See accompanying notes to condensed consolidated financial
statements (unaudited).
See accompanying notes to condensed consolidated financial
statements (unaudited).
See accompanying notes to condensed consolidated financial
statements (unaudited).
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
(AMOUNTS AND SHARES IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 1 - 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, 2013, are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30, 2014. 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 15, 2013 for the fiscal
year ended June 30, 2013.
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.
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 six months ended December 31, 2013 and December 31, 2012.
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, 2013 and December 31, 2012, diluted EPS for common
shareholders includes 128 shares upon conversion of Class C Common.
Page 9
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
(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
December 31, 2013
|
|
Three months ended
December 31, 2012
|
Basic
|
|
Total
|
|
Common Stock
|
|
Class C Common Stock
|
|
Total
|
|
Common Stock
|
|
Class C Common Stock
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
2,143
|
|
|
$
|
2,003
|
|
|
$
|
36
|
|
|
$
|
1,349
|
|
|
$
|
1,259
|
|
|
$
|
23
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
6,006
|
|
|
|
6,006
|
|
|
|
383
|
|
|
|
5,926
|
|
|
|
5,926
|
|
|
|
383
|
|
Basic income per common share
|
|
$
|
0.36
|
|
|
$
|
0.33
|
|
|
$
|
0.09
|
|
|
$
|
0.23
|
|
|
$
|
0.21
|
|
|
$
|
0.06
|
|
Diluted
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
6,006
|
|
|
|
383
|
|
|
|
|
|
|
|
5,926
|
|
|
|
383
|
|
Stock options
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
Convertible Class C Stock
|
|
|
|
|
|
|
128
|
|
|
|
—
|
|
|
|
|
|
|
|
128
|
|
|
|
—
|
|
Total Denominator for diluted earnings per share
|
|
|
|
|
|
|
6,133
|
|
|
|
383
|
|
|
|
|
|
|
|
6,054
|
|
|
|
383
|
|
Diluted income per common share
|
|
|
|
|
|
$
|
0.33
|
|
|
$
|
0.09
|
|
|
|
|
|
|
$
|
0.21
|
|
|
$
|
0.06
|
|
Page 10
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
(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, 2013
|
|
Six months ended
December 31, 2012
|
Basic
|
|
Total
|
|
Common Stock
|
|
Class C Common Stock
|
|
Total
|
|
Common Stock
|
|
Class C Common Stock
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
4,580
|
|
|
$
|
4,280
|
|
|
$
|
77
|
|
|
$
|
2,801
|
|
|
$
|
2,616
|
|
|
$
|
47
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
5,992
|
|
|
|
5,992
|
|
|
|
383
|
|
|
|
5,914
|
|
|
|
5,914
|
|
|
|
383
|
|
Basic income per common share
|
|
$
|
0.76
|
|
|
$
|
0.71
|
|
|
$
|
0.20
|
|
|
$
|
0.47
|
|
|
$
|
0.44
|
|
|
$
|
0.12
|
|
Diluted
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
5,992
|
|
|
|
383
|
|
|
|
|
|
|
|
5,914
|
|
|
|
383
|
|
Stock options
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
Convertible Class C Stock
|
|
|
|
|
|
|
128
|
|
|
|
—
|
|
|
|
|
|
|
|
128
|
|
|
|
—
|
|
Total Denominator for diluted earnings per share
|
|
|
|
|
|
|
6,120
|
|
|
|
383
|
|
|
|
|
|
|
|
6,042
|
|
|
|
383
|
|
Diluted income per common share
|
|
|
|
|
|
$
|
0.70
|
|
|
$
|
0.20
|
|
|
|
|
|
|
$
|
0.43
|
|
|
$
|
0.12
|
|
Recent Accounting Pronouncements
In July 2012, the FASB issued ASU No. 2012-02,
Intangibles-Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment. This ASU simplifies how entities
test indefinite-lived intangible assets for impairment which improves consistency in impairment testing requirements among long-lived
asset categories. These amended standards permit an assessment of qualitative factors to determine whether it is more likely than
not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets in which this assessment
concludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the
requirement to perform quantitative impairment testing as outlined in previously issued standards. The guidance is effective for
annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, early adoption is permitted.
