LIABILITIES
AND STOCKHOLDERS’ EQUITY (Continued)
STOCKHOLDERS'
EQUITY:
|
|
September
30, 2016
|
|
June
30, 2016 *
|
Class
A non-voting preferred stock $.0001 par value; 453 shares authorized at September 30, 2016 and June 30, 2016, 313 issued and
outstanding at September 30, 2016 and June 30, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
Preferred
stock $.001 par value; 567 shares authorized at September 30, 2016 and June 30, 2016, issued and outstanding – none
|
|
|
—
|
|
|
|
—
|
|
Common
Stock $.0001 par value; 8,500 shares authorized at September 30, 2016 and June 30, 2016, 6,170 and 6,062 issued at September
30, 2016 and June 30, 2016, respectively; 6,158 and 6,051 outstanding at September 30, 2016 and June 30, 2016, respectively
|
|
|
1
|
|
|
|
1
|
|
Class
B Common Stock (10 votes per share) $.0001 par value; 227 shares authorized at September 30, 2016 and June 30, 2016; .146
issued and outstanding at September 30, 2016 and June 30, 2016
|
|
|
—
|
|
|
|
—
|
|
Class
C Common Stock (25 votes per share) $.0001 par value; 567 shares authorized at September 30, 2016 and June 30, 2016, 383 issued
and outstanding at September 30, 2016 and June 30, 2016
|
|
|
—
|
|
|
|
—
|
|
Paid-in
capital in excess of par value
|
|
|
175,948
|
|
|
|
173,702
|
|
Accumulated
deficit
|
|
|
(117,053
|
)
|
|
|
(120,624
|
)
|
Notes
receivable from employee stockholders
|
|
|
(22
|
)
|
|
|
(24
|
)
|
Treasury
stock, at cost - 12 shares of common stock at September 30, 2016 and June 30, 2016
|
|
|
(675
|
)
|
|
|
(675
|
)
|
Total
Fonar Corporation Stockholder Equity
|
|
|
58,199
|
|
|
|
52,380
|
|
Noncontrolling
interests
|
|
|
7,488
|
|
|
|
8,396
|
|
Total
Stockholders' Equity
|
|
|
65,687
|
|
|
|
60,776
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
86,140
|
|
|
$
|
84,888
|
|
*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 SEPTEMBER 30,
|
REVENUES
|
|
2016
|
|
2015
|
Product
sales – net
|
|
$
|
242
|
|
|
$
|
18
|
|
Service
and repair fees – net
|
|
|
2,351
|
|
|
|
2,284
|
|
Service
and repair fees - related parties – net
|
|
|
28
|
|
|
|
28
|
|
Patient
fee revenue, net of contractual allowances and discounts
|
|
|
8,823
|
|
|
|
8,114
|
|
Provision
for bad debts for patient fee
|
|
|
(3,878
|
)
|
|
|
(3,507
|
)
|
Management
and other fees – net
|
|
|
9,261
|
|
|
|
8,829
|
|
Management
and other fees - related medical practices – net
|
|
|
1,907
|
|
|
|
1,845
|
|
Total
Revenues – Net
|
|
|
18,734
|
|
|
|
17,611
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
Costs
related to product sales
|
|
|
213
|
|
|
|
112
|
|
Costs
related to service and repair fees
|
|
|
655
|
|
|
|
543
|
|
Costs
related to service and repair fees - related parties
|
|
|
8
|
|
|
|
7
|
|
Costs
related to patient fee revenue
|
|
|
2,414
|
|
|
|
2,228
|
|
Costs
related to management and other fees
|
|
|
5,261
|
|
|
|
5,419
|
|
Costs
related to management and other fees – related medical practices
|
|
|
953
|
|
|
|
1,058
|
|
Research
and development
|
|
|
412
|
|
|
|
436
|
|
Selling,
general and administrative
|
|
|
4,065
|
|
|
|
4,193
|
|
Total
Costs and Expenses
|
|
|
13,981
|
|
|
|
13,996
|
|
Income
From Operations
|
|
|
4,753
|
|
|
|
3,615
|
|
Interest
Expense
|
|
|
(98
|
)
|
|
|
(150
|
)
|
Investment
Income
|
|
|
48
|
|
|
|
50
|
|
Other
Expense
|
|
|
(3
|
)
|
|
|
—
|
|
Income
Before Provision for Income Taxes and Noncontrolling Interests
|
|
|
