ASSETS
|
|
March
31,
2016
|
|
June
30,
2015 *
|
Cash and cash equivalents
|
|
$
|
13,147
|
|
|
$
|
9,449
|
|
Accounts receivable – net
|
|
|
4,326
|
|
|
|
3,791
|
|
Accounts receivable - related party
|
|
|
30
|
|
|
|
—
|
|
Medical receivable – net
|
|
|
10,097
|
|
|
|
9,082
|
|
Management and other fees receivable – net
|
|
|
15,901
|
|
|
|
14,058
|
|
Management and other fees receivable – related medical practices – net
|
|
|
4,059
|
|
|
|
3,507
|
|
Costs and estimated earnings in excess of billing on uncompleted contracts
|
|
|
279
|
|
|
|
682
|
|
Inventories
|
|
|
2,234
|
|
|
|
2,192
|
|
Prepaid expenses and other current assets
|
|
|
834
|
|
|
|
860
|
|
Total Current Assets
|
|
|
50,907
|
|
|
|
43,621
|
|
Deferred income tax asset
|
|
|
8,423
|
|
|
|
8,423
|
|
Property and equipment – net
|
|
|
11,877
|
|
|
|
12,901
|
|
Goodwill
|
|
|
1,767
|
|
|
|
1,767
|
|
Other intangible assets – net
|
|
|
8,066
|
|
|
|
8,950
|
|
Other assets
|
|
|
972
|
|
|
|
830
|
|
Total Assets
|
|
$
|
82,012
|
|
|
$
|
76,492
|
|
*Condensed from audited financial statements.
See accompanying notes to condensed consolidated financial
statements.
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts and shares in thousands,
except per share amounts)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
March
31,
2016
|
|
June 30,
2015 *
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt and capital leases
|
|
$
|
2,455
|
|
|
$
|
2,490
|
|
Accounts payable
|
|
|
1,345
|
|
|
|
1,783
|
|
Other current liabilities
|
|
|
8,638
|
|
|
|
8,253
|
|
Unearned revenue on service contracts
|
|
|
4,350
|
|
|
|
4,187
|
|
Unearned revenue on service contracts - related party
|
|
|
28
|
|
|
|
—
|
|
Customer advances
|
|
|
1,511
|
|
|
|
1,938
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
255
|
|
|
|
142
|
|
Total Current Liabilities
|
|
|
18,582
|
|
|
|
18,793
|
|
Long-Term Liabilities:
|
|
|
|
|
|
|
|
|
Deferred income tax liability
|
|
|
510
|
|
|
|
510
|
|
Due to related medical practices
|
|
|
237
|
|
|
|
237
|
|
Long-term debt and capital leases, less current
portion
|
|
|
3,863
|
|
|
|
5,699
|
|
Other liabilities
|
|
|
718
|
|
|
|
469
|
|
Total Long-Term Liabilities
|
|
|
5,328
|
|
|
|
6,915
|
|
Total Liabilities
|
|
|
23,910
|
|
|
|
25,708
|
|
*Condensed from audited financial statements.
See accompanying notes to condensed consolidated financial
statements.
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,
2016
|
|
June 30,
2015 *
|
STOCKHOLDERS' EQUITY:
|
|
|
|
|
Class A non-voting preferred stock $.0001 par value; 453 shares authorized at March 31, 2016 and June 30, 2015, 313 issued and outstanding at March 31, 2016 and June 30, 2015
|
|
$
|
—
|
|
|
$
|
—
|
|
Preferred stock $.001 par value; 567 shares authorized at March 31, 2016 and June 30, 2015, issued and outstanding – none
|
|
|
—
|
|
|
|
—
|
|
Common Stock $.0001 par value; 8,500 shares authorized at March 31, 2016 and June 30, 2015, 6,062 issued at March 31, 2016 and June 30, 2015; 6,051 outstanding at March 31, 2016 and June 30, 2015
|
|
|
1
|
|
|
|
1
|
|
Class B Common Stock (10 votes per share) $ .0001 par value; 227 shares authorized at March 31, 2016 and June 30, 2015, .146 issued and outstanding at March 31, 2016 and June 30, 2015
|
|
|
—
|
|
|
|
—
|
|
Class C Common Stock (25 votes per share) $.0001 par value; 567 shares authorized at March 31, 2016 and June 30, 2015, 383 issued and outstanding at March 31, 2016 and June 30, 2015
|
|
|
—
|
|
|
|
—
|
|
Paid-in capital in excess of par value
|
|
|
175,448
|
|
|
|
175,448
|
|
Accumulated deficit
|
|
|
(126,989
|
)
|
|
|
(136,349
|
)
|
Notes receivable from employee stockholders
|
|
|
(26
|
)
|
|
|
(32
|
)
|
Treasury stock, at cost - 12 shares of common stock at March 31, 2016 and June 30, 2015
|
|
|
(675
|
)
|
|
|
(675
|
)
|
Total Fonar Corporation Stockholder Equity
|
|
|
47,759
|
|
|
|
38,393
|
|
Noncontrolling interests
|
|
|
10,343
|
|
|
|
12,391
|
|
Total Stockholders' Equity
|
|
|
58,102
|
|
|
|
50,784
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
82,012
|
|
|
$
|
76,492
|
|
*Condensed from audited financial statements.
See accompanying notes to condensed consolidated financial
statements.
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
|
|
2016
|
|
2015
|
Product sales – net
|
|
$
|
20
|
|
|
$
|
160
|
|
Service and repair fees – net
|
|
|
2,406
|
|
|
|
2,299
|
|
Service and repair fees – related parties - net
|
|
|
27
|
|
|
|
27
|
|
Patient fee revenue, net of contractual allowances and discounts
|
|
|
8,695
|
|
|
|
7,284
|
|
Provision for bad debts for patient fee
|
|
|
(3,830
|
)
|
|
|
(3,201
|
)
|
Management and other fees – net
|
|
|
9,394
|
|
|
|
8,653
|
|
Management and other fees – related medical practices – net
|
|
|
1,907
|
|
|
|
1,874
|
|
Total Revenues – Net
|
|
|
18,619
|
|
|
|
17,096
|
|
COSTS AND EXPENSES
|
|
|
|
|
|
|
|
|
Costs related to product sales
|
|
|
263
|
|
|
|
352
|
|
Costs related to service and repair fees
|
|
|
552
|
|
|
|
630
|
|
Costs related to service and repair fees – related parties
|
|
|
6
|
|
|
|
7
|
|
Costs related to patient fee revenue
|
|
|
2,549
|
|
|
|
2,044
|
|
Costs related to management and other fees
|
|
|
5,649
|
|
|
|
5,285
|
|
Costs related to management and other fees – related medical practices
|
|
|
1,045
|
|
|
|
1,284
|
|
Research and development
|
|
|
395
|
|
|
|
360
|
|
Selling, general and administrative
|
|
|
4,533
|
|
|
|
3,706
|
|
Provision for bad debts
|
|
|
(470
|
)
|
|
|
762
|
|
Total Costs and Expenses
|
|
|
14,522
|
|
|
|
14,430
|
|
Income From Operations
|
|
|
4,097
|
|
|
|
2,666
|
|
Interest Expense
|
|
|
(127
|
)
|
|
|
(169
|
)
|
Investment Income
|
|
|
56
|
|
|
|
52
|
|
Income Before Provision for Income Taxes and Noncontrolling Interests
|
|
|
4,026
|
|
|
|
2,549
|
|
Provision for Income Taxes
|
|
|
145
|
|
|
|
30
|
|
Net Income
|
|
|
3,881
|
|
|
|
2,519
|
|
Net Income - Noncontrolling Interests
|
|
|
(876
|
)
|
|
|
(500
|
)
|
Net Income - Controlling Interests
|
|
$
|
3,005
|
|
|
$
|
2,019
|
|
Net Income Available to Common Stockholders
|
|
$
|
2,810
|
|
|
$
|
1,888
|
|
Net Income Available to Class A Non-Voting Preferred Stockholders
|
|
$
|
145
|
|
|
$
|
98
|
|
Net Income Available to Class C Common Stockholders
|
|
$
|
50
|
|
|
$
|
33
|
|
Basic Net Income Per Common Share Available to Common Stockholders
|
|
$
|
0.46
|
|
|
$
|
0.31
|
|
Diluted Net Income Per Common Share Available to Common Stockholders
|
|
$
|
0.45
|
|
|
$
|
0.31
|
|
Basic and Diluted Income Per Share-Class C Common
|
|
$
|
0.13
|
|
|
$
|
0.09
|
|
Weighted Average Basic Shares Outstanding-Common Stockholders
|
|
|
6,050
|
|
|
|
6,050
|
|
Weighted Average Diluted Shares Outstanding – Common Stockholders
|
|
|
6,178
|
|
|
|
6,178
|
|
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.
