NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2014 and 2013
(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 nine months ended March 31,
2014, 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 nine months ended March 31, 2014 and March 31, 2013.
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, 2014 and March
31, 2013, 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
MARCH
31, 2014 and 2013
(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, 2014
|
|
Three
months ended
March
31, 2013
|
Basic
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
|
Class
C Common Stock
|
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
|
Class
C Common Stock
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income Available to common stockholders
|
|
$
|
1,739
|
|
|
$
|
1,625
|
|
|
$
|
29
|
|
|
$
|
1,076
|
|
|
$
|
1,005
|
|
|
$
|
18
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
6,022
|
|
|
|
6,022
|
|
|
|
383
|
|
|
|
5,937
|
|
|
|
5,937
|
|
|
|
383
|
|
Basic
income per common share
|
|
$
|
0.29
|
|
|
$
|
0.27
|
|
|
$
|
0.08
|
|
|
$
|
0.18
|
|
|
$
|
0.17
|
|
|
$
|
0.05
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares outstanding
|
|
|
|
|
|
|
6,022
|
|
|
|
383
|
|
|
|
|
|
|
|
5,937
|
|
|
|
383
|
|
Stock options
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
Convertible
Class C Stock
|
|
|
|
|
|
|
128
|
|
|
|
—
|
|
|
|
|
|
|
|
128
|
|
|
|
—
|
|
Total
Denominator for diluted earnings per share
|
|
|
|
|
|
|
6,150
|
|
|
|
383
|
|
|
|
|
|
|
|
6,065
|
|
|
|
383
|
|
Diluted
income per common share
|
|
|
|
|
|
$
|
0.26
|
|
|
$
|
0.08
|
|
|
|
|
|
|
$
|
0.17
|
|
|
$
|
0.05
|
|
Page
10
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2014 and 2013
(AMOUNTS
AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings
Per Share
(Continued)
|
|
Nine
months ended
March
31, 2014
|
|
Nine
months ended
March
31, 2013
|
Basic
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
|
Class
C Common Stock
|
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
|
Class
C Common Stock
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income Available to common stockholders
|
|
$
|
6,319
|
|
|
$
|
5,907
|
|
|
$
|
105
|
|
|
$
|
3,876
|
|
|
$
|
3,621
|
|
|
$
|
65
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
6,002
|
|
|
|
6,002
|
|
|
|
383
|
|
|
|
5,921
|
|
|
|
5,921
|
|
|
|
383
|
|
Basic
income per common share
|
|
$
|
1.05
|
|
|
$
|
0.98
|
|
|
$
|
0.27
|
|
|
$
|
0.65
|
|
|
$
|
0.61
|
|
|
$
|
0.17
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares outstanding
|
|
|
|
|
|
|
6,002
|
|
|
|
383
|
|
|
|
|
|
|
|
5,921
|
|
|
|
383
|
|
Stock options
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
Convertible
Class C Stock
|
|
|
|
|
|
|
128
|
|
|
|
—
|
|
|
|
|
|
|
|
128
|
|
|
|
—
|
|
Total
Denominator for diluted earnings per share
|
|
|
|
|
|
|
6,130
|
|
|
|
383
|
|
|
|
|
|
|
|
6,049
|
|
|
|
383
|
|
Diluted
income per common share
|
|
|
|
|
|
$
|
0.96
|
|
|
$
|
0.27
|
|
|
|
|
|
|
$
|
0.60
|
|
|
$
|
0.17
|
|
Page
11
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2014 and 2013
(AMOUNTS
AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 March
31, 2014 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 2014 or 2013, 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.
Page
12
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2014 and 2013
(AMOUNTS
AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year presentation. The reclassifications did not have any
effect on reported consolidated net income for any periods presented.
NOTE 3
– ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE
Receivables,
net is comprised of the following at March 31, 2014:
|
|
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
|
|
$
|
30
|
|
|
|
—
|
|
|
$
|
30
|
|
Medical
Receivable
|
|
$
|
18,639
|
|
|
$
|
9,715
|
|
|
$
|
8,924
|
|
Management
and other fees receivables
|
|
$
|
22,534
|
|
|
$
|
9,859
|
|
|
$
|
12,675
|
|
Management
and other fees receivables from related medical practices ("PC’s")
|
|
$
|
3,866
|
|
|
$
|
403
|
|
|
$
|
3,463
|
|
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.