4,700
|
|
|
|
3,515
|
|
Provision
for Income Taxes
|
|
|
200
|
|
|
|
50
|
|
Net
Income
|
|
|
4,500
|
|
|
|
3,465
|
|
Net
Income - Noncontrolling Interests
|
|
|
(929
|
)
|
|
|
(603
|
)
|
Net
Income - Controlling Interests
|
|
$
|
3,571
|
|
|
$
|
2,862
|
|
Net
Income Available to Common Stockholders
|
|
$
|
3,343
|
|
|
$
|
2,676
|
|
Net
Income Available to Class A Non-Voting Preferred Stockholders
|
|
$
|
170
|
|
|
$
|
139
|
|
Net
Income Available to Class C Common Stockholders
|
|
$
|
58
|
|
|
$
|
47
|
|
Basic
Net Income Per Common Share Available to Common Stockholders
|
|
$
|
0.55
|
|
|
$
|
0.44
|
|
Diluted
Net Income Per Common Share Available to Common Stockholders
|
|
$
|
0.54
|
|
|
$
|
0.43
|
|
Basic
and Diluted Income Per Share – Class C Common
|
|
$
|
0.15
|
|
|
$
|
0.12
|
|
Weighted
Average Basic Shares Outstanding – Common Stockholders
|
|
|
6,105
|
|
|
|
6,050
|
|
Weighted
Average Diluted Shares Outstanding - Common Stockholders
|
|
|
6,233
|
|
|
|
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 THREE MONTHS ENDED
SEPTEMBER 30,
|
|
|
2016
|
|
2015
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
4,500
|
|
|
$
|
3,465
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
856
|
|
|
|
829
|
|
Provision
for bad debts
|
|
|
(161
|
)
|
|
|
418
|
|
Compensatory
element of stock issuances
|
|
|
7
|
|
|
|
—
|
|
Stock
issued for costs and expenses
|
|
|
2,239
|
|
|
|
—
|
|
(Increase)
decrease in operating assets, net:
|
|
|
|
|
|
|
|
|
Accounts,
medical and management fee receivable(s)
|
|
|
(1,675
|
)
|
|
|
(2,186
|
)
|
Notes
receivable
|
|
|
12
|
|
|
|
11
|
|
Inventories
|
|
|
(140
|
)
|
|
|
(104
|
)
|
Prepaid
expenses and other current assets
|
|
|
26
|
|
|
|
73
|
|
Other
assets
|
|
|
(63
|
)
|
|
|
12
|
|
Increase
(decrease) in operating liabilities, net:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
50
|
|
|
|
(187
|
)
|
Other
current liabilities
|
|
|
(2,218
|
)
|
|
|
1,120
|
|
Customer
deposits
|
|
|
(132
|
)
|
|
|
1
|
|
Billings
in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(30
|
)
|
|
|
—
|
|
Other
liabilities
|
|
|
92
|
|
|
|
16
|
|
Due
to related medical practices
|
|
|
(9
|
)
|
|
|
(4
|
)
|
Net
cash provided by operating activities
|
|
|
3,354
|
|
|
|
3,464
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(599
|
)
|
|
|
(45
|
)
|
Cost
of patents
|
|
|
(43
|
)
|
|
|
(19
|
)
|
Net
cash used in investing activities
|
|
|
(642
|
)
|
|
|
(64
|
)
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Repayment
of borrowings and capital lease obligations
|
|
|
(1,410
|
)
|
|
|
(623
|
)
|
Distributions
to noncontrolling interests
|
|
|
(1,837
|
)
|
|
|
(1,255
|
)
|
Repayment
of notes receivable from employee stockholders
|
|
|
1
|
|
|
|
2
|
|
Net
cash used in financing activities
|
|
|
(3,246
|
)
|
|
|
(1,876
|
)
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
|
|
(534
|
)
|
|
|
1,524
|
|
Cash
and Cash Equivalents - Beginning of Period
|
|
|
8,528
|
|
|
|
9,449
|
|
Cash
and Cash Equivalents - End of Period
|
|
$
|
7,994
|
|
|
$
|
10,973
|
|
See
accompanying notes to condensed consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 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 months ended September 30, 2016,
are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2017. 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 28, 2016 for the fiscal year ended June 30, 2016.