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF INCOME
(Amounts and shares in thousands,
except per share amounts)
(UNAUDITED)
|
|
FOR THE NINE MONTHS
ENDED MARCH 31,
|
REVENUES
|
|
2016
|
|
2015
|
Product sales – net
|
|
$
|
780
|
|
|
$
|
1,806
|
|
Service and repair fees – net
|
|
|
6,970
|
|
|
|
7,288
|
|
Service and repair fees – related parties - net
|
|
|
83
|
|
|
|
83
|
|
Patient fee revenue, net of contractual allowances and discounts
|
|
|
24,596
|
|
|
|
20,700
|
|
Provision for bad debts for patient fee
|
|
|
(10,608
|
)
|
|
|
(9,244
|
)
|
Management and other fees – net
|
|
|
27,180
|
|
|
|
26,004
|
|
Management and other fees – related medical practices – net
|
|
|
5,598
|
|
|
|
5,536
|
|
Total Revenues – Net
|
|
|
54,599
|
|
|
|
52,173
|
|
COSTS AND EXPENSES
|
|
|
|
|
|
|
|
|
Costs related to product sales
|
|
|
939
|
|
|
|
1,674
|
|
Costs related to service and repair fees
|
|
|
1,542
|
|
|
|
1,611
|
|
Costs related to service and repair fees - related parties
|
|
|
18
|
|
|
|
18
|
|
Costs related to patient fee revenue
|
|
|
7,015
|
|
|
|
5,845
|
|
Costs related to management and other fees
|
|
|
16,664
|
|
|
|
15,665
|
|
Costs related to management and other fees – related medical practices
|
|
|
3,116
|
|
|
|
3,893
|
|
Research and development
|
|
|
1,243
|
|
|
|
1,116
|
|
Selling, general and administrative
|
|
|
12,425
|
|
|
|
11,108
|
|
Provision for bad debts
|
|
|
(300
|
)
|
|
|
1,540
|
|
Total Costs and Expenses
|
|
|
42,662
|
|
|
|
42,470
|
|
Income From Operations
|
|
|
11,937
|
|
|
|
9,703
|
|
Interest Expense
|
|
|
(416
|
)
|
|
|
(545
|
)
|
Investment Income
|
|
|
164
|
|
|
|
173
|
|
Other Income (Expense)
|
|
|
1
|
|
|
|
(2
|
)
|
Income Before Provision for Income Taxes and Noncontrolling Interests
|
|
|
11,686
|
|
|
|
9,329
|
|
Provision for Income Taxes
|
|
|
235
|
|
|
|
99
|
|
Net Income
|
|
|
11,451
|
|
|
|
9,230
|
|
Net Income - Noncontrolling Interests
|
|
|
(2,091
|
)
|
|
|
(2,018
|
)
|
Net Income - Controlling Interests
|
|
$
|
9,360
|
|
|
$
|
7,212
|
|
Net Income Available to Common Stockholders
|
|
$
|
8,752
|
|
|
$
|
6,743
|
|
Net Income Available to Class A Non-voting Preferred Stockholders
|
|
$
|
453
|
|
|
$
|
350
|
|
Net Income Available to Class C Common Stockholders
|
|
$
|
155
|
|
|
$
|
119
|
|
Basic Net Income Per Common Share Available to Common Stockholders
|
|
$
|
1.45
|
|
|
$
|
1.11
|
|
Diluted Net Income Per Common Share Available to Common Stockholders
|
|
$
|
1.42
|
|
|
$
|
1.09
|
|
Basic and Diluted Income Per Share-Class C Common
|
|
$
|
0.40
|
|
|
$
|
0.31
|
|
Weighted Average Basic Shares Outstanding – Common Stockholders
|
|
|
6,050
|
|
|
|
6,050
|
|
Weighted Average Diluted Shares Outstanding – Common Stockholders
|
|
|
6,178
|
|
|
|
6,178
|
|
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.
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,
|
|
|
2016
|
|
2015
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,451
|
|
|
$
|
9,230
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,507
|
|
|
|
2,665
|
|
Provision for bad debts
|
|
|
(300
|
)
|
|
|
1,540
|
|
Stock issued for costs and expenses
|
|
|
—
|
|
|
|
76
|
|
Compensatory element of stock issuances
|
|
|
—
|
|
|
|
53
|
|
(Increase) decrease in operating assets, net:
|
|
|
|
|
|
|
|
|
Accounts, medical and management fee receivable(s)
|
|
|
(3,674
|
)
|
|
|
(4,310
|
)
|
Notes receivable
|
|
|
17
|
|
|
|
118
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
403
|
|
|
|
79
|
|
Inventories
|
|
|
(43
|
)
|
|
|
158
|
|
Prepaid expenses and other current assets
|
|
|
9
|
|
|
|
89
|
|
Other assets
|
|
|
(143
|
)
|
|
|
18
|
|
Increase (decrease) in operating liabilities, net:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(437
|
)
|
|
|
(178
|
)
|
Other current liabilities
|
|
|
576
|
|
|
|
(501
|
)
|
Customer advances
|
|
|
(427
|
)
|
|
|
(259
|
)
|
Billings in excess of costs and
estimated earnings on uncompleted contracts
|
|
|
112
|
|
|
|
—
|
|
Other liabilities
|
|
|
249
|
|
|
|
(230
|
)
|
Due to related medical practices
|
|
|
—
|
|
|
|
(2
|
)
|
Net cash provided by operating activities
|
|
|
10,300
|
|
|
|
8,546
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(534
|
)
|
|
|
(125
|
)
|
Cost of patents
|
|
|
(65
|
)
|
|
|
(108
|
)
|
Net cash used in investing activities
|
|
|
(599
|
)
|
|
|
(233
|
)
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Repayment of borrowings and capital lease obligations
|
|
|
(1,871
|
)
|
|
|
(2,166
|
)
|
Distributions to noncontrolling interests
|
|
|
(4,138
|
)
|
|
|
(3,306
|
)
|
Buyout of noncontrolling interests
|
|
|
—
|
|
|
|
(4,971
|
)
|
Repayment of notes receivable from employee stockholders
|
|
|
6
|
|
|
|
6
|
|
Net cash used in financing activities
|
|
|
(6,003
|
)
|
|
|
(10,437
|
)
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
3,698
|
|
|
|
(2,124
|
)
|
Cash and Cash Equivalents – Beginning of Period
|
|
|
9,449
|
|
|
|
9,952
|
|
Cash and Cash Equivalents - End of Period
|
|
$
|
13,147
|
|
|
$
|
7,828
|
|
See accompanying notes to condensed consolidated financial
statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016 and 2015
(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, 2016, are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30, 2016. 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 29, 2015 for the fiscal
year ended June 30, 2015.
