10-Q 1 fonar_10-q.htm FONAR FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2019

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, 2019

Commission file number 0-10248

FONAR CORPORATION

____________________________________________

(Exact name of registrant as specified in its charter)

DELAWARE		11-2464137
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		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 _X_ Non-accelerated filer___ 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_

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 April 30, 2019
Common Stock, par value $.0001		6,357,482
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

FONAR CORPORATION AND SUBSIDIARIES

INDEX

PART I - FINANCIAL INFORMATION			PAGE

Item 1. Financial Statements

Condensed Consolidated Balance Sheets - March 31, 2019 (Unaudited) and June 30, 2018			3

Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2019 and March 31, 2018 (Unaudited)			6

Condensed Consolidated Statements of Income for the Nine Months Ended March 31, 2019 and March 31, 2018 (Unaudited)			7

Condensed Consolidated Statements of Changes in Equity for the Nine Months Ended March 31, 2019 and March 31, 2018 (Unaudited)			8

Condensed Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2019 and March 31, 2018 (Unaudited)			10

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2019 and March 31, 2018 (Unaudited)			12

Notes to Condensed Consolidated Financial Statements (Unaudited)			13

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			33

PART II - OTHER INFORMATION			33

Item 1. Legal Proceedings			33

Item 1A. Risk Factors			33

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			35

Item 3. Defaults Upon Senior Securities			35

Item 4. Mine Safety Disclosures			35

Item 5. Other Information			36

Item 6. Exhibits			36

Signatures			36

Page 2

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(UNAUDITED)

ASSETS

	March 31, 2019		June 30, 2018 *
Cash and cash equivalents	$	24,780	$	19,634
Accounts receivable – net		3,709		3,814
Accounts receivable - related party		30		—
Medical receivable – net		15,318		13,351
Management and other fees receivable – net		24,979		21,863
Management and other fees receivable – related medical practices – net		6,204		5,535
Inventories		1,810		1,431

Costs and estimated earnings in excess of billings on uncompleted contracts		335		87
Prepaid expenses and other current assets		1,647		1,350
Total Current Assets		78,812		67,065

Income taxes receivable		1,200		1,200
Deferred income tax asset		18,989		22,689
Property and equipment – net		17,440		16,492
Goodwill		3,985		3,985
Other intangible assets - net		4,959		5,602
Other assets		1,207		1,278
Total Assets	$	126,592	$	118,311

*Condensed from audited financial statements.

See accompanying notes to condensed consolidated financial statements.

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(UNAUDITED)

LIABILITIES AND STOCKHOLDERS' EQUITY

	March 31, 2019		June 30, 2018 *
Current Liabilities:
Current portion of long-term debt and capital leases	$	40	$	39
Accounts payable		1,631		1,300
Other current liabilities		4,973		8,178
Unearned revenue on service contracts		3,777		4,192
Unearned revenue on service contracts - related party		27		—
Customer deposits		834		858
Total Current Liabilities		11,282		14,567
Long-Term Liabilities:
Deferred income tax liability		239		239
Due to related medical practices		93		227
Long-term debt and capital leases, less current portion		282		306
Other liabilities		755		737
Total Long-Term Liabilities		1,369		1,509
Total Liabilities		12,651		16,076

*Condensed from audited financial statements.

See accompanying notes to condensed consolidated financial statements.

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(UNAUDITED)

LIABILITIES AND STOCKHOLDERS' EQUITY (Continued)

	March 31, 2019			June 30, 2018 *
STOCKHOLDERS' EQUITY:
Class A non-voting preferred stock $.0001 par value; 453 shares authorized at March 31, 2019 and June 30, 2018, 313 issued and outstanding at March 31, 2019 and June 30, 2018	$	—		$	—
Preferred stock $.001 par value; 567 shares authorized at March 31, 2019 and June 30, 2018, issued and outstanding – none		—			—
Common Stock $.0001 par value; 8,500 shares authorized at March 31, 2019 and June 30, 2018, 6,369 and 6,299 issued at March 31, 2019 and June 30, 2018; 6,357 and 6,288 outstanding at March 31, 2019 and June 30, 2018		1			1
Class B Common Stock (10 votes per share) $ .0001 par value; 227 shares authorized at March 31, 2019 and June 30, 2018, .146 issued and outstanding at March 31, 2019 and June 30, 2018		—			—
Class C Common Stock (25 votes per share) $.0001 par value; 567 shares authorized at March 31, 2019 and June 30, 2018, 383 issued and outstanding at March 31, 2019 and June 30, 2018		—			—
Paid-in capital in excess of par value		181,086			179,132
Accumulated deficit		(69,039	)		(79,773	)
Notes receivable from employee stockholders		—			(9	)
Treasury stock, at cost - 12 shares of common stock at March 31, 2019 and June 30, 2018		(675	)		(675	)
Total Fonar Corporation’s Stockholder Equity		111,373			98,676
Noncontrolling interests		2,568			3,559
Total Stockholders' Equity		113,941			102,235
Total Liabilities and Stockholders' Equity	$	126,592		$	118,311

