NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018 and 2017
(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, 2018,
are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2019. For further information,
refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K filed
on September 21, 2018 for the fiscal year ended June 30, 2018.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
unaudited condensed consolidated financial statements include the accounts of FONAR Corporation, its majority and wholly-owned
subsidiaries and partnerships (collectively the “Company”). All significant intercompany accounts and transactions
have been eliminated in consolidation.
Revenues
On
July 1, 2018, the Company adopted the new revenue recognition accounting standard issued by the Financial Accounting Standards
Board (“FASB”) and codified in the ASC as topic 606 (“ASC 606”). The revenue recognition standard in ASC
606 outlines a single comprehensive model for recognizing revenue as performance obligations, defined in a contract with a customer
as goods or services transferred to the customer in exchange for consideration, are satisfied. The standard also requires expanded
disclosures regarding the Company’s revenue recognition policies and significant judgments employed in the determination
of revenue.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018 and 2017
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenues
(Continued)
The
Company applied the modified retrospective approach to all contracts when adopting ASC 606. As a result, at the adoption of ASC
606 the majority of what was previously classified as the provision for bad debts in the statement of operations is now reflected
as implicit price concessions (as defined in ASC 606) and therefore included as a reduction to net operating revenues in 2019.
For changes in credit issues not assessed at the date of service, the Company will prospectively recognize those amounts in other
operating expenses on the statement of operations. For periods prior to the adoption of ASC 606, the provision for bad debts has
been presented consistent with the previous revenue recognition standards that required it to be presented separately as a component
of net operating revenues. Additionally, upon adoption of ASC 606 the allowance for doubtful accounts of approximately $22.7 million
as of July 1, 2018 was reclassified as a component of net patient accounts receivable. Other than these changes in presentation
on the condensed consolidated statement of operations and condensed consolidated balance sheet, the adoption of ASC 606 did not
have a material impact on the consolidated results of operations for the three months ended September 30, 2018, and the Company
does not expect it to have a material impact on its consolidated results of operations for the remainder of 2019 and on a prospective
basis.
Our
revenues generally relate to net patient fees received from various payers and patients themselves under contracts in which
our performance obligations are to provide diagnostic services to the patients. Revenues are recorded during the period our obligations
to provide diagnostic services are satisfied. Our performance obligations for diagnostic services are generally satisfied over
a period of less than one day. The contractual relationships with patients, in most cases, also involve a third-party payer (Medicare,
Medicaid, managed care health plans and commercial insurance companies, including plans offered through the health insurance exchanges)
and the transaction prices for the services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated
with (managed care health plans and commercial insurance companies) the third-party payers. The payment arrangements with third-party
payers for the services we provide to the related patients typically specify payments at amounts less than our standard charges
and generally provide for payments based upon predetermined rates per diagnostic services or discounted fee-for-service rates.
Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations
and the frequent changes in managed care contractual terms resulting from contract renegotiations and renewals.
Earnings
Per Share
Basic
earnings per share (“EPS”) is computed based 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, 2018 and 2017.
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, 2018 and 2017, 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, 2018 and 2017
(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, 2018
|
|
Three
months ended
September 30, 2017
|
|
|
Total
|
|
Common
Stock
|
|
Class
C Common
Stock
|
|
Total
|
|
Common
Stock
|
|
Class
C Common
Stock
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
Net income available to common stockholders
|
|
$
|
3,318
|
|
|
$
|
3,113
|
|
|
$
|
52
|
|
|
$
|
3,719
|
|
|
$
|
3,486
|
|
|
$
|
59
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
6,344
|
|
|
|
6,344
|
|
|
|
383
|
|
|
|
6,287
|
|
|
|
6,287
|
|
|
|
383
|
|
Basic
income per common share
|
|
$
|
0.52
|
|
|
$
|
0.49
|
|
|
$
|
0.14
|
|
|
$
|
0.59
|
|
|
$
|
0.55
|
|
|
$
|
0.16
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
Weighted average shares outstanding
|
|
|
|
|
|
|
6,344
|
|
|
|
383
|
|
|
|
|
|
|
|
6,287
|
|
|
|
383
|
|
Convertible
Class C Stock
|
|
|
|
|
|
|
128
|
|
|
|
—
|
|
|
|
|
|
|
|
128
|
|
|
|
—
|
|
Total
Denominator for diluted earnings per share
|
|
|
|
|
|
|
6,472
|
|
|
|
383
|
|
|
|
|
|
|
|
6,415
|
|
|
|
383
|
|
Diluted
income per common share
|
|
|
|
|
|
$
|
0.48
|
|
|
$
|
0.14
|
|
|
|
|
|
|
$
|
0.54
|
|
|
$
|
0.16
|
|
Recent
Accounting Pronouncements
In
May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, (Topic 606). ASU 2014-09 requires an entity
to recognize as revenue the amount that reflects the consideration which it expects to be entitled in exchange for goods and services
as it transfers control to its customers. It also requires more detailed disclosures to enable users of the financial statements
to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The
Company earns revenue from the sale of scanners, maintenance contracts, product upgrades, patient services and management fees.