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, 2016 and March 31, 2015.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016 and 2015
(Amounts and shares in thousands,
except per share amounts)
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share
(Continued)
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, 2016 and March 31, 2015, diluted EPS for common shareholders
includes 128 shares upon conversion of Class C Common.
|
|
Three months ended
March 31, 2016
|
|
Three months ended
March 31, 2015
|
|
|
Total
|
|
Common Stock
|
|
Class C Common Stock
|
|
Total
|
|
Common Stock
|
|
Class C Common Stock
|
Basic
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
3,005
|
|
|
$
|
2,810
|
|
|
$
|
50
|
|
|
$
|
2,019
|
|
|
$
|
1,888
|
|
|
$
|
33
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
6,050
|
|
|
|
6,050
|
|
|
|
383
|
|
|
|
6,050
|
|
|
|
6,050
|
|
|
|
383
|
|
Basic income per common share
|
|
$
|
0.50
|
|
|
$
|
0.46
|
|
|
$
|
0.13
|
|
|
$
|
0.33
|
|
|
$
|
0.31
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
6,050
|
|
|
|
383
|
|
|
|
|
|
|
|
6,050
|
|
|
|
383
|
|
Convertible Class C Stock
|
|
|
|
|
|
|
128
|
|
|
|
—
|
|
|
|
|
|
|
|
128
|
|
|
|
—
|
|
Total denominator for diluted earnings per share
|
|
|
|
|
|
|
6,178
|
|
|
|
383
|
|
|
|
|
|
|
|
6,178
|
|
|
|
383
|
|
Diluted income per common share
|
|
|
|
|
|
$
|
0.45
|
|
|
$
|
0.13
|
|
|
|
|
|
|
$
|
0.31
|
|
|
$
|
0.09
|
|
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016 and 2015
(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, 2016
|
|
Nine months ended
March 31, 2015
|
|
|
Total
|
|
Common Stock
|
|
Class C Common Stock
|
|
Total
|
|
Common Stock
|
|
Class C Common Stock
|
Basic
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
9,360
|
|
|
$
|
8,752
|
|
|
$
|
155
|
|
|
$
|
7,212
|
|
|
$
|
6,743
|
|
|
$
|
119
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
6,050
|
|
|
|
6,050
|
|
|
|
383
|
|
|
|
6,050
|
|
|
|
6,050
|
|
|
|
383
|
|
Basic income per common share
|
|
$
|
1.55
|
|
|
$
|
1.45
|
|
|
$
|
0.40
|
|
|
$
|
1.19
|
|
|
$
|
1.11
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
6,050
|
|
|
|
383
|
|
|
|
|
|
|
|
6,050
|
|
|
|
383
|
|
Convertible Class C Stock
|
|
|
|
|
|
|
128
|
|
|
|
—
|
|
|
|
|
|
|
|
128
|
|
|
|
—
|
|
Total denominator for diluted earnings per share
|
|
|
|
|
|
|
6,178
|
|
|
|
383
|
|
|
|
|
|
|
|
6,178
|
|
|
|
383
|
|
Diluted income per common share
|
|
|
|
|
|
$
|
1.42
|
|
|
$
|
0.40
|
|
|
|
|
|
|
$
|
1.09
|
|
|
$
|
0.31
|
|
Recent Accounting Pronouncements
In March 2016, the FASB issued ASU No. 2016-09,
“Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. This update
includes provisions intended to simplify various aspects of accounting for share-based compensation. ASU No. 2016-09 will take
effect for public companies for the annual periods beginning after December 15, 2016. The Company is currently assessing the potential
impact of ASU No. 2016-09 on the Company’s consolidated condensed financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016 and 2015
(Amounts and shares in thousands,
except per share amounts)
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Recent Accounting Pronouncements
(Continued)
In November 2015, the FASB issued ASU No. 2015-17,
Balance Sheet Classification of Deferred Taxes, which will require entities to present deferred tax assets and deferred tax liabilities
as non-current in a classified balance sheet. The ASU simplified the current guidance, which requires entities to separately present
deferred tax assets and deferred tax liabilities as current and non-current in a classified balance sheet. This standard is effective
for annual periods and interim periods within those fiscal years, beginning after December 15, 2016 but permits entities to early
adopt at the beginning of any interim or annual period. During the quarter ended December 31, 2015, the Company elected to early
adopt ASU 2015-17 and applied the change retrospectively to all periods present. As a result, the Company presented all deferred
assets and liabilities as non-current in its consolidated balance sheet. The adoption of this ASU did not result in a reclassification
of the Company’s net deferred tax assets and liabilities as of June 30, 2015. As of March 31, 2016, there was no impact on
the Company’s results of operations as a result of the adoption of ASU No. 2015-17
The FASB has issued ASU No. 2014-09,
Revenue
from Contracts with Customers
. This ASU supercedes the revenue recognition requirements in Accounting Standards Codification
605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity
recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those goods or services. This ASU is effective for annual reporting
periods beginning after December 15, 2017, as deferred including interim periods within the reporting period and should be applied
retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the
ASU recognized at the date of initial application. The Company is currently evaluating the effect that this ASU will have on its
condensed consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has
it determined the effect of the standard on it ongoing financial reporting.
In July 2015, the FASB issued Accounting Standards
Update No. 2015-11, “
Simplifying the Measurement of Inventory
” (“ASU 2015-11”). ASU 2015-11 requires
an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices
in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement
is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail inventory method. It is effective
for annual reporting periods beginning after December 15, 2016. The amendments should be applied prospectively with earlier application
permitted as of the beginning of an interim or annual reporting period.