*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	2019			2018
Patient fee revenue, net of contractual allowances and discounts	$	6,410		$	10,163
Provision for bad debts for patient fee		—			(4,552	)
Patient fee revenue - net		6,410			5,611
Product sales – net		796			69
Service and repair fees – net		1,964			2,314
Service and repair fees – related parties - net		28			28
Management and other fees – net		11,191			10,670
Management and other fees – related medical practices – net		2,390			2,287
Total Revenues – Net		22,779			20,979
COSTS AND EXPENSES
Costs related to patient fee revenue		2,740			2,570
Costs related to product sales		216			173
Costs related to service and repair fees		752			775
Costs related to service and repair fees – related parties		10			9
Costs related to management and other fees		5,834			5,733
Costs related to management and other fees – related medical practices		1,634			1,281
Research and development		381			503
Selling, general and administrative		4,604			5,533
Total Costs and Expenses		16,171			16,577
Income From Operations		6,608			4,402
Interest Expense		(27	)		(46	)
Investment Income		104			74
Other Expense		—			(8	)
Income Before Provision for Income Taxes and Noncontrolling Interests		6,685			4,422
Provision for Income Taxes		(1,484	)		(160	)
Net Income		5,201			4,262
Net Income - Noncontrolling Interests		(1,338	)		(781	)
Net Income - Controlling Interests	$	3,863		$	3,481
Net Income Available to Common Stockholders	$	3,623		$	3,263
Net Income Available to Class A Non-Voting Preferred Stockholders	$	179		$	163
Net Income Available to Class C Common Stockholders	$	61		$	55
Basic Net Income Per Common Share Available to Common Stockholders	$	0.57		$	0.52
Diluted Net Income Per Common Share Available to Common Stockholders	$	0.56		$	0.51
Basic and Diluted Income Per Share-Class C Common	$	0.16		$	0.15
Weighted Average Basis Shares Outstanding-Common Stockholders		6,357			6,287
Weighted Average Diluted Shares Outstanding-Common Stockholders		6,485			6,415
Weighted Average Basic Shares Outstanding – Class C Common		383			383
Weighted Average Diluted Shares Outstanding – Class C Common		383			383

See accompanying notes to condensed consolidated financial statements.

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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,
	2019			2018
REVENUES
Patient fee revenue, net of contractual allowances and discounts	$	17,856		$	28,353
Provision for bad debts for patient fee		—			(12,873	)
Patient fee revenue - net		17,856			15,480
Product sales – net		1,241			508
Service and repair fees – net		6,116			6,929
Service and repair fees – related parties - net		83			83
Management and other fees – net		32,448			30,781
Management and other fees – related medical practices – net		6,965			6,699
Total Revenues – Net		64,709			60,480
COSTS AND EXPENSES
Costs related to patient fee revenue		8,016			7,619
Costs related to product sales		539			562
Costs related to service and repair fees		2,242			2,309
Costs related to service and repair fees – related parties		30			27
Costs related to management and other fees		17,493			17,116
Costs related to management and other fees – related medical practices		4,421			3,692
Research and development		1,368			1,258
Selling, general and administrative		12,474			12,899
Total Costs and Expenses		46,583			45,482
Income From Operations		18,126			14,998
Interest Expense		(78	)		(138	)
Investment Income		336			179
Other Expense		—			(15	)
Income Before Provision for Income Taxes and Noncontrolling Interests		18,384			15,024
Provision for Income Taxes		(3,826	)		(920	)
Net Income		14,558			14,104
Net Income - Noncontrolling Interests		(3,824	)		(2,715	)
Net Income - Controlling Interests	$	10,734		$	11,389
Net Income Available to Common Stockholders	$	10,067		$	10,675
Net Income Available to Class A Non-Voting Preferred Stockholders	$	496		$	532
Net Income Available to Class C Common Stockholders	$	170		$	182
Basic Net Income Per Common Share Available to Common Stockholders	$	1.58		$	1.70
Diluted Net Income Per Common Share Available to Common Stockholders	$	1.55		$	1.66
Basic and Diluted Income Per Share-Class C Common	$	0.44		$	0.48
Weighted Average Basic Shares Outstanding-Common Stockholders		6,353			6,287
Weighted Average Diluted Shares Outstanding-Common Stockholders		6,481			6,415
Weighted Average Basic Shares Outstanding – Class C Common		383			383
Weighted Average Diluted Shares Outstanding – Class C Common		383			383

See accompanying notes to condensed consolidated financial statements.

