NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description
of Business
Effective
July 1, 2015, the Company restructured the corporate organization of the management of diagnostic imaging centers segment of our
business. The reorganization was structured to more completely integrate the operations of Health Management Corporation of America
and HDM. Imperial contributed all of its assets (which were utilized in the business of Health Management Corporation of America)
to HDM and received a 24.2% interest in HDM. Health Management Corporation of America retained a direct ownership interest of
45.8% in HDM, and the original investors in HDM retained a 30.0% ownership interest in the newly expanded HDM. The entire management
of diagnostic imaging centers business segment is now being conducted by HDM, operating under the name “Health Management
Company of America”.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by accounting principles generally accepted in the United States
of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating results for the three and six months ended December
31, 2017, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2018. 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 27, 2017 for the fiscal year ended June 30, 2017.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
unaudited condensed consolidated financial statements include the accounts of FONAR Corporation, its majority and wholly-owned
subsidiaries and partnerships (collectively the “Company”). All significant intercompany accounts and transactions
have been eliminated in consolidation.
Earnings
Per Share
Basic
earnings per share (“EPS”) is computed based on weighted average number of shares common stock and stock equivalents
outstanding, net of common stock. In accordance with ASC topic 260-10, “Participating Securities and the Two-Class method”,
the Company used the Two-Class method for calculating basic earnings per share and applied the if converted method in calculating
diluted earnings per share for the three and six months ended December 31, 2017 and December 31, 2016.
Diluted
EPS reflects the potential dilution from the exercise or conversion of all dilutive securities into common stock based on the
average market price of common shares outstanding during the period. For the three and six months ended December 31, 2017 and
December 31, 2016, diluted EPS for common shareholders includes 128 shares upon conversion of Class C Common.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings
Per Share (Continued)
|
|
Three
months ended
December
31, 2017
|
|
Three
months ended
December
31, 2016
|
Basic
|
|
Total
|
|
Common
Stock
|
|
Class
C Common Stock
|
|
Total
|
|
Common
Stock
|
|
Class
C Common Stock
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$
|
4,189
|
|
|
$
|
3,926
|
|
|
$
|
67
|
|
|
$
|
4,242
|
|
|
$
|
3,971
|
|
|
$
|
69
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
6,287
|
|
|
|
6,287
|
|
|
|
383
|
|
|
|
6,158
|
|
|
|
6,158
|
|
|
|
383
|
|
Basic
income per common share
|
|
$
|
0.67
|
|
|
$
|
0.62
|
|
|
$
|
0.17
|
|
|
$
|
0.69
|
|
|
$
|
0.64
|
|
|
$
|
0.18
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
6,287
|
|
|
|
383
|
|
|
|
|
|
|
|
6,158
|
|
|
|
383
|
|
Convertible
Class C Stock
|
|
|
|
|
|
|
128
|
|
|
|
—
|
|
|
|
|
|
|
|
128
|
|
|
|
—
|
|
Total
Denominator for diluted earnings per share
|
|
|
|
|
|
|
6,415
|
|
|
|
383
|
|
|
|
|
|
|
|
6,286
|
|
|
|
383
|
|
Diluted
income per common share
|
|
|
|
|
|
$
|
0.61
|
|
|
$
|
0.17
|
|
|
|
|
|
|
$
|
0.63
|
|
|
$
|
0.18
|
|
|
|
Six
months ended
December
31, 2017
|
|
Six
months ended
December
31, 2016
|
Basic
|
|
Total
|
|
Common
Stock
|
|
Class
C Common Stock
|
|
Total
|
|
Common
Stock
|
|
Class
C Common Stock
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$
|
7,908
|
|
|
$
|
7,413
|
|
|
$
|
126
|
|
|
$
|
7,812
|
|
|
$
|
7,313
|
|
|
$
|
127
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
6,287
|
|
|
|
6,287
|
|
|
|
383
|
|
|
|
6,131
|
|
|
|
6,131
|
|
|
|
383
|
|
Basic
income per common share
|
|
$
|
1.26
|
|
|
$
|
1.18
|
|
|
$
|
0.33
|
|
|
$
|
1.27
|
|
|
$
|
1.19
|
|
|
$
|
0.33
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
6,287
|
|
|
|
383
|
|
|
|
|
|
|
|
6,131
|
|
|
|
383
|
|
Convertible
Class C Stock
|
|
|
|
|
|
|
128
|
|
|
|
—
|
|
|
|
|
|
|
|
128
|
|
|
|
—
|
|
Total
Denominator for diluted earnings per share
|
|
|
|
|
|
|
6,415
|
|
|
|
383
|
|
|
|
|
|
|
|
6,259
|
|
|
|
383
|
|
Diluted
income per common share
|
|
|
|
|
|
$
|
1.16
|
|
|
$
|
0.33
|
|
|
|
|
|
|
$
|
1.17
|
|
|
$
|
0.33
|
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent
Accounting Pronouncements
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 condensed consolidated 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. We are evaluating the impact of adopting
this guidance on our condensed consolidated financial statements.