FASB, the Emerging Issues Task Force and the
SEC have issued certain other accounting standards, updates, and regulations as of March 31, 2016 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 2016 or 2015, 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 reclassifications did not have any effect on reported consolidated net income
for any periods presented.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016 and 2015
(Amounts and shares in thousands,
except per share amounts)
(UNAUDITED)
NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT
AND OTHER FEES RECEIVABLE
Receivables, net is comprised of the following
at March 31, 2016:
|
|
Gross
Receivable
|
|
Allowance for
doubtful accounts
|
|
Net
|
Accounts receivable
|
|
$
|
4,614
|
|
|
$
|
288
|
|
|
$
|
4,326
|
|
Accounts receivable - related party
|
|
$
|
30
|
|
|
|
—
|
|
|
$
|
30
|
|
Medical receivable
|
|
$
|
36,164
|
|
|
$
|
26,067
|
|
|
$
|
10,097
|
|
Management and other fees receivable
|
|
$
|
28,873
|
|
|
$
|
12,972
|
|
|
$
|
15,901
|
|
Management and other fees receivable - related medical practices ("PC’s")
|
|
$
|
4,462
|
|
|
$
|
403
|
|
|
$
|
4,059
|
|
Receivables, net is comprised of the following
at June 30, 2015:
|
|
Gross
Receivable
|
|
Allowance for
doubtful accounts
|
|
Net
|
Accounts receivable
|
|
$
|
4,153
|
|
|
$
|
362
|
|
|
$
|
3,791
|
|
Accounts receivable - related party
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Medical receivable
|
|
$
|
24,541
|
|
|
$
|
15,459
|
|
|
$
|
9,082
|
|
Management and other fees receivable
|
|
$
|
27,330
|
|
|
$
|
13,272
|
|
|
$
|
14,058
|
|
Management and other fees receivable - related medical practices ("PC’s")
|
|
$
|
3,910
|
|
|
$
|
403
|
|
|
$
|
3,507
|
|
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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016 and 2015
(Amounts and shares in thousands,
except per share amounts)
(UNAUDITED)
NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT
AND OTHER FEES RECEIVABLE (Continued)
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 59% and 55% of the PCs’
net revenues for the three months ended March 31, 2016 and 2015, respectively, were derived from no-fault and personal injury protection
claims. Approximately 60% and 54% of the PCs’ net revenues for the nine months ended March 31, 2016 and 2015, 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 10.2% and 11% of the consolidated net revenues for the three months ended
March 31, 2016 and 2015, respectively. Net revenues from management and other fees charged to the related PCs accounted for approximately
10.3% and 10.6% of the consolidated net revenues for the nine months ended March 31, 2016 and 2015, 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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016 and 2015
(Amounts and shares in thousands,
except per share amounts)
(UNAUDITED)
NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT
AND OTHER FEES RECEIVABLE (Continued)
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, 2016 and
2015 are summarized in the following tables.
|
|
For the Three Months Ended
March 31,
|
|
|
2016
|
|
2015
|
Commercial Insurance/ Managed Care
|
|
$
|
1,245
|
|
|
$
|
1,091
|
|
Medicare/Medicaid
|
|
|
332
|
|
|
|
292
|
|
Workers' Compensation/Personal Injury
|
|
|
5,453
|
|
|
|
4,513
|
|
Other
|
|
|
1,665
|
|
|
|
1,388
|
|
Patient Fee Revenue, net of contractual allowances and discounts
|
|
|
8,695
|
|
|
|
7,284
|
|
Provision for Bad Debts
|
|
|
(3,830
|
)
|
|
|
(3,201
|
)
|
Net Patient Fee for Revenue
|
|
$
|
4,865
|
|
|
$
|
4,083
|
|
|
|
For the Nine Months Ended
March 31,
|
|
|
2016
|
|
2015
|
Commercial Insurance/ Managed Care
|
|
$
|
3,438
|
|
|
$
|
3,245
|
|
Medicare/Medicaid
|
|
|
874
|
|
|
|
896
|
|
Workers' Compensation/Personal Injury
|
|
|
15,649
|
|
|
|
11,354
|
|
Other
|
|
|
4,635
|
|
|
|
5,205
|
|
Patient Fee Revenue, net of contractual allowances and discounts
|
|
|
24,596
|
|
|
|
20,700
|
|
Provision for Bad Debts
|
|
|
(10,608
|
)
|
|
|
(9,244
|
)
|
Net Patient Fee for Revenue
|
|
$
|
13,988
|
|
|
$
|
11,456
|
|
NOTE 4 - INVENTORIES
Inventories included in the accompanying condensed consolidated balance
sheet consist of the following:
|
|
March 31,
2016
|
|
June 30,
2015
|
Purchased parts, components and supplies
|
|
$
|
2,033
|
|
|
$
|
2,043
|
|
Work-in-process
|
|
|
201
|
|
|
|
149
|
|
Total Inventories
|
|
$
|
2,234
|
|
|
$
|
2,192
|
|
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016 and 2015
(Amounts and shares in thousands,
except per share amounts)
(UNAUDITED)
NOTE 5 – COSTS AND ESTIMATED EARNINGS
ON UNCOMPLETED CONTRACTS
Information relating
to uncompleted contracts is as follows:
|
|
March 31, 2016
|
|
June 30, 2015
|
Costs incurred on uncompleted contracts
|
|
$
|
2,310
|
|
|
$
|
1,862
|
|
Estimated earnings
|
|
|
1,622
|
|
|
|
1,371
|
|
Subtotal
|
|
|
3,932
|
|
|
|
3,233
|
|
Less: Billings to date
|
|
|
3,908
|
|
|
|
2,693
|
|
Total Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
24
|
|
|
$
|
540
|
|
Included in the accompanying
condensed consolidated balance sheets under the following captions:
|
|
March 31, 2016
|
|
June 30, 2015
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
279
|
|
|
$
|
682
|
|
Less: Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
255
|
|
|
|
142
|
|
Total Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
24
|
|
|
|
540
|
|
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, 2016
|
|
June 30, 2015
|
Capitalized software development costs
|
|
$
|
7,005
|
|
|
$
|
7,005
|
|
Patents and copyrights
|
|
|
4,612
|
|
|
|
4,547
|
|
Non-compete
|
|
|
4,100
|
|
|
|
4,100
|
|
Customer relationships
|
|
|
3,800
|
|
|
|
3,800
|
|
Gross Other intangible assets
|
|
|
19,517
|
|
|
|
19,452
|
|
Less: Accumulated amortization
|
|
|
11,451
|
|
|
|
10,502
|
|
Other Intangible Assets
|
|
$
|
8,066
|
|
|
$
|
8,950
|
|
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016 and 2015
(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, 2016 and 2015 amounted to $47 and $46, respectively.
Amortization of capitalized
software development costs for the three months ended March 31, 2016 and 2015 amounted to $65 and $81, respectively.
Amortization of non-compete
for the three months ended March 31, 2016 and 2015 amounted to $146 and $146, respectively.
Amortization of customer
relationships for the three months ended March 31, 2016 and 2015 amounted to $47 and $47, respectively.
Amortization of patents
and copyrights for the nine months ended March 31, 2016 and 2015 amounted to $141 and $137, respectively.
Amortization of capitalized
software development costs for the nine months ended March 31, 2016 and 2015 amounted to $227 and $246, respectively.
Amortization of non-compete
for the nine months ended March 31, 2016 and 2015 amounted to $439 and $439, respectively.
Amortization of customer
relationships for the nine months ended March 31, 2016 and 2015 amounted to $142 and $142, respectively.