Under the new guidance, the reporting for patient services revenue is now reported differently. All other streams of revenue were
not impacted by the new guidance. The primary change for healthcare providers under the new guidance relates to revenue generated
from patient services, with patient responsibility for payment. Under the new guidance, the Company is required to report an implicit
price concession (both initially and for the subsequent changes in estimates) as a reduction of revenues as opposed to bad debt
expense as a component of operating expenses. The Company now records any changes in expectation of collection amounts due to
patient specific events that suggests that the patient no longer has the ability and intent to pay the amount due through the
bad debt expense, as that is more indicative of a change in the customer’s credit worthiness as opposed to change in the
transaction price.
The
new standard supersedes most current revenue guidance, including industry-specific guidance. The guidance became effective for
the Company on July 1, 2018 and as part of adopting the standard, the Company identified revenue streams of like contracts to
allow for ease of implementation. The Company used primarily a portfolio approach to apply the new model to classes of customers
with similar characteristics. The impact of adopting the new standard on our total revenue; and income from operations was not
material. While the adoption of ASU 2014-09 did impact the presentation of net operating revenues in our Consolidated Statements
of Operations and will impact certain disclosures, it did not materially impact our financial position, results of operations
or cash flows. There was no cumulative effect of a change in accounting principle recorded related to the adoption of ASU 2014-09
on July 1, 2018.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018 and 2017
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent
Accounting Pronouncements (Continued)
In
January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and Other
(Topic 350). The amendments in this update simplify the test for goodwill impairment by eliminating Step 2 from the impairment
test, which required the entity to perform procedures to determine the fair value at the impairment testing date of its assets
and liabilities following the procedure that would be required in determining fair value of assets acquired and liabilities assumed
in a business combination. The amendments in this update are effective for public companies for annual or any interim goodwill
impairment tests in fiscal years beginning after December 15, 2019. We are evaluating the impact of adopting this guidance on
our consolidated condensed financial statements.
In
January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805); Clarifying the Definition of a Business. The amendments
in this update clarify the definition of a business to help companies evaluate whether transactions should be accounted for as
acquisitions or disposals of assets or businesses. The amendments in this update are effective for public companies for annual
periods beginning after December 15, 2017, including interim periods within those periods. The Company has adopted this guidance
on our consolidated condensed financial statements and it has no impact on the Company’s financial statements.
During
February 2016, FAS issued ASU 2016-02, Leases (Topic 842). The new standard requires lessees to apply a dual approach, classifying
leases as either finance or operating leases based upon the principle of whether or not the lease is effectively a financed purchase
by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or
on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability
for all leases with a term of greater than 12 months regardless of their classification. Lease with a term of 12 months or less
will be accounted for similar to existing guidance for operating leases. The new guidance will be effective for annual reporting
periods beginning after December 15, 2018, including interim periods within that reporting period and is applied retrospectively.
Early adoption is permitted. The Company is currently in the process of assessing the impact the adoption of this guidance will
have on the Company’s consolidated condensed financial statements.
FASB,
the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of September
30, 2018 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 2018 or 2017, and
it does not believe that any of those pronouncements will have a significant impact on our consolidated condensed financial statements
at the time they become effective.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018 and 2017
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year presentation. The reclassifications did not have any
effect on reported consolidated net income for any periods presented.