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 has adopted ASU No. 2016-09. Our adoption of ASU No. 2016-09 did not have an impact on our condensed consolidated
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, 2016, including interim periods within the reporting
period and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect
of initially applying the ASU recognized at the date of initial application. The Company is currently evaluating the effect that
this ASU will have on its condensed consolidated financial statements and related disclosures. The Company has not yet selected
a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 Company has adopted
ASU 2015-11. Our adoption of ASU 2015-11 did not have an impact on our condensed consolidated financial statements.
FASB,
the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of December
31, 2017 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 condensed consolidated financial statements
at the time they become effective.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year presentation. The reclassifcations did not have any effect
on reported consolidated net income for any periods presented.
NOTE
3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE
Receivables,
net is comprised of the following at December 31, 2017:
|
|
Gross
Receivable
|
|
Allowance
for doubtful accounts
|
|
Net
|
Accounts
receivable
|
|
$
|
4,412
|
|
|
$
|
190
|
|
|
$
|
4,222
|
|
Accounts
receivable - related party
|
|
$
|
60
|
|
|
|
—
|
|
|
$
|
60
|
|
Medical
receivable
|
|
$
|
33,506
|
|
|
$
|
21,026
|
|
|
$
|
12,480
|
|
Management
and other fees receivable
|
|
$
|
31,335
|
|
|
$
|
11,067
|
|
|
$
|
20,268
|
|
Management
and other fees receivable from related medical practices ("PC’s")
|
|
$
|
6,457
|
|
|
$
|
1,235
|
|
|
$
|
5,222
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE (CONTINUED)
Receivables,
net is comprised of the following at June 30, 2017:
|
|
Gross
Receivable
|
|
Allowance
for doubtful accounts
|
|
Net
|
Accounts
receivable
|
|
$
|
4,512
|
|
|
$
|
190
|
|
|
$
|
4,322
|
|
Accounts
receivable - related party
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Medical
receivable
|
|
$
|
31,598
|
|
|
$
|
19,853
|
|
|
$
|
11,745
|
|
Management
and other fees receivable
|
|
$
|
31,454
|
|
|
$
|
12,860
|
|
|
$
|
18,594
|
|
Management
and other fees receivable from related medical practices ("PC’s")
|
|
$
|
5,541
|
|
|
$
|
582
|
|
|
$
|
4,959
|
|
The
Company's customers are concentrated in the healthcare industry.
Accounts
Receivable
Credit
risk with respect to the Company’s accounts receivable related to product sales and service and repair fees is limited due
to the customer advances received prior to the commencement of work performed and the billing of amounts to customers as sub-assemblies
are completed. Service and repair fees are billed on a monthly or quarterly basis and the Company does not continue providing
these services if accounts receivable become past due. The Company controls credit risk with respect to accounts receivable from
service and repair fees through its credit evaluation process, credit limits, monitoring procedures and reasonably short collection
terms. The Company performs ongoing credit authorizations before a product sales contract is entered into or service and repair
fees are provided.
Medical
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.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE (CONTINUED)
Payment
of the management fee receivables from the PC’s may be impaired by the inability of the PC’s to collect in a timely
manner their medical fees from the third party payors, particularly insurance carriers covering automobile no-fault and workers
compensation claims due to longer payment cycles and rigorous informational requirements and certain other disallowed claims.
Approximately 65% and 62% of the PCs’ net revenues for the three months ended December 31, 2017 and 2016, respectively,
were derived from no-fault and personal injury protection claims. Approximately 66% and 63% of the PCs’ net revenues for
the six months ended December 31, 2017 and 2016, 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 10.9% and 10.4% of the consolidated
net revenues for the three months ended December 31, 2017 and 2016, respectively. Net revenues from management and other fees
charged to the related PCs accounted for approximately 11.2% and 10.3% of the consolidated net revenues for the six months ended
December 31, 2017 and 2016, 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
and six months ended December 31, 2017 and 2016 are summarized in the following tables.