NOTE 7 – OTHER CURRENT LIABILITIES
Other current liabilities in the accompanying
condensed consolidated balance sheet consist of the following:
|
|
March 31, 2016
|
|
June 30, 2015
|
Accrued salaries, commissions and payroll taxes
|
|
$
|
903
|
|
|
$
|
992
|
|
Accrued interest
|
|
|
117
|
|
|
|
117
|
|
Litigation accruals
|
|
|
493
|
|
|
|
521
|
|
Sales tax payable
|
|
|
2,565
|
|
|
|
2,539
|
|
Legal and other professional fees
|
|
|
307
|
|
|
|
344
|
|
Accounting fees
|
|
|
193
|
|
|
|
235
|
|
Self-funded health insurance reserve
|
|
|
434
|
|
|
|
510
|
|
Interest and penalty - sales tax
|
|
|
2,644
|
|
|
|
2,509
|
|
Other
|
|
|
982
|
|
|
|
486
|
|
Total Other Current Liabilities
|
|
$
|
8,638
|
|
|
$
|
8,253
|
|
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016 and 2015
(Amounts and shares in thousands,
except per share amounts)
(UNAUDITED)
NOTE 8 - 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, 2015. 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, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
$
|
2,454
|
|
|
$
|
16,165
|
|
|
$
|
18,619
|
|
Inter-segment net revenues
|
|
$
|
546
|
|
|
$
|
—
|
|
|
$
|
546
|
|
(Loss) income from operations
|
|
$
|
(207
|
)
|
|
$
|
4,304
|
|
|
$
|
4,097
|
|
Depreciation and amortization
|
|
$
|
79
|
|
|
$
|
751
|
|
|
$
|
830
|
|
Capital expenditures
|
|
$
|
31
|
|
|
$
|
117
|
|
|
$
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
$
|
2,486
|
|
|
$
|
14,610
|
|
|
$
|
17,096
|
|
Inter-segment net revenues
|
|
$
|
502
|
|
|
$
|
—
|
|
|
$
|
502
|
|
(Loss) income from operations
|
|
$
|
(367
|
)
|
|
$
|
3,033
|
|
|
$
|
2,666
|
|
Depreciation and amortization
|
|
$
|
78
|
|
|
$
|
811
|
|
|
$
|
889
|
|
Capital expenditures
|
|
$
|
111
|
|
|
$
|
—
|
|
|
$
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
$
|
7,833
|
|
|
$
|
46,766
|
|
|
$
|
54,599
|
|
Inter-segment net revenues
|
|
$
|
1,594
|
|
|
$
|
—
|
|
|
$
|
1,594
|
|
Income from operations
|
|
$
|
18
|
|
|
$
|
11,919
|
|
|
$
|
11,937
|
|
Depreciation and amortization
|
|
$
|
242
|
|
|
$
|
2,265
|
|
|
$
|
2,507
|
|
Capital expenditures
|
|
$
|
390
|
|
|
$
|
209
|
|
|
$
|
599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
$
|
9,177
|
|
|
$
|
42,996
|
|
|
$
|
52,173
|
|
Inter-segment net revenues
|
|
$
|
1,504
|
|
|
$
|
—
|
|
|
$
|
1,504
|
|
Income from operations
|
|
$
|
457
|
|
|
$
|
9,246
|
|
|
$
|
9,703
|
|
Depreciation and amortization
|
|
$
|
229
|
|
|
$
|
2,436
|
|
|
$
|
2,665
|
|
Capital expenditures
|
|
$
|
178
|
|
|
$
|
55
|
|
|
$
|
233
|
|
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016 and 2015
(Amounts and shares in thousands,
except per share amounts)
(UNAUDITED)
NOTE 9– SUPPLEMENTAL CASH FLOW INFORMATION
During the nine months ended March 31, 2016
and March 31, 2015, the Company paid $280 and $406 for interest, respectively.
During the nine months ended March 31, 2016
and March 31, 2015, the Company paid $235 and $99 for income taxes, respectively.
NOTE 10 – 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, 2015 with the exception of the case with Dr. Shapiro. The
case was settled for $258,400 plus interest on February 18. 2016.
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, 2016, the Company has recorded tax
obligations of approximately $2,565 plus interest and penalties of approximately $2,644. The Company is in the process of determining
the regulatory requirements in order to become compliant.
The Company maintains a self-funded health insurance
program with a stop-loss umbrella policy with a third party insurer to limit the maximum potential liability for individual claims
to $100 per person and for a maximum potential claim liability based on member enrollment. With respect to this program, the Company
considers historical and projected medical utilization data when estimating its health insurance program liability and related
expense. As of March 31, 2016 and June 30, 2015, the Company had approximately $434 and $510, respectively, in reserve for its
self-funded health insurance programs. The reserves are included in “Other current liabilities” in the condensed consolidated
balance sheets.
The Company regularly analyzes its reserves
for incurred but not reported claims, and for reported but not paid claims related to its reinsurance and self-funded insurance
programs. The Company believes its reserves are adequate. However, significant judgment is involved in assessing these reserves
such as assessing historical paid claims, average lags between the claims’ incurred date, reported dates and paid dates,
and the frequency and severity of claims. There may be differences between actual settlement amounts and recorded reserves and
any resulting adjustments are included in expense once a probable amount is known. There were no significant adjustments recorded
in the periods covered by this report.
In March 2016, the Company signed a 2nd
amendment with Signature Bank to extend the terms of the revolving loan to September 2018. As of March 31, 2016, the Company
has not been advanced any money under this revolving loan.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016 and 2015
(Amounts and shares in thousands,
except per share amounts)
(UNAUDITED)
NOTE 11 - 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 2009.
The Company recorded a deferred tax asset of
$8,423 and a deferred tax liability of $510 as of March 31, 2016, primarily relating to net operating loss carryforwards of approximately
$122,926 available to offset future taxable income through 2034. The net operating losses begin to expire in 2019 for federal tax
purposes and in 2015 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 the remainder of the valuation. Should the Company continue to remain
profitable in future periods with supportable trends, the valuation allowance will be reversed accordingly.
NOTE 12- SUBSEQUENT EVENTS
On May 2, 2016, the Company repaid the balance
of the Class A Stockholders capital contribution in the amount of $1,125. As a result, the Company’s subsidiary, HMCA, owns
a 100% interest in Imperial Management Services.
FONAR CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
For the nine
month period ended March 31, 2016, we reported a net income of $11.5 million on revenues of $54.6 million as compared to net income
of $9.2 million on revenues of $52.2 million for the nine month period ended March 31, 2016. Operating income increased 23.0% from
$9.7 million for the nine month period ended March 31, 2015 to $11.9 million for the six month period ended March 31, 2016.
For the three
month period ended March 31, 2016, we reported net income of $3.9 million on revenues of $18.6 million as compared to net income
of $2.5 million of revenues of $17.1 million for the three month period ended December 31, 2015.
The revenue
increase of 4.6%, from $52.2 million for the first nine months of fiscal 2015 to $54.6 million for the first nine months of fiscal
2016, was primarily due to an increase in patient fee revenue (net of contractual allowances and discounts) from $11.5 million
for the first nine months of fiscal 2015 to $14.0 million for the first nine months of fiscal 2016. There were also increases in
net management fees of $1.2 million, from $31.6 million for the first nine months of fiscal 2015 to $32.8 million for the first
nine months of fiscal 2016.
Offsetting
these increases, however, net product sales decreased by 56.8% to $780,000 for the first nine months of fiscal 2016 from $1.8 million
for the first nine months of fiscal 2015. Service and repair fees also decreased by 4.3% to $7.1 million for the first nine months
of fiscal 2016 from $7.4 million for the first nine months of fiscal 2015.
The increase
in the amount of our revenues was higher than the increase in the amount of our costs and expenses, and as a result, our operating
income of $11.9 million for the nine months ended March 31, 2016 was higher than our operating income of $9.7 million for the nine
months ended March 31, 2015. In terms of percentages, costs and expenses increased 0.5% from $42.5 million in the first nine months
of fiscal 2015 to $42.7 million in the first nine months of fiscal 2016, while revenues increased 4.6%, from $52.2 million in the
first nine months of fiscal 2015 to $54.6 million in the first nine months of fiscal 2016.
