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
|
|
2019
|
|
2018
|
Patient
fee revenue – net of contractual allowances and discounts
|
|
$
|
6,045
|
|
|
$
|
5,525
|
|
Product
sales – net
|
|
|
192
|
|
|
|
50
|
|
Service
and repair fees – net
|
|
|
2,064
|
|
|
|
2,131
|
|
Service
and repair fees - related parties – net
|
|
|
28
|
|
|
|
28
|
|
Management
and other fees – net
|
|
|
11,028
|
|
|
|
10,684
|
|
Management
and other fees - related medical practices – net
|
|
|
2,390
|
|
|
|
2,287
|
|
Total
Revenues – Net
|
|
|
21,747
|
|
|
|
20,705
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
Costs
related to patient fee revenue
|
|
|
2,863
|
|
|
|
2,575
|
|
Costs
related to product sales
|
|
|
330
|
|
|
|
5
|
|
Costs
related to service and repair fees
|
|
|
750
|
|
|
|
745
|
|
Costs
related to service and repair fees - related parties
|
|
|
10
|
|
|
|
9
|
|
Costs
related to management and other fees
|
|
|
6,005
|
|
|
|
5,756
|
|
Costs
related to management and other fees – related medical practices
|
|
|
1,537
|
|
|
|
1,382
|
|
Research
and development
|
|
|
472
|
|
|
|
437
|
|
Selling,
general and administrative
|
|
|
4,294
|
|
|
|
4,259
|
|
Total
Costs and Expenses
|
|
|
16,261
|
|
|
|
15,168
|
|
Income
From Operations
|
|
|
5,486
|
|
|
|
5,537
|
|
Interest
Expense
|
|
|
(21
|
)
|
|
|
(25
|
)
|
Investment
Income
|
|
|
148
|
|
|
|
108
|
|
Income
Before Provision for Income Taxes and Noncontrolling Interests
|
|
|
5,613
|
|
|
|
5,620
|
|
Provision
for Income Taxes
|
|
|
(1,107
|
)
|
|
|
(1,128
|
)
|
Net
Income
|
|
|
4,506
|
|
|
|
4,492
|
|
Net
Income - Noncontrolling Interests
|
|
|
(1,207
|
)
|
|
|
(1,174
|
)
|
Net
Income - Controlling Interests
|
|
$
|
3,299
|
|
|
$
|
3,318
|
|
Net
Income Available to Common Stockholders
|
|
$
|
3,097
|
|
|
$
|
3,113
|
|
Net
Income Available to Class A Non-Voting Preferred Stockholders
|
|
$
|
151
|
|
|
$
|
153
|
|
Net
Income Available to Class C Common Stockholders
|
|
$
|
51
|
|
|
$
|
52
|
|
Basic
Net Income Per Common Share Available to Common Stockholders
|
|
$
|
0.48
|
|
|
$
|
0.49
|
|
Diluted
Net Income Per Common Share Available to Common Stockholders
|
|
$
|
0.47
|
|
|
$
|
0.48
|
|
Basic
and Diluted Income Per Share – Class C Common
|
|
$
|
0.13
|
|
|
$
|
0.14
|
|
Weighted
Average Basic Shares Outstanding – Common Stockholders
|
|
|
6,432
|
|
|
|
6,344
|
|
Weighted
Average Diluted Shares Outstanding - Common Stockholders
|
|
|
6,560
|
|
|
|
6,472
|
|
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 CHANGES IN EQUITY
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
For
the Three Months Ending September 30, 2019
|
|
Common
Stock
|
|
Paid
in capital in excess of par value
|
|
Accumulated
Deficit
|
|
Notes
receivable from employee stockholders
|
|
Treasury
Stock
|
|
Non
Controlling Interests
|
|
Total
|
Balance
- June 30, 2019
|
|
|
1
|
|
|
|
181,086
|
|
|
|
(64,456
|
)
|
|
|
|
—
|
|
|
(675
|
)
|
|
|
2,156
|
|
|
|
118,112
|
|
Issuance
of Common Stock
|
|
|
—
|
|
|
|
1,991
|
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
1,991
|
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
3,299
|
|
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
3,299
|
|
Distributions
- Non controlling
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
|
(1,755
|
)
|
|
|
(1,755
|
)
|
Income
- Non controlling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
|
1,207
|
|
|
|
1,207
|
|
Balance
- September 30, 2019
|
|
|
1
|
|
|
