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 DECEMBER 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 

 

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 ___ Non-accelerated filer _X__ 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 February 5, 2021
Common Stock, par value $.0001   6,554,210
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
   
Condensed Consolidated Balance Sheets - December 31, 2020 (Unaudited) and June 30, 2020
  3
Condensed Consolidated Statements of Income for the Three Months Ended December 31, 2020 and December 31, 2019 (Unaudited)
  6
Condensed Consolidated Statements of Income for the Six Months Ended December 31, 2020 and December 31, 2019 (Unaudited)
  7
Condensed Consolidated Statements of Changes in Equity for the Three Months Ended December 31, 2020 and December 31, 2019 (Unaudited)
  8
Condensed Consolidated Statements of Changes in Equity for the Six Months Ended December 31, 2020 and December 31, 2019 (Unaudited)
  9
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2020 and December 30, 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
  26
Item 3. Quantitative and Qualitative Disclosures About Market Risk   33
Item 4. Controls and Procedures   34

 

PART II - OTHER INFORMATION

  34
Item 1. Legal Proceedings
  34
Item 1A. Risk Factors
  34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  36
Item 3. Defaults Upon Senior Securities
  36
Item 4. Mine Safety Disclosures
  36
Item 5. Other Information
  36
Item 6. Exhibits
  36
Signatures   37

 

 

 

  Page 2  

 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(UNAUDITED)

 

ASSETS

 

    December 31,
2020
  June 30,
2020 *
Current Assets:                
 Cash and cash equivalents   $ 40,579     $ 36,802  
 Short term investments     32       32  
 Accounts receivable – net     4,171       4,313  
 Accounts receivable - related party     72       6  
 Medical receivable – net     16,373       16,172  
 Management and other fees receivable – net     29,808       27,438  
Management and other fees receivable – related medical practices – net     7,262       6,896  
 Inventories     1,844       1,649  
Costs and estimated earnings in excess of billings on uncompleted contracts     153       153  
 Income tax receivable     —         671  
 Prepaid expenses and other current assets     1,302       1,758  

 

 Total Current Assets

    101,596       95,890  
                 
Accounts receivable     2,594       2,730  
 Deferred income tax asset     16,848       18,810  
 Property and equipment – net     21,683       21,364  
 Right-of-use Asset – operating lease     29,570       31,392  
 Right-of-use Asset – financing lease     1,226       1,326  
 Goodwill     3,985       3,985  
 Other intangible assets – net     4,014       4,109  
 Other assets     632       653  

  

Total Assets

  $ 182,148     $ 180,259  

 

*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

 

    December 31,
2020
  June 30,
2020 *
Current Liabilities:                
Current portion of long-term debt and capital leases   $ 222     $ 108  
Accounts payable     2,198       1,965  
Other current liabilities     5,584       8,185  
 Unearned revenue on service contracts     4,029       4,105  
 Unearned revenue on service contracts – related party     55       —    
 Operating lease liability - current portion     3,403       3,370  
 Financing lease liability - current portion     200       75  
Customer deposits     1,232       855  
                 
Total Current Liabilities     16,923       18,663  
                 
Long-Term Liabilities:                
 Unearned revenue on service contracts     2,528       2,656  
 Deferred income tax liability     234       234  
 Due to related medical practices     93       93  
 Operating lease liability – net of current portion     28,415       30,105  
 Financing lease liability – net of current portion     1,151       1,251  
 Long-term debt and capital leases, less current portion     780       865  
 Other liabilities     148       150  
                 
Total Long-Term Liabilities     33,349       35,354  

 

Total Liabilities

    50,272       54,017  

 

*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:   December 31, 2020   June 30,
2020 *
Class A non-voting preferred stock $.0001 par value; 453 shares authorized at December 31, 2020 and June 30, 2020, 313 issued and outstanding at December 31, 2020 and June 30, 2020   $ —       $ —    
Preferred stock $.001 par value; 567 shares authorized at December 31, 2020 and June 30, 2020, issued and outstanding – none     —         —    
Common Stock $.0001 par value; 8,500 shares authorized at December 31, 2020 and June 30, 2020, 6,566 and 6,459 issued at December 31, 2020 and June 30, 2020, 6,554 and 6,447 outstanding at December 31, 2020and June 30, 2020     1       1  
Class B Common Stock (10 votes per share) $.0001 par value; 227 shares authorized at December 31, 2020 and June 30, 2020; .146 issued and outstanding at December 31, 2020 and June 30, 2020     —         —    
 Class C Common Stock (25 votes per share) $.0001 par value; 567 shares authorized at December 31, 2020 and June 30, 2020, 383 issued and outstanding at December 31, 2020 and June 30, 2020     —         —    
 Paid-in capital in excess of par value     185,101       183,076  
 Accumulated deficit     (50,596 )     (56,215 )
Treasury stock, at cost - 12 shares of common stock at December 31, 2020 and June 30, 2020     (675 )     (675 )
 Total Fonar Corporation’s Stockholders’ Equity     133,831       126,187  
 Noncontrolling interests     (1,955 )     55  
 Total Stockholders' Equity     131,876       126,242  
 Total Liabilities and Stockholders' Equity   $ 182,148     $ 180,259  