NOTE
3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE
Receivables,
net is comprised of the following at September 30, 2018, and June 30, 2018:
|
|
September
30, 2018
|
|
|
Gross
Receivable
|
|
Allowance
for doubtful accounts
|
|
Net
|
Accounts
receivable
|
|
$
|
4,359
|
|
|
$
|
190
|
|
|
$
|
4,169
|
|
Accounts
receivable - related party
|
|
$
|
90
|
|
|
|
—
|
|
|
$
|
90
|
|
Medical
receivable
|
|
$
|
37,021
|
|
|
$
|
23,312
|
|
|
$
|
13,709
|
|
Management
and other fees receivable
|
|
$
|
32,582
|
|
|
$
|
10,609
|
|
|
$
|
21,973
|
|
Management
and other fees receivable from related medical practices ("PC’s")
|
|
$
|
8,328
|
|
|
$
|
2,166
|
|
|
$
|
6,162
|
|
|
|
June
30, 2018
|
|
|
Gross
Receivable
|
|
Allowance
for doubtful accounts
|
|
Net
|
Accounts
receivable
|
|
$
|
4,004
|
|
|
$
|
190
|
|
|
$
|
3,814
|
|
Accounts
receivable - related party
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Medical
receivable
|
|
$
|
36,079
|
|
|
$
|
22,728
|
|
|
$
|
13,351
|
|
Management
and other fees receivable
|
|
$
|
32,846
|
|
|
$
|
10,983
|
|
|
$
|
21,863
|
|
Management
and other fees receivable from related medical practices ("PC’s")
|
|
$
|
7,246
|
|
|
$
|
1,711
|
|
|
$
|
5,535
|
|
The
Company's customers are concentrated in the healthcare industry.
Accounts
Receivable
Credit
risk with respect to the Company’s accounts receivable related to product sales and service and repair fees is limited due
to the customer advances received prior to the commencement of work performed and the billing of amounts to customers as sub-assemblies
are completed. Service and repair fees are billed on a monthly or quarterly basis and the Company does not continue providing
these services if accounts receivable become past due. The Company controls credit risk with respect to accounts receivable from
service and repair fees through its credit evaluation process, credit limits, monitoring procedures and reasonably short collection
terms. The Company performs ongoing credit authorizations before a product sales contract is entered into or service and repair
fees are provided.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018 and 2017
(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 67% and 66% of the PCs’ net revenues for the three months ended September 30, 2018 and 2017, 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 11.0% and 11.4% of the consolidated
net revenues for the three months ended September 30, 2018 and 2017, respectively.
Tallahassee
Magnetic Resonance Imaging, PA, Stand Up MRI of Boca Raton, PA and Stand Up MRI & Diagnostic Center, PA (all related medical
practices) entered into a guaranty agreement, pursuant to which they cross guaranteed all management fees which are payable to
the Company, which have arisen under each individual management agreement. Additional Company managed entities also operate under
a guaranty agreement, pursuant to which management fees are payable to the Company.
The
Company’s patient fee revenue, net of contractual allowances and discounts less the provision for bad debts for the three
months ended September 30, 2018 and 2017 are summarized in the following table.