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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, 2019


	Common Stock		Paid in capital in excess of par value		Accumulated Deficit

Balance – July 1, 2018	$	1	$	179,132	$	(79,773	)

Issuance of Common Stock		—		1,954		—
Net income – Controlling interests		—		—		10,734
Repayment of notes receivable		—		—		—
Distributions – Noncontrolling		—		—		—
Income – Noncontrolling interests		—		—		—

Balance – March 31, 2019	$	1	$	181,086	$	(69,039	)

For the Nine Months Ending March 31, 2019


	Notes receivable from employee stockholders			Treasury Stock			Non controlling Interests			Total

Balance – July 1, 2018	$	(9	)	$	(675	)	$	3,559		$	102,235

Issuance of Common Stock		—			—			—			1,954
Net income – Controlling interests		—			—			—			10,734
Repayment of notes receivable		9			—			—			9
Distributions – Noncontrolling		—			—			(4,815	)		(4,815	)
Income – Noncontrolling interests		—			—			3,824			3,824

Balance – March 31, 2019	$	—		$	(675	)	$	2,568		$	113,941

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, 2018


		Common Stock		Paid in capital in excess of par value		Accumulated Deficit

Balance – July 1, 2017	$	1	$	179,131	$	(101,003	)

Issuance of Common Stock		—		—		—
Net income – Controlling interests		—		—		11,389
Repayment of notes receivable		—		—		—
Distributions – Noncontrolling		—		—		—
Income – Noncontrolling interests		—		—		—

Balance – March 31, 2018	$	1	$	179,131	$	(89,614	)

For the Nine Months Ending March 31, 2018


	Notes receivable from employee stockholders			Treasury Stock			Non controlling Interests			Total

Balance – July 1, 2017	$	(17	)	$	(675	)	$	5,473		$	82,910

Issuance of Common Stock		—			—			—			—
Net income – Controlling interests		—			—			—			11,389
Repayment of notes receivable		6			—			—			6
Distributions – Noncontrolling		—			—			(4,456	)		(4,456	)
Income – Noncontrolling interests		—			—			2,715			2,715

Balance – March 31, 2018	$	(11	)	$	(675	)	$	3,732		$	92,564

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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, 2019


	Common Stock		Paid in capital in excess of par value		Accumulated Deficit

Balance – January 1, 2019	$	1	$	181,086	$	(72,902	)

Issuance of Common Stock		—		—		—
Net income – Controlling interests		—		—		3,863
Repayment of notes receivable		—		—		—
Distributions – Noncontrolling		—		—		—
Income – Noncontrolling interests		—		—		—

Balance – March 31, 2019	$	1	$	181,086	$	(69,039	)

For the Three Months Ending March 31, 2019


	Notes receivable from employee stockholders			Treasury Stock			Non controlling Interests			Total

Balance – January 1, 2019	$	(9	)	$	(675	)	$	2,355		$	109,856

Issuance of Common Stock		—			—			—			—
Net income – Controlling interests		—			—			—			3,863
Repayment of notes receivable		9			—			—			9
Distributions – Noncontrolling		—			—			(1,125	)		(1,125	)
Income – Noncontrolling interests		—			—			1,338			1,338

Balance – March 31, 2019	$	—		$	(675	)	$	2,568		$	113,941

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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, 2018


	Common Stock		Paid in capital in excess of par value		Accumulated Deficit

Balance – January 1, 2018	$	1	$	179,131	$	(93,095	)

Issuance of Common Stock		—		—		—
Net income – Controlling interests		—		—		3,481
Repayment of notes receivable		—		—		—
Distributions – Noncontrolling		—		—		—
Income – Noncontrolling interests		—		—		—

Balance – March 31, 2018	$	1	$	179,131	$	(89,614	)