|
|
For
the Three Months Ended December 31,
|
|
|
2017
|
|
2016
|
Commercial
Insurance/ Managed Care
|
|
$
|
1,017
|
|
|
$
|
1,158
|
|
Medicare/Medicaid
|
|
|
293
|
|
|
|
299
|
|
Workers'
Compensation/Personal Injury
|
|
|
6,530
|
|
|
|
5,404
|
|
Other
|
|
|
1,697
|
|
|
|
1,796
|
|
Patient
Fee Revenue, net of contractual allowances and discounts
|
|
|
9,537
|
|
|
|
8,657
|
|
Provision
for Bad Debts and bad debt expense
|
|
|
(4,571
|
)
|
|
|
(4,002
|
)
|
Net
Patient Fee for Revenue
|
|
$
|
4,966
|
|
|
$
|
4,655
|
|
|
|
For
the Six Months Ended December 31,
|
|
|
2017
|
|
2016
|
Commercial
Insurance/ Managed Care
|
|
$
|
2,215
|
|
|
$
|
2,422
|
|
Medicare/Medicaid
|
|
|
565
|
|
|
|
599
|
|
Workers'
Compensation/Personal Injury
|
|
|
12,108
|
|
|
|
11,084
|
|
Other
|
|
|
3,302
|
|
|
|
3,376
|
|
Patient
Fee Revenue, net of contractual allowances and discounts
|
|
|
18,190
|
|
|
|
17,481
|
|
Provision
for Bad Debts and bad debt expense
|
|
|
(8,321
|
)
|
|
|
(7,880
|
)
|
Net
Patient Fee for Revenue
|
|
$
|
9,869
|
|
|
$
|
9,601
|
|
FONAR CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
4 - INVENTORIES
Inventories
included in the accompanying condensed consolidated balance sheet consist of the following:
|
|
December
31,
2017
|
|
June
30,
2017
|
Purchased
parts, components and supplies
|
|
$
|
1,466
|
|
|
$
|
1,431
|
|
Work-in-process
|
|
|
230
|
|
|
|
193
|
|
Total
Inventories
|
|
$
|
1,696
|
|
|
$
|
1,624
|
|
NOTE
5 – COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information
relating to uncompleted contracts is as follows:
|
|
December
31, 2017
|
|
June
30,
2017
|
Costs
incurred on uncompleted contracts
|
|
$
|
1,031
|
|
|
$
|
1,031
|
|
Estimated
earnings
|
|
|
999
|
|
|
|
999
|
|
Subtotal
|
|
|
2,030
|
|
|
|
2,030
|
|
Less:
Billings to date
|
|
|
1,294
|
|
|
|
1,294
|
|
Total
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
736
|
|
|
$
|
736
|
|
Included
in the accompanying condensed consolidated balance sheets under the following captions:
|
|
December
31,
2017
|
|
June
30,
2017
|
Costs
and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
736
|
|
|
$
|
736
|
|
Less:
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
—
|
|
|
|
—
|
|
Total
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
736
|
|
|
$
|
736
|
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
6 – OTHER INTANGIBLE ASSETS
Other
intangible assets, net of accumulated amortization, in the accompanying condensed consolidated balance sheet consist of the following:
|
|
December
31,
2017
|
|
June
30,
2017
|
Capitalized
software development costs
|
|
$
|
7,005
|
|
|
$
|
7,005
|
|
Patents
and copyrights
|
|
|
4,778
|
|
|
|
4,727
|
|
Non-compete
|
|
|
4,100
|
|
|
|
4,100
|
|
Customer
relationships
|
|
|
3,800
|
|
|
|
3,800
|
|
Gross
Other intangible assets
|
|
|
19,683
|
|
|
|
19,632
|
|
Less:
Accumulated amortization
|
|
|
13,607
|
|
|
|
12,987
|
|
Other
Intangible Assets – net
|
|
$
|
6,076
|
|
|
$
|
6,645
|
|
Amortization
of patents and copyrights for the three months ended December 31, 2017 and 2016 amounted to $52 and $49, respectively.
Amortization
of capitalized software development costs for the three months ended December 31, 2017 and 2016 amounted to $65 and $65, respectively.
Amortization
of non-compete for the three months ended December 31, 2017 and 2016 amounted to $147 and $147, respectively.
Amortization
of customer relationships for the three months ended December 31, 2017 and 2016 amounted to $47 and $47, respectively.
Amortization
of patents and copyrights for the six months ended December 31, 2017 and 2016 amounted to $102 and $96, respectively.
Amortization
of capitalized software development costs for the six months ended December 31, 2017 and 2016 amounted to $130 and $130 respectively.
Amortization
of non-compete for the six months ended December 31, 2017 and 2016 amounted to $293 and $293, respectively.