Fonar’s
wholly-owned subsidiary, Health Management Corporation of America (“HMCA”), is the controlling, but not sole owner
of two limited liability companies, Imperial Management Services, LLC (“Imperial”) and Health Diagnostics Management,
LLC (“HDM”). Effective July 1, 2015, the Company restructured the corporate organization of the management of diagnostic
imaging centers segment of the business. The reorganization was structured to more completely integrate the operations of HMCA
and HDM. Imperial Management Services LLC contributed all of its assets (which had been utilized in the business of HMCA) to HDM
and received a 24.2% interest in HDM. HMCA 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 the diagnostic imaging centers business
segment is now being conducted by HDM, operating under the name “Health Management Company of America”. For the sake
of simplicity, HMCA, Imperial and HDM are referred to as “HMCA”, unless otherwise indicated.
FONAR CORPORATION AND SUBSIDIARIES
Forward Looking Statements
Certain statements
made in this Quarterly Report on Form 10-Q are "forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of Management for future operations. Such statements involve
known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking
statements included herein are based on current expectations that involve numerous risks and uncertainties. Our plans and objectives
are based, in part, on assumptions involving the expansion of business. Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that our assumptions
underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can
be no assurance that the forward-looking statements included in this Report will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statement included herein, the inclusion of such information should not be regarded
as a representation by us or any other person that our objectives and plans will be achieved.
Results of
Operations
We operate
in two industry segments: the manufacture and servicing of medical (MRI) equipment, our traditional business, which is conducted
directly by Fonar, and diagnostic facilities management services, which is conducted through HMCA and its subsidiaries.
Manufacturing
and Service of MRI Equipment
Revenues from
MRI product sales decreased 56.8% to $780,000 for the first nine months of fiscal 2016 from $1.8 million for the first nine months
of fiscal 2015. Costs related to product sales also decreased, by 43.9%, from $1.7 million for the nine month period ended March
31, 2015 to $939,000 for the nine month period ended March 31, 2016. The decrease in sales revenues, when expressed as a percentage,
reflects the volatility resulting from low sales volume. During the first nine months of fiscal 2015 we sold two scanners; during
the first nine months of fiscal 2016 we sold one scanner. Continuing tight credit and economic uncertainty, together with lower
reimbursement rates for MRI scans, have depressed the market for our MRI scanner products.
Service revenues
decreased 4.3% from $7.4 million for the nine month period ended March 31, 2015 to $7.1 million for the nine month period ended
March 31, 2016. However, service revenues increased 4.6% from $2.3 million for the three month period ended March 31, 2015 to $2.4
million for the three month period ended March 31, 2016. Continuing lower sales volumes have been a factor ultimately contributing
to decreasing service revenues, as the number of older scanners being taken out of service has been greater than the number of
new scanners being placed under service agreements following the expiration of their warranties.
FONAR CORPORATION AND SUBSIDIARIES
Costs relating
to providing service for the first nine months of fiscal 2016 decreased by 4.2% from $1.63 million in the first nine months of
fiscal 2015 to $1.56 million in the first nine months of fiscal 2016. Costs relating to providing service for the three month period
ended March 31, 2016 also decreased, by 12.4% to $558,000 from $637,000 for the three month period ending March 31, 2015. We believe
that an important factor in controlling our service costs is our ability to monitor the performance of customers’ scanners
from our facilities in Melville, New York on a daily basis, and to detect and repair any irregularities before more serious problems
result.
There were
approximately $440,000 in foreign revenues for the first nine months of fiscal 2016 as compared to approximately $1.9 million in
foreign revenues for the first nine months of fiscal 2015, representing a decrease in foreign revenues of 76.8%. We do not regard
this as a material trend, but as part of a normal although sometimes volatile variation resulting from low volumes of foreign sales.
We recognize
MRI scanner sales revenues on the “percentage of completion” basis, which means the revenues are recognized as the
scanner is manufactured. Revenues recognized in a particular quarter do not necessarily reflect new orders or progress payments
made by customers in that quarter. We build the scanner as the customer meets certain benchmarks in its site preparation in order
to minimize the time lag between incurring costs of manufacturing and our receipt of the cash progress payments from the customer
which are due upon delivery. Consequently, there can be a disparity between the revenues recognized in a fiscal period and the
number of product sales. Generally, the revenues from a scanner sale are recognized in a fiscal quarter or quarters following the
quarter in which the sale was made.
Revenues for
the medical equipment segment as a whole decreased by 14.6% to $7.8 million for the first nine months of fiscal 2016 from $9.2
million for the first nine months of fiscal 2015. Operating results for our medical equipment segment decreased to an operating
income of $18,000 for the first nine months of fiscal 2016 as compared to an operating income of $457,000 for the first nine months
of fiscal 2015. For the first nine months of fiscal 2016, our medical equipment segment recognized a net loss of $226,000, compared
to a net income of $377,000 in the same period of fiscal 2015.
Diagnostic
Facilities Management Services
HMCA revenues
increased in the first nine months of fiscal 2016 by 8.8% to $46.8 million from $43.0 million for the first nine months of fiscal
2015. The percentage of our revenues derived from our diagnostic facilities management segment relative to the percentage of our
revenues derived from our medical equipment segment increased to 85.7% for the first nine months of fiscal 2016, from 82.5% for
the first nine months of fiscal 2015).
The increase
in HMCA revenues is principally due to HMCA’s success in marketing the scanning services of the facilities managed or owned
by HMCA, notwithstanding the decrease in reimbursement rates paid for MRI scans by insurers, Medicare and other government programs.
The reductions in reimbursement rates are not unique to HMCA or HMCA’s clients but are being experienced by the industry
in general.
HMCA’s
efforts are countering the effects of lower reimbursement rates by increasing the scan volume of the facilities it owns or manages.
As a result
of our vigorous marketing efforts, the number of scans performed at our centers and at our client’s centers increased from
106,259 in the first nine months of fiscal 2015 to 116,226 in the first nine months of fiscal 2016.
FONAR CORPORATION AND SUBSIDIARIES
We manage twenty-five
sites, twenty-four of which are equipped with Fonar Upright® MRI scanners (our Upright® MRI Scanners are also called Stand-Up®
MRI Scanners). HMCA experienced an operating income of $11.9 million for the first nine months of fiscal 2016 compared to operating
income of $9.2 million for the first nine months of fiscal 2015.
HMCA’s
cost of revenues for the first nine months of fiscal 2016 as compared to the first nine months of fiscal 2015 increased by 5.5%
from $25.4 million to $26.8 million.
Consolidated
For the first
nine months of fiscal 2016, our consolidated net revenues increased by 4.6% to $54.6 million from $52.2 million for the first nine
months of fiscal 2015, and total costs and expenses increased by 0.5% to $42.7 million for the first nine months of fiscal 2016
from $42.5 million for the first nine months of fiscal 2015. As a result, our operating income increased 23.0% to $11.9 million
in the first six months of fiscal 2016 from $9.7 million in the first nine months of fiscal 2015.
