FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the quarterly period ended MARCH 31, 2020

  

Commission file number 0-10248

 

FONAR CORPORATION

(Exact name of registrant as specified in its charter)

  

DELAWARE   11-2464137
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
110 Marcus Drive  Melville, New York   11747
Address of principal executive offices)   (Zip Code)

Registrant's telephone number, including area code: (631) 694-2929 

Title of each class   Trading Symbol   Name of each exchange on which registered
Common Stock   FONR   NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES _X_ NO ___

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit such files YES _X_ NO ___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of accelerated filer, large accelerated filer, smaller reporting company and emerging growth company in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer___; Accelerated filer _X_; Non-accelerated filer___;Smaller reporting company _X_; Emerging growth company ___.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ___ NO _X_

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the latest practicable date.

 

Class   Outstanding at May 6, 2020
Common Stock, par value $.0001   6,447,463
Class B Common Stock, par value $.0001   146
Class C Common Stock, par value $.0001   382,513
Class A Preferred Stock, par value $.0001   313,438

 

 

 

  FONAR CORPORATION AND SUBSIDIARIES

 

INDEX

PART I - FINANCIAL INFORMATION   PAGE
Item 1. Financial Statements   3
Condensed Consolidated Balance Sheets - March 31, 2020 (Unaudited) and June 30, 2019   3
Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2020 and March 31, 2019 (Unaudited)   6
Condensed Consolidated Statements of Income for the Nine Months Ended March 31, 2020 and March 31, 2019 (Unaudited)   7
Condensed Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2020 and March 31, 2019 (Unaudited)   8
Condensed Consolidated Statements of Changes in Equity for the Nine Months Ended March 31, 2020 and March 31, 2019 (Unaudited)   9
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2020 and March 31, 2019 (Unaudited)   10
Notes to Condensed Consolidated Financial Statements (Unaudited)   11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations   25
Item 3. Quantitative and Qualitative Disclosures About Market Risk   35
Item 4. Controls and Procedures   35
     
 PART II - OTHER INFORMATION   36
Item 1. Legal Proceedings   36
Item 1A. Risk Factors   36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   40
Item 3. Defaults Upon Senior Securities   40
Item 4. Mine Safety Disclosures   40
Item 5. Other Information   40
Item 6. Exhibits   40
Signatures   40

 

 

 

Page 2  

 

 FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

ASSETS

 

 

    March 31,
2020
  June 30,
2019 *
Current Assets:                
 Cash and cash equivalents   $ 31,019     $ 13,882  
 Short term investments     32       15,095  
 Accounts receivable – net     3,832       3,737  
 Accounts receivable - related party     30       —    
 Medical receivable – net     16,481       15,729  
 Management and other fees receivable – net     28,007       25,709  
Management and other fees receivable – related medical practices – net     7,035       6,501  
 Inventories     1,775       1,798  
Costs and estimated earnings in excess of billings on uncompleted contracts     153       525  
 Income tax receivable     1,200       600  
 Prepaid expenses and other current assets     1,798       1,513  
 Total Current Assets     91,362       85,089  
                 
Accounts receivable     2,166       —    
 Income taxes receivable     —         600  
 Deferred income tax asset     18,457       20,937  
 Property and equipment – net     21,258       16,986  
 Right-of-use asset – net     29,145       —    
 Goodwill     3,985       3,985  
 Other intangible assets – net     4,162       4,756  
 Other assets     645       1,207  
  Total Assets   $ 171,180     $ 133,560  

 

*Condensed from audited financial statements.

 

See accompanying notes to condensed consolidated financial statements.

 

Page 3  

 

 FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

    March 31,
2020
  June 30,
2019 *
Current Liabilities:                
Current portion of long-term debt and capital leases   $ 34     $ 41  
Accounts payable     1,687       1,861  
Other current liabilities     5,162       7,577  
 Unearned revenue on service contracts     3,912       3,812  
 Unearned revenue on service contracts – related party     27       —    
 Lease liability - current portion     3,214       —    
Customer deposits     854       799  
Total Current Liabilities     14,890       14,090  
                 
Long-Term Liabilities:                
 Unearned revenue on service contracts     2,096       —    
 Deferred income tax liability     243       243  
 Due to related medical practices     93       93  
 Long-term debt and capital leases, less current portion     247       273  
 Lease liability - net of current portion     27,885       —    
 Other liabilities     139       749  
                 
Total Long-Term Liabilities     30,703       1,358  
 Total Liabilities     45,593       15,448  

 

 

 

*Condensed from audited financial statements.