Amortization
of customer relationships for the six months ended December 31, 2017 and 2016 amounted to $95 and $95, respectively.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
7 – OTHER CURRENT LIABILITIES
Other
current liabilities in the accompanying condensed consolidated balance sheet consist of the following:
|
|
December
31,
2017
|
|
June
30,
2017
|
Accrued
salaries, commissions and payroll taxes
|
|
$
|
1,320
|
|
|
$
|
1,139
|
|
Accrued
interest
|
|
|
45
|
|
|
|
45
|
|
Litigation
accruals
|
|
|
145
|
|
|
|
145
|
|
Sales
tax payable
|
|
|
2,330
|
|
|
|
2,282
|
|
Legal
and other professional fees
|
|
|
114
|
|
|
|
296
|
|
Accounting
fees
|
|
|
65
|
|
|
|
154
|
|
Self-funded
health insurance reserve
|
|
|
—
|
|
|
|
92
|
|
Interest
and penalty - sales tax
|
|
|
2,163
|
|
|
|
2,296
|
|
Other
|
|
|
480
|
|
|
|
754
|
|
Total
Other Current Liabilities
|
|
$
|
6,662
|
|
|
$
|
7,203
|
|
NOTE
8 – BUSINESS COMBINATIONS
Acquisitions
On
June 15, 2017, the Company purchased 100% interest in Turnkey Equipment Management of Great Neck, LLC. The consideration and net
assets acquired is as follows:
Cash
Paid
|
|
$
|
1,313
|
|
Security
Deposit
|
|
|
24
|
|
Total
Consideration
|
|
|
1,337
|
|
Net
assets at Fair Value
|
|
|
732
|
|
Goodwill
|
|
$
|
605
|
|
On
March 20, 2017, the Company purchased 100% interest in Radwell Leasing LLC and Radwell LLC. The net assets acquired and consideration
is as follows:
Diagnostic
Equipment
|
|
$
|
544
|
|
Leasehold
Improvements
|
|
|
126
|
|
Total
Net Assets Acquired
|
|
$
|
670
|
|
Stock
issued as consideration
|
|
$
|
791
|
|
|
|
|
|
|
Less
cash received - net
|
|
|
(121
|
)
|
Total
Consideration
|
|
$
|
670
|
|
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
|
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
8 – BUSINESS COMBINATIONS (CONTINUED)
Pro
forma Results
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.
The results of operations of Radwell Leasing LLC, Radwell LLC and Turnkey Equipment of Great Neck LLC were diminutive and did
not affect the proforma results of operations.
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, 2017. All inter-segment sales are market-based. The Company evaluates performance based
on income or loss from operations.
Summarized
financial information concerning the Company's reportable segments is shown in the following table:
|
|
Medical
Equipment
|
|
Management
Of
Diagnostic
Imaging
Centers
|
|
Totals
|
For
the three months ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues from external customers
|
|
$
|
2,656
|
|
|
$
|
17,512
|
|
|
$
|
20,168
|
|
Inter-segment
net revenues
|
|
$
|
227
|
|
|
$
|
—
|
|
|
$
|
227
|
|
Income
from operations
|
|
$
|
164
|
|
|
$
|
5,646
|
|
|
$
|
5,810
|
|
Depreciation
and amortization
|
|
$
|
84
|
|
|
$
|
914
|
|
|
$
|
998
|
|
Capital
expenditures
|
|
$
|
135
|
|
|
$
|
1,033
|
|
|
$
|
1,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues from external customers
|
|
$
|
2,477
|
|
|
$
|
15,926
|
|
|
$
|
18,403
|
|
Inter-segment
net revenues
|
|
$
|
382
|
|
|
$
|
—
|
|
|
$
|
382
|
|
Income
from operations
|
|
$
|
89
|
|
|
$
|
4,520
|
|
|
$
|
4,609
|
|
Depreciation
and amortization
|
|
$
|
81
|
|
|
$
|
782
|
|
|
$
|
863
|
|
Capital
expenditures
|
|
$
|
53
|
|
|
$
|
908
|
|
|
$
|
961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the six months ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues from external customers
|
|
$
|
5,110
|
|
|
$
|
34,392
|
|
|
$
|
39,502
|
|
Inter-segment
net revenues
|
|
$
|
446
|
|
|
$
|
—
|
|
|
$
|
446
|
|
(Loss)
income from operations
|
|
$
|
(33
|
)
|
|
$
|
10,629
|
|
|
$
|
10,596
|
|
Depreciation
and amortization
|
|
$
|
166
|
|
|
$
|
1,791
|
|
|
$
|
1,957
|
|
Capital
expenditures
|
|
$
|
179
|
|
|
$
|
1,683
|
|
|
$
|
1,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the six months ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues from external customers
|
|
$
|
5,098
|
|
|
$
|
32,040
|
|
|
$
|
37,138
|
|
Inter-segment
net revenues
|
|
$
|
763
|
|
|
$
|
—
|
|
|
$
|
763
|
|
Income
from operations
|
|
$
|
(58
|
)
|
|
$
|
9,419
|
|
|
$
|
9,361
|
|
Depreciation
and amortization
|
|
$
|
161
|
|
|
$
|
1,558
|
|
|
$
|
1,719
|
|
Capital
expenditures
|
|
$
|
96
|
|
|
$
|
1,507
|
|
|
$
|
1,603
|
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
10– SUPPLEMENTAL CASH FLOW INFORMATION
During
the six months ended December 31, 2017 and December 31, 2016, the Company paid $25 and $119 for interest, respectively.