Selling, general
and administrative expenses increased by 11.9% to $12.4 million in the first nine months of fiscal 2016 from $11.1 million in the
first nine months of fiscal 2015. The compensatory element of stock issuances, which is included in selling, general and administrative
expenses, decreased, by 100%, to $0 for the first nine months of fiscal 2016 from $53,200 for the first nine months of fiscal 2015.
Research and
development expenses increased by 11.4% to $1.2 million for the first nine months of fiscal 2016 from $1.1 million for the first
nine months of fiscal 2015.
Interest expense
in the first nine months of fiscal 2016 decreased by 23.7% to $416,000 from $545,000 in the first nine months of fiscal 2015. The
decrease was due to the repayment of debt incurred by Fonar in connection with the acquisition of HDM.
Inventories
remained constant at $2.2 million at March 31, 2016 and June 30, 2015. This represents our purchase of raw materials and components
in our business operations.
Net Management
fee and medical receivables increased by 12.8% to $30.1 million at March 31, 2016 from $26.6 million at June 30, 2015 as a result
of slower collections. The slower collections were primarily due to an increase in no-fault and workers’ compensation revenue,
which typically takes longer to collect.
The results
of operations for the first nine months of fiscal 2016 reflect an increase in revenues from management, patient and other fees,
as compared to the first nine months of fiscal 2015 ($46.8 million for the first nine months of fiscal 2016 as compared to $43.0
million for the first nine months of fiscal 2015), and an decrease in MRI equipment segment revenues ($7.8 million as compared
to $9.2 million). Revenues were 14.3% from the MRI equipment segment as compared to 85.7% from HMCA, for the first nine months
of fiscal 2016, as compared to 17.6% from the MRI equipment segment and 82.4% from HMCA for the first nine months of fiscal 2015.
The implementation
of the Patient Protection and Affordable Care Act (PPACA) is having a profound impact on the healthcare industry. We are experiencing
some of the impact of the Act on our business in the reduction of reimbursement rates and fewer sales of our MRI equipment, but
are unable to predict the ultimate effect of the legislative mandates and regulations on our MRI equipment segment or HMCA segment
in the future.
FONAR CORPORATION AND SUBSIDIARIES
We are committed
to improving our operating results and dealing with the challenges posed by legislative and regulatory requirements. Nevertheless,
factors beyond our control, such as the timing and rate of market growth, economic conditions, the availability of credit and payor
reimbursement rates, or unexpected expenditures and the timing of such expenditures, make it difficult to forecast future operating
results.
As mentioned,
one of the effects of the PPACA on our business has been the reduction in Medicare reimbursement rates for MRI scans. This also
has resulted in a reduction in the reimbursement rates by commercial insurers and government programs which tie their reimbursement
rates to the Medicare rates. Nevertheless, the increased patient volume of the scanning centers we manage or own has enabled us
to maintain a healthy profitability in spite of these challenges. We believe we are pursuing the correct policies to cope with
these problems and to improve the Company’s operating results. However, our future revenues and results of operations may
be adversely impacted by future reductions in reimbursement rates.
Our Upright®
MRI (also referred to as the Stand-Up® MRI), together with our works-in-progress, are intended to significantly improve our
competitive position.
The Upright®
MRI scanner, which operates at 6000 gauss (.6 Tesla) field strength, allows patients to be scanned while standing, sitting, reclining
and in multiple flexion and extension positions. It is common in visualizing the spine that abnormalities are visualized in some
positions and not others. This enables surgical corrections that heretofore would be unaddressable for lack of visualizing the
symptom causing the pathology and therefore, in general enables the treating physician to achieve a better treatment outcome for
his patient. A floor-recessed elevator brings the patient to the height appropriate for the targeted image region. A custom-built
multi-position adjustable bed will allow patients to sit or lie on their backs, sides or stomachs at any angle. This allows the
MRI technologist to ask the patient to position himself/herself in the exact position that generates his/her pain so that images
of the patient in the position that explicitly generates the patient’s pain can be nailed down. Full-range-of-motion studies
of the joints in virtually any direction are possible, a particularly promising feature for sports injuries.
In addition
FONAR has announced the publication of a new book “THE CRANIOCERVICAL SYNDROME and MRI” that highlights the unique
attributes of FONAR UPRIGHT® MRI Imaging (S. Karger, A.G. based in Basel, Switzerland- www.karger.com/Book/Home/261956) which
has been published by S. Karger, a 125 year old company and an academic publisher of scientific and medical journals and books.
The seven chapter monograph examines the rapid advances in MRI made possible by the FONAR UPRIGHT® Multi-Position MRI that
are transforming the treatment of patients suffering from the craniocervical syndrome (CCS). It is written by leading international
experts in the field to practitioners with a better understanding of the subtle anatomy and MRI appearances at the craniocervical
junction, along with insight into the clinical significance of cerebrospinal fluid (CSF) flow measurements and its potential role
in generating the devastating impairments of the neurodegenerative diseases: Alzheimer’s (5.1 million patients in the United
States), childhood and adult Autism (3.0 million), Parkinson’s (1.0 million), Multiple Sclerosis (250,000-350,000) and Amyotrophic
Lateral Sclerosis (ALS) (30,000). It calls attention to the revolutionary importance of FONAR’s new UPRIGHT® MRI imaging
technology and the prospect of significantly relieving the suffering of the above totaled 9.38 million patients afflicted with
these disorders.
FONAR CORPORATION AND SUBSIDIARIES
Fonar also
announced a major diagnostic breakthrough in multiple sclerosis achieved with advanced Upright® MRI. Medical researchers at
FONAR published a paper reporting a diagnostic breakthrough in multiple sclerosis (MS), based on observations made possible by
the Company’s unique Upright® Multi-Position™ MRI scanner. The findings reveal that the cause of multiple sclerosis
may be biomechanical and related to earlier trauma to the neck, which can result in obstruction of the flow of cerebrospinal fluid
(CSF), which is produced and stored in the central anatomic structures of the brain known as the ventricles. Since the ventricles
produce a large net volume of CSF each day (500 cc), the obstruction can result in a build up of pressure within the ventricles,
resulting in leakage of the CSF and the antigenic polypeptides it contains into the surrounding brain tissue. This leakage could
be responsible for generating the brain lesions of multiple sclerosis.
The paper,
titled “The Possible Role of Cranio-Cervical Trauma and Abnormal CSF Hydrodynamics in the Genesis of Multiple Sclerosis,"
appears in the the Journal of Physiological Chemistry and Physics and Medical NMR (Sept. 20, 2011).
This capability
of the Fonar Upright® technology has demonstrated its key value on patients with the Arnold-Chiari syndrome [Cerebellar Tonsil
Extopia (CTE)], which is believed to affect 200,000 to 500,000 Americans. In this syndrome, brain stem compression and subsequent
severe neurological symptoms occur in these patients, because the brain stem descends and is compressed at the base of the skull
in the foramen magnum, which is the circular bony opening at the base of the skull where the spinal cord exits the skull. Conventional
lie-down MRI scanners cannot make an adequate evaluation of this pathology since the patient's pathology is most visible and the
symptoms most acute when the patient is scanned in the upright fully weight-bearing position.
A combined
study of 1,200 neck pain patients published in “Brain Injury” (July 2010) by eight university medical centers reported
that cerebellar tonsil ectopia (CTE) of 1mm or greater was found and visualized 2.5 times (250%) more frequently when patients
who had sustained automobile whiplash injuries were scanned upright rather than lying down.