The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial
position and results of operations.
Page 11
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
(AMOUNTS AND SHARES IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Recent Accounting Pronouncements
(Continued)
The FASB has issued ASU No. 2013-11, Income
Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a
Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force). The amendments in this ASU state that an unrecognized
tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred
tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent
a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under
the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax
position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use,
the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability
and should not be combined with deferred tax assets. The amendments in this ASU are effective for fiscal years, and interim periods
within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years, and
interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. The amendments should be applied
prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption
of this standard did not have a material impact on the Company’s condensed consolidated financial position and results of
operations.
FASB, the Emerging Issues Task Force and
the SEC have issued certain other accounting standards, updates, and regulations as of December 31, 2013 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 2013 or 2012, 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 December 31, 2013:
|
|
Gross Receivable
|
|
Allowance for doubtful accounts
|
|
Net
|
Receivables from equipment sales and service contracts
|
|
$
|
5,616
|
|
|
$
|
257
|
|
|
$
|
5,359
|
|
Receivables from equipment sales and service contracts - related party
|
|
$
|
60
|
|
|
$
|
—
|
|
|
$
|
60
|
|
Medical Receivable
|
|
$
|
15,731
|
|
|
$
|
6,847
|
|
|
$
|
8,884
|
|
Management and other fees receivables
|
|
$
|
21,224
|
|
|
$
|
8,877
|
|
|
$
|
12,347
|
|
Management and other fees receivables from related medical practices ("PC’s")
|
|
$
|
3,388
|
|
|
$
|
403
|
|
|
$
|
2,985
|
|
Page 12
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
(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, 2013:
|
|
Gross Receivable
|
|
Allowance for doubtful accounts
|
|
Net
|
Receivables from equipment sales and service contracts
|
|
$
|
4,701
|
|
|
$
|
257
|
|
|
$
|
4,444
|
|
Receivables from equipment sales and service contracts - related party
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Medical Receivable
|
|
$
|
10,711
|
|
|
$
|
2,585
|
|
|
$
|
8,126
|
|
Management and other fees receivables
|
|
$
|
20,561
|
|
|
$
|
9,095
|
|
|
$
|
11,466
|
|
Management and other fees receivables from related medical practices ("PC’s")
|
|
$
|
2,785
|
|
|
$
|
403
|
|
|
$
|
2,382
|
|
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 Receivable
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 continuously monitors collections from its clients and maintains an allowance for bad debts based upon the Company’s
historical collection experience. 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.
Page 13
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
(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)
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 49% and 36%
of the PCs’ net revenues for the three months ended December 31, 2013 and 2012, respectively, were derived from
no-fault and personal injury protection claims. Approximately 50% and 37% of the PCs’ net revenues for the six months
ended December 31, 2013 and 2012, 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 13.2% and 20.4% of the consolidated net revenues for the three months ended
December 31, 2013 and 2012, respectively. Net revenues from management and other fees
charged to the related PCs accounted for approximately 13.5% and 20.6% of the consolidated net revenues for the six months ended
December 31, 2013 and 2012, 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.