|
|
For
the Three Months Ended
September
30,
|
|
|
2018
|
|
2017
|
Commercial
Insurance/ Managed Care
|
|
$
|
1,180
|
|
|
$
|
1,198
|
|
Medicare/Medicaid
|
|
|
291
|
|
|
|
272
|
|
Workers'
Compensation/Personal Injury
|
|
|
3,702
|
|
|
|
5,578
|
|
Other
|
|
|
352
|
|
|
|
1,605
|
|
Patient
Fee Revenue, net of contractual allowances and discounts
|
|
|
5,525
|
|
|
|
8,653
|
|
Provision
for Bad Debts
|
|
|
—
|
|
|
|
(3,750
|
)
|
Patient
Fee Revenue - net
|
|
$
|
5,525
|
|
|
$
|
4,903
|
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018 and 2017
(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, 2018
|
|
June
30, 2018
|
Purchased
parts, components and supplies
|
|
$
|
1,437
|
|
|
$
|
1,312
|
|
Work-in-process
|
|
|
212
|
|
|
|
119
|
|
TOTAL
INVENTORIES
|
|
$
|
1,649
|
|
|
$
|
1,431
|
|
NOTE
5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information
relating to uncompleted contracts is as follows:
|
|
September
30, 2018
|
|
June
30, 2018
|
Costs
incurred on uncompleted contracts
|
|
$
|
449
|
|
|
$
|
449
|
|
Estimated
earnings
|
|
|
309
|
|
|
|
309
|
|
Subtotal
|
|
|
758
|
|
|
|
758
|
|
Less:
Billings to date
|
|
|
671
|
|
|
|
671
|
|
Total
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
87
|
|
|
$
|
87
|
|
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, 2018
|
|
June
30, 2018
|
Capitalized
software development costs
|
|
$
|
7,005
|
|
|
$
|
7,005
|
|
Patents
and copyrights
|
|
|
4,856
|
|
|
|
4,836
|
|
Non-compete
|
|
|
4,100
|
|
|
|
4,100
|
|
Customer
relationships
|
|
|
3,800
|
|
|
|
3,800
|
|
Gross
Other intangible assets
|
|
|
19,761
|
|
|
|
19,741
|
|
Less:
Accumulated amortization
|
|
|
14,383
|
|
|
|
14,139
|
|
Other
Intangible Assets
|
|
$
|
5,378
|
|
|
$
|
5,602
|
|
Amortization
of patents and copyrights for the three months ended September 30, 2018 and 2017 amounted to $50 and $50, respectively.
Amortization
of capitalized software development costs for the three months ended September 30, 2018 and 2017 amounted to $0 and $65, respectively.
Amortization
of non-compete for the three months ended September 30, 2018 and 2017 amounted to $146 and $146, respectively.
Amortization
of customer relationships for the three months ended September 30, 2018 and 2017 amounted to $48 and $48, respectively.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018 and 2017
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
7 – OTHER CURRENT LIABILITIES
Other
current liabilities in the accompanying condensed consolidated balance sheets consist of the following:
|
|
September
30,
2018
|
|
June
30,
2018
|
Accrued
salaries, commissions and payroll taxes
|
|
$
|
1,121
|
|
|
$
|
3,438
|
|
Litigation
accruals
|
|
|
145
|
|
|
|
145
|
|
Sales
tax payable
|
|
|
1,707
|
|
|
|
2,092
|
|
Legal
and other professional fees
|
|
|
128
|
|
|
|
119
|
|
Accounting
fees
|
|
|
30
|
|
|
|
125
|
|
Self-funded
health insurance reserve
|
|
|
20
|
|
|
|
79
|
|
Accrued
interest and penalty
|
|
|
1,218
|
|
|
|
1,498
|
|
Other
|
|
|
414
|
|
|
|
682
|
|
Other
Current Liabilities
|
|
$
|
4,783
|
|
|
$
|
8,178
|
|
NOTE
8 – STOCKHOLDERS EQUITY
Common
Stock
During
the three months ended September 30, 2018, the Company issued 70 shares of common stock for costs and expenses of $1,955.
NOTE
9 - SEGMENT AND RELATED INFORMATION
The
Company operates in two industry segments - manufacturing and the servicing of medical equipment and management of diagnostic
imaging centers.
The
accounting policies of the segments are the same as those described in the summary of significant accounting policies as disclosed
in the Company’s 10-K as of June 30, 2018. All inter-segment sales are market-based. The Company evaluates performance based
on income or loss from operations.