Page
13
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2014 and 2013
(AMOUNTS
AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 3
– ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE (Continued)
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.
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 50% and 51% of the PCs’ net revenues for the three months ended March 31, 2014 and 2013, respectively, were
derived from no-fault and personal injury protection claims. Approximately 50% and 47% of the PCs’ net revenues for the
nine months ended March 31, 2014 and 2013, 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
14
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2014 and 2013
(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 13.2% and 16.9% of the consolidated
net revenues for the three months ended March 31, 2014 and 2013, respectively. Net revenues from management and other fees charged
to the related PCs accounted for approximately 13.4% and 19.2% of the consolidated net revenues for the nine months ended March
31, 2014 and 2013, 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 nine months ended March 31, 2014 and 2013 are summarized in the following tables.
|
|
For
the Three Months Ended
March 31,
|
|
|
2014
|
|
2013
|
Commercial
Insurance/ Managed Care
|
|
$
|
1,033
|
|
|
$
|
186
|
|
Medicare/Medicaid
|
|
|
343
|
|
|
|
81
|
|
Workers'
Compensation/Personal Injury
|
|
|
3,329
|
|
|
|
404
|
|
Other
|
|
|
1,385
|
|
|
|
294
|
|
Patient
Fee Revenue, net of contractual allowances and discounts
|
|
|
6,090
|
|
|
|
965
|
|
Provision
for Bad Debts
|
|
|
(2,868
|
)
|
|
|
—
|
|
Net
Patient Fee for Revenue
|
|
$
|
3,222
|
|
|
$
|
965
|
|
|
|
For
the Nine Months Ended
March 31,
|
|
|
2014
|
|
2013
|
Commercial
Insurance/ Managed Care
|
|
$
|
3,144
|
|
|
$
|
186
|
|
Medicare/Medicaid
|
|
|
1,161
|
|
|
|
81
|
|
Workers'
Compensation/Personal Injury
|
|
|
9,679
|
|
|
|
404
|
|
Other
|
|
|
3,827
|
|
|
|
294
|
|
Patient
Fee Revenue, net of contractual allowances and discounts
|
|
|
17,811
|
|
|
|
965
|
|
Provision
for Bad Debts
|
|
|
(7,130
|
)
|
|
|
—
|
|
Net
Patient Fee for Revenue
|
|
$
|
10,681
|
|
|
$
|
965
|
|
Page
15
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2014 and 2013
(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,
2014
|
|
June
30,
2013
|
Purchased
parts, components and supplies
|
|
$
|
2,120
|
|
|
$
|
1,784
|
|
Work-in-process
|
|
|
390
|
|
|
|
293
|
|
Total
Inventories
|
|
$
|
2,510
|
|
|
$
|
2,077
|
|
NOTE
5 – CUSTOMER ADVANCES
Customer
advances consist of the following:
|
|
March
31,
2014
|
|
June
30,
2013
|
Total
Advances
|
|
$
|
4,484
|
|
|
$
|
4,228
|
|
Less:
Advances on contracts under construction
|
|
|
2,693
|
|
|
|
2,370
|
|
Total
customer advances
|
|
$
|
1,791
|
|
|
$
|
1,858
|
|
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,
2014
|
|
June
30,
2013
|
Capitalized
software development costs
|
|
$
|
7,669
|
|
|
$
|
7,669
|
|
Patents
and copyrights
|
|
|
4,365
|
|
|
|
4,194
|
|
Non-compete
|
|
|
4,100
|
|
|
|
4,100
|
|
Customer
relationships
|
|
|
3,800
|
|
|
|
3,800
|
|
Gross
Other intangible assets
|
|
|
19,934
|
|
|
|
19,763
|
|
Less:
Accumulated amortization
|
|
|
8,891
|
|
|
|
7,859
|
|
Other
Intangible Assets
|
|
$
|
11,043
|
|
|
$
|
11,904
|
|
Page
16
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2014 and 2013
(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, 2014 and 2013 amounted to $44 and $42, respectively.