For the Three Months Ending March 31, 2018


	Notes receivable from employee stockholders			Treasury Stock			Non controlling Interests			Total

Balance – January 1, 2018	$	(13	)	$	(675	)	$	4,646		$	89,995

Issuance of Common Stock		—			—			—			—
Net income – Controlling interests		—			—			—			3,481
Repayment of notes receivable		2			—			—			2
Distributions – Noncontrolling		—			—			(1,695	)		(1,695	)
Income – Noncontrolling interests		—			—			781			781

Balance – March 31, 2018	$	(11	)	$	(675	)	$	3,732		$	92,564

Page 11

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,
	2019			2018
Cash Flows from Operating Activities:
Net income	$	14,557		$	14,104
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,852			2,949
Deferred income tax		3,701			575
Provision for bad debts		(652	)		122
Stock issued for costs and expenses		1,955			—
(Increase) decrease in operating assets, net:
Accounts, medical receivable and management fee(s)		(5,025	)		(3,005	)
Notes receivable		(13	)		—
Costs and estimated earnings in excess of billings on uncompleted contracts		(248	)		649
Inventories		(378	)		(13	)
Prepaid expenses and other current assets		(214	)		(132	)
Other assets		—			(883	)
Increase (decrease) in operating liabilities, net:
Accounts payable		331			(164	)
Other current liabilities		(3,593	)		(1,681	)
Customer advances		(24	)		79
Other liabilities		18			1
Due to related medical practices		(135	)		—
Net cash provided by operating activities		13,132			12,601
Cash Flows from Investing Activities:
Purchases of property and equipment		(3,069	)		(2,594	)
Cost of patents		(88	)		(75	)
Net cash used in investing activities		(3,157	)		(2,669	)
Cash Flows from Financing Activities:
Repayment of borrowings and capital lease obligations		(23	)		(150	)
Additional acquisition costs		—			(58	)
Distributions to noncontrolling interests		(4,815	)		(4,455	)
Repayment of notes receivable from employee stockholders		9			5
Net cash used in financing activities		(4,829	)		(4,658	)
Net Increase in Cash and Cash Equivalents		5,146			5,274
Cash and Cash Equivalents – Beginning of Period		19,634			10,140
Cash and Cash Equivalents – End of Period	$	24,780		$	15,414

See accompanying notes to condensed consolidated financial statements.

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 and 2018

(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, 2019, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2019. 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 September 21, 2018 for the fiscal year ended June 30, 2018.

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.

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 and 2018

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

(UNAUDITED)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenues (Continued)

The Company applied the modified retrospective approach to all contracts when adopting ASC 606. As a result, at the adoption of ASC 606 the majority of what was previously classified as the provision for bad debts in the statement of operations is now reflected as implicit price concessions (as defined in ASC 606) and therefore included as a reduction to net operating revenues in 2019. For changes in credit issues not assessed at the date of service, the Company will prospectively recognize those amounts in other operating expenses on the statement of operations. For periods prior to the adoption of ASC 606, the provision for bad debts has been presented consistent with the previous revenue recognition standards that required it to be presented separately as a component of net operating revenues. Additionally, upon adoption of ASC 606 the allowance for doubtful accounts of approximately $22.7 million as of July 1, 2018 was reclassified as a component of net patient accounts receivable. Other than these changes in presentation on the condensed consolidated statement of operations and condensed consolidated balance sheet, the adoption of ASC 606 did not have a material impact on the consolidated results of operations for the three months and nine months ended March 31, 2019, and the Company does not expect it to have a material impact on its consolidated results of operations for the remainder of 2019 and on a prospective basis.

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.

Earnings Per Share

Basic earnings per share (“EPS”) is computed based on weighted average number of shares 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 earnings per share and applied the if converted method in calculating diluted earnings per share for the three and nine months ended March 31, 2019 and 2018.

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, 2019 and 2018, diluted EPS for common shareholders includes 128 shares upon conversion of Class C Common.