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 upon the weighted average number of shares of common stock and stock
equivalents outstanding, net of common stock. In accordance with ASC topic 260-10, “Participating Securities and the Two-Class
method”, the Company used the Two-Class method for calculating basic income per share and applied the if converted method
in calculating diluted income per share for the three months ended September 30, 2016 and 2015.
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 months ended September 30, 2016 and 2015, diluted
EPS for common shareholders includes 128 shares upon conversion of Class C Common.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 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)
|
|
Three
months ended
September 30, 2016
|
|
Three
months ended
September 30, 2015
|
|
|
Total
|
|
Common
Stock
|
|
Class
C Common
Stock
|
|
Total
|
|
Common
Stock
|
|
Class
C Common
Stock
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
Net
income available to common stockholders
|
|
$
|
3,571
|
|
|
$
|
3,343
|
|
|
$
|
58
|
|
|
$
|
2,862
|
|
|
$
|
2,676
|
|
|
$
|
47
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
6,105
|
|
|
|
6,105
|
|
|
|
383
|
|
|
|
6,050
|
|
|
|
6,050
|
|
|
|
383
|
|
Basic
income per common share
|
|
$
|
0.58
|
|
|
$
|
0.55
|
|
|
$
|
0.15
|
|
|
$
|
0.47
|
|
|
$
|
0.44
|
|
|
$
|
0.12
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
Weighted
average shares outstanding
|
|
|
|
|
|
|
6,105
|
|
|
|
383
|
|
|
|
|
|
|
|
6,050
|
|
|
|
383
|
|
Convertible
Class C Stock
|
|
|
|
|
|
|
128
|
|
|
|
—
|
|
|
|
|
|
|
|
128
|
|
|
|
—
|
|
Total
Denominator for diluted earnings per share
|
|
|
|
|
|
|
6,233
|
|
|
|
383
|
|
|
|
|
|
|
|
6,178
|
|
|
|
383
|
|
Diluted
income per common share
|
|
|
|
|
|
$
|
0.54
|
|
|
$
|
0.15
|
|
|
|
|
|
|
$
|
0.43
|
|
|
$
|
0.12
|
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2016 and 2015
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
During
February 2016, FAS issued ASU 2016-02, Leases (Topic 842). The new standard requires lessees to apply a dual approach, classifying
leases as either finance or operating leases based upon the principle of whether or not the lease is effectively a financed purchase
by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or
on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability
for all leases with a term of greater than 12 months regardless of their classification. Lease with a term of 12 months or less
will be accounted for similar to existing guidance for operating leases. The new guidance will be effective for annual reporting
periods beginning after December 15, 2018, including interim periods within that reporting period and is applied retrospectively.
Early adoption is permitted. The Company is currently in the process of assessing the impact the adoption of this guidance will
have on the Company’s consolidated condensed financial statements.
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, 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 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 September
30, 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 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
SEPTEMBER
30, 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
Accounts
Receivable, Medical Receivable and Management and Other Fees Receivable
Receivables,
net is comprised of the following September 30, 2016, and June 30, 2016:
|
|
September
30, 2016
|
|
|
|
Gross
Receivable
|
|
|
|
Allowance
for doubtful accounts
|
|
|
|
Net
|
|
Accounts
receivable
|
|
$
|
4,888
|
|
|
$
|
284
|
|
|
$
|
4,604
|
|
Accounts
receivable - related party
|
|
$
|
90
|
|
|
|
—
|
|
|
$
|
90
|
|
Medical
receivable
|
|
$
|
28,752
|
|
|
$
|
18,205
|
|
|
$
|
10,547
|
|
Management
and other fees receivable
|
|
$
|
29,469
|
|
|
$
|
12,909
|
|
|
$
|
16,560
|
|
Management
and other fees receivable from related medical practices ("PC’s")
|
|
$
|
4,625
|
|
|
$
|
393
|
|
|
$
|
4,232
|
|
|
|
June
30, 2016
|
|
|
|
Gross
Receivable
|
|
|
|
Allowance
for doubtful accounts
|
|
|
|
Net
|
|
Accounts
receivable
|
|
$
|
4,654
|
|
|
$
|
284
|
|
|
$
|
4,370
|
|
Accounts
receivable - related party
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Medical
receivable
|
|
$
|
27,579
|
|
|
$
|
17,452
|
|
|
$
|
10,127
|
|
Management
and other fees receivable
|
|
$
|
29,584
|
|
|
$
|
13,946
|
|
|
$
|
15,638
|
|
Management
and other fees receivable from related medical practices ("PC’s")
|
|
$
|
4,457
|
|
|
$
|
393
|
|
|
$
|
4,064
|
|
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
SEPTEMBER
30, 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
Receivables
Medical
receivables are due under fee-for-service contracts from third party payors, such as hospitals, government sponsored healthcare
programs, patient’s legal counsel and directly from patients. Substantially all the revenue relates to patients residing
in Florida. The carrying amount of the medical receivable is reduced by an allowance that reflects management’s best estimate
of the amounts that will not be collected. The Company 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 64% and 60% of the PCs’ net revenues for the three months ended September 30, 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 10.5% of the consolidated
net revenues for the three months ended September 30, 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.