|
183,077
|
|
|
|
(61,157
|
)
|
|
|
|
—
|
|
|
(675
|
)
|
|
|
1,608
|
|
|
|
122,854
|
|
For
the Three Months Ending September 30, 2018
|
|
Common
Stock
|
|
Paid
in capital in excess of par value
|
|
Accumulated
Deficit
|
|
Notes
receivable from employee stockholders
|
|
Treasury
Stock
|
|
Non
Controlling Interests
|
|
Total
|
Balance
- June 30, 2018
|
|
|
1
|
|
|
|
179,131
|
|
|
|
(79,772
|
)
|
|
|
(9
|
)
|
|
|
(675
|
)
|
|
|
3,559
|
|
|
|
102,235
|
|
Issuance
of Common Stock
|
|
|
—
|
|
|
|
1,955
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,955
|
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
3,318
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,318
|
|
Distributions
- Non controlling
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,740
|
)
|
|
|
(1,740
|
)
|
Income
- Non controlling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,174
|
|
|
|
1,174
|
|
Balance
- September 30, 2018
|
|
|
1
|
|
|
|
181,086
|
|
|
|
(76,454
|
)
|
|
|
(9
|
)
|
|
|
(675
|
)
|
|
|
2,993
|
|
|
|
106,942
|
|
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,
|
|
|
2019
|
|
2018
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
4,506
|
|
|
$
|
4,492
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
995
|
|
|
|
922
|
|
Amortization
on right-of-use assets
|
|
|
819
|
|
|
|
—
|
|
Provision
for bad debts
|
|
|
(239
|
)
|
|
|
80
|
|
Deferred
income tax – net
|
|
|
1,004
|
|
|
|
1,128
|
|
Stock
issued for costs and expenses
|
|
|
1,991
|
|
|
|
1,955
|
|
(Increase)
decrease in operating assets, net:
|
|
|
|
|
|
|
|
|
Accounts,
medical and management fee receivable(s)
|
|
|
(1,188
|
)
|
|
|
(1,621
|
)
|
Notes
receivable
|
|
|
—
|
|
|
|
(12
|
)
|
Costs
and estimated earnings in excess of billings on uncompleted contracts
|
|
|
218
|
|
|
|
—
|
|
Inventories
|
|
|
7
|
|
|
|
(218
|
)
|
Prepaid
expenses and other current assets
|
|
|
233
|
|
|
|
(186
|
)
|
Other
assets
|
|
|
(44
|
)
|
|
|
—
|
|
Increase
(decrease) in operating liabilities, net:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(345
|
)
|
|
|
210
|
|
Other
current liabilities
|
|
|
(2,889
|
)
|
|
|
(3,123
|
)
|
Operating
lease liabilities
|
|
|
(750
|
)
|
|
|
—
|
|
Customer
deposits
|
|
|
(62
|
)
|
|
|
132
|
|
Other
liabilities
|
|
|
(13
|
)
|
|
|
10
|
|
Net
cash provided by operating activities
|
|
|
4,243
|
|
|
|
3,769
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(2,411
|
)
|
|
|
(449
|
)
|
Short
term investment
|
|
|
(119
|
)
|
|
|
—
|
|
Cost
of patents
|
|
|
(38
|
)
|
|
|
(20
|
)
|
Net
cash used in investing activities
|
|
|
(2,568
|
)
|
|
|
(469
|
)
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Repayment
of borrowings and capital lease obligations
|
|
|
(8
|
)
|
|
|
(7
|
)
|
Distributions
to noncontrolling interests
|
|
|
(1,755
|
)
|
|
|
(1,740
|
)
|
Net
cash used in financing activities
|
|
|
(1,763
|
)
|
|
|
(1,747
|
)
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
|
|
(88
|
)
|
|
|
1,553
|
|
Cash
and Cash Equivalents - Beginning of Period
|
|
|
13,882
|
|
|
|
19,634
|
|
Cash
and Cash Equivalents - End of Period
|
|
$
|
13,794
|
|
|
$
|
21,187
|
|
See
accompanying notes to condensed consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2019 and 2018
(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, 2019,
are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2020. 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 30, 2019 for the fiscal year ended June 30, 2019.