Amortization
of capitalized software development costs for the three months ended March 31, 2014 and 2013 amounted to $104 and $76, respectively.
Amortization
of non-compete for the three months ended March 31, 2014 and 2013 amounted to $146 and $49, respectively.
Amortization
of customer relationships for the three months ended March 31, 2014 and 2013 amounted to $47 and $67, respectively.
Amortization
of patents and copyrights for the nine months ended March 31, 2014 and 2013 amounted to $133 and $125, respectively.
Amortization
of capitalized software development costs for the nine months ended March 31, 2014 and 2013 amounted to $321 and $226, respectively.
Amortization
of non-compete for the nine months ended March 31, 2014 and 2013 amounted to $439 and $49, respectively.
Amortization
of customer relationships for the nine months ended March 31, 2014 and 2013 amounted to $139 and $67, respectively.
NOTE
7 – OTHER CURRENT LIABILITIES
Other
current liabilities in the accompanying condensed consolidated balance sheet consist of the following:
March 31,
|
|
June 30,
|
|
|
2014
|
|
2013
|
Accrued
salaries, commissions
and payroll taxes
|
|
$
|
974
|
|
|
$
|
711
|
|
Accrued interest
|
|
|
117
|
|
|
|
117
|
|
Litigation accruals
|
|
|
702
|
|
|
|
809
|
|
Sales tax payable
|
|
|
2,927
|
|
|
|
2,859
|
|
Legal and other
professional fees
|
|
|
491
|
|
|
|
569
|
|
Accounting fees
|
|
|
221
|
|
|
|
305
|
|
Insurance premiums
|
|
|
255
|
|
|
|
13
|
|
Interest and penalty
- sales tax
|
|
|
2,483
|
|
|
|
2,322
|
|
Penalty -
401k plan
|
|
|
250
|
|
|
|
250
|
|
Purchase scanners
|
|
|
450
|
|
|
|
—
|
|
Rent
|
|
|
57
|
|
|
|
148
|
|
Other
|
|
|
738
|
|
|
|
533
|
|
Total
Other Current Liabilities
|
|
$
|
9,665
|
|
|
$
|
8,636
|
|
Page
17
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2014 and 2013
(AMOUNTS
AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED
NOTE
8 – STOCKHOLDERS EQUITY
Common
Stock
During
the three months ended March 31, 2014:
a)
The Company issued 15 shares of common stock for costs and expenses of $110.
During
the nine months ended March 31, 2014:
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 35 shares of common stock for costs and expenses of $407.
c)
Options for 10 shares of common stock pursuant to the 2005 Incentive Stock Option Plan were exercised for $31.
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.
Page
18
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2014 and 2013
(AMOUNTS
AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 9
– CONTROLLING AND NONCONTROLLING INTERESTS (Continued)
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
|
|
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
|
|
|
|
|
|
Page
19
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2014 and 2013
(AMOUNTS
AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 9
– CONTROLLING AND NONCONTROLLING INTERESTS (Continued)
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 MARCH 31, 2013
|
|
FOR
THE NINE MONTHS ENDED MARCH 31, 2013
|
Total
Revenues - Net
|
|
$
|
15,115
|
|
|
$
|
51,049
|
|
Net
Income - Controlling Interests
|
|
|
1,446
|
|
|
|
5,356
|
|
Net
Income Available to Common Stockholders
|
|
|
1,351
|
|
|
|
5,003
|
|
Net
Income Available to Class A Non-Voting Preferred Stockholders
|
|
|
71
|
|
|
|
263
|
|
Net
Income Available to Class C Common Stockholders
|
|
|
24
|
|
|
|
90
|
|
Basic
Net Income Per Common Share Available to Common Stockholders
|
|
$
|
0.23
|
|
|
$
|
0.84
|
|
Diluted
Net Income Per Common Share Available to Common Stockholders
|
|
$
|
0.22
|
|
|
$
|
0.83
|
|
Basic
and Diluted Income Per Share - Common C
|
|
$
|
0.06
|
|
|
$
|
0.23
|
|
Weighted Average
Basic Shares Outstanding
|
|
|
5,937
|
|
|
|
5,922
|
|
Weighted Average
Diluted Shares Outstanding
|
|
|
6,065
|
|
|
|
6,049
|
|
Weighted
Average Basic and Diluted Shares Outstanding - Class C Common
|
|
|
383
|
|
|
|
383
|
|
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.