 

*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 DECEMBER 31,
REVENUES   2020   2019
Patient fee revenue – net of contractual allowances and discounts   $ 5,238     $ 5,996  
Product sales – net     3       3  
Service and repair fees – net     1,862       2,038  
Service and repair fees - related parties – net     28       28  
Management and other fees – net     11,340       10,996  
Management and other fees - related medical practices – net     2,693       2,390  
Total Revenues – Net     21,164       21,451  
COSTS AND EXPENSES                
Costs related to patient fee revenue     2,649       2,958  
Costs related to product sales     192       120  
Costs related to service and repair fees     608       772  
Costs related to service and repair fees - related parties     9       10  
Costs related to management and other fees     6,237       6,203  
Costs related to management and other fees – related medical practices     1,522       1,621  
Research and development     424       583  
Selling, general and administrative     4,541       4,163  
Total Costs and Expenses     16,182       16,430  
Income From Operations     4,982       5,021  
Interest Expense     (16 )     (19 )
Investment Income     75       139  
Income Before Provision for Income Taxes and Noncontrolling Interests     5,041       5,141  
Provision for Income Taxes     (1,113 )     (932 )
Net Income     3,928       4,209  
Net Income - Noncontrolling Interests     (817 )     (1,105 )
Net Income – Attributable to FONAR   $ 3,111     $ 3,104  
Net Income Available to Common Stockholders   $ 2,923     $ 2,914  
Net Income Available to Class A Non-Voting Preferred Stockholders   $ 140     $ 142  
Net Income Available to Class C Common Stockholders   $ 48     $ 48  
Basic Net Income Per Common Share Available to Common Stockholders   $ 0.45     $ 0.45  
Diluted Net Income Per Common Share Available to Common Stockholders   $ 0.44     $ 0.44  
Basic and Diluted Income Per Share – Class C Common   $ 0.12     $ 0.13  
Weighted Average Basic Shares Outstanding – Common Stockholders     6,465       6,447  
Weighted Average Diluted Shares Outstanding - Common Stockholders     6,593       6,575  
Weighted Average Basic and 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 SIX MONTHS ENDED DECEMBER 31,
REVENUES   2020   2019
Patient fee revenue – net of contractual allowances and discounts   $ 10,330     $ 12,041  
Product sales – net     31       195  
Service and repair fees – net     3,788       4,102  
Service and repair fees - related parties – net     55       55  
Management and other fees – net     22,554       22,024  
Management and other fees - related medical practices – net     5,386       4,780  
Total Revenues – Net     42,144       43,197  
COSTS AND EXPENSES                
Costs related to patient fee revenue     5,169       5,820  
Costs related to product sales     325       450  
Costs related to service and repair fees     1,234       1,522  
Costs related to service and repair fees - related parties     18       20  
Costs related to management and other fees     11,788       12,208  
Costs related to management and other fees – related medical practices     2,950       3,157  
Research and development     824       1,055  
Selling, general and administrative     10,704       8,458  
Total Costs and Expenses     33,012       32,690  
Income From Operations     9,132       10,507  
Other Expenses     (140 )     —    
Interest Expense     (38 )     (40 )
Investment Income     187       287  
Income Before Provision for Income Taxes and Noncontrolling Interests     9,141       10,754  
Provision for Income Taxes     (1,962 )     (2,039 )
Net Income     7,179       8,715  
Net Income - Noncontrolling Interests     (1,560 )     (2,313 )
Net Income – Attributable to FONAR   $ 5,619     $ 6,402  
Net Income Available to Common Stockholders   $ 5,281     $ 6,010  
Net Income Available to Class A Non-Voting Preferred Stockholders   $ 252     $ 292  
Net Income Available to Class C Common Stockholders   $ 86     $ 100  
Basic Net Income Per Common Share Available to Common Stockholders   $ 0.82     $ 0.93  
Diluted Net Income Per Common Share Available to Common Stockholders   $ 0.80     $ 0.92  
Basic and Diluted Income Per Share – Class C Common   $ 0.23     $ 0.26  
Weighted Average Basic Shares Outstanding – Common Stockholders     6,456       6,440  
Weighted Average Diluted Shares Outstanding - Common Stockholders     6,584       6,568  
Weighted Average Basic and 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 December 31, 2020

 