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, 2019 and 2018
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenues
(Continued)
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, 2019 and 2018.
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, 2019 and 2018, 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, 2019 and 2018
(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, 2019
|
|
Three
months ended
September 30, 2018
|
|
|
Total
|
|
Common
Stock
|
|
Class
C Common
Stock
|
|
Total
|
|
Common
Stock
|
|
Class
C Common
Stock
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
Net income available to common stockholders
|
|
$
|
3,299
|
|
|
$
|
3,097
|
|
|
$
|
51
|
|
|
$
|
3,318
|
|
|
$
|
3,113
|
|
|
$
|
52
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
6,432
|
|
|
|
6,432
|
|
|
|
383
|
|
|
|
6,344
|
|
|
|
6,344
|
|
|
|
383
|
|
Basic
income per common share
|
|
$
|
0.51
|
|
|
$
|
0.48
|
|
|
$
|
0.13
|
|
|
$
|
0.52
|
|
|
$
|
0.49
|
|
|
$
|
0.14
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
Weighted average shares outstanding
|
|
|
|
|
|
|
6,432
|
|
|
|
383
|
|
|
|
|
|
|
|
6,344
|
|
|
|
383
|
|
Convertible
Class C Stock
|
|
|
|
|
|
|
128
|
|
|
|
—
|
|
|
|
|
|
|
|
128
|
|
|
|
—
|
|
Total
Denominator for diluted earnings per share
|
|
|
|
|
|
|
6,560
|
|
|
|
383
|
|
|
|
|
|
|
|
6,472
|
|
|
|
383
|
|
Diluted
income per common share
|
|
|
|
|
|
$
|
0.47
|
|
|
$
|
0.13
|
|
|
|
|
|
|
$
|
0.48
|
|
|
$
|
0.14
|
|
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 consolidated condensed financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2019 and 2018
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent
Accounting Pronouncements (Continued)
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.
The Company adopted this guidance on July 1, 2019, as required, electing to apply retrospectively at the period of adoption with
practical expedients. The adoption of this guidance had a material impact on the Company’s balance sheet by virtue of including
the present value of its future operating lease payments as a liability of $33.3 million and related right-to-use lease assets
as of July 1, 2019.
The
Company accounts for its various operating leases in accordance with Accounting Standards Codification (‘ASC’) 842
– Lease, as updated by ASU 2016-02. At the inception of a lease, the Company recognizes right-of-use lease assets and related
lease liabilities measured at present value of future lease payments on its balance sheet. Lease expense is recognized on a straight-line
basis over the term of the lease. The Company reviewed its contracts with vendors and customers, determining that its right-to-use
lease assets consisted of only office space operating leases. In determining the right-to-use lease assets and liabilities, the
Company did recognize lease extension options which the Company feels would be reasonably exercised. Also included in other current
assets is a $950,000 receivable from a landlord for tenant improvements. A reconciliation of operating lease payments undiscounted
cash flows to lease liabilities recognized as of September 30, 2019 is as follows:
|
|
Operating
Lease Payments
|
|
2020
(Nine Months)
|
|
|
|
3,592
|
|
|
2021
|
|
|
|
4,782
|
|
|
2022
|
|
|
|
4,463
|
|
|
2023
|
|
|
|
4,415
|
|
|
2024
|
|
|
|
4,120
|
|
|
Thereafter
|
|
|
|
21,545
|
|
|
Present
Value discount (5.5% weighted average)
|
|
|
|
(10,307
|
)
|
|
Total
lease liability
|
|
|
|
32,610
|
|
FASB,
the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of September
30, 2019 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 2019 or 2018, 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.