The Company’s patient fee revenue, net
of contractual allowances and discounts less the provision for bad debts for the three and six months ended December 31, 2013 and
2012 are summarized in the following tables.
|
|
For the Three Months Ended December 31,
|
|
|
2013
|
|
2012
|
Commercial Insurance/ Managed Care
|
|
$
|
1,011
|
|
|
$
|
—
|
|
Medicare/Medicaid
|
|
|
439
|
|
|
|
—
|
|
Workers' Compensation/Personal Injury
|
|
|
3,455
|
|
|
|
—
|
|
Other
|
|
|
989
|
|
|
|
—
|
|
Patient Fee Revenue, net of contractual allowances and discounts
|
|
|
5,894
|
|
|
|
—
|
|
Provision for Bad Debts
|
|
|
(2,223
|
)
|
|
|
—
|
|
Net Patient Fee for Revenue
|
|
$
|
3,671
|
|
|
$
|
—
|
|
PAGE 14
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
(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)
|
|
For the Six Months Ended December 31,
|
|
|
2013
|
|
2012
|
Commercial Insurance/ Managed Care
|
|
$
|
2,111
|
|
|
$
|
—
|
|
Medicare/Medicaid
|
|
|
818
|
|
|
|
—
|
|
Workers' Compensation/Personal Injury
|
|
|
6,350
|
|
|
|
—
|
|
Other
|
|
|
2,442
|
|
|
|
—
|
|
Patient Fee Revenue, net of contractual allowances and discounts
|
|
|
11,721
|
|
|
|
—
|
|
Provision for Bad Debts
|
|
|
(4,262
|
)
|
|
|
—
|
|
Net Patient Fee for Revenue
|
|
$
|
7,459
|
|
|
$
|
—
|
|
NOTE 4 - INVENTORIES
Inventories included in the accompanying condensed consolidated balance
sheet consist of the following:
|
|
December 31, 2013
|
|
June 30, 2013
|
Purchased parts, components and supplies
|
|
$
|
2,247
|
|
|
$
|
1,784
|
|
Work-in-process
|
|
|
315
|
|
|
|
293
|
|
Total Inventories
|
|
$
|
2,562
|
|
|
$
|
2,077
|
|
NOTE 5 – CUSTOMER ADVANCES
Customer advances consist of the following as of December
31, 2013:
|
|
December 31, 2013
|
|
June 30, 2013
|
Total Advances
|
|
$
|
4,484
|
|
|
$
|
4,228
|
|
Less: Advances on contracts under construction
|
|
|
2,443
|
|
|
|
2,370
|
|
Total customer advances
|
|
$
|
2,041
|
|
|
$
|
1,858
|
|
Page 15
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
(AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
(UNAUDITED)
NOTE 6 – OTHER INTANGIBLE ASSETS
Other intangible assets, net of accumulated
amortization, in the accompanying condensed consolidated balance sheet consist of the following:
|
|
December 31,
2013
|
|
June 30,
2013
|
Capitalized software development costs
|
|
$
|
7,669
|
|
|
$
|
7,669
|
|
Patents and copyrights
|
|
|
4,251
|
|
|
|
4,194
|
|
Non-compete
|
|
|
4,100
|
|
|
|
4,100
|
|
Customer relationships
|
|
|
3,800
|
|
|
|
3,800
|
|
Gross Other intangible assets
|
|
|
19,820
|
|
|
|
19,763
|
|
Less: Accumulated amortization
|
|
|
8,549
|
|
|
|
7,859
|
|
Other Intangible Assets
|
|
$
|
11,271
|
|
|
$
|
11,904
|
|
Amortization of patents and copyrights for the
three months ended December 31, 2013 and 2012 amounted to $45 and $42, respectively.
Amortization of capitalized software development
costs for the three months ended December 31, 2013 and 2012 amounted to $108 and $65, respectively.
Amortization of non-compete for the three months
ended December 31, 2013 and 2012 amounted to $147 and $0, respectively.
Amortization of customer relationships for the
three months ended December 31, 2013 and 2012 amounted to $48 and $0, respectively.
Amortization of patents and copyrights for the
six months ended December 31, 2013 and 2012 amounted to $89 and $83, respectively.
Amortization of capitalized software development
costs for the six months ended December 31, 2013 and 2012 amounted to $217 and $150, respectively.
Amortization of non-compete for the six months
ended December 31, 2013 and 2012 amounted to $293 and $0, respectively.