Summarized
financial information concerning the Company's reportable segments is shown in the following table:
|
|
Medical
Equipment
|
|
Management
Of Diagnostic
Imaging
Centers
|
|
Totals
|
For
the three months ended Sept. 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues from external customers
|
|
$
|
2,209
|
|
|
$
|
18,496
|
|
|
$
|
20,705
|
|
Inter-segment
net revenues
|
|
$
|
228
|
|
|
$
|
—
|
|
|
$
|
228
|
|
(Loss)
Income from operations
|
|
$
|
(230
|
)
|
|
$
|
5,767
|
|
|
$
|
5,537
|
|
Depreciation
and amortization
|
|
$
|
93
|
|
|
$
|
829
|
|
|
$
|
922
|
|
Capital
expenditures
|
|
$
|
20
|
|
|
$
|
449
|
|
|
$
|
469
|
|
For
the three months ended Sept. 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues from external customers
|
|
$
|
2,454
|
|
|
$
|
16,880
|
|
|
$
|
19,334
|
|
Inter-segment
net revenues
|
|
$
|
219
|
|
|
$
|
—
|
|
|
$
|
219
|
|
(Loss)
Income from operations
|
|
$
|
(197
|
)
|
|
$
|
4,982
|
|
|
$
|
4,785
|
|
Depreciation
and amortization
|
|
$
|
82
|
|
|
$
|
877
|
|
|
$
|
959
|
|
Capital
expenditures
|
|
$
|
44
|
|
|
$
|
650
|
|
|
$
|
694
|
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018 and 2017
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
10 – SUPPLEMENTAL CASH FLOW INFORMATION
During
the three months ended September 30, 2018 and September 30, 2017, the Company paid $139 and $10 for interest, respectively.
During
the three months ended September 30, 2018 and September 30, 2017, the Company paid $180 and $185 for income taxes, respectively.
NOTE
11 – 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, 2018.
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, 2018, the Company has recorded tax obligations of approximately $1,707 plus interest and penalties of approximately
$1,173. 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, 2018 and June 30, 2018, the Company
had approximately $20 and $79, 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, 2018 and 2017
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
12 - INCOME TAXES
In
accordance with ASC 740-270, Income Taxes – Interim Reporting, the Company is required at the end of each interim period
to determine the best estimate of its annual effective tax rate and apply that rate to year-to-date ordinary income or loss. The
resulting tax expense (or benefit) is adjusted for the tax effect of specific events, if any, required to be discretely recognized
in the interim period as they occur. For the three months ended September 30, 2018 and 2017, the Company recorded income tax expense
of $1,128 in 2018 as compared to $185 in 2017. The 2018 provision is comprised of a current income tax component of $587 and
a deferred income tax component of $541. Obligations for any liability associated with the current income tax provision, has
been reduced, primarily resulting from the benefits and utilization of net operating loss carryforwards.
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. The Company believes
there are no uncertain tax positions in prior years tax filings and therefore it has not recorded a liability for unrecognized
tax benefits.
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 2014.
The
Company recorded a deferred tax asset of $21,561 and a deferred tax liability of $239 as of September 30, 2018, primarily relating
to net operating loss carryforwards of approximately $80,312 available to offset future taxable income through 2030. The net operating
losses begin to expire in 2021 for federal tax and state income tax purposes.
Future
ownership changes as determined under Section 382 of the Internal Revenue code could further limit the utilization of net operating
loss carryforwards. As of September 30, 2018, no such changes in ownership have occurred.
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 or when such net operating losses can be utilized. The Company considers projected
future taxable income, the regulatory environment of the industry 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 deferred tax asset carryforwards, will not
all be fully realized. In recognition of this inherent risk, a valuation allowance was established for the partial value of the
deferred tax asset, (principally related to research and development tax credits and allowance for doubtful accounts).
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018 and 2017
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
12 - INCOME TAXES (CONTINUED)
A
valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of the remainder of the
valuation.
The
Tax Cuts and Jobs Act was signed into law on December 22, 2017 and makes numerous changes to the Internal Revenue Code. Among
other changes, the Act reduces the US corporate income tax rate to 21% effective January 1, 2018.
Under
ASC topic 740, Accounting for Income Taxes, the enactment of the Tax Act also requires companies, to recognize the effects of
changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws
in the period in which the new legislation is enacted. The Company’s gross deferred tax assets and liabilities
were revalued from 35% to 21%. Deferred tax assets of $46.2 million (as of the enactment effective date - the quarter ended
December 31, 2017) were revalued to approximately $30.2 million with a corresponding decrease to the Company’s
valuation allowance.
NOTE
13 – SUBSEQUENT EVENTS
The
Company has evaluated events that occurred subsequent to September 30, 2018 and through the date the condensed consolidated financial
statements were issued.
FONAR
CORPORATION AND SUBSIDIARIES