 

See accompanying notes to condensed consolidated financial statements.

Page 4  

 

 FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

  

LIABILITIES AND STOCKHOLDERS’ EQUITY (Continued)

 

STOCKHOLDERS' EQUITY:   March 31, 2020   June 30,
2019 *
 Class A non-voting preferred stock $.0001 par value; 453 shares authorized at March 31, 2020 and June 30, 2019, 313 issued and outstanding at March 31, 2020 and June 30, 2019   $ —       $ —    
 Preferred stock $.001 par value; 567 shares authorized at March 31, 2020 and June 30, 2019, issued and outstanding – none     —         —    
 Common Stock $.0001 par value; 8,500 shares authorized at March 31, 2020 and June 30, 2019, 6,459 and 6,369 issued at March 31, 2020 and June 30, 2019, 6,447 and 6,357 outstanding at March 31, 2020 and June 30, 2019     1       1  
 Class B Common Stock (10 votes per share) $.0001 par value; 227 shares authorized at March 31, 2020 and June 30, 2019; .146 issued and outstanding at March 31, 2020 and June 30, 2019     —         —    
  Class C Common Stock (25 votes per share) $.0001 par value; 567 shares authorized at March 31, 2020 and June 30, 2019, 383 issued and outstanding at March 31, 2020 and June 30, 2019     —         —    
 Paid-in capital in excess of par value     183,076       181,086  
 Accumulated deficit     (56,792 )     (64,456 )
Treasury stock, at cost - 12 shares of common stock at March 31, 2020 and June 30, 2019     (675 )     (675 )
 Total Fonar Corporation’s Stockholders’ Equity     125,610       115,956  
 Noncontrolling interests     (23 )     2,156  
 Total Stockholders' Equity     125,587       118,112  
 Total Liabilities and Stockholders' Equity   $ 171,180     $ 133,560  

 

*Condensed from audited financial statements.

See accompanying notes to condensed consolidated financial statements.    

Page 5  

 

 FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

    FOR THE THREE MONTHS ENDED MARCH 31,
REVENUES   2020   2019
Patient fee revenue – net of contractual allowances and discounts   $ 5,713     $ 6,410  
Product sales – net     92       796  
Service and repair fees – net     1,942       1,964  
Service and repair fees - related parties – net     28       28  
Management and other fees – net     11,218       11,191  
Management and other fees - related medical practices – net     2,693       2,390  
Total Revenues – Net     21,686       22,779  
COSTS AND EXPENSES                
Costs related to patient fee revenue     2,840       2,740  
Costs related to product sales     235       216  
Costs related to service and repair fees     674       752  
Costs related to service and repair fees - related parties     9       10  
Costs related to management and other fees     6,004       5,834  
Costs related to management and other fees – related medical practices     1,550       1,634  
Research and development     535       381  
Selling, general and administrative     7,224       4,604  
Total Costs and Expenses     19,071       16,171  
Income From Operations     2,615       6,608  
Interest Expense     (17 )     (27 )
Investment Income     126       104  
Income Before Provision for Income Taxes and Noncontrolling Interests     2,724       6,685  
Provision for Income Taxes     (810 )     (1,484 )
Net Income     1,914       5,201  
Net Income - Noncontrolling Interests     (653 )     (1,338 )
Net Income - Controlling Interests   $ 1,261     $ 3,863  
Net Income Available to Common Stockholders   $ 1,184     $ 3,623  
Net Income Available to Class A Non-Voting Preferred Stockholders   $ 57     $ 179  
Net Income Available to Class C Common Stockholders   $ 20     $ 61  
Basic Net Income Per Common Share Available to Common Stockholders   $ 0.18     $ 0.57  
Diluted Net Income Per Common Share Available to Common Stockholders   $ 0.18     $ 0.56  
Basic and Diluted Income Per Share – Class C Common   $ 0.05     $ 0.16  
Weighted Average Basic Shares Outstanding – Common Stockholders     6,447       6,357  
Weighted Average Diluted Shares Outstanding - Common Stockholders     6,575       6,485  
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. 

