   1,028    1,127 
Goodwill   4,269    4,269 
Other intangible assets – net   3,855    4,038 
Other assets   553    667 
Total Assets  $193,730   $189,506 

 

*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

 

   December 31,
2021
  June 30,
2021 *
Current Liabilities:          
Current portion of long-term debt and capital leases  $39   $173 
Accounts payable   775    1,866 
Other current liabilities   4,617    9,162 
Unearned revenue on service contracts   3,971    4,366 
Unearned revenue on service contracts – related party   55     
Contract liabilities   15    15 
Operating lease liability - current portion   3,592    3,533 
Financing lease liability - current portion   206    203 
Customer deposits   454    731 
           
Total Current Liabilities   13,724    20,049 
           
Long-Term Liabilities:          
Unearned revenue on service contracts   2,290    2,801 
Deferred income tax liability   238    238 
Due to related medical practices   93    93 
Operating lease liability – net of current portion   33,681    28,975 
Financing lease liability – net of current portion   944    1,049 
Long-term debt and capital leases, less current portion   180    760 
Other liabilities   138    171 
           
Total Long-Term Liabilities   37,564    34,087 
Total Liabilities   51,288    54,136 

 

*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:  December 31, 2021  June 30,
2021 *
Class A non-voting preferred stock $.0001 par value; 453 shares authorized at December 31, 2021 and June 30, 2021, 313 issued and outstanding at December 31, 2021 and June 30, 2021  $   $ 
Preferred stock $.001 par value; 567 shares authorized at December 31, 2021 and June 30, 2021, issued and outstanding – none        
Common Stock $.0001 par value; 8,500 shares authorized at December 31, 2021 and June 30, 2021, 6,566 issued at December 31, 2021 and June 30, 2021, 6,554 outstanding at December 31, 2021 and June 30, 2021   1    1 
Class B Common Stock (10 votes per share) $.0001 par value; 227 shares authorized at December 31, 2021 and June 30, 2021; .146 issued and outstanding at December 31, 2021 and June 30, 2021        
Class C Common Stock (25 votes per share) $.0001 par value; 567 shares authorized at December 31, 2021 and June 30, 2021, 383 issued and outstanding at December 31, 2021 and June 30, 2021        
Paid-in capital in excess of par value   184,531    185,101 
Accumulated deficit   (38,101)   (46,008)
Treasury stock, at cost - 12 shares of common stock at December 31, 2021 and June 30, 2021   (675)   (675)
Total Fonar Corporation’s Stockholders’ Equity   145,756    138,419 
Noncontrolling interests   (3,314)   (3,049)
Total Stockholders’ Equity   142,442    135,370 
Total Liabilities and Stockholders’ Equity  $193,730   $189,506 

 