The
Company’s patient fee revenue, net of contractual allowances and discounts less the provision for bad debts for the three
months ended September 30, 2016 and 2015 are summarized in the following table.
|
|
For
the Three Months Ended September 30,
|
|
|
2016
|
|
2015
|
Commercial
Insurance/ Managed Care
|
|
$
|
1,264
|
|
|
$
|
1,071
|
|
Medicare/Medicaid
|
|
|
300
|
|
|
|
275
|
|
Workers'
Compensation/Personal Injury
|
|
|
5,680
|
|
|
|
5,308
|
|
Other
|
|
|
1,579
|
|
|
|
1,460
|
|
Patient
Fee Revenue, net of contractual allowances and discounts
|
|
|
8,823
|
|
|
|
8,114
|
|
Provision
for Bad Debts
|
|
|
(3,878
|
)
|
|
|
(3,507
|
)
|
Net
Patient Fee for Revenue
|
|
$
|
4,945
|
|
|
$
|
4,607
|
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2016 and 2015
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
4 - INVENTORIES
Inventories
included in the accompanying condensed consolidated balance sheets consist of the following:
|
|
September
30, 2016
|
|
June
30, 2016
|
Purchased
parts, components and supplies
|
|
$
|
1,984
|
|
|
$
|
1,862
|
|
Work-in-process
|
|
|
230
|
|
|
|
212
|
|
TOTAL
INVENTORIES
|
|
$
|
2,214
|
|
|
$
|
2,074
|
|
NOTE
5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information
relating to uncompleted contracts is as follows:
|
|
September
30, 2016
|
|
June
30, 2016
|
Costs
incurred on uncompleted contracts
|
|
$
|
837
|
|
|
$
|
894
|
|
Estimated
earnings
|
|
|
480
|
|
|
|
491
|
|
Subtotal
|
|
|
1,317
|
|
|
|
1,385
|
|
Less:
Billings to date
|
|
|
1,493
|
|
|
|
1,592
|
|
Total
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
(176
|
)
|
|
$
|
(207
|
)
|
Included
in the accompanying condensed consolidated balance sheets under the following captions:
|
|
September
30, 2016
|
|
June
30, 2016
|
Costs
and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
—
|
|
|
$
|
—
|
|
Less:
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(176
|
)
|
|
|
(207
|
)
|
Total
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
(176
|
)
|
|
|
(207
|
)
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2016 and 2015
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
6 – OTHER INTANGIBLE ASSETS
Other
intangible assets, net of accumulated amortization, in the accompanying condensed consolidated balance sheets consist of the following:
|
|
September
30, 2016
|
|
June
30, 2016
|
Capitalized
software development costs
|
|
$
|
7,005
|
|
|
$
|
7,005
|
|
Patents
and copyrights
|
|
|
4,614
|
|
|
|
4,571
|
|
Non-compete
|
|
|
4,100
|
|
|
|
4,100
|
|
Customer
relationships
|
|
|
3,800
|
|
|
|
3,800
|
|
Gross
Other intangible assets
|
|
|
19,519
|
|
|
|
19,476
|
|
Less:
Accumulated amortization
|
|
|
12,063
|
|
|
|
11,757
|
|
Other
Intangible Assets
|
|
$
|
7,456
|
|
|
$
|
7,719
|
|
Amortization
of patents and copyrights for the three months ended September 30, 2016 and 2015 amounted to $47 and $47, respectively.