    Common Stock   Paid in capital in excess of par value   Accumulated Deficit   Treasury Stock   Non Controlling Interests   Total
Balance - September 30, 2020   $ 1     $ 183,076     ($ 53,707 )   ($ 675 )   ($ 642 )   $ 128,053  
Issuance of Common Stock     —         2,025       —                         2,025  
Net income     —         —         3,111       —         —         3,111  
Distributions - Non controlling     —         —         —         —         (2,130 )     (2,130 )
Income - Non controlling interests     —         —         —         —         817       817  
Balance - December 31, 2020   $ 1     $ 185,101     ($ 50,596 )   ($ 675 )   ($ 1,955 )   $ 131,876  

 

 

For the Three Months Ending December 31, 2019

 

    Common Stock   Paid in capital in excess of par value   Accumulated Deficit   Treasury Stock   Non Controlling Interests   Total
Balance - September 30, 2019   $ 1     $ 183,076     ($ 61,157 )   ($ 675 )   $ 1,609     $ 122,854  
Net income     —         —         3,104               —         3,104  
Distributions - Non controlling     —         —         —         —         (1,980 )     (1,980 )
Income - Non controlling interests     —         —         —         —         1,105       1,105  
Balance - December 31, 2019   $ 1     $ 183,076     ($ 58,053 )   ($ 675 )   $ 734     $ 125,083  
  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 Six Months Ending December 31, 2020

 

    Common Stock   Paid in capital in excess of par value   Accumulated Deficit   Treasury Stock   Non Controlling Interests   Total
Balance - June 30, 2020   $ 1     $ 183,076     ($ 56,215 )   ($ 675 )   $ 55     $ 126,242  
Issuance of Common Stock     —         2,025       —                 —         2,025  
Net income     —         —         5,619       —                 5,619  
Distributions - Non controlling     —         —         —         —         (3,570 )     (3,570 )
Income - Non controlling interests     —         —         —         —         1,560       1,560  
Balance - December 31, 2020   $ 1     $ 185,101     ($ 50,596 )   ($ 675 )   ($ 1,955 )   $ 131,876  
                                                 

 

 

For the Six Months Ending December 31, 2019

 

    Common Stock   Paid in capital in excess of par value   Accumulated Deficit   Treasury Stock   Non Controlling Interests   Total
Balance - June 30, 2019   $ 1     $ 181,086     ($ 64,455 )   ($ 675 )   $ 2,156     $ 118,113  
Issuance of Common Stock     —         1,990       —                 —         1,990  
Net income     —         —         6,402       —         —         6,402  
Distributions - Non controlling     —         —         —         —         (3,735 )     (3,735 )
Income - Non controlling interests     —         —         —         —         2,313       2,313  
Balance - December 31, 2019   $ 1     $ 183,076     ($ 58,053 )   ($ 675 )   $ 734     $ 125,083  

 

  Page 9  

 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

(UNAUDITED)

 

   

FOR THE SIX MONTHS

ENDED DECEMBER 31,

    2020   2019
Cash Flows from Operating Activities:                
 Net income   $ 7,179     $ 8,715  
 Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation and amortization     2,009       2,003  
Amortization on right-of-use assets     1,922       1,656  
Provision(Recovery) for bad debts     2,825       (978 )
Deferred income tax – net     1,962       1,816  
Compensatory element of stock issuances     83       —    
Stock issued for costs and expenses     1,941       1,990  
Abandoned patents     1       —    
(Increase) decrease in operating assets, net:                
Accounts, medical and management fee receivable(s)     (5,549 )     (4,300 )
Notes receivable     25       11  
Costs and estimated earnings in excess of billings on uncompleted contracts     —         372  
Inventories     (195 )     47  
Income tax receivable     671       —    
Prepaid expenses and other current assets     452       330  
Other assets     (1 )     (45 )
Increase (decrease) in operating liabilities, net:                
Accounts payable     233       (576 )
Other current liabilities     (2,748 )     430  
Operating lease liabilities     (1,657 )     (1,447 )
Financing lease liabilities     24       —    
Customer deposits     378       28  
Billings in excess of costs and estimated earnings on uncompleted contracts     —         12  
Other liabilities     (3 )     123  
Net cash provided by operating activities     9,552       10,187  
 Cash Flows from Investing Activities:                
Purchases of property and equipment     (2,143 )     (4,656 )
Purchase of short term investment     —         (199 )
Cost of patents     (90 )     (62 )
Net cash used in investing activities     (2,233 )     (4,917 )
 Cash Flows from Financing Activities:                
 Repayment of borrowings and capital lease obligations     (35 )     (24 )
 Proceeds from debt     63       —    
 Distributions to noncontrolling interests     (3,570 )     (3,735 )
Net cash used in financing activities     (3,542 )     (3,759 )
 Net Increase in Cash and Cash Equivalents     3,777       1,511  
Cash and Cash Equivalents - Beginning of Period     36,802       13,882  
Cash and Cash Equivalents - End of Period   $ 40,579     $ 15,393  

 

See accompanying notes to condensed consolidated financial statements.  