*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 DECEMBER 31,
REVENUES  2021  2020
Patient fee revenue – net of contractual allowances and discounts  $7,443   $5,238 
Product sales – net   198    3 
Service and repair fees – net   1,907    1,862 
Service and repair fees - related parties – net   28    28 
Management and other fees – net   12,108    11,340 
Management and other fees - related medical practices – net   2,795    2,693 
Total Revenues – Net   24,479    21,164 
COSTS AND EXPENSES          
Costs related to patient fee revenue   3,323    2,649 
Costs related to product sales   190    192 
Costs related to service and repair fees   719    608 
Costs related to service and repair fees - related parties   10    9 
Costs related to management and other fees   6,924    6,237 
Costs related to management and other fees – related medical practices   1,690    1,522 
Research and development   370    424 
Selling, general and administrative   4,770    4,541 
Total Costs and Expenses   17,996    16,182 
Income From Operations   6,483    4,982 
Other Income   47     
Interest Expense   (23)   (16)
Investment Income   60    75 
Income Before Provision for Income Taxes and Noncontrolling Interests   6,567    5,041 
Provision for Income Taxes   (1,430)   (1,113)
Net Income   5,137    3,928 
Net Income - Noncontrolling Interests   (1,117)   (817)
Net Income – Attributable to FONAR  $4,020   $3,111 
Net Income Available to Common Stockholders  $3,777   $2,923 
Net Income Available to Class A Non-Voting Preferred Stockholders  $181   $140 
Net Income Available to Class C Common Stockholders  $62   $48 
Basic Net Income Per Common Share Available to Common Stockholders  $0.58   $0.45 
Diluted Net Income Per Common Share Available to Common Stockholders  $0.57   $0.44 
Basic and Diluted Income Per Share – Class C Common  $0.16   $0.12 
Weighted Average Basic Shares Outstanding – Common Stockholders   6,554    6,465 
Weighted Average Diluted Shares Outstanding - Common Stockholders   6,682    6,593 
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 SIX MONTHS ENDED DECEMBER 31,
REVENUES  2021  2020
Patient fee revenue – net of contractual allowances and discounts  $14,294   $10,330 
Product sales – net   346    31 
Service and repair fees – net   3,844    3,788 
Service and repair fees - related parties – net   55    55 
Management and other fees – net   24,081    22,554 
Management and other fees - related medical practices – net   5,589    5,386 
Total Revenues – Net   48,209    42,144 
COSTS AND EXPENSES          
Costs related to patient fee revenue   6,479    5,169 
Costs related to product sales   299    325 
Costs related to service and repair fees   1,443    1,234 
Costs related to service and repair fees - related parties   21    18 
Costs related to management and other fees   13,801    11,788 
Costs related to management and other fees – related medical practices   3,326    2,950 
Research and development   755    824 
Selling, general and administrative   9,860    10,704 
Total Costs and Expenses   35,984    33,012 
Income From Operations   12,225    9,132 
Other Income/(Expense)   858    (140)
Interest Expense   (40)   (38)
Investment Income   122    187 
Income Before Provision for Income Taxes and Noncontrolling Interests   13,165    9,141 
Provision for Income Taxes   (2,846)   (1,962)
Net Income   10,319    7,179 
Net Income - Noncontrolling Interests   (2,412)   (1,560)
Net Income – Attributable to FONAR  $7,907   $5,619 
Net Income Available to Common Stockholders  $7,430   $5,281 
Net Income Available to Class A Non-Voting Preferred Stockholders  $355   $252 
Net Income Available to Class C Common Stockholders  $122   $86 
Basic Net Income Per Common Share Available to Common Stockholders  $1.13   $0.82 
Diluted Net Income Per Common Share Available to Common Stockholders  $1.11   $0.80 
Basic and Diluted Income Per Share – Class C Common  $0.32   $0.23 
Weighted Average Basic Shares Outstanding – Common Stockholders   6,554    6,456 
Weighted Average Diluted Shares Outstanding - Common Stockholders   6,682    6,584 
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 BALANCE SHEETS

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

(UNAUDITED)

 

For the Three Months Ending December 31, 2021

 

                               
   Common Stock  Paid in capital in excess of par value  Accumulated Deficit  Treasury Stock  Non Controlling Interests  Total
Balance – September 30, 2021  $1   $185,101   ($42,121)  ($675)  ($2,834)  $139,472 
Net income           4,020            4,020 
Purchase of Non controlling interest       (570)           24    (546)
Distributions - Non controlling                   (1,621)   (1,621)
Income - Non controlling interests                   1,117    1,117 
Balance – December 31, 2021  $1   $184,531   ($38,101)  ($675)  ($3,314)  $142,442 

 

For the Three Months Ending December 31, 2020

 

   Common Stock  Paid in capital in excess of par value  Accumulated Deficit  Treasury Stock  Non Controlling Interests  Total
Balance - September 30, 2020  $1   $183,076   ($53,707)  ($675)  ($642)  $128,053 
Issuance of Common Stock       2,025                2,025 
Net income           3,111            3,111 
Distributions - Non controlling                   (2,130)   (2,130)
Income - Non controlling interests                   817    817 
Balance - December 31, 2020  $1   $185,101   ($50,596)  ($675)  ($1,955)  $131,876 

 

Page 8

 

 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS 

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

(UNAUDITED)

 

For the Six Months Ending December 31, 2021

 