Amortization
of capitalized software development costs for the three months ended September 30, 2016 and 2015 amounted to $65 and $81, respectively.
Amortization
of non-compete for the three months ended September 30, 2016 and 2015 amounted to $146 and $146, respectively.
Amortization
of customer relationships for the three months ended September 30, 2016 and 2015 amounted to $48 and $48, respectively.
NOTE
7 – OTHER CURRENT LIABILITIES
Other
current liabilities in the accompanying condensed consolidated balance sheets consist of the following:
|
|
September
30, 2016
|
|
June
30, 2016
|
Accrued
salaries, commissions and payroll taxes
|
|
$
|
860
|
|
|
$
|
3,189
|
|
Accrued
interest
|
|
|
45
|
|
|
|
45
|
|
Litigation
accruals
|
|
|
545
|
|
|
|
545
|
|
Sales
tax payable
|
|
|
2,387
|
|
|
|
2,403
|
|
Legal
and other professional fees
|
|
|
370
|
|
|
|
385
|
|
Accounting
fees
|
|
|
123
|
|
|
|
241
|
|
Self-funded
health insurance reserve
|
|
|
9
|
|
|
|
392
|
|
Interest
and penalty - sales tax
|
|
|
2,517
|
|
|
|
2,487
|
|
Other
|
|
|
1,413
|
|
|
|
1,140
|
|
Other
Current Liabilities
|
|
$
|
8,269
|
|
|
$
|
10,827
|
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2016 and 2015
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
8 – STOCKHOLDERS EQUITY
Common
Stock
During
the three months ended September 30, 2016, the Company issued .3 shares of common stock to employees and consultants as compensation
valued at $7 under a stock bonus plan.
During
the three months ended September 30, 2016, the Company issued 107 shares of common stock for costs and expenses of $2,239.
NOTE
9 – BUSINESS COMBINATIONS
Acquisitions
On
June 30, 2016, the Company purchased 100% interest in TK2 Equipment Management, LLC and Turnkey Services of New York, LLC. The
consideration and net assets acquired is as follows:
Cash
Paid
|
|
$
|
4,224
|
|
Net
assets at Fair Value
|
|
|
2,862
|
|
Goodwill
|
|
$
|
1,555
|
|
Pro
forma Results
The
following unaudited pro forma results of operations for the three months ended September 30, 2015 assumes that the above acquisitions
were made at the beginning of the year prior to acquisition. The unaudited pro forma information does not purport to be indicative
of the results that would have been obtained if the acquisitions had actually occurred at the beginning of the year prior to acquisition,
nor of the results that may be reported in the future.
|
|
Three
months ended September 30, 2015
|
Total
Revenues – Net
|
|
|
17,611
|
|
Net
Income - Controlling Interests
|
|
|
2,953
|
|
Net
Income Available to Common Stockholders
|
|
|
2,761
|
|
Net
Income Available to Class A Non-Voting Preferred Stockholders
|
|
|
143
|
|
Net
Income Available to Class C Common Stockholders
|
|
|
49
|
|
Basic
Net Income Per Common Share Available to Common Stockholders
|
|
|
0.46
|
|
Diluted
Net Income Per Common Share Available to Common Stockholders
|
|
|
0.45
|
|
Basic
and Diluted Income Per Share - Common C
|
|
|
0.13
|
|
Weighted
Average Basic Shares Outstanding
|
|
|
6,051
|
|
Weighted
Average Diluted Shares Outstanding
|
|
|
6,179
|
|
Weighted
Average Basic and Diluted Shares Outstanding - Class C Common
|
|
|
383
|
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2016 and 2015
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
10 - SEGMENT AND RELATED INFORMATION
The
Company operates in two industry segments - manufacturing and the servicing of medical equipment and management of diagnostic
imaging centers.