Page 6  

 

 FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

    FOR THE NINE MONTHS ENDED MARCH 31,
REVENUES   2020   2019
Patient fee revenue – net of contractual allowances and discounts   $ 17,754     $ 17,856  
Product sales – net     288       1,241  
Service and repair fees – net     6,044       6,116  
Service and repair fees - related parties – net     83       83  
Management and other fees – net     33,242       32,448  
Management and other fees - related medical practices – net     7,473       6,965  
Total Revenues – Net     64,884       64,709  
COSTS AND EXPENSES                
Costs related to patient fee revenue     8,660       8,016  
Costs related to product sales     685       539  
Costs related to service and repair fees     2,196       2,242  
Costs related to service and repair fees - related parties     30       30  
Costs related to management and other fees     18,203       17,493  
Costs related to management and other fees – related medical practices     4,707       4,421  
Research and development     1,590       1,368  
Selling, general and administrative     15,691       12,474  
Total Costs and Expenses     51,762       46,583  
Income From Operations     13,122       18,126  
Interest Expense     (57 )     (78 )
Investment Income     413       336  
Other Income     1       —    
Income Before Provision for Income Taxes and Noncontrolling Interests     13,479       18,384  
Provision for Income Taxes     (2,849 )     (3,826 )
Net Income     10,630       14,558  
Net Income - Noncontrolling Interests     (2,966 )     (3,824 )
Net Income - Controlling Interests   $ 7,664     $ 10,734  
Net Income Available to Common Stockholders   $ 7,194     $ 10,067  
Net Income Available to Class A Non-Voting Preferred Stockholders   $ 350     $ 496  
Net Income Available to Class C Common Stockholders   $ 120     $ 170  
Basic Net Income Per Common Share Available to Common Stockholders   $ 1.12     $ 1.58  
Diluted Net Income Per Common Share Available to Common Stockholders   $ 1.10     $ 1.55  
Basic and Diluted Income Per Share – Class C Common   $ 0.31     $ 0.44  
Weighted Average Basic Shares Outstanding – Common Stockholders     6,442       6,353  
Weighted Average Diluted Shares Outstanding - Common Stockholders     6,570       6,481  
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. 

Page 7  

 

 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 March 31, 2020

    Common Stock   Paid in capital in excess of par value   Accumulated Deficit   Notes receivable from employee stockholders   Treasury Stock   Non Controlling Interests   Total
Balance - December 31, 2019   $ 1     $ 183,076     $ (58,053 )     —       $ (675 )   $ 734     $ 125,083  
Net income     —         —         1,261       —         —         —         1,261  
Distributions - Non controlling     —         —         —         —         —         (1,410 )     (1,410 )
Income - Non controlling interests     —         —         —         —         —         653       653  
Balance - March 31, 2020   $ 1     $ 183,076     $ (56,792 )     —       $ (675 )   $ (23 )   $ 125,587  

 

For the Three Months Ending March 31, 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 - December 31, 2018   $ 1     $ 181,086     $ (72,902 )   $ (9 )   $ (675 )   $ 2,355     $ 109,856  
Net income     —         —         3,863       —         —         —         3,863  
Repayment of notes receivable     —         —         —         9       —         —         9  
Distributions - Non controlling     —         —         —         —         —         (1,125 )     (1,125 )
Income - Non controlling interests     —         —         —         —         —         1,338       1,338  
Balance - March 31, 2019   $ 1     $ 181,086     $ (69,039 )   $ —       $ (675 )   $ 2,568     $ 113,941  

 

See accompanying notes to condensed consolidated financial statements. 

Page 8  

 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED) 

 

 

For the Nine Months Ending March 31, 2020

    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     —         1,990       —         —         —         —         1,990  
Net income     —         —         7,664       —         —         —         7,664  
Distributions - Non controlling     —         —         —         —         —         (5,145 )     (5,145 )
Income - Non controlling interests     —         —         —         —         —         2,966       2,966  
Balance - March 31, 2020   $ 1     $ 183,076     $ (56,792 )     —         (675 )   $ (23 )   $ 125,587  

 

For the Nine Months Ending March 31, 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, 2018   $ 1     $ 179,131     $ (79,773 )   $ (9 )   $ (675 )   $ 3,559     $ 102,234  
Issuance of Common Stock     —         1,955       —         —         —         —         1,955  
Net income     —         —         10,734       —         —         —         10,734  
Repayment of notes receivable     —         —         —         9       —         —         9  
Distributions - Non controlling     —         —         —         —         —         (4,815 )     (4,815 )
Income - Non controlling interests     —         —         —         —         —         3,824       3,824  
Balance - March 31, 2019   $ 1     $ 181,086     $ (69,039 )   $ —       $ (675 )   $ 2,568     $ 113,941  

 

See accompanying notes to condensed consolidated financial statements. 