Amortization of customer relationships for
the six months ended December 31, 2013 and 2012 amounted to $92 and $0, respectively.
Page 16
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
(AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
(UNAUDITED)
NOTE 7 – OTHER CURRENT LIABILITIES
Other current liabilities in the accompanying
condensed consolidated balance sheet consist of the following:
|
|
December 31, 2013
|
|
June 30, 2013
|
Accrued salaries, commissions and payroll taxes
|
|
$
|
859
|
|
|
$
|
711
|
|
Accrued interest
|
|
|
117
|
|
|
|
117
|
|
Litigation accruals
|
|
|
849
|
|
|
|
809
|
|
Sales tax payable
|
|
|
2,931
|
|
|
|
2,859
|
|
Legal and other professional fees
|
|
|
431
|
|
|
|
569
|
|
Accounting fees
|
|
|
148
|
|
|
|
305
|
|
Insurance premiums
|
|
|
105
|
|
|
|
13
|
|
Interest and penalty - sales tax
|
|
|
2,440
|
|
|
|
2,322
|
|
Penalty - 401k plan
|
|
|
250
|
|
|
|
250
|
|
Purchase scanners
|
|
|
575
|
|
|
|
—
|
|
Rent
|
|
|
115
|
|
|
|
148
|
|
Other
|
|
|
581
|
|
|
|
533
|
|
Total Other Current Liabilities
|
|
$
|
9,401
|
|
|
$
|
8,636
|
|
NOTE 8 – STOCKHOLDERS EQUITY
Common Stock
During the
three months ended December 31, 2013:
a) The Company
issued 8 shares of common stock to employees and consultants as compensation valued at $67 under a stock bonus plan.
b) The Company
issued 5 shares of common stock for costs and expenses of $45.
c) Options
for 10 shares of common stock pursuant to the 2005 Incentive Stock Option Plan were exercised for $31.
During the six months ended December 31, 2013:
a) The Company issued 11 shares of common stock to employees
and consultants as compensation valued at $86 under a stock bonus plan.
b) The Company issued 20 shares of common stock for costs and expenses
of $155.
c) Options for 10 shares of common stock pursuant to the 2005 Incentive
Stock Option Plan were exercised for $31.
Page 17
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
(AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
(UNAUDITED)
NOTE 9 – CONTROLLING AND NONCONTROLLING INTERESTS
On February 13, 2013 the Company entered into
an agreement with outside investors to acquire a 50.5% controlling interest in a newly formed limited liability company, Health
Diagnostics Management LLC (HDM). According to the February 13, 2013 LLC operating agreement of HDM there are two classes of members;
Class A members and one Class B member. The Class A members have an ownership interest of 49.5% of HDM. The Class B member (HMCA)
has an ownership of 50.5% of HDM. On all matters on which members may vote every member is entitled to cast the percentage of votes
equal to their percentage of ownership interest. Profits and losses an all items of income, gain or loss, deductions or other allocations
of the Company will be allocated among the members in the same proportions as their membership interests in the Company bear to
all the Class A and Class B membership interests of the Company in the aggregate outstanding. All of the depreciation and amortization
of the assets of the Company will be allocated solely to the Class A members, unless and until their interests have been redeemed
by the Company in full pursuant to the provisions of the operating agreement. During March 2013 the Company contributed $20,200
to HDM and the group of outside investors contributed $19,800 for its non-controlling membership interest.
To fund its capital contribution the Company
borrowed a total of $14,000 from a bank in the form of a term loan aggregating $11,000 and a revolving credit loan aggregating
$3,000. The term loan is payable in 60 consecutive monthly installments, commencing September 1, 2013. The term loan bears interest
at 4.75% per annum and is payable monthly. The revolving credit loan is due March 5, 2016. The Company can prepay the loan in whole
or in part in multiples of $100 at any time without penalty. The revolving credit note bears interest at a rate of 4% per annum
and is payable monthly. All borrowings under the loan agreements are collateralized by substantially all of the Company’s
assets. The loan agreements also contain certain financial covenants that must be met on a periodic basis.