   Common Stock  Paid in capital in excess of par value  Accumulated Deficit  Treasury Stock  Non Controlling Interests  Total
Balance - June 30, 2021  $1   $185,101   ($46,008)  ($675)  ($3,049)  $135,370 
Net income           7,907            7,907 
Purchase of Non controlling interest       (570)           24    (546)
Distributions - Non controlling                   (2,701)   (2,701)
Income - Non controlling interests                   2,412    2,412 
Balance - December 31, 2021  $1   $184,531   ($38,101)  ($675)  ($3,314)  $142,442 

 

For the Six Months Ending December 31, 2020

 

   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           5,619            5,619 
Distributions - Non controlling                   (3,570)   (3,570)
Income - Non controlling interests                   1,560    1,560 
Balance - December 31, 2020  $1   $185,101   ($50,596)  ($675)  ($1,955)  $131,876 

 

Page 9

 

 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

(UNAUDITED)

 

           
   FOR THE SIX MONTHS   ENDED DECEMBER 31,
   2021  2020
Cash Flows from Operating Activities:          
Net income  $10,319   $7,179 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   2,358    2,009 
Amortization on right-of-use assets   1,644    1,922 
Provision for bad debts   822    2,825 
Deferred income tax – net   2,437    1,962 
Compensatory element of stock issuances       83 
Stock issued for costs and expenses       1,941 
Abandoned patents       1 
Gain on forgiveness of PPP loan   (701)    
(Increase) decrease in operating assets, net:          
Accounts, medical and management fee receivable(s)   (2,429)   (5,549)
Notes receivable   22    25 
Inventories   (436)   (195)
Income tax receivable       671 
Prepaid expenses and other current assets   (33)   452 
Other assets   102    (1)
Increase (decrease) in operating liabilities, net:          
Accounts payable   (1,090)   233 
Other current liabilities   (5,395)   (2,748)
Operating lease liabilities   (1,414)   (1,657)
Financing lease liabilities   (101)   24 
Customer deposits   (277)   378 
Other liabilities   (33)   (3)
Net cash provided by operating activities   5,795    9,552 
Cash Flows from Investing Activities:          
Purchases of property and equipment   (2,106)   (2,143)
           
Purchase of noncontrolling interests   (546)    
Cost of patents   (38)   (90)
Net cash used in investing activities   (2,690)   (2,233)
Cash Flows from Financing Activities:          
Repayment of borrowings and capital lease obligations   (13)   (35)
Proceeds from debt       63 
Distributions to noncontrolling interests   (2,701)   (3,570)
Net cash used in financing activities   (2,714)   (3,542)
Net Increase in Cash and Cash Equivalents   391    3,777 
Cash and Cash Equivalents - Beginning of Period   44,460    36,802 
Cash and Cash Equivalents - End of Period  $44,851   $40,579 

 

See accompanying notes to condensed consolidated financial statements.

 

Page 10

 

 

FONAR CORPORATION AND SUBSIDIARIES 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 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. During the six months ended December 31, 2021, the Company purchased non-controlling interests from the minority shareholders for $546,000. Currently the Company has a direct ownership interest of 70.8% and the investors’ have a 29.2% ownership interest. 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 six months ended December 31, 2021, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2022. 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 13, 2021 for the fiscal year ended June 30, 2021.

 

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. 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 also received some government stimulus funds from the Paycheck Protection Program (“PPP”) and Medicare advances/stimulus payments. During the six months ended December 31, 2021 the PPP loan was forgiven in its entirety. During fiscal 2022, the Company had to deal with the increased strictness in the enforcement of COVID-19 mandates, such as the requirement that employees in healthcare facilities be vaccinated, along with the newer omicrom variant that is more transmissible. As a result, the Company experienced absences due to illness and the loss of unvaccinated employees whose duties required them to be in contact with patients. Due to these conditions, the Company was sometimes unable to keep scanning facilities open for all shifts and as a result there was a slight decrease in scans during the second quarter of fiscal 2022. The Company has been able to navigate through these challenges and avoid any significant disruption of the business and the volume has recently risen back almost to pre- COVID-19 levels. 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

DECEMBER 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

 

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 judgements 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.

 

Page 12

 

 

FONAR CORPORATION AND SUBSIDIARIES 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 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

 

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 six months ended December 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 six months ended December 31, 2021 and 2020, diluted EPS for common shareholders includes 128 shares upon conversion of Class C Common.