Page 9  

 

 FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

   

FOR THE NINE MONTHS

ENDED MARCH 31,

    2020   2019
Cash Flows from Operating Activities:                
 Net income   $ 10,630     $ 14,557  
 Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation and amortization     3,001       2,852  
Amortization on right-of-use assets     2,505       —    
Provision (Recovery) for bad debts     1,711       (652 )
Deferred income tax – net     2,481       3,701  
Stock issued for costs and expenses     1,990       1,955  
(Increase) decrease in operating assets, net:                
Accounts, medical and management fee receivable(s)     (6,808 )     (5,025 )
Notes receivable     22       (13 )
Costs and estimated earnings in excess of billings on uncompleted contracts     372       (248 )
Inventories     23       (378 )
Prepaid expenses and other current assets     570       (214 )
Other assets     (142 )     —    
Increase (decrease) in operating liabilities, net:                
Accounts payable     (175 )     331  
Other current liabilities     (193 )     (3,593 )
Operating lease liabilities     (2,216 )     —    
Customer deposits     56       (24 )
Other liabilities     105       18  
Due to related medical practices     —         (135 )
Net cash provided by operating activities     13,932       13,132  
 Cash Flows from Investing Activities:                
Purchases of property and equipment     (6,601 )     (3,069 )
Proceeds/(Purchase) of Short term investment     15,063       (15,000
Cost of patents     (79 )     (88 )
Net cash provided by (used) in investing activities     8,383       (18,157 )
 Cash Flows from Financing Activities:                
 Repayment of borrowings and capital lease obligations     (33 )     (23 )
 Repayment of notes receivable from employee stockholders     —         9  
 Distributions to noncontrolling interests     (5,145 )     (4,815 )
Net cash used in financing activities     (5,178 )     (4,829 )
 Net Increase (Decrease) in Cash and Cash Equivalents     17,137       (9,854 )
Cash and Cash Equivalents - Beginning of Period     13,882       19,634  
Cash and Cash Equivalents - End of Period   $ 31,019     $ 9,780  

 

See accompanying notes to condensed consolidated financial statements. 

Page 10  

 

  FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020 and 2019

(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 and nine months ended March 31, 2020, 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.

  

During March 2020, the global pandemic of COVID-19 has caused turbulence and uncertainty in the United States and international markets and economies may adversely effect our workforce, liquidity, financial condition, revenues, profitability and business operations, generally. COVID-19 has caused us to require that much of our workforce work from home and has restricted the ability of our personnel to travel for marketing purposes or to service our customers. Through March 31, 2020, COVID-19 did not have a material effect on the financial condition and results of operations of the Company.

 

 

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.

 

Page 11  

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020 and 2019

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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.

 

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 and nine months ended March 31, 2020 and 2019.

 

Diluted EPS reflects the potential dilution from the exercise or conversion of all dilutive securities into common stock based on the average market price of common shares outstanding during the period. For the three and nine months ended March 31, 2020 and 2019, diluted EPS for common shareholders includes 128 shares upon conversion of Class C Common.

 

Page 12  

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020 and 2019

(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
March 31, 2020
  Three months ended
March 31, 2019
    Total   Common Stock   Class C Common
Stock
  Total   Common Stock   Class C Common
Stock
Basic                        
Numerator: 
Net income available to common stockholders
  $ 1,261     $ 1,184     $ 20     $ 3,863     $ 3,623     $ 61  
Denominator:                                                
Weighted average shares outstanding     6,447       6,447       383       6,357       6,357       383  
Basic income per common share   $ 0.20     $ 0.18     $ 0.05     $ 0.61     $ 0.57     $ 0.16  
Diluted                                                
Denominator:
Weighted average shares outstanding
            6,447       383               6,357       383  
Convertible Class C Stock             128       —                 128       —    
Total Denominator for diluted earnings per share             6,575       383               6,485       383  
Diluted income per common share           $ 0.18     $ 0.05             $ 0.56     $ 0.16  

 

    Nine months ended
March 31, 2020
  Nine months ended
March 31, 2019
    Total   Common Stock   Class C Common
Stock
  Total   Common Stock   Class C Common
Stock
Basic                        
Numerator: 
Net income available to common stockholders
  $ 7,664     $ 7,194     $ 120     $ 10,734     $ 10,067     $ 170  
Denominator:                                                
Weighted average shares outstanding     6,442       6,442       383       6,353       6,353       383  
Basic income per common share   $ 1.19     $ 1.12     $ 0.31     $ 1.69     $ 1.58     $ 0.44  
Diluted                                                
Denominator:
Weighted average shares outstanding
            6,442       383               6,353       383  
Convertible Class C Stock             128       —                 128       —    
Total Denominator for diluted earnings per share             6,570       383               6,481       383  
Diluted income per common share           $ 1.10     $ 0.31             $ 1.55     $ 0.44  

Page 13  

 

 FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020 and 2019

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Recent Accounting Pronouncements

 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) : Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for the Company beginning July 1, 2021. The Company is currently evaluating the impact of the adoption of ASU 2019-12 on its condensed consolidated financial statements.