On March 5, 2013 HDM purchased from Health Diagnostics,
LLC (“HD”) and certain of its subsidiaries, a business managing twelve (12) Stand-Up® MRI Centers and two (2) other
scanning centers located in the States of New York and Florida for a total purchase price (including consideration of $1,500 to
outside investors) aggregating $35,900. Concurrently with the acquisition, HDM entered into several consulting and non-competition
agreements for a consideration of $4,100. The acquisition was accounted for using the purchase method in accordance with ASC 805,
“Business Combinations”. The accompanying consolidated financial statements include the operations of HDM from the
date of acquisition. The Company recognizes and measures goodwill as of the acquisition date, as the excess of the fair value of
the consideration paid over the fair value of the identified net assets acquired.
The following table summarizes the estimated
fair values of the assets and liabilities assumed at the acquisition date:
Management fee receivable
|
|
$
|
6,667
|
|
Medical receivables
|
|
|
7,390
|
|
Prepaid expenses and other current assets
|
|
|
10
|
|
Property and equipment
|
|
|
14,913
|
|
Intangible assets
|
|
|
9,200
|
|
Goodwill
|
|
|
1,767
|
|
Other assets
|
|
|
333
|
|
Other current liabilities
|
|
|
(6
|
)
|
Long term debt
|
|
|
(274
|
)
|
Net assets acquired
|
|
$
|
40,000
|
|
Page 18
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
(AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
(UNAUDITED)
NOTE 9 – CONTROLLING AND NONCONTROLLING INTERESTS (Continued)
The purchase price was allocated to the tangible
and intangible assets and liabilities assumed based on estimates of their respective fair values at the date of acquisition with
the remaining unallocated purchase price recorded as goodwill. Management is responsible for the valuation of net assets acquired
and considered a number of factors, including valuations and appraisals, when estimating the fair values and estimated useful lives
of acquired assets and liabilities. The intangible assets, excluding goodwill, are being amortized on a straight-line basis over
their weighted average lives as follows:
|
|
Fair Value
|
|
|
Non compete
|
|
$
|
4,100
|
|
|
|
7 years
|
|
Customer relationships
|
|
|
3,800
|
|
|
|
20 years
|
|
Developed software
|
|
|
1,300
|
|
|
|
5 years
|
|
Total intangible assets
|
|
$
|
9,200
|
|
|
|
|
|
The HDM acquisition operating results have been
included within the Company’s condensed consolidated financial statements since the date of acquisition. The following unaudited
pro forma information assumes that the acquisition had been completed as of July 1, 2012:
|
|
FOR THE THREE MONTHS ENDED DECEMBER 31, 2012
|
|
FOR THE
SIX
MONTHS ENDED DECEMBER 31, 2012
|
Total Revenues - Net
|
|
$
|
17,896
|
|
|
$
|
37,090
|
|
Net Income - Controlling Interests
|
|
|
796
|
|
|
|
2,856
|
|
Net Income Available to Common Stockholders
|
|
|
743
|
|
|
|
2,667
|
|
Net Income Available to Class A Non-Voting Preferred Stockholders
|
|
|
39
|
|
|
|
141
|
|
Net Income Available to Class C Common Stockholders
|
|
|
14
|
|
|
|
48
|
|
Basis Net Income Per Common Share Available to Common Stockholders
|
|
$
|
0.13
|
|
|
$
|
0.45
|
|
Diluted Net Income Per Common Share Available to Common Stockholders
|
|
$
|
0.12
|
|
|
$
|
0.44
|
|
Basic and Diluted Income Per Share - Common C
|
|
$
|
0.04
|
|
|
$
|
0.13
|
|
Weighted Average Basic Shares Outstanding
|
|
|
5,926
|
|
|
|
5,901
|
|
Weighted Average Diluted Shares Outstanding
|
|
|
6,054
|
|
|
|
6,029
|
|
Weighted Average Basic and Diluted Shares Outstanding - Class C Common
|
|
|
383
|
|
|
|
383
|
|
Page 19
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
(AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
(UNAUDITED)
NOTE 10 - SEGMENT AND RELATED INFORMATION
The Company operates in two industry segments
- manufacturing and the servicing of medical equipment and management of diagnostic imaging centers.