The
accounting policies of the segments are the same as those described in the summary of significant accounting policies as disclosed
in the Company’s 10-K as of June 30, 2016. 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 Sept. 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues from external customers
|
|
$
|
2,621
|
|
|
$
|
16,113
|
|
|
$
|
18,734
|
|
Inter-segment
net revenues
|
|
$
|
381
|
|
|
$
|
—
|
|
|
$
|
381
|
|
(Loss)
Income from operations
|
|
$
|
(147
|
)
|
|
$
|
4,900
|
|
|
$
|
4,753
|
|
Depreciation
and amortization
|
|
$
|
80
|
|
|
$
|
776
|
|
|
$
|
856
|
|
Capital
expenditures
|
|
$
|
43
|
|
|
$
|
599
|
|
|
$
|
642
|
|
For
the three months ended Sept. 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues from external customers
|
|
$
|
2,330
|
|
|
$
|
15,281
|
|
|
$
|
17,611
|
|
Inter-segment
net revenues
|
|
$
|
524
|
|
|
$
|
—
|
|
|
$
|
524
|
|
(Loss)
Income from operations
|
|
$
|
(63
|
)
|
|
$
|
3,678
|
|
|
$
|
3,615
|
|
Depreciation
and amortization
|
|
$
|
78
|
|
|
$
|
751
|
|
|
$
|
829
|
|
Capital
expenditures
|
|
$
|
19
|
|
|
$
|
45
|
|
|
$
|
64
|
|
NOTE
11 – SUPPLEMENTAL CASH FLOW INFORMATION
During
the three months ended September 30, 2016 and September 30, 2015, the Company paid $67 and $102 for interest, respectively.
During
the three months ended September 30, 2016 and September 30, 2015, the Company paid $200 and $50 for income taxes, respectively.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2016 and 2015
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
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, 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
September 30, 2016, the Company has recorded tax obligations of approximately $2,387 plus interest and penalties of approximately
$2,517. 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 September 30, 2016 and June 30, 2016, the Company
had approximately $9 and $392, 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.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2016 and 2015
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
13 - 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 2010.
The
Company has recorded a deferred tax asset of $13,042 and a deferred tax liability of $482 as of September 30, 2016, primarily
relating to net operating loss carryforwards of approximately $110,029 available to offset future taxable income through 2031.
The net operating losses begin to expire in 2021 for federal tax purposes and in 2016 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 believes that it is more likely than not that the benefits from certain NOL
carryforwards will not be fully realized. In recognition of this inherent risk, 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
14 – SUBSEQUENT EVENTS
The
Company has evaluated events that occurred subsequent to September 30, 2016 and through the date the condensed consolidated financial
statements were issued.
FONAR
CORPORATION AND SUBSIDIARIES
Item
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
For
the three month period ended September 30, 2016, we reported a net income of $4.5 million on revenues of $18.7 million as compared
to net income of $3.5 million on revenues of $17.6 million for the three month period ended September 30, 2015. Operating income
increased 31.5% from $3.6 million for the three month period ended September 30, 2015 to $4.8 million for the three month period
ended September 30, 2016.
The
revenue increase of 6.4%, from $17.6 million for the first three months of fiscal 2016 to $18.7 million for the first three months
of fiscal 2017, was primarily due to an increase in patient fee revenue (net of contractual allowances and discounts) from $4.6
million for the first three months of fiscal 2016 to $4.9 million for the first three months of fiscal 2017 and increases in net
management fees of $494,000, from $10.7 million for the first three months of fiscal 2016 to $11.2 million for the first three
months of fiscal 2017. Revenues from product sales and service repair fees also increased from the first three months of fiscal
2016 to the first three months of fiscal 2017, by $224,000 and $67,000 respectively.
While
our revenues increased, our costs and expenses remained constant, resulting in an operating income of $4.7 million for the three
months ended September 30, 2016, compared to our operating income of $3.5 million for the three months ended September 30, 2015.
In terms of percentages, costs and expenses remained constant at $13.9 million in the first three months of fiscal 2016 and in
the first three months of fiscal 2017, while revenues increased 6.4%, from $17.6 million in the first three months of fiscal 2016
to $18.7 million in the first three months of fiscal 2017.