 

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 condensed financial statements.

 

During February 2016, FAS issued ASU 2016-02, Leases (Topic 842). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based upon the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Lease with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. The new guidance will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period and is applied retrospectively. 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.

 

Page 14  

 

  FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020 and 2019

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Recent Accounting Pronouncements (Continued)

 

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 $562 receivable from a landlord for tenant improvements. A reconciliation of operating lease payments undiscounted cash flows to lease liabilities recognized as of March 31, 2020 is as follows:

 

        Operating Lease Payments  
2020 (Three Months)       1,214  
2021       4,782  
2022       4,463  
2023       4,415  
2024       4,120  
Thereafter       21,545  
Present Value discount (5.5% weighted average)       (9,440 )
   Total lease liability       31,099  

 

FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of March 31, 2020 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 2020 or 2019, 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.

 

Page 15  

 

  FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020 and 2019

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

 NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE

 

Receivables, net is comprised of the following at March 31, 2020, and June 30, 2019:

 

    March 31, 2020
    Gross Receivable   Allowance for doubtful accounts   Net
Accounts receivable   $ 4,402     $ 570     $ 3,832  
Accounts receivable - related party   $ 30       —       $ 30  
Medical receivable   $ 16,481     $ —       $ 16,481  
Management and other fees receivable   $ 37,483     $ 9,476     $ 28,007  
Management and other fees receivable from related medical practices ("PC’s")   $ 9,827     $ 2,792     $ 7,035  

 

 

    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.

 

Page 16  

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020 and 2019

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE (CONTINUED)

 

Long Term Accounts Receivable

 

The Company generated revenue from long-term, non-cancellable contracts to provide service and repair services. Future revenue to be received over the next four years at March 31, 2020 are as follows:

 

  2021       $ 579  
  2022         579  
  2023         579  
  2024         359  
  Total       $ 2,096  

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 72% and 67% of the PCs’ net revenues for the three months ended March 31, 2020 and 2019, respectively, were derived from no-fault and personal injury protection claims. Approximately 66% and 67% of the PCs’ net revenues for the nine months ended March 31, 2020 and 2019, 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.

Page 17  

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020 and 2019

(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)

 

Net revenues from management and other fees charged to the related PCs accounted for approximately 12.4% and 10.5% of the consolidated net revenues for the three months ended March 31, 2020 and 2019, respectively. Net revenues from management and other fees charged to the related PCs accounted for approximately 11.5% and 10.8% of the consolidated net revenues for the nine months ended March 31, 2020 and 2019, 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 for the three and nine months ended March 31, 2020 and 2019 are summarized in the following table.

 

    For the Three Months Ended
March 31,
    2020   2019
Commercial Insurance/ Managed Care   $ 1,166     $ 1,345  
Medicare/Medicaid     280       315  
Workers' Compensation/Personal Injury     4,120       4,569  
Other     147       181  
Patient Fee Revenue, net of contractual allowances and discounts   $ 5,713     $ 6,410  

 

 

    For the Nine Months Ended
March 31,
    2020   2019
Commercial Insurance/ Managed Care   $ 3,856     $ 3,860  
Medicare/Medicaid     821       876  
Workers' Compensation/Personal Injury     12,526       12,227  
Other     551       893  
Patient Fee Revenue, net of contractual allowances and discounts   $ 17,754     $ 17,856  

  

Page 18  

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020 and 2019

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

 

NOTE 4 - INVENTORIES

 

Inventories included in the accompanying condensed consolidated balance sheets consist of the following:

 

    March 31,
2020
  June 30,
2019
Purchased parts, components and supplies   $ 1,619     $ 1,640  
Work-in-process     156       158  
TOTAL INVENTORIES   $ 1,775     $ 1,798  

 

 

NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

 

Information relating to uncompleted contracts is as follows:

 

    March 31,
2020
  June 30,
 2019
Costs incurred on uncompleted contracts   $ 448     $ 448  
Estimated earnings     310       1,089  
Subtotal     758       1,537  
Less: Billings to date     605       1,012  
Total Costs and estimated earnings in excess of billings on uncompleted contracts - net   $ 153     $ 525  