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, 2019 and 2018
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE
Receivables,
net is comprised of the following at September 30, 2019, and June 30, 2019:
|
|
September
30, 2019
|
|
|
Gross
Receivable
|
|
Allowance
for doubtful accounts
|
|
Net
|
Accounts
receivable
|
|
$
|
3,955
|
|
|
$
|
190
|
|
|
$
|
3,765
|
|
Accounts
receivable - related party
|
|
$
|
90
|
|
|
|
—
|
|
|
$
|
90
|
|
Medical
receivable
|
|
$
|
15,866
|
|
|
$
|
—
|
|
|
$
|
15,866
|
|
Management
and other fees receivable
|
|
$
|
35,751
|
|
|
$
|
9,085
|
|
|
$
|
26,666
|
|
Management
and other fees receivable from related medical practices ("PC’s")
|
|
$
|
9,106
|
|
|
$
|
2,391
|
|
|
$
|
6,715
|
|
|
|
June
30, 2019
|
|
|
Gross
Receivable
|
|
Allowance
for doubtful accounts
|
|
Net
|
Accounts
receivable
|
|
$
|
3,927
|
|
|
$
|
190
|
|
|
$
|
3,737
|
|
Accounts
receivable - related party
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Medical
receivable
|
|
$
|
15,729
|
|
|
$
|
—
|
|
|
$
|
15,729
|
|
Management
and other fees receivable
|
|
$
|
35,114
|
|
|
$
|
9,405
|
|
|
$
|
25,709
|
|
Management
and other fees receivable from related medical practices ("PC’s")
|
|
$
|
8,812
|
|
|
$
|
2,311
|
|
|
$
|
6,501
|
|
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, 2019 and 2018
(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 67% of the PCs’ net revenues for the three months ended September 30, 2019 and 2018, 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 11.0% of the consolidated
net revenues for the three months ended September 30, 2019 and 2018, 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.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2019 and 2018
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE (CONTINUED)
Management
and Other Fees Receivable (Continued)
The
Company’s patient fee revenue, net of contractual allowances and discounts for the three months ended September 30, 2019
and 2018 are summarized in the following table.
|
|
For
the Three Months Ended
September
30,
|
|
|
2019
|
|
2018
|
Commercial
Insurance/ Managed Care
|
|
$
|
1,354
|
|
|
$
|
1,180
|
|
Medicare/Medicaid
|
|
|
266
|
|
|
|
291
|
|
Workers'
Compensation/Personal Injury
|
|
|
4,294
|
|
|
|
3,702
|
|
Other
|
|
|
131
|
|
|
|
352
|
|
Patient
Fee Revenue, net of contractual allowances and discounts
|
|
$
|
6,045
|
|
|
$
|
5,525
|
|
NOTE
4 - INVENTORIES
Inventories
included in the accompanying condensed consolidated balance sheets consist of the following:
|
|
September
30,
2019
|
|
June
30,
2019
|
Purchased
parts, components and supplies
|
|
$
|
1,708
|
|
|
$
|
1,640
|
|
Work-in-process
|
|
|
83
|
|
|
|
158
|
|
TOTAL
INVENTORIES
|
|
$
|
1,791
|
|
|
$
|
1,798
|
|
NOTE
5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information
relating to uncompleted contracts is as follows:
|
|
September
30,
2019
|
|
June
30,
2019
|
Costs
incurred on uncompleted contracts
|
|
$
|
520
|
|
|
$
|
448
|
|
Estimated
earnings
|
|
|
1,059
|
|
|
|
1,089
|
|
Subtotal
|
|
|
1,579
|
|
|
|
1,537
|
|
Less:
Billings to date
|
|
|
1,272
|
|
|
|
1,012
|
|
Total
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
307
|
|
|
$
|
525
|
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2019 and 2018
(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,
2019
|
|
June
30,
2019
|
Capitalized
software development costs
|
|
$
|
7,005
|
|
|
$
|
7,005
|
|
Patents
and copyrights
|
|
|
5,002
|
|
|
|
4,964
|
|
Non-compete
|
|
|
4,100
|
|
|
|
4,100
|
|
Customer
relationships
|
|
|
3,800
|
|
|
|
3,800
|
|
Gross
Other intangible assets
|
|
|
19,907
|
|
|
|
19,869
|
|
Less:
Accumulated amortization
|
|
|
15,354
|
|
|
|
15,113
|
|
Other
Intangible Assets
|
|
$
|
4,553
|
|
|
$
|
4,756
|
|
Amortization
of patents and copyrights for the three months ended September 30, 2019 and 2018 amounted to $47 and $50, respectively.