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 increased to $242,000 for the first three months of fiscal 2017 from $18,000 for the first three months
of fiscal 2016. Costs related to product sales also increased, from $112,000 for the three month period ended September 30, 2015
to $213,000 for the three month period ended September 30, 2016. The increase in sales revenues, reflects the volatility resulting
from low sales volume. 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 increased 2.9% from $2.3 million for the three month period
ended September 30, 2015 to $2.4 million for the three month period ended September 30, 2016. Continuing lower sales volumes have
been a factor ultimately contributing to the small increase in 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 three months of fiscal 2017 increased by 20.5% from $550,000 in the first three months
of fiscal 2016 to $663,000 in the first three months of fiscal 2017. 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 $194,000 in foreign revenues for the first three months of fiscal 2017 as compared to approximately $150,000
in foreign revenues for the first three months of fiscal 2016, representing an increase in foreign revenues of 29.3%. 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 increased by 12.5% to $2.6 million for the three months of fiscal 2017 from $2.3
million for the first three months of fiscal 2016. Operating results for our medical equipment segment decreased to an operating
loss of $147,000 for the first three months of fiscal 2017 as compared to an operating loss of $63,000 for the first three months
of fiscal 2016.
Diagnostic
Facilities Management Services
HMCA
revenues increased in the first three months of fiscal 2017 by 5.4% to $16.1 million from $15.3 million for the first three months
of fiscal 2016. 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 decreased slightly to 86.0% for the first three months of fiscal 2017,
from 86.8% for the first three months of fiscal 2016.
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.
FONAR
CORPORATION AND SUBSIDIARIES
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 38,238 in the first three months of fiscal 2016 to 39,725 in the first three months of fiscal 2017.
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 $4.9 million for the first three months of
fiscal 2017 compared to operating income of $3.7 million for the first three months of fiscal 2016.
HMCA’s
cost of revenues for the first three months of fiscal 2017 as compared to the first three months of fiscal 2016 decreased by 0.9%
from $8.7 million to $8.6 million.
Consolidated
For
the first three months of fiscal 2016, our consolidated net revenues increased by 6.4% to $18.7 million from $17.6 million for
the first three months of fiscal 2016, and total costs and expenses remained constant for the first three months of fiscal 2017
and for the first three months of fiscal 2016 at $13.9 million. As a result, our operating income increased 31.5% to $4.8 million
in the first three months of fiscal 2017 from $3.6 million in the first three months of fiscal 2016.
Selling,
general and administrative expenses decreased by 3.1% to $4.1 million in the first three months of fiscal 2017 from $4.2 million
in the first three months of fiscal 2016. The compensatory element of stock issuances, which is included in selling, general and
administrative expenses, increased, $6,802 for the first three months of fiscal 2017 from $0 for the first three months of fiscal
2016.
Research
and development expenses decreased by 5.5% to $412,000 for the first three months of fiscal 2017 from $436,000 for the first three
months of fiscal 2016.
Interest
expense in the first three months of fiscal 2017 decreased by 34.7% to $98,000 from $150,000 in the first three months of fiscal
2016. The decrease was due to the repayment of debt incurred by Fonar in connection with the acquisition of HDM.
Inventories
increased to $2.2 million at September 30, 2016 from $2.1 million at June 30, 2016. This represents our use of raw materials and
components in our business operations.
Net Management fee and medical receivables increased by 5.0% to $31.3 million at September
30, 2016 from $29.8 million at June 30, 2016 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.
FONAR
CORPORATION AND SUBSIDIARIES
The
results of operations for the first three months of fiscal 2017 reflect an increase in revenues from management, patient and other
fees, as compared to the first three months of fiscal 2016 ($16.1 million for the first three months of fiscal 2017 as compared
to $15.3 million for the first three months of fiscal 2016), and an increase in MRI equipment segment revenues ($2.4 million as
compared to $2.3 million). Revenues were 14.0% from the MRI equipment segment as compared to 86.0% from HMCA, for the first three
months of fiscal 2017, as compared to 13.3% from the MRI equipment segment and 86.7% from HMCA for the first three months of fiscal
2016.
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.
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.
FONAR
CORPORATION AND SUBSIDIARIES
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 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.
FONAR
CORPORATION AND SUBSIDIARIES
The
paper, titled “The Possible Role of Cranio-Cervical Trauma and Abnormal CSF Hydrodynamics in the Genesis of Multiple Sclerosis,"
appears in the of the journal Physiological Chemistry and Physics and Medical NMR (Sept. 20, 2011).