 

 

NOTE 6 – OTHER INTANGIBLE ASSETS

 

Other intangible assets, net of accumulated amortization, in the accompanying condensed consolidated balance sheets consist of the following:

    March 31,
2020
  June 30,
2019
Capitalized software development costs   $ 7,005     $ 7,005  
Patents and copyrights     5,043       4,964  
Non-compete     4,100       4,100  
Customer relationships     3,800       3,800  
Gross Other intangible assets     19,948       19,869  
Less: Accumulated amortization     15,786       15,113  
Other Intangible Assets   $ 4,162     $ 4,756  
Page 19  

 

 FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020 and 2019

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

NOTE 6 – OTHER INTANGIBLE ASSETS (CONTINUED)

 

 Amortization of patents and copyrights for the three months ended March 31, 2020 and 2019 amounted to $45 and $50, respectively.

 

Amortization of non-compete for the three months ended March 31, 2020 and 2019 amounted to $98 and $146, respectively.

 

Amortization of customer relationships for the three months ended March 31, 2020 and 2019 amounted to $48 and $48, respectively.

 

 Amortization of patents and copyrights for the nine months ended March 31, 2020 and 2019 amounted to $139 and $149, respectively.

 

Amortization of non-compete for the nine months ended March 31, 2020 and 2019 amounted to $391 and $439, respectively.

 

Amortization of customer relationships for the nine months ended March 31, 2020 and 2019 amounted to $143 and $143, respectively.

 

NOTE 7 – OTHER CURRENT LIABILITIES

Other current liabilities in the accompanying condensed consolidated balance sheets consist of the following:

 

    March 31,
2020
  June 30,
2019
Accrued salaries, commissions and payroll taxes   $ 1,442     $ 3,898  
Litigation accruals     141       145  
Sales tax payable     1,519       1,671  
Legal and other professional fees     109       126  
Accounting fees     90       105  
Self-funded health insurance reserve     115       68  
Accrued interest and penalty     976       1,054  
Other     770       510  
Other Current Liabilities   $ 5,162     $ 7,577  

 

 

NOTE 8 – STOCKHOLDERS EQUITY

 

Common Stock

 

During the nine months ended March 31, 2020, the Company issued 90 shares of common stock for costs and expenses of $1,990.

 

Page 20  

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020 and 2019

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

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 Mar. 31, 2020                        
Net revenues from external customers   $ 2,062     $ 19,624     $ 21,686  
Inter-segment net revenues   $ 218     $ —       $ 218  
(Loss) Income from operations   $ (1,802 )   $ 4,417     $ 2,615  
Depreciation and amortization   $ 91     $ 907     $ 998  
Capital expenditures   $ 621     $ 1,341     $ 1,962  
                         
For the three months ended Mar. 31, 2019                        
Net revenues from external customers   $ 2,788     $ 19,991     $ 22,779  
Inter-segment net revenues   $ 228     $ —       $ 228  
(Loss) Income from operations   $ (27 )   $ 6,635     $ 6,608  
Depreciation and amortization   $ 92     $ 886     $ 978  
Capital expenditures   $ 661     $ 213     $ 874  

 

    Medical
Equipment
  Management
of Diagnostic
Imaging
Centers
  Totals
For the nine months ended Mar. 31, 2020                        
Net revenues from external customers   $ 6,415     $ 58,469     $ 64,884  
Inter-segment net revenues   $ 656     $ —       $ 656  
(Loss) Income from operations   $ (3,328 )   $ 16,450     $ 13,122  
Depreciation and amortization   $ 276     $ 2,725     $ 3,001  
Capital expenditures   $ 2,375     $ 4,305     $ 6,680  
                         
For the nine months ended Mar. 31, 2019                        
Net revenues from external customers   $ 7,440     $ 57,269     $ 64,709  
Inter-segment net revenues   $ 683     $ —       $ 683  
(Loss) Income from operations   $ (665 )   $ 18,791     $ 18,126  
Depreciation and amortization   $ 276     $ 2,576     $ 2,852  
Capital expenditures   $ 706     $ 2,451     $ 3,157  

 

Page 21  

 

 FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020 and 2019

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

NOTE 10 – SUPPLEMENTAL CASH FLOW INFORMATION

 

During the nine months ended March 31, 2020 and March 31, 2019, the Company paid $21 and $158 for interest, respectively.