Amortization
of non-compete for the three months ended September 30, 2019 and 2018 amounted to $146 and $146, respectively.
Amortization
of customer relationships for the three months ended September 30, 2019 and 2018 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,
2019
|
|
June
30,
2019
|
Accrued
salaries, commissions and payroll taxes
|
|
$
|
1,392
|
|
|
$
|
3,898
|
|
Litigation
accruals
|
|
|
145
|
|
|
|
145
|
|
Sales
tax payable
|
|
|
1,536
|
|
|
|
1,671
|
|
Legal
and other professional fees
|
|
|
130
|
|
|
|
126
|
|
Accounting
fees
|
|
|
50
|
|
|
|
105
|
|
Self-funded
health insurance reserve
|
|
|
—
|
|
|
|
68
|
|
Accrued
interest and penalty
|
|
|
1,067
|
|
|
|
1,054
|
|
Other
|
|
|
355
|
|
|
|
510
|
|
Other
Current Liabilities
|
|
$
|
4,675
|
|
|
$
|
7,577
|
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2019 and 2018
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
8 – STOCKHOLDERS EQUITY
Common
Stock
During
the three months ended September 30, 2019, the Company issued 90 shares of common stock for costs and expenses of $1,990.
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, 2019. 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, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues from external customers
|
|
$
|
2,284
|
|
|
$
|
19,463
|
|
|
$
|
21,747
|
|
Inter-segment
net revenues
|
|
$
|
219
|
|
|
$
|
—
|
|
|
$
|
219
|
|
(Loss)
Income from operations
|
|
$
|
(736
|
)
|
|
$
|
6,222
|
|
|
$
|
5,486
|
|
Depreciation
and amortization
|
|
$
|
91
|
|
|
$
|
904
|
|
|
$
|
995
|
|
Capital
expenditures
|
|
$
|
1,601
|
|
|
$
|
848
|
|
|
$
|
2,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
NOTE
10 – SUPPLEMENTAL CASH FLOW INFORMATION
During
the three months ended September 30, 2019 and September 30, 2018, the Company paid $8 and $139 for interest, respectively.
During
the three months ended September 30, 2019 and September 30, 2018, the Company paid $228 and $180 for income taxes, respectively.
During
the three months ended September 30, 2019, the Company recorded a current receivable of $950 from a landlord for tenant improvements.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2019 and 2018
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
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, 2019.
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, 2019, the Company has recorded tax obligations of approximately $1,536 plus interest and penalties of approximately
$1,021. 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, 2019 and June 30, 2019, the Company
had approximately $0 and $68, 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.
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, 2019 and 2018, the Company recorded income tax expense
of $1,107 in 2019 as compared to $1,128 in 2018. The 2019 provision is comprised of a current income tax component of $103 and
a deferred income tax component of $1,004. 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.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2019 and 2018
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
12 - INCOME TAXES (CONTINUED)
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 2015.
The
Company recorded a deferred tax asset of $19,934 and a deferred tax liability of $243 as of September 30, 2019, primarily relating
to net operating loss carryforwards of approximately $65,792 available to offset future taxable income through 2030. The net operating
losses begin to expire in 2023 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, 2019, 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).
A
valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of the remainder of the
valuation.
NOTE
13 – SUBSEQUENT EVENTS
The
Company has evaluated events that occurred subsequent to September 30, 2019 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, 2019, we reported a net income of $4.5 million on revenues of $21.7 million as compared
to net income of $4.5 million on revenues of $20.7 million for the three month period ended September 30, 2018. Operating income
remained constant at $5.5 million for the three month period ended September 30, 2018 and for the three month period ended September
30, 2019.