The Upright®
MRI has also demonstrated its value for patients suffering from scoliosis. Scoliosis patients have been typically subjected to
routine x-ray exams for years and must be imaged upright for an adequate evaluation of their scoliosis. Because the patient must
be standing for a complete evaluation of the extent of the patient’s scoliosis, an x-ray machine has been the only modality
that could provide that service. The Upright® MRI is the only MRI scanner which allows the patient to stand during the MRI
exam. Fonar has developed an RF receiver and scanning protocol that for the first time allows scoliosis patients to obtain diagnostic
pictures of their spines without the risks of x-rays. A study by the National Cancer Institute (2000) of 5,466 women with scoliosis
reported a 70% increase in breast cancer resulting from 24.7 chest x-rays these patients received on the average in the course
of their scoliosis treatment. The Upright® MRI examination of scoliosis enables the needed imaging evaluation of the degree
of spine scoliosis without exposing the patient to the risk of breast cancer from x-radiation. Currently scoliosis affects more
than 3,000,000 American women.
In addition,
the University of California, Los Angeles (UCLA) reported their results of their study of 1,302 patients utilizing the Fonar Upright®
MRI at the 22nd Annual Meeting of the North American Spine Society on October 23, 2007. The UCLA study showed the superior ability
of the Fonar Upright® MRI to detect spine pathology, including spondylolisthesis, disc herniations and disc degeneration, as
compared to visualizations of the spine produced by traditional single position static MRIs.
FONAR CORPORATION AND SUBSIDIARIES
The UCLA study
by MRI of 1,302 back pain patients when they were in the Fonar Upright® MRI and examined in a full range of flexion and extension
positions made possible by Fonar’s new Upright® technology established that significant “misses” of pathology
were occurring with static single position MRI imaging. At L4-5, the vertebral level responsible for 49.8% of lumbar disc herniations,
35.1% of the spondylolistheses (vertebral instabilities) visualized by the Upright® MRI, were being missed by static single
position MRI (510 patients). Since this vertebral segment is responsible for the majority of all disc herniations, the finding
may reveal a significant cause of failed back surgeries. The UCLA study further showed the “miss-rate” of vertebral
instabilities by static only MRI was even higher, 38.7%, at the L3-4 vertebral segment. Additionally, the UCLA study showed that
MRI examinations of the cervical spine that did not perform extension images of the neck “missed” disc bulges 23.75%
of the time (163 patients).
The UCLA study
further reported that they were able to quantitatively measure the dimensions of the central spinal canal with the “highest
accuracy” using the FONAR Upright® MRI thereby enabling the extent of spinal canal stenosis that existed in patients
to be measured. Spinal canal stenosis gives rise to the symptom complex intermittent neurogenic claudication manifest as debilitating
pain in the back and lower extremities, weakness and difficulties in ambulation and leg paresthesias. Spinal canal stenosis is
a spinal compression syndrome separate and distinct from the more common nerve compression syndrome of the spinal nerves as they
exit the vertebral column through the bony neural foramen.
The Fonar
Upright® MRI can also be useful for MRI directed emergency neuro-surgical procedures as the surgeon would have unhindered access
to the patient’s head when the patient is supine with no restrictions in the vertical direction. This easy-entry, mid-field-strength
scanner could prove ideal for trauma centers where a quick MRI-screening within the first critical hour of treatment will greatly
improve patients’ chances for survival and optimize the extent of recovery.
Liquidity and
Capital Resources
Cash and cash
equivalents increased by 39.1% from $9.4 million at June 30, 2015 to $13.1 million at March 31, 2016, primarily as a result of
the increased profitability of HMCA.
Cash provided
by operating activities for the first nine months of fiscal 2016 was $10.3 million. Cash provided by operating activities was attributable
principally to net income of $11.5 million, an increase in other current liabilities of $576,000, and depreciation and amortization
of $2.5 million, offset by an increase in accounts, management fees and medical receivables of $3.7 million.
Cash used in
investing activities for the first nine months of fiscal 2016 was $599,000. The principal uses of cash used in investing activities
during the first nine months of fiscal 2016 consisted of patent costs of $65,000 and the purchase of property and equipment of
$534,000.
Cash used in
financing activities for the first nine months of fiscal 2016 was $6.0 million. The principal uses of cash in financing activities
during the first six months of fiscal 2016 were the repayment of principal on long-term debt and capital lease obligations of $1.9
million and distributions to non-controlling interests of $4.1 million.
FONAR CORPORATION AND SUBSIDIARIES
Total liabilities
decreased by 7.0% to $23.9 million at March 31, 2016 from $25.7 million at June 30, 2015. “Other” current liabilities
increased by 4.7% to $8.6 million at March 31, 2016 from $8.3 million at June 30, 2015, offset by a decrease in long-term debt
and capital lease obligations from $5.7 million to $3.9 million. The current portion of our unearned revenue on service contracts
increased from $4.2 million to $4.4 million. Customer deposits decreased from $1.9 million at June 30, 2015 to $1.5 million at
March 31, 2016 as a result of reduced sales.
As of March
31, 2016, the total of $8.8 million in “other” current liabilities included accrued salaries and payroll taxes of $903,000,
and sales taxes of $2.6 million plus accrued interest and penalties of $2.6 million.
Our working
capital increased to $32.3 million at March 31, 2016 from $24.8 million at June 30, 2015. This resulted from an increase in current
assets ($43.6 million at June 30, 2015 as compared to $50.9 million at March 31, 2016), and a smaller decrease in current liabilities
from $18.8 million at June 30, 2015 to $18.6 million at March 31, 2016.
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. A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of any portion
or all of the valuation allowance. Should the Company continue to remain profitable in the future periods with supportable trends,
the valuation allowance will be reversed accordingly.
Fonar has not
committed to making any significant capital expenditures for the remainder of the 2016 fiscal year.
Critical to
our business plan are the improvement and expansion of the MRI facilities managed or owned by HMCA, and increasing the number of
scans performed at those facilities. In addition, our business plan calls for a continuing commitment to providing our customers
with enhanced equipment service and maintenance capabilities and delivering state-of-the-art, innovative and high quality equipment
and upgrades at competitive prices.
In furtherance
of our business plan, HMCA began managing a twenty-fifth MRI scanning facility located in Great Neck, New York, in the last week
of December, 2015.
Management
is seeking to promote wider market recognition of Fonar’s scanner products, and to increase demand for Upright® scanning
at the facilities HMCA owns or manages. Given the liquidity and credit constraints in the markets, and the uncertainty resulting
for the Patient Protection and Affordable Care Act, the sale of medical equipment has and may continue to suffer.
The Company
believes that its business plan has been responsible for the past four consecutive fiscal years and past three fiscal quarters
of profitability (fiscal 2012, fiscal 2013, fiscal 2014, fiscal 2015 and the first nine months of fiscal 2016) and that its capital
resources will be adequate to support operations at current levels through at least March 31, 2017. In the past, the Company experienced
periods of working capital deficits and prior to fiscal 2011, losses. The future effects on our business of healthcare reform legislation,
the Deficit Reduction Act, the 2.3% excise tax on sales of medical equipment, reimbursement rates and the general economic and
business climate are not known at the present time. Nevertheless, there is a possibility of adverse consequences to our business
operations from these causes.
FONAR CORPORATION AND SUBSIDIARIES