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 and 2018

(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, 2019						Three months ended March 31, 2018
Basic	Total		Common Stock		Class C Common Stock		Total		Common Stock		Class C Common Stock
Numerator:
Net income available to common stockholders	$	3,863	$	3,623	$	61	$	3,481	$	3,263	$	55
Denominator:
Weighted average shares outstanding		6,357		6,357		383		6,287		6,287		383
Basic income per common share	$	0.61	$	0.57	$	0.16	$	0.55	$	0.52	$	0.15
Diluted
Denominator:
Weighted average shares outstanding				6,357		383				6,287		383
Convertible Class C Stock				128		—				128		—
Total Denominator for diluted earnings per share				6,485		383				6,415		383
Diluted income per common share			$	0.56	$	0.16			$	0.51	$	0.15

	Nine months ended March 31, 2019						Nine months ended March 31, 2018
Basic	Total		Common Stock		Class C Common Stock		Total		Common Stock		Class C Common Stock
Numerator:
Net income available to common stockholders	$	10,734	$	10,067	$	170	$	11,389	$	10,675	$	182
Denominator:
Weighted average shares outstanding		6,353		6,353		383		6,287		6,287		383
Basic income per common share	$	1.69	$	1.58	$	0.44	$	1.81	$	1.70	$	0.48
Diluted
Denominator:
Weighted average shares outstanding				6,353		383				6,287		383
Convertibloe Class C Stock				128		—				128		—
Total Denominator for diluted earnings per share				6,481		383				6,415		383
Diluted income per common share			$	1.55	$	0.44			$	1.66	$	0.48

Page 15

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 and 2018

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

(UNAUDITED)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent Accounting Pronouncements

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

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

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 is evaluating the impact of adopting this guidance on our consolidated condensed financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805); Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business to help companies evaluate whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The amendments in this update are effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company has adopted this guidance on our consolidated condensed financial statements and it has no impact on the Company’s financial statements.

Page 16

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 and 2018

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

(UNAUDITED)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent Accounting Pronouncements (Continued)

During February 2016, FAS 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 new guidance will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period and is applied retrospectively. Early adoption is permitted. The Company is currently in the process of assessing the impact the adoption of this guidance will have on the Company’s consolidated condensed financial statements.

FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of March 31, 2019 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 2019 or 2018, and it does not believe that any of those pronouncements will have a significant impact on our condensed consolidated financial statements at the time they become effective.

Reclassifications

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

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

Receivables, net is comprised of the following at March 31, 2019:

	Gross Receivable		Allowance for doubtful accounts		Net
Accounts receivable	$	3,899	$	190	$	3,709
Accounts receivable - related party	$	30		—	$	30
Medical receivable – net	$	15,318		—	$	15,318
Management and other fees receivable	$	34,479	$	9,500	$	24,979
Management and other fees receivable from related medical practices ("PC’s")	$	8,746	$	2,542	$	6,204

Page 17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 and 2018

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

(UNAUDITED)

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

Receivables, net is comprised of the following at June 30, 2018:

	Gross Receivable		Allowance for doubtful accounts		Net
Accounts receivable	$	4,004	$	190	$	3,814
Accounts receivable - related party	$	—		—	$	—
Medical receivable	$	36,079	$	22,728	$	13,351
Management and other fees receivable	$	32,846	$	10,983	$	21,863
Management and other fees receivable from related medical practices ("PC’s")	$	7,246	$	1,711	$	5,535

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.

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 allowances for contractual adjustments and subsequent changes in credit worthiness based on specific payor class 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.

Page 18

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 and 2018

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

(UNAUDITED)

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

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 March 31, 2019 and 2018, respectively, were derived from no-fault and personal injury protection claims. Approximately 67% and 66% of the PCs’ net revenues for the nine months ended March 31, 2019 and 2018, 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.

Net revenues from management and other fees charged to the related PCs accounted for approximately 10.5% and 10.9% of the consolidated net revenues for the three months ended March 31, 2019 and 2018, respectively. Net revenues from management and other fees charged to the related PCs accounted for approximately 10.8% and 11.0% of the consolidated net revenues for the nine months ended March 31, 2019 and 2018, 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 less the provision for bad debts for the three and nine months ended March 31, 2019 and 2018 are summarized in the following tables.

	For the Three Months Ended March 31,
	2019		2018
Commercial Insurance/ Managed Care	$	1,345	$	1,238
Medicare/Medicaid		315		337
Workers' Compensation/Personal Injury		4,569		6,577
Other		181		2,011
Patient Fee Revenue, net of contractual allowances and discounts		6,410		10,163
Provision for Bad Debts and bad debt expense		—		(4,552	)
Net Patient Fee for Revenue	$	6,410	$	5,611

	For the Nine Months Ended March 31,
	2019		2018
Commercial Insurance/ Managed Care	$	3,860	$	3,452
Medicare/Medicaid		876		903
Workers' Compensation/Personal Injury		12,227		18,685
Other		893		5,313
Patient Fee Revenue, net of contractual allowances and discounts		17,856		28,353
Provision for Bad Debts and bad debt expense		—		(12,873	)
Net Patient Fee for Revenue	$	17,856	$	15,480