The accounting policies of the segments are
the same as those described in the summary of significant accounting policies as disclosed in the Company’s 10-K as of June
30, 2013. 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 December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
$
|
3,331
|
|
|
$
|
14,278
|
|
|
$
|
17,609
|
|
Inter-segment net revenues
|
|
$
|
495
|
|
|
$
|
—
|
|
|
$
|
495
|
|
(Loss) Income from operations
|
|
$
|
(31
|
)
|
|
$
|
3,326
|
|
|
$
|
3,295
|
|
Depreciation and amortization
|
|
$
|
60
|
|
|
$
|
912
|
|
|
$
|
972
|
|
Capital expenditures
|
|
$
|
26
|
|
|
$
|
80
|
|
|
$
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
$
|
3,873
|
|
|
$
|
5,740
|
|
|
$
|
9,613
|
|
Inter-segment net revenues
|
|
$
|
203
|
|
|
$
|
—
|
|
|
$
|
203
|
|
Income from operations
|
|
$
|
241
|
|
|
$
|
1,481
|
|
|
$
|
1,722
|
|
Depreciation and amortization
|
|
$
|
137
|
|
|
$
|
258
|
|
|
$
|
395
|
|
Capital expenditures
|
|
$
|
37
|
|
|
$
|
54
|
|
|
$
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
$
|
5,898
|
|
|
$
|
28,542
|
|
|
$
|
34,440
|
|
Inter-segment net revenues
|
|
$
|
990
|
|
|
$
|
—
|
|
|
$
|
990
|
|
Income from operations
|
|
$
|
131
|
|
|
$
|
7,217
|
|
|
$
|
7,348
|
|
Depreciation and amortization
|
|
$
|
218
|
|
|
$
|
1,736
|
|
|
$
|
1,954
|
|
Capital expenditures
|
|
$
|
73
|
|
|
$
|
262
|
|
|
$
|
335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
$
|
7,650
|
|
|
$
|
11,474
|
|
|
$
|
19,124
|
|
Inter-segment net revenues
|
|
$
|
405
|
|
|
$
|
—
|
|
|
$
|
405
|
|
Income from operations
|
|
$
|
468
|
|
|
$
|
3,130
|
|
|
$
|
3,598
|
|
Depreciation and amortization
|
|
$
|
295
|
|
|
$
|
515
|
|
|
$
|
810
|
|
Capital expenditures
|
|
$
|
108
|
|
|
$
|
230
|
|
|
$
|
338
|
|
Page 20
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
(AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
(UNAUDITED)
NOTE 11– SUPPLEMENTAL CASH FLOW INFORMATION
During the six months ended December 31, 2013
and December 31, 2012, the Company paid $361 and $63 for interest, respectively.
During the six months ended December 31, 2013
and December 31, 2012, the Company paid $190 and $227 for income taxes, respectively.
NOTE 12 – COMMITMENTS AND CONTINGENCIES
Litigation
The Company is subject to legal proceedings
and claims arising from the ordinary course of its business, including personal injury, customer contract and employment claims.
In the opinion of management, the aggregate liability, if any, with respect to such actions, will not have a material adverse effect
on the consolidated financial position or results of operations of the Company.
There were no material changes in litigation
from that reported in our Form 10-K for the fiscal year ended June 30, 2013.