 

Earnings Per Share

 

                              
   Three months ended
December 31, 2021
  Three months ended
December 31, 2020
   Total  Common Stock  Class C Common
Stock
  Total  Common Stock  Class C Common
Stock
Basic                              
Numerator:
Net income available to common stockholders
  $4,020   $3,777   $62   $3,111   $2,923   $48 
Denominator:                              
Weighted average shares outstanding   6,554    6,554    383    6,465    6,465    383 
Basic income per common share  $0.61   $0.58   $0.16   $0.48   $0.45   $0.12 
Diluted                              
Denominator:
Weighted average shares outstanding
        6,554    383         6,465    383 
Convertible Class C Stock        128             128     
Total Denominator for diluted earnings per share        6,682    383         6,593    383 
Diluted income per common share       $0.57   $0.16        $0.44   $0.12 

 

Page 13

 


FONAR CORPORATION AND SUBSIDIARIES 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 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)

 

   Six months ended
December 31, 2021
  Six months ended
December 31, 2020
   Total  Common Stock  Class C Common
Stock
  Total  Common Stock  Class C Common
Stock
Basic                              
Numerator:
Net income available to common stockholders
  $7,907   $7,430   $122   $5,619   $5,281   $86 
Denominator:                              
Weighted average shares outstanding   6,554    6,554    383    6,456    6,456    383 
Basic income per common share  $1.21   $1.13   $0.32   $0.87   $0.82   $0.23 
Diluted                              
Denominator:
Weighted average shares outstanding
        6,554    383         6,456    383 
Convertible Class C Stock        128             128     
Total Denominator for diluted earnings per share        6,682    383         6,584    383 
Diluted income per common share       $1.11   $0.32        $0.80   $0.23 

 

Recent Accounting Pronouncements

 

FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of December 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.

 

Page 14

 

 

FONAR CORPORATION AND SUBSIDIARIES 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 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

 

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

 

               
   December 31, 2021
   Gross Receivable  Allowance for doubtful accounts  Net
Accounts receivable  $4,477   $371   $4,106 
Accounts receivable - related party  $60       $60 
Medical receivable  $18,775   $   $18,775 
Management and other fees receivable  $48,943   $16,807   $32,136 
Management and other fees receivable from related medical practices (“PC’s”)  $12,280   $3,987   $8,293 

 

   June 30, 2021
   Gross Receivable  Allowance for doubtful accounts  Net
Accounts receivable  $4,968   $442   $4,526 
Accounts receivable - related party  $12       $12 
Medical receivable  $17,901   $   $17,901 
Management and other fees receivable  $46,735   $15,787   $30,948 
Management and other fees receivable from related medical practices (“PC’s”)  $11,998   $4,184   $7,814 

 

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

DECEMBER 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 December 31, 2021 is as follows:

 

      
2023   $1,020 
2024    944 
2025    289 
2026    37 
Total   $2,290 

 

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 67% and 66% of the PCs’ net revenues for the three months ended December 31, 2021 and 2020, respectively, were derived from no-fault and personal injury protection claims. Approximately 67% and 66% of the PCs’ net revenue for the six months ended December 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

DECEMBER 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 11.4% and 12.7% of the consolidated net revenues for the three months ended December 31, 2021 and 2020, respectively. Net revenues from management and other fees charged to the related PCs accounted for approximately 11.6% and 12.8% of the consolidated net revenues for the six months ended December 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 six months ended December 31, 2021 and 2020 are summarized in the following table.

 

          
   For the Three Months Ended   December 31,
   2021  2020
Commercial Insurance/ Managed Care  $1,068   $966 
Medicare/Medicaid   273    206 
Workers’ Compensation/Personal Injury   4,344    3,543 
Other   1,758    523 
Patient Fee Revenue, net of contractual allowances and discounts  $7,443   $5,238 

 

Management and Other Fees Receivable (Continued)

 

   For the Six Months Ended   December 31,
   2021  2020
Commercial Insurance/ Managed Care  $2,154   $1,912 
Medicare/Medicaid   522    404 
Workers’ Compensation/Personal Injury   8,468    6,930 
Other   3,150    1,084 
Patient Fee Revenue, net of contractual allowances and discounts  $14,294   $10,330 