Page 19

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 and 2018

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

(UNAUDITED)

NOTE 4 - INVENTORIES

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

	March 31, 2019		June 30, 2018
Purchased parts, components and supplies	$	1,686	$	1,312
Work-in-process		124		119
Total Inventories	$	1,810	$	1,431

NOTE 5 – COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

Information relating to uncompleted contracts is as follows:

	March 31, 2019		June 30, 2018
Costs incurred on uncompleted contracts	$	449	$	449
Estimated earnings		742		309
Subtotal		1,191		758
Less: Billings to date		856		671
Total Costs and estimated earnings in excess of billings on uncompleted contracts	$	335	$	87

NOTE 6 – OTHER INTANGIBLE ASSETS

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

	March 31, 2019		June 30, 2018
Capitalized software development costs	$	7,005	$	7,005
Patents and copyrights		4,924		4,836
Non-compete		4,100		4,100
Customer relationships		3,800		3,800
Gross Other intangible assets		19,829		19,741
Less: Accumulated amortization		14,870		14,139
Other Intangible Assets – net	$	4,959	$	5,602

Page 20

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 and 2018

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

(UNAUDITED)

NOTE 6 – OTHER INTANGIBLE ASSETS (CONTINUED)

Amortization of patents and copyrights for the three months ended March 31, 2019 and 2018 amounted to $50 and $50, respectively.

Amortization of capitalized software development costs for the three months ended March 31, 2019 and 2018 amounted to $0 and $43, respectively.

Amortization of non-compete for the three months ended March 31, 2019 and 2018 amounted to $146 and $146, respectively.

Amortization of customer relationships for the three months ended March 31, 2019 and 2018 amounted to $48 and $48, respectively.

Amortization of patents and copyrights for the nine months ended March 31, 2019 and 2018 amounted to $149 and $152, respectively.

Amortization of capitalized software development costs for the nine months ended March 31, 2019 and 2018 amounted to $0 and $173 respectively.

Amortization of non-compete for the nine months ended March 31, 2019 and 2018 amounted to $439 and $439, respectively.

Amortization of customer relationships for the nine months ended March 31, 2019 and 2018 amounted to $143 and $143, respectively.

NOTE 7 – OTHER CURRENT LIABILITIES

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

	March 31, 2019		June 30, 2018
Accrued salaries, commissions and payroll taxes	$	1,096	$	3,438
Litigation accruals		145		145
Sales tax payable		1,695		2,092
Legal and other professional fees		132		119
Accounting fees		90		125
Self-funded health insurance reserve		—		79
Accrued interest and penalty		1,253		1,498
Other		562		682
Total Other Current Liabilities	$	4,973	$	8,178

NOTE 8 – STOCKHOLDERS EQUITY

Common Stock

During the nine months ended March 31, 2019, the Company issued 70 shares of common stock for costs and expenses of $1,955.

Page 21

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 and 2018

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

(UNAUDITED)

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, 2018. 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, 2019
Net revenues from external customers	$	2,788		$	19,991	$	22,779
Inter-segment net revenues	$	228		$	—	$	228
(Loss) income from operations	$	(27	)	$	6,635	$	6,608
Depreciation and amortization	$	92		$	886	$	978
Capital expenditures	$	661		$	213	$	874

For the three months ended March 31, 2018
Net revenues from external customers	$	2,411		$	18,568	$	20,979
Inter-segment net revenues	$	228		$	—	$	228
(Loss) income from operations	$	(457	)	$	4,859	$	4,402
Depreciation and amortization	$	93		$	899	$	992
Capital expenditures	$	80		$	727	$	807

For the nine months ended March 31, 2019
Net revenues from external customers	$	7,440		$	57,269	$	64,709
Inter-segment net revenues	$	683		$	—	$	683
(Loss) income from operations	$	(665	)	$	18,791	$	18,126
Depreciation and amortization	$	276		$	2,576	$	2,852
Capital expenditures	$	706		$	2,451	$	3,157

For the nine months ended March 31, 2018
Net revenues from external customers	$	7,520		$	52,960	$	60,480
Inter-segment net revenues	$	674		$	—	$	674
(Loss) income from operations	$	(490	)	$	15,488	$	14,998
Depreciation and amortization	$	259		$	2,690	$	2,949
Capital expenditures	$	259