This
capability of the Fonar Upright® technology has demonstrated its key value on patients with the Arnold-Chiari syndrome [Cerebellar
Tonsil Extopia (CTE)], which is believed to affect 200,000 to 500,000 Americans. In this syndrome, brain stem compression and
subsequent severe neurological symptoms occur in these patients, because the brain stem descends and is compressed at the base
of the skull in the foramen magnum, which is the circular bony opening at the base of the skull where the spinal cord exits the
skull. Conventional lie-down MRI scanners cannot make an adequate evaluation of this pathology since the patient's pathology is
most visible and the symptoms most acute when the patient is scanned in the upright fully weight-bearing position.
A
combined study of 1,200 neck pain patients published in “Brain Injury” (July 2010) by eight university medical centers
reported that cerebellar tonsil ectopia (CTE) of 1mm or greater was found and visualized 2.5 times (250%) more frequently when
patients who had sustained automobile whiplash injuries were scanned upright rather than lying down.
The
Upright® MRI has also demonstrated its value for patients suffering from scoliosis. Scoliosis patients have been typically
subjected to routine x-ray exams for years and must be imaged upright for an adequate evaluation of their scoliosis. Because the
patient must be standing for a complete evaluation of the extent of the patient’s scoliosis, an x-ray machine has been the
only modality that could provide that service. The Upright® MRI is the only MRI scanner which allows the patient to stand
during the MRI exam. Fonar has developed an RF receiver and scanning protocol that for the first time allows scoliosis patients
to obtain diagnostic pictures of their spines without the risks of x-rays. A study by the National Cancer Institute (2000) of
5,466 women with scoliosis reported a 70% increase in breast cancer resulting from 24.7 chest x-rays these patients received on
the average in the course of their scoliosis treatment. The Upright® MRI examination of scoliosis enables the needed imaging
evaluation of the degree of spine scoliosis without exposing the patient to the risk of breast cancer from x-radiation. Currently
scoliosis affects more than 3,000,000 American women.
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 decreased by 6.3% from $8.5 million at June 30, 2016 to $8.0 million at September 30, 2016, primarily as
a result of the increased purchases of property and equipment.
Cash
provided by operating activities for the first three months of fiscal 2017 was $3.4 million. Cash provided by operating activities
was attributable principally to net income of $4.5 million and depreciation and amortization of $856,000, offset by an increase
in accounts, management fee receivables and medical receivables of $1.7 million and a decrease in other current liabilities of
$2.2 million.
Cash used in investing activities for the first three months of fiscal 2017 was $642,000. The principal uses of cash
used in investing activities during the first three months of fiscal 2017 consisted of patent costs of $43,000 and the purchase
of property and equipment of $599,000.
FONAR
CORPORATION AND SUBSIDIARIES
Cash
used in financing activities for the first three months of fiscal 2017 was $3.2 million. The principal uses of cash in financing
activities during the first three months of fiscal 2017 were the repayment of principal on long-term debt and capital lease obligations
of $1.4 million and distributions to non-controlling interests of $1.8 million.
Total
liabilities decreased by 15.2% to $20.5 million at September 30, 2016 from $24.1 million at June 30, 2015. “Other”
current liabilities decreased by 23.6% to $8.3 million at September 30, 2016 from $10.8 million at June 30, 2016. Long-term debt
and capital lease obligations decreased from $2.1 million to $661,000. The current portion of our unearned revenue on service
contracts increased from $4.7 million to $5.0 million. Customer deposits decreased from $1.2 million at June 30, 2016 to $1.1
million at September 30, 2016 as a result of reduced sales.
As
of September 30, 2016, the total of $8.3 million in “other” current liabilities included accrued salaries and payroll
taxes of $860,000, and sales taxes of $2.4 million plus accrued interest and penalties of $2.5 million.
Our
working capital increased to $28.7 million at September 30, 2016 from $24.9 million at June 30, 2016. This resulted from an increase
in current assets ($45.6 million at June 30, 2016 as compared to $47.0 million at September 30, 2016), and a decrease in current
liabilities from $20.6 million at June 30, 2016 to $18.3 million at September 30, 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 2017 fiscal year, except for a new scanner
HMCA plans to acquire to provide to a site in Florida presently managed by HMCA.
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.
FONAR
CORPORATION AND SUBSIDIARIES
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 fiscal quarter
of profitability (fiscal 2012, fiscal 2013, fiscal 2014, fiscal 2015, fiscal 2016 and the first three months of fiscal 2017) and
that its capital resources will be adequate to support operations at current levels through at least September 30, 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.