 

Page 17

 

 

FONAR CORPORATION AND SUBSIDIARIES 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 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 December 31, 2021 is as follows:

 

            
Twelve Months Ending   December 31,  Operating Lease   Payments  Financing Lease Payments
 2022   $5,282   $244 
 2023    5,439    244 
 2024    5,247    244 
 2025    4,954    244 
 2026    4,410    244 
 Thereafter    22,755    42 
 Present value discount    (10,814)   (112)
 Total lease liability   $37,273   $1,150 

 

Page 18

 

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 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:

 

          
   December 31,   2021  June 30,   2021
Purchased parts, components and supplies  $1,859   $1,393 
Work-in-process   240    270 
Total Inventories  $2,099   $1,663 

 

NOTE 6 – CONTRACT ASSETS AND LIABILITIES

 

Information relating to uncompleted contracts about contract assets and (liabilities) is as follows:

 

          
   December 31,   2021  June 30,    2021
Costs incurred on uncompleted contracts  $339   $295 
Estimated earnings   524    568 
Costs and estimated earnings on uncompleted contracts   863    863 
Less: Billings to date   878    878 
Total costs and estimated earnings on uncompleted contracts  $(15)  $(15)

  

NOTE 7 – OTHER INTANGIBLE ASSETS

 

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

 

          
   December 31,   2021  June 30,   2021
Capitalized software development costs  $7,005   $7,005 
Patents and copyrights   5,283    5,245 
Non-compete   4,150    4,150 
Customer relationships   3,900    3,900 
Gross Other intangible assets   20,338    20,300 
Less: Accumulated amortization   16,483    16,262 
Other Intangible Assets  $3,855   $4,038 

 

Page 19

 

 

FONAR CORPORATION AND SUBSIDIARIES 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 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 December 31, 2021 and 2020 amounted to $49 and $44, respectively.

 

Amortization of non-compete for the three months ended December 31, 2021 and 2020 amounted to $12 and $0, respectively.

 

Amortization of customer relationships for the three months ended December 31, 2021 and 2020 amounted to $50 and $47, respectively.

 

Amortization of patents and copyrights for the six months ended December 31, 2021 and 2020 amounted to $96 and $89, respectively.

 

Amortization of non-compete for the six months ended December 31, 2021 and 2020 amounted to $25 and $0, respectively.

 

Amortization of customer relationships for the six months ended December 31, 2021 and 2020 amounted to $100 and $95, respectively.

 

NOTE 8 – OTHER CURRENT LIABILITIES

 

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

 

          
   December 31,   2021  June 30,   2021
Accrued salaries, commissions and payroll taxes  $2,141   $5,407 
Litigation accruals       900 
Sales tax payable   543    645 
State income taxes payable   188    774 
Legal and other professional fees   11    38 
Accounting fees   116    127 
Self-funded health insurance reserve       62 
Accrued interest and penalty   105    493 
Other general & administrative expenses   1,513    716 
Other Current Liabilities  $4,617   $9,162 

 

NOTE 9 - 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, 2021. All inter-segment sales are market-based. The Company evaluates performance based on income or loss from operations.

 

Page 20

 

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2021 and 2020

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

(UNAUDITED)

 

NOTE 9 - SEGMENT AND RELATED INFORMATION (CONTINUED)

 

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 Dec, 31, 2021               
Net revenues from external customers  $2,133   $22,346   $24,479 
Inter-segment net revenues  $239   $   $239 
(Loss) Income from operations  $(27)  $6,510   $6,483 
Depreciation and amortization  $68   $1,121   $1,189 
Capital expenditures  $66   $869   $935 
                
For the three months ended Dec. 31, 2020               
Net revenues from external customers  $1,893   $19,271   $21,164 
Inter-segment net revenues  $219   $   $219 
(Loss) Income from operations  $(8)  $4,990   $4,982 
Depreciation and amortization  $65   $977   $1,042 
Capital expenditures  $70   $1,728   $1,798 

 