During the nine months ended March 31, 2020 and March 31, 2019, the Company paid $228 and $305 for income taxes, respectively.

During the nine months ended March 31, 2020, the Company recorded a current receivable of $950 from a landlord for tenant improvements.  

 

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 March 31, 2020, the Company has recorded tax obligations of approximately $1,519 plus interest and penalties of approximately $930. The Company is in the process of determining the regulatory requirements in order to become compliant.

 

The Company maintains a self-funded health insurance program with a stop-loss umbrella policy with a third party insurer to limit the maximum potential liability for individual claims to $100 per person and for a maximum potential claim liability based on member enrollment. With respect to this program, the Company considers historical and projected medical utilization data when estimating its health insurance program liability and related expense. As of March 31, 2020 and June 30, 2019, the Company had approximately $115 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.

Page 22  

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020 and 2019

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

 

NOTE 12 - INCOME TAXES

 

In accordance with ASC 740-270, Income Taxes – Interim Reporting, the Company is required at the end of each interim period to determine the best estimate of its annual effective tax rate and apply that rate to year-to-date ordinary income or loss. The resulting tax expense (or benefit) is adjusted for the tax effect of specific events, if any, required to be discretely recognized in the interim period as they occur. For the nine months ended March 31, 2020 and 2019, the Company recorded income tax expense of $2,849 in 2020 as compared to $3,701 in 2019. The 2020 provision is comprised of a current income tax component of $368 and a deferred income tax component of $2,481. Obligations for any liability associated with the current income tax provision, has been reduced, primarily resulting from the benefits and utilization of net operating loss carryforwards.

  

ASC topic 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a corporate tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to the interpretation are referred to as unrecognized benefits. A liability is recognized (or amount of net operating loss carryforward or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC topic 740. The Company believes there are no uncertain tax positions in prior years tax filings and therefore it has not recorded a liability for unrecognized tax benefits.

 

In accordance with ASC topic 740, interest costs related to unrecognized tax benefits are required to be calculated (if applicable) and would be classified as “Interest expense, net”. Penalties if incurred would be recognized as a component of “Selling, general and administrative” expenses.

 

The Company files corporate income tax returns in the United States (federal) and in various state and local jurisdictions. In most instances, the Company is no longer subject to federal, state and local income tax examinations by tax authorities for years prior to 2015.

 

The Company recorded a deferred tax asset of $18,457 and a deferred tax liability of $243 as of March 31, 2020, primarily relating to net operating loss carryforwards of approximately $53,460 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 March 31, 2020, no such changes in ownership have occurred.

 

Page 23  

 

 FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020 and 2019

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 

 

NOTE 12 - INCOME TAXES (CONTINUED)

 

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.

 

On March 27, 2020 Congress enacted the CARES Act (Coronavirus Aid, Relief and Economic Security Act). The Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding prior and future operation losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections to prior tax legislation for tax depreciation of certain qualified improvement property and the creation of refundable employee retention credits.

 

At the present time, the only impact of the CARES Act to the Company is allowing a full reimbursement of $1,200 of tax credits relating to the alternative minimum tax credits in the current year. Previously, these credits were to be refunded over a 3 year period.

 

As we continue to monitor tax implications of the CARES Act and other state and federal stimulus tax legislation, we may make adjustments to our estimates and record additional amounts for tax assets and liabilities

 

 

NOTE 13 – SUBSEQUENT EVENTS

 

The Company has evaluated events that occurred subsequent to March 31, 2020 and through the date the condensed consolidated financial statements were issued.

  

The COVID-19 outbreak has caused the Company’s owned and managed sites to continue to decline after March 31, 2020 as a result of the intensification of the virus and the attendant quarantines and lockdowns. By the end of April 2020, the number of scans being preformed are only at approximately 50% of pre-COVID-19 levels. As the authorities begin to reassess the situation in May and June 2020, some quarantine and lockdown measures may be able to be lifted and following that it is uncertain whether or not our scanning levels can be expected to begin to return to pre-COVID-19 levels. We are unable to predict, how long the present COVID-19 pandemic will continue or when it will abate, or whether it will worsen. 

Page 24  

 

FONAR CORPORATION AND SUBSIDIARIES

 

Item 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

   

For the nine-month period ended March 31, 2020, we reported a net income of $10.6 million on revenues of $64.9 million as compared to net income of $14.6 million on revenues of $64.7 million for the nine-month period ended March 31, 2019. Operating income decreased from $18.1 million for the nine-month period ended March 31, 2019 to $13.1 million for the nine-month period ended March 31, 2020.