The
revenue increase of 5.0%, from $20.7 million for the first three months of fiscal 2019 to $21.7 million for the first three months
of fiscal 2020, was primarily due to increases in net management fees of $0.4 million, from $13.0 million for the first three
months of fiscal 2019 to $13.4 million for the first three months of fiscal 2020. Revenues from product sales and service and
repair fees increased by $0.1 million from $2.2 million for the first three months of fiscal 2019 to $2.3 million for the first
three months of fiscal 2020.
While
our revenues increased, our costs and expenses increased by a similar amount, resulting in our operating income remaining constant
at $5.5 million for the three months ended September 30, 2019 and for the three months ended September 30, 2018. In terms of percentages,
costs and expenses increased 7.2% from $15.2 million for the first three months of fiscal 2019 to $16.3 million for the first
three months of fiscal 2020, while revenues increased 5.0%, from $20.7 million for the first three months of fiscal 2019 to $21.7
million for the first three months of fiscal 2020.
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. HMCA presently has a direct ownership interest of 70.0% in HDM, and the investors in
HDM have a 30.0% ownership interest. HMCA has a 100% ownership interest in Imperial. Imperial is presently inactive. The entire
management of the diagnostic imaging centers business segment is 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.
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.
FONAR
CORPORATION AND SUBSIDIARIES
Results
of Operations
We
operate in two industry segments: the manufacture and servicing of medical (MRI) equipment, which is conducted 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 $192,000 for the first three months of fiscal 2020 from $50,000 for the first three months
of fiscal 2019. Costs related to product sales increased, from $5,000 for the three month period ended September 30, 2018 to $330,000
for the three month period ended September 30, 2019. Economic uncertainty and lower reimbursement rates for MRI scans, have depressed
the market for our MRI scanner products, notwithstanding our scanners’ unique technological capabilities (e.g. multi positional
scanning).
Service
revenues decreased 3.1% from $2.2 million for the three month period ended September 30, 2018 to $2.1 million for the three month
period ended September 30, 2019. Continuing lower sales volumes have been a factor ultimately contributing to the decrease in
service revenues, as the revenue from new scanners being placed under service agreements, following the expiration of their warranties,
is insufficient to replace the revenue lost as a result of older scanners being taken out of service.
Costs
relating to providing service increased slightly from $754,000 in the first three months of fiscal 2019 to $760,000 in the first
three months of fiscal 2020. Because of 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 and costly problems result,
we have been able to control our costs of providing service.
There
were approximately $183,000 in foreign revenues for the first three months of fiscal 2020 as compared to approximately $124,000
in foreign revenues for the first three months of fiscal 2019, representing a decrease in foreign revenues of 47.6%. 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 increased slightly to $2.3 million for the first three months of fiscal 2020 from $2.2 million
for the first three months of fiscal 2019. Operating losses for our medical equipment segment increased to an operating loss of
$736,000 for the first three months of fiscal 2020 as compared to an operating loss of $230,000 for the first three months of
fiscal 2019.
FONAR
CORPORATION AND SUBSIDIARIES
Diagnostic
Facilities Management Services
HMCA
revenues increased in the first three months of fiscal 2020 by 5.2% to $19.5 million from $18.5 million for the first three months
of fiscal 2019. The percentage of our revenues derived from our diagnostic facilities management segment relative to the percentage
of our revenues derived from our medical equipment segment increased slightly to 89.5% for the first three months of fiscal 2020,
from 89.3% for the first three months of fiscal 2019.
The
increase in HMCA revenues is principally due to HMCA’s success in marketing the scanning services of the facilities managed
or owned by HMCA, notwithstanding the decrease in reimbursement rates paid for MRI scans by insurers, Medicare and other government
programs. The reductions in reimbursement rates are not unique to HMCA or HMCA’s clients but are being experienced by the
industry in general.
HMCA
is countering the effects of lower reimbursement rates by increasing the scan volume of the facilities it owns or manages from
adding additional scanners at current centers and increasing our marketing efforts.
As
a result of our vigorous marketing efforts, the number of scans performed at our centers and at our client’s centers increased
from approximately 45,000 in the first three months of fiscal 2019 to approximately 47,000 in the first three months of fiscal
2020.