   Medical
Equipment
  Management
of Diagnostic
Imaging
Centers
  Totals
For the six months ended Dec, 31, 2021               
Net revenues from external customers  $4,245   $43,964   $48,209 
Inter-segment net revenues  $475   $   $475 
(Loss) Income from operations  $(517)  $12,742   $12,225 
Depreciation and amortization  $135   $2,223   $2,358 
Capital expenditures  $187   $1,957   $2,144 
                
For the six months ended Dec. 31, 2020               
Net revenues from external customers  $3,874   $38,270   $42,144 
Inter-segment net revenues  $438   $   $438 
(Loss) Income from operations  $(569)  $9,701   $9,132 
Depreciation and amortization  $132   $1,878   $2,010 
Capital expenditures  $90   $2,143   $2,233 

 

NOTE 10 – SUPPLEMENTAL CASH FLOW INFORMATION

 

During the six months ended December 31, 2021 and December 31, 2020, the Company paid $265 and $35 for interest, respectively.

 

During the six months ended December 31, 2021 and December 31, 2020, the Company paid $572 and $145 for income taxes, respectively.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2021 and 2020

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

(UNAUDITED)

 

NOTE 11 – 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, 2021.

 

Other Matters

 

In September 2019, the Company was notified by one of its landlords that it was required to vacate the premises within 180 days under the demolition clause in the lease. The Company believed the lease renewal which was not negotiated in good faith since the renewal was negotiated in February 2018. The Company has recently relocated to a new space but the original lease provided for penalty payments in the event that the Company had not vacated the lease space. The Company had been making normal rent payments throughout the course of the arbitration proceedings. The case was settled for $900 of leasehold holdover charges which was paid in August 2021.

 

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 has satisfied most of its delinquencies in filing sales tax returns for certain states, for which the Company has transacted business. The Company has recorded tax obligations of approximately $543 plus interest and penalties of approximately $60 until the remaining states have been resolved.

 

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 $150 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 December 31, 2021 and June 30, 2021, the Company had approximately $0 and $62, 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.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2021 and 2020

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

(UNAUDITED)

 

NOTE 12 - 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 six months ended December 31, 2021 and 2020, the Company recorded income tax expense of $2,846 in 2021 as compared to $1,962 in 2020. The 2021 provision is comprised of a current income tax component of $409 and a deferred income tax component of $2,437. 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 2017.

 

The Company recorded a deferred tax asset of $13,522 and a deferred tax liability of $238 as of December 31, 2021, primarily relating to net operating loss carryforwards of approximately $25,066 available to offset future taxable income through 2032. The net operating losses begin to expire in 2023 for federal tax and state income tax purposes.

 

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.

 

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 December 31, 2021, no such changes in ownership have occurred.

 

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CONDENSED CONSOLIDATED BALANCE SHEETS

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

(UNAUDITED)

 

NOTE 12 - INCOME TAXES (CONTINUED)

 

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.

 

NOTE 13 – 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 14 – SUBSEQUENT EVENTS

 

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

 

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FONAR CORPORATION AND SUBSIDIARIES

 

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

 

For the six month period ended December 31, 2021, we reported a net income of $10.3 million on revenues of $48.2 million as compared to net income of $7.2 million on revenues of $42.1 million for the six month period ended December 31, 2020. Operating income increased from $9.1 million for the six month period ended December 31, 2020 to $12.2 million for the six month period ended December 31, 2021.

 

For the three month period ended December 31, 2021, we reported a net income of $5.1 on revenues of $24.5 as compared to net income of $3.9 million on revenues of $21.2 million for the three month period ended December 31, 2020.

 

The revenue increase, from $42.1 million for the first six months of fiscal 2021 to $48.2 million for the first six months of fiscal 2022, was primarily due to increases in patient fee revenue of $4.0 million, from $10.3 million for the first six months of fiscal 2021 to $14.3 million for the first six months of fiscal 2022. Revenues from product sales and service and repair fees increased by 9.6% from $3.9 million for the first six months of fiscal 2021 to $4.2 million for the first six months of fiscal 2022.

 

While our revenues increased, our costs and expenses also increased, but by a lesser amount resulting in our operating income increasing to $12.2 million for the six months ended December 30, 2021 as compared to $9.1 million for the six months ended December 31, 2020. In terms of percentages, costs and expenses increased 9.0% from $33.0 million for the first six months of fiscal 2021 to $36.0 million for the first six months of fiscal 2022, while revenues increased 14.4%, from $42.1 million for the first six months of fiscal 2021 to $48.2 million for the first six months of fiscal 2022.