Bonutti Research v. Fonar Corporation, Health
Management Corporation of America, Health Diagnostics, LLC et al, was commenced on December 2, 2011. Bonutti Research filed a patent
infringement action in the U.S. District Court for the Eastern District Court of New York, alleging that Fonar’s Upright®
MRI scanners infringe plaintiff’s patent which relates to the moving of a patient into the scanner. Fonar believes
plaintiff’s claims are without merit and further, that the patent is invalid. The parties have settled the case for $150
payable by Fonar in twelve installments and certain licenses and covenants not to sue. The $150 has been accrued as of December
31, 2013 in the Company’s condensed consolidated financial statements.
Bolt MRI Technologies v. Fonar Corporation,
Health Management Corporation of America & Health Diagnostics, LLC, was commenced on July 22, 2013, when Bolt MRI Technologies
filed an action against Fonar Corporation, Health Management Corporation of America and Health Diagnostics, LLC alleging infringement
of the same patent which is the subject of the Bonutti case. Bolt alleged that the patent was assigned to Bolt. The settlement
of the Bonutti case covers this case as well.
Other Matters
The Company is also delinquent in filing sales
tax returns for certain states, for which the Company has transacted business. As of December 31, 2013, the Company has recorded
tax obligations of approximately $2,704 plus interest and penalties of approximately $2,440. The Company is in the process of determining
the regulatory requirements in order to become compliant.
Page 21
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
(AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
(UNAUDITED)
NOTE 12 – COMMITMENTS AND CONTINGENCIES (Continued)
Other Matters
(Continued)
On August 31, 2011 the Company submitted
an application to the Internal Revenue Service to voluntarily correct required reporting and disclosure requirements
regarding its 401(k) Employee Benefit Plan. On December 9, 2011, the Internal Revenue Service issued a favorable
determination letter on the tax-qualified status of the 401K plan document and a favorable compliance statement. During
December 2013, the Company submitted an application to the U.S. Department of Labor to voluntarily correct the late filing of
prior Form 5500s (annual returns). The voluntary correction application is still pending. The Company, however, does
not anticipate any additional penalties will be assessed by the U.S. Department of Labor. The Company has recorded
provisions for any potential penalties totaling $250, which was the Company’s best estimate of its possible exposure
for penalties at that time. Management still is unable to determine the outcome of this uncertainty, but is optimistic that
the total penalties will be significantly less than the $250 reserve. The Company has engaged outside counsel to assist with
the correction process and to obtain compliance with all reporting and disclosure requirements.
NOTE 13 - INCOME TAXES
Effective January 1, 2007, the Company adopted
the provisions of ASC topic 740 (formerly FASB Interpretation No. 48/FASB Statement No. 109, “Accounting for Uncertainty
in Income Taxes”). 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.
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 2008.
The Company netted a deferred tax asset of $2,936
and a deferred tax liability of $462 as of December 31, 2013, primarily relating to net operating loss carryforwards of approximately
$142,788 available to offset future taxable income through 2030. The net operating losses begin to expire in 2019 for federal tax
purposes and in 2013 for state income tax purposes.
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.
The Company considers projected future taxable income and tax planning strategies in making this assessment. At present, the Company
does have a sufficient history of income and anticipates profitability in the coming years and has concluded that it is more-likely-than-not
that the Company will be able to realize a portion of its tax benefits in the near future and therefore a valuation allowance was
established for the partial value of the deferred tax asset.
Page 22
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
(AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
(UNAUDITED)
NOTE 13 - INCOME TAXES (Continued)
A valuation allowance will be maintained until
sufficient positive evidence exists to support the reversal of any portion or all of the valuation. Should the Company become profitable
in future periods with supportable trends, the valuation allowance will be reversed accordingly.
NOTE 14- SUBSEQUENT EVENTS
During the period from January 1, 2014 through
January 31, 2014, the Company issued 15 shares of common stock for costs and expenses of $110 under a stock bonus plan.