We
manage twenty-five sites, twenty-three 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 $6.2 million for the first three months of
fiscal 2020 compared to operating income of $5.8 million for the first three months of fiscal 2019.
HMCA’s
cost of revenues for the first three months of fiscal 2020 as compared to the first three months of fiscal 2019 increased by 7.1%
from $9.7 million to $10.4 million primarily as a result of the higher volume of scans performed.
Consolidated
For
the first three months of fiscal 2020, our consolidated net revenues increased by 5.0% to $21.7 million from $20.7 million for
the first three months of fiscal 2019, and total costs and expenses increased by 7.2% to $16.3 million from $15.2 million for
the first three months of fiscal 2020 and for the first three months of fiscal 2019 respectively. As a result, our operating income
remained constant at $5.5 million in the first three months of fiscal 2020 and in the first three months of fiscal 2019.
Selling,
general and administrative expenses remained constant at $4.3 million in the first three months of fiscal 2020 and in the first
three months of fiscal 2019. The compensatory element of stock issuances, which is included in selling, general and administrative
expenses, remained constant at $0 for the first three months of fiscal 2020 and 2019.
Research
and development expenses increased by 8.0% to $ 472,000 for the first three months of fiscal 2020 from $437,000 for the first
three months of fiscal 2019.
Interest
expense in the first three months of fiscal 2020 decreased by 20.0% to $21,000 from $25,000 in the first three months of fiscal
2019. The decrease was due to the repayment of debt.
Inventories
remained constant at $1.8 million at September 30, 2019 and at June 30, 2019.
FONAR
CORPORATION AND SUBSIDIARIES
Net
management fee and medical receivables increased by 2.7% to $49.2 million at September 30, 2019 from $47.9 million at June 30,
2019 as a result of slower collections. The slower collections were primarily due to an increase in no-fault and workers’
compensation revenue, which typically takes longer to collect.
The
results of operations for the first three months of fiscal 2020 reflect an increase in revenues from management, patient and other
fees, as compared to the first three months of fiscal 2019 ($19.5 million for the first three months of fiscal 2020 as compared
to $18.5 million for the first three months of fiscal 2019), and an increase in MRI equipment segment revenues ($2.2 million as
compared to $2.3 million). Revenues were 10.5% from the MRI equipment segment as compared to 89.5% from HMCA, for the first three
months of fiscal 2020, as compared to 10.7% from the MRI equipment segment and 89.3% from HMCA for the first three months of fiscal
2019.
The
implementation of the Patient Protection and Affordable Care Act (PPACA) has had 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. Efforts to repeal and replace, or modify the PPACA may result in further significant changes in the healthcare
industry and our business.
We
are committed to improving our operating results and dealing with the challenges posed by legislative and regulatory requirements.
Nevertheless, factors beyond our control, such as the timing and rate of market growth, economic conditions, the availability
of credit and payor reimbursement rates, or unexpected expenditures and the timing of such expenditures, make it difficult to
forecast future operating results.
As
mentioned, one of the effects of the PPACA on our business has been the reduction in Medicare reimbursement rates for MRI scans.
This also has resulted in a reduction in the reimbursement rates by commercial insurers and government programs which tie their
reimbursement rates to the Medicare rates. Nevertheless, the increased patient volume of the scanning centers we manage or own
has enabled us to maintain a healthy profitability in spite of these challenges. We believe we are pursuing the correct policies
to cope with these problems and to improve the Company’s operating results. However, our future revenues and results of
operations may be adversely impacted by future reductions in reimbursement rates.
Our
Upright® MRI (also referred to as the Stand-Up® MRI), together with our works-in-progress, are intended to significantly
improve our competitive position.
The
Upright® MRI scanner, which operates at 6000 gauss (.6 Tesla) field strength, allows patients to be scanned while standing,
sitting, reclining and in multiple flexion and extension positions. It is common in visualizing the spine that abnormalities are
visualized in some positions and not others. This enables surgical corrections that heretofore would be unaddressable for lack
of visualizing the symptom causing the pathology and therefore, in general enables the treating physician to achieve a better
treatment outcome for his patient. A floor-recessed elevator brings the patient to the height appropriate for the targeted image
region. A custom-built multi-position adjustable bed will allow patients to sit or lie on their backs, sides or stomachs at any
angle. This allows the MRI technologist to ask the patient to position himself/herself in the exact position that generates his/her
pain so that images of the patient in the position that explicitly generates the patient’s pain can be nailed down. Full-range-of-motion
studies of the joints in virtually any direction are possible, a particularly promising feature for sports injuries.