 

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 70.8% in HDM, and the investors in HDM have a 29.2% ownership interest, as compared to HMCA’s 70% ownership interest and the investors’ 30% ownership interest in HDM in fiscal 2021. This change resulted from the Company’s purchase of non-controlling interests from the minority shareholders for $546,000 in the second quarter of fiscal 2022. 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 half of fiscal 2021 has been the COVID-19 pandemic. Although it had seemed the worst had passed, by August 2020, subsequent events have shown a spike in new cases and the emergence of new strains of the virus. This is by no means a problem confined to our Company, but regardless of our best efforts and improved ability to cope with the pandemic, the impact on our results of operation and financial condition is potentially volatile and severe.

 

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 COVID-19 has caused us to require that a portion of our workforce work from home and restricted the ability of our personnel to travel for marketing purposes or to service our customers. 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, the Company believes with the positive cash flows, low debt and cash on hand, it will be able to continue operations going forward.

 

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FONAR CORPORATION AND SUBSIDIARIES

 

One of the concerns we have are the increased strictness in enforcement of COVID-19 mandates, such as the requirement that employees in healthcare facilities be vaccinated. Another concern we have is the newer omicrom variant that is more transmissible. We are in fact facing some of these challenges now. As a result, between absences due to illness and the loss of unvaccinated employees whose duties required them to be in contact with patients, we were sometimes unable to keep a scanning facility open for all shifts. During the second quarter of fiscal 2022, the aggregate number of scans performed by the sites we manage or own declined to 45,991 scans from 48,469 scans in the first quarter of fiscal 2022. Nevertheless, we have been able to navigate through these challenges and avoid any significant disruption to our business

 

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 $346,000 for the first six months of fiscal 2022 from $31,000 for the first six months of fiscal 2021. Costs related to product sales decreased from $325,000 for the six month period ended December 31, 2020 to $299,000 for the six month period ended December 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 increased by 1.5% from $3.8 million for the six month period ended December 31, 2020 to $3.9 million for the six month period ended December 31, 2021. The increase represents a reversal of the continuing decreases in service revenue we had been experiencing, but it is too early to determine whether this increase represents a trend or is an anomaly.

 

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FONAR CORPORATION AND SUBSIDIARIES

 

Costs relating to providing service were $1.3 million in the first six months of fiscal 2021 and $1.5 million in the first six months of fiscal 2022. 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 reduce our costs of providing service.

 

There were approximately $353,000 in foreign revenues for the first six months of fiscal 2022 as compared to approximately $205,000 in foreign revenues for the first six months of fiscal 2021, representing an increase in foreign revenues of 72.2%. We do not regard this as a material trend, but as part of a normal although sometimes volatile variation resulting from low volumes of foreign sales.

 

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 site preparation and our installation of the scanner, 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 increased to $4.2 million for the first six months of fiscal 2022 from $3.9 million for the first six months of fiscal 2021. Operating losses for our medical equipment segment decreased to an operating loss of $517,000, for the first six months of fiscal 2022 as compared to an operating loss of $569,000 for the first six months of fiscal 2021.

 

Diagnostic Facilities Management Services

 

HMCA revenues increased in the first six months of fiscal 2022 by 14.9% to $44.0 million from $38.3 million for the first six months of fiscal 2021. 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 91.2% for the first six months of fiscal 2022, from 90.8% for the first six months of fiscal 2021.

 

HMCA’s current 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 had seen decreases in its scan volume. Nevertheless, the Company continued its program of adding additional scanners. The scan volume recovered, and even though the volume decreased again in the second quarter of fiscal 2022, it appears to be recovering in the third quarter of fiscal 2022, but the continuation of the COVID-19 virus and its omicron variant may delay the completion of the installation of some of the scanners. If scan volumes decrease however, and remain at lower volumes, the Company, notwithstanding its ample cash reserves, may need to consider reducing the size of its operations temporarily as a last resort.