During
the six months ended December 31, 2017 and December 31, 2016, the Company paid $185 and $740 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, 2017 and our form
10-Q for the first quarter of fiscal 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
December 31, 2017, the Company has recorded tax obligations of approximately $2,330 plus interest and penalties of approximately
$2,163. 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 December 31, 2017 and June 30, 2017, the Company
had approximately $0 and $92, 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
DECEMBER
31, 2017 and 2016
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE 12 - 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’s effective income tax rate
is based on expected income, statutory rates and tax planning opportunities available in the various jurisdictions in which it
operates. For interim financial reporting, the Company estimates the annual income tax rate based on projected taxable income for
the full year and records a quarterly income tax provision or benefit in accordance with the anticipated annual rate. The Company
refines the estimates of the year’s taxable income on a periodic basis as new information becomes available, including actual
year-to-date financial results. This continual estimation process often results in a change to the expected effective income tax
rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate
occurs so that the year-to-date provision reflects the expected income tax rate. Significant judgment is required in determining
the effective tax rate and in evaluating tax positions.
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. Because the Act became effective mid-way through the Company’s tax year,
the Company will have a US statutory income tax rate of 27.7% for the fiscal 2018 and will have a 21% statutory income tax rate
for fiscal years thereafter.
Under ASC740,
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 in enacted.
The Company’s gross deferred tax assets and liabilities will be revalued from 35% to 21% with a corresponding offset to the
valuation allowance and any potential other taxes arising due to the Tax Act will result in reductions to its net operating loss
carryforward and valuation allowance. Deferred tax assets of approximately $46.2 million will be revalued to approximately $30.2
million with an approximated corresponding decrease to the Company’s valuation allowance. The Company will continue to analyze the Tax Act to assess the full effects on its financial results, including disclosures,
for our fiscal year ending June 30, 2018.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
12 - INCOME TAXES (CONTINUED)
The Company recorded a deferred tax asset of
$17,287 and a deferred tax liability of $332 as of December 31, 2017, primarily relating to net operating loss carryforwards of
approximately $99,019 available to offset future taxable income through 2030. The net operating losses begin to expire in 2021
for federal tax purposes and in 2017 for state income tax purposes.
During the three and six months ended
December 31, the Company recorded a net decrease in its deferred tax asset of $575 for 2017 and a net increase $800 for 2016,
in its condensed consolidated balance sheets. During the three months ended December 31, the Company recorded a net provision
of $575 for 2017 and a net benefit of $353 ($800 benefit offset by a $447 provision) for 2016, in its condensed consolidated
statements of income. During the six months ended December 31, 2017 the Company recorded a net provision of $760 and a net
benefit of $153($800 benefit offset by a $647 provision) for 2016, in its consolidated statements of income.
As of each reporting date management considers new evidence, both
positive and negative that could effect its view of future realization of deferred tax assets. Due to the ability to sustain profitable
levels of income on the U.S. Federal tax jurisdiction, management determined that there is sufficient positive evidence to conclude
that it is more likely than not, that such deferred taxes are realizable.
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 and the regulatory environment in making this
assessment. At present, the Company believes that it is more-likely-than-not that the tax benefits from certain NOL carryforwards
will not be fully realized. In recognition of this inherent risk, a valuation allowance is maintained as a reduction of the gross
deferred tax assets that is not expected to be utilized.
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 and the risks of the regulatory environment are minimized, with supportable trends, the valuation
allowance will be reversed accordingly.
NOTE
13- SUBSEQUENT EVENTS
The
Company has evaluated events that occurred subsequent to December 31, 2017 and through the date the condensed consolidated financial
statements were issued.
FONAR
CORPORATION AND SUBSIDIARIES