 

  Page 10  

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 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 and six months ended December 31, 2020, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2021. 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 October 1, 2020 for the fiscal year ended June 30, 2020.

 

During March 2020 the global pandemic of COVID-19 has caused turbulence and uncertainty in the United States and international markets and economies which has adversely effected our workforce, liquidity, financial conditions, revenues, profitability and business operations. Generally COVID-19 had 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. The Company experienced a sudden drop in scan volume for a short term period and while the Company is not back to pre-COVID-19 levels, the volume has risen. At the end of fiscal year ending June 30, 2020, the Company was able to enact certain decisions to allow the Company to survive during the global pandemic and from further losses or additional decreases in scan volume. The Company immediately enacted wide scale furloughs, deferment of up to 50% of management salaries, halted variable compensation plans and rent deferrals we negotiated with the majority of all landlords. The Company also received some government stimulus funds from the Paycheck Protection Program (“PPP”) and Medicare advances/stimulus payments. Although we are unable to predict if there will be additional consequences on our operations from the continuing global pandemic of COVID-19, the Company believes with positive cash flows, low debt and cash on hand, it will be able to continue operations going forward.

  Page 11  

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 and 2019

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

(UNAUDITED)

 

 

 

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.

 

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 six months ended December 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 six months ended December 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

DECEMBER 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
December 31, 2020
  Three months ended
December 31, 2019
    Total   Common Stock   Class C Common
Stock
  Total   Common Stock   Class C Common
Stock
Basic                        
Numerator: 
Net income available to common stockholders
  $ 3,111     $ 2,923     $ 48     $ 3,104     $ 2,914     $ 48  
Denominator:                                                
Weighted average shares outstanding     6,465       6,465       383       6,447       6,447       383  
Basic income per common share   $ 0.48     $ 0.45     $ 0.12     $ 0.48     $ 0.45     $ 0.13  
Diluted                                                
Denominator:
Weighted average shares outstanding
            6,465       383               6,447       383  
Convertible Class C Stock             128       —                 128       —    
Total Denominator for diluted earnings per share             6,593       383               6,575       383  
Diluted income per common share           $ 0.44     $ 0.12             $ 0.44     $ 0.13  

 

 

    Six months ended
December 31, 2020
  Six months ended
December 31, 2019
    Total   Common Stock   Class C Common
Stock
  Total   Common Stock   Class C Common
Stock
Basic                        
Numerator: 
Net income available to common stockholders
  $ 5,619     $ 5,281     $ 86     $ 6,402     $ 6,010     $ 100  
Denominator:                                                
Weighted average shares outstanding     6,456       6,456       383       6,440       6,440       383  
Basic income per common share   $ 0.87     $ 0.82     $ 0.23     $ 0.99     $ 0.93     $ 0.26  
Diluted                                                
Denominator:
Weighted average shares outstanding
            6,456       383               6,440       383  
Convertible Class C Stock             128       —                 128       —    
Total Denominator for diluted earnings per share             6,584       383               6,568       383  
Diluted income per common share           $ 0.80     $ 0.23             $ 0.92     $ 0.26  

  

 

  Page 13  

 

 FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 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 2019-12 (“ASU 2019-12”), Income Taxes (Topic 740). ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other areas of the standard. ASU 2019-12 will be effective beginning in the first quarter of 2021. Early adoption is permitted. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. We are current evaluating the impact this ASU will have on our financial statements and related disclosures as well as the timing of the adoption.

 

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. The Company adopted the Standard on July 1, 2020 and the impact of adopting this guidance will have no material impact on our Consolidated Financial Statements.

 

FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of December 31, 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 14  

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 and 2019

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

 

 

 

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

 

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

 

    December 31, 2020
    Gross Receivable  

 

Allowance for doubtful accounts

  Net
Accounts receivable   $ 4,686     $ 515     $ 4,171  
Accounts receivable - related party   $ 72       —       $ 72  
Medical receivable   $ 16,373     $ —       $ 16,373  
Management and other fees receivable   $ 43,298     $ 13,490     $ 29,808  
Management and other fees receivable from related medical practices ("PC’s")   $ 10,982     $ 3,720     $ 7,262  

 

 

    June 30, 2020
    Gross Receivable  

 

Allowance for doubtful accounts

  Net
Accounts receivable   $ 4,828     $ 515     $ 4,313  
Accounts receivable - related party   $ 6       —       $ 6  
Medical receivable   $ 16,172     $ —       $ 16,172  
Management and other fees receivable   $ 38,501     $ 11,063     $ 27,438  
Management and other fees receivable from related medical practices ("PC’s")   $ 