 

New York State mandated that as of October 7, 2021, all workers at hospitals, long-term care facilities and diagnostic centers be COVID-19-vaccinated. Workers who were not vaccinated either resigned, were transferred to a non-diagnostic facility within the company, or were dismissed. The resulting reduction in the number of workers available at sites owned or managed by HMCA, has been challenging and has significantly reduced the pool of qualified and vaccinated workers. Also this is combined with the emergence of the new highly transmissible omicron variant, HMCA owned or managed sites struggling with reduced staff either cut their business hours and therefore scan fewer patients or, when possible, maintain regular business hours by paying employees who are willing to work extra hours at overtime rates. While it is too early to assess the ultimate impact, New York’s vaccination mandate and the emergence of the new omicrom variant are having a negative effect on our business in fiscal 2022.

 

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FONAR CORPORATION AND SUBSIDIARIES

 

Although the COVID-19 virus and government mandates have adversely affected our marketing efforts our scan volumes in fiscal 2020 and the beginning of fiscal 2021, the number of scans performed at our centers and at our client’s centers has recovered to pre-COVID-19 levels and has increased from approximately 86,000 in the first six months of fiscal 2021 to approximately 94,000 in the first six months of fiscal 2022.

 

We now manage or own a total of 40 MRI scanners. Twenty-five (25) MRI scanners are located in New York and fifteen (15) are located in Florida. HMCA experienced an operating income of $12.7 million for the first six months of fiscal 2022 compared to operating income of $9.7 million for the first six months of fiscal 2021.

 

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 six months of fiscal 2022 as compared to the first six months of fiscal 2021 increased by 18.6% from $19.9 million to $23.6 million primarily as a result of an increase in scan volume.

 

Consolidated

 

For the first six months of fiscal 2022, our consolidated net revenues increased by 14.4% to $48.2 million from $42.1 million for the first six months of fiscal 2021, and total costs and expenses increased by 9.0% to $36.0 million from $33.0 million for the first six months of fiscal 2022 and for the first six months of fiscal 2021 respectively. As a result, our operating income increased to $12.2 million in the first six months of fiscal 2022 as compared to $9.1 million in the first six months of fiscal 2021. A decrease in selling, general and other administrative costs in particular resulted in the smaller increase of cost and expenses as compared to the increase in net revenues.

 

Selling, general and administrative expenses decreased to $9.9 million in the first six months of fiscal 2022 from $10.7 million in the first six months of fiscal 2021. This decrease in selling, general and administrative expenses was due mainly to less reserves taken on management fees. Some of these reserves had 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, remained constant at $0 for the first six months of fiscal 2022 and 2021.

 

Research and development expenses decreased by 8.4% to $755,000 for the first six months of fiscal 2022 from $824,000 for the first six months of fiscal 2021.

 

Interest expense in the first six months of fiscal 2021 increased by 5.3% to $40,000 from $38,000 in the first six months of fiscal 2021.

 

Inventories increased to $2.1 million at December 31, 2021 as compared to $1.7 million at June 30, 2021.

 

Net management fee and medical receivables increased by 4.5% to $59.2 million at December 31, 2021 from $56.7 million at June 30, 2021 as a result of slower collections. The slower collections were primarily due to an increase in no-fault and workers’ compensation revenue, which typically takes longer to collect.

 

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The results of operations for the first six months of fiscal 2022 reflect an increase in revenues from management, patient and other fees, as compared to the first six months of fiscal 2021 ($44.0 million for the first six months of fiscal 2022 as compared to $38.3 million for the first six months of fiscal 2021), and a increase in MRI equipment segment revenues ($4.2 million as compared to $3.9 million). Revenues were 8.8% from the MRI equipment segment as compared to 91.2% from HMCA, for the first six months of fiscal 2022, as compared to 9.2% from the MRI equipment segment and 90.8% from HMCA for the first six months of fiscal 2021.

 

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 $1.3 million of tax credits relating to the alternative minimum tax credits in the prior fiscal 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” that highlights the unique attributes of FONAR UPRIGHT® MRI Imaging (S. Karger, A.G. based in Basel, Switzerland- www.karger.com/Book/Home/261956) which has been 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 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 canresult 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. 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.

 

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FONAR CORPORATION AND SUBSIDIARIES

 

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