FONAR
CORPORATION AND SUBSIDIARIES
In
addition FONAR has announced the publication of a 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, an approximately 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
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.
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.
FONAR
CORPORATION AND SUBSIDIARIES
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 recumbent-only position static MRIs.
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 recumbent-only 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 recumbent-only 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 recumbent-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® Multi-Position™ 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
emergency 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.
FONAR
CORPORATION AND SUBSIDIARIES
Liquidity
and Capital Resources
Cash
and cash equivalents decreased by 0.6% from $13.9 million at June 30, 2019 to $13.8 million at September 30, 2019.
Cash
provided by operating activities for the first three months of fiscal 2020 was $4.2 million. Cash provided by operating activities
was attributable principally to net income of $4.5 million, depreciation and amortization of $1.0 million and deferred income
tax of $1.0 million, offset by an increase in accounts, management fee receivables and medical receivables of $1.2 million and
a decrease in other current liabilities of $2.9 million.
Cash
used in investing activities for the first three months of fiscal 2020 was $2.6 million. The principal uses of cash used in investing
activities during the first nine months of fiscal 2020 consisted of patent costs of $38,000 and the purchase of property and equipment
of $2.4 million.
Cash
used in financing activities for the first three months of fiscal 2020 was $1.8 million. The principal uses of cash in financing
activities during the first three months of fiscal 2020 were the repayment of principal on long-term debt and capital lease obligations
of $8,000 and distributions to non-controlling interests of $1.8 million.
Total
liabilities increased by 185.0% to $44.0 million at September 30, 2019 from $15.4 million at June 30, 2019. This was primarily
due to the adoption of the new accounting pronouncement regarding leases in the amount of $32.6 million. “Other” current
liabilities decreased by 38.3% to $4.7 million at September 30, 2019 from $7.6 million at June 30, 2019. Long-term debt and capital
lease obligations decreased from $273,000 to $266,000. The current portion of our unearned revenue on service contracts decreased
from $3.8 million to $3.7 million. Customer deposits decreased from $799,000 at June 30, 2019 to $736,000 at September 30, 2019
as a result of an increase in services performed.
As
of September 30, 2019, the total of $4.7 million in “other” current liabilities included accrued salaries and payroll
taxes of $1.4 million, and sales taxes of $1.5 million plus accrued interest and penalties of $1.0 million.
Our
working capital increased to $73.1 million at September 30, 2019 from $71.0 million at June 30, 2019. This resulted from an increase
in current assets ($85.1 million at June 30, 2019 as compared to $87.0 million at September 30, 2019), and a decrease in current
liabilities from $14.1 million at June 30, 2019 to $13.9 million at September 30, 2019.
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 the
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).
A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of any portion or all
of the valuation allowance.
FONAR
CORPORATION AND SUBSIDIARIES
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 made numerous changes to the Internal Revenue Code. Among other
changes, the Act reduced 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 required 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 were revalued form
35% to 21%. Deferred tax assets of approximately $46.2 million (as of the enactment effective date) were revalued to approximately
$30.2 million with a corresponding decrease to the Company’s valuation allowance.
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 impacts 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
Fonar
has not committed to making any significant capital expenditures for the remainder of the 2020 fiscal year with the exception
of placing additional scanners at facilities located in Ormond Beach, Florida and Islandia and White Plains, New York. Also we
signed a lease for a new location for a new facility in Pembroke Pines, Florida.
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.
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
from the Patient Protection and Affordable Care Act or its repeal and replacement, the sale of medical equipment has and may continue
to suffer.
The
Company believes that its business plan has been responsible for the past seven consecutive fiscal years and past fiscal quarter
of profitability and that its capital resources will be adequate to support operations at current levels through at least September
30, 2020. The future effects on our business of healthcare 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.