 

For the three-month period ended March 31, 2020, we reported a net income of $1.9 million on revenues of $21.7 million as compared to net income of $5.2 million on revenues of $22.8 million for the three- month period ended March 31, 2019.

 

The revenue increased slightly, from $64.7 million for the first nine months of fiscal 2019 to $64.9 million for the first nine months of fiscal 2020, was primarily due to increases in net management fees of $1.3 million, from $39.4 million for the first nine months of fiscal 2019 to $40.7 million for the first nine months of fiscal 2020. Revenues from product sales and service and repair fees decreased by $1.0 million from $7.4 million for the first nine months of fiscal 2019 to $6.4 million for the first nine months of fiscal 2020.

 

While our revenues increased, our costs and expenses increased by a larger amount, resulting in our operating income decreasing to $13.1 million for the nine months ended March 31, 2020 as compared to $18.1 million for the nine months ended March 31, 2019. In terms of percentages, costs and expenses increased 11.1% from $46.6 million for the first nine months of fiscal 2019 to $51.8 million for the first nine months of fiscal 2020, while revenues increased slightly, from $64.7 million for the first nine months of fiscal 2019 to $64.9 million for the first nine months of fiscal 2020.

 

Fonar’s wholly owned subsidiary, Health Management Corporation of America (“HMCA”), is the controlling interest, of Health Diagnostics Management, LLC (“HDM”). HMCA presently has a direct ownership interest of 70.0% in HDM, and the investors in HDM have a 30.0% ownership interest. 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, and HDM are referred to as “HMCA”, unless otherwise indicated.

 

Through March 31, 2020, the COVID-19 virus had not had a material effect on the financial condition and results of operations of the Company. Revenues have increased slightly for the nine-month period and declined only slightly for the three-month period. The drop in operating income of approximately $5.0 million for the nine-month period ended March 31, 2020 (as compared to the first nine months of fiscal 2019) was due entirely to a $5.2 million increase in costs and expenses for the period. Revenues for the same nine-month period increased by $175,000. The greater part of the increase in costs and expenses, $2.9 million, occurred in the third quarter of fiscal 2020 ($19.1 million in the third quarter of fiscal 2020 as compared to $16.2 in the third quarter of fiscal 2019), which included an increase of $2.6 million in selling, general and administrative expenses ($7.2 million in the third quarter of fiscal 2020 as compared to $4.6 in the third quarter of fiscal 2019). The increase in service, general and administrative expense was due mainly to additional reserves taken on Management Fees, service contract receivables, and on Notes receivable. Some of these reserves have been taken in the ordinary course of business and some in connection with the impact of the COVID-19 virus.

 

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The volume of scans performed at HMCA owned and HMCA managed sites continued to decline after March 31, 2020 as a result of the intensification of the COVID-19 virus and the attendant quarantines and lockdowns. By the middle of April, the number of scans being performed were at approximately 50% of pre-COVID-19 levels. The Company also has been willing to accommodate some of its MRI scanner service customers who can demonstrate need, allowing a deferral of a part of the payments due Fonar under their service contracts. Some of these deferred amounts, however, may prove to be uncollectable, and some amounts already outstanding may prove uncollectable as well. At the present volumes of scans, the Company does not believe the scanning centers will be able to pay the current levels of its Management Fees or satisfy previously incurred Management Fee obligations

 

As the authorities begin to reassess the situation in May and June, 2020, some quarantine and lockdown measures may be able to lifted and following that, we expect our scanning levels will begin to return to pre-COVID-19 levels. We are unable to predict, however, how long the present COVID-19 pandemic will continue or when it will abate, or whether it will worsen. For these reasons the Company has strengthened its cost controls, but also is looking to the future and continuing its program of expanding its scanning capacity. We anticipate we will complete the installation of three additional scanners in the first quarter of fiscal 2021.

 

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.

 

 During March 2020, the global pandemic of COVID-19 has caused turbulence and uncertainty in the United States and international markets and economies may adversely effect our workforce, liquidity, financial condition, revenues, profitability and business operations, generally. COVID-19 has caused us to require that much of our workforce work from home and has restricted the ability of our personnel to travel for marketing purposes or to service our customers. Through March 31, 2020, COVID-19 did not have a material effect on the financial condition and results of operations of the Company. Subsequent to March 31, 2020 COVID-19 has caused a decrease in the number of scans performed at our owned and managed centers and will likely have an impact on its financial results that the Company is not currently able to quantify.

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Results of Operations