PAGE
20
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2014 and 2013
(AMOUNTS
AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE
10 - 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 March
31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues from external customers
|
|
$
|
3,023
|
|
|
$
|
14,017
|
|
|
$
|
17,040
|
|
Inter-segment net
revenues
|
|
$
|
495
|
|
|
$
|
—
|
|
|
$
|
495
|
|
Income from operations
|
|
$
|
192
|
|
|
$
|
2,127
|
|
|
$
|
2,319
|
|
Depreciation and
amortization
|
|
$
|
104
|
|
|
$
|
829
|
|
|
$
|
933
|
|
Capital expenditures
|
|
$
|
114
|
|
|
$
|
98
|
|
|
$
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March
31, 2013 *
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from
external customers
|
|
$
|
3,310
|
|
|
$
|
8,332
|
|
|
$
|
11,642
|
|
Inter-segment net
revenues
|
|
$
|
300
|
|
|
$
|
141
|
|
|
$
|
441
|
|
(Loss) income from
operations
|
|
$
|
(286
|
)
|
|
$
|
1,916
|
|
|
$
|
1,630
|
|
Depreciation and
amortization
|
|
$
|
126
|
|
|
$
|
553
|
|
|
$
|
679
|
|
Capital expenditures
|
|
$
|
58
|
|
|
$
|
281
|
|
|
$
|
339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended March 31,
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from
external customers
|
|
$
|
8,922
|
|
|
$
|
42,559
|
|
|
$
|
51,481
|
|
Inter-segment net
revenues
|
|
$
|
1,485
|
|
|
$
|
—
|
|
|
$
|
1,485
|
|
Income from operations
|
|
$
|
323
|
|
|
$
|
9,345
|
|
|
$
|
9,668
|
|
Depreciation and
amortization
|
|
$
|
322
|
|
|
$
|
2,565
|
|
|
$
|
2,887
|
|
Capital expenditures
|
|
$
|
187
|
|
|
$
|
360
|
|
|
$
|
547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended March 31,
2013 *
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from
external customers
|
|
$
|
10,960
|
|
|
$
|
19,806
|
|
|
$
|
30,766
|
|
Inter-segment net
revenues
|
|
$
|
705
|
|
|
$
|
141
|
|
|
$
|
846
|
|
Income from operations
|
|
$
|
182
|
|
|
$
|
5,046
|
|
|
$
|
5,228
|
|
Depreciation and
amortization
|
|
$
|
421
|
|
|
$
|
1,068
|
|
|
$
|
1,489
|
|
Capital expenditures
|
|
$
|
166
|
|
|
$
|
511
|
|
|
$
|
677
|
|
*includes HDM transactions as of
March 5,2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Page
21
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2014 and 2013
(AMOUNTS
AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE
11– SUPPLEMENTAL CASH FLOW INFORMATION
During
the nine months ended March 31, 2014 and March 31, 2013, the Company paid $521 and $198 for interest, respectively.
During
the nine months ended March 31, 2014 and March 31, 2013, the Company paid $255 and $252 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 and our form
10-Q for the first and second quarters of fiscal 2014, except with respect to the following matters.
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 UPRIGHTt® 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 March 31, 2014 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.
PAGE
22
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2014 and 2013
(AMOUNTS
AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 12
– COMMITMENTS AND CONTINGENCIES (Continued)
Other
Matters
The
Company is also delinquent in filing sales tax returns for certain states, for which the Company has transacted business. As of
March 31, 2014, the Company has recorded tax obligations of approximately $2,717 plus interest and penalties of approximately
$2,483. The Company is in the process of determining the regulatory requirements in order to become compliant.
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.
Page
23
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2014 and 2013
(AMOUNTS
AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE
13 - INCOME TAXES (Continued)
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 March 31, 2014, 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.
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
On
May 1, 2014, the Company repaid a portion of the Class A Stockholders capital contribution in the amount of $1.1 million. As
a result, the Company’s subsidiary, HMCA, owns a 91% interest in Imperial Management Services.
Page
24
FONAR
CORPORATION AND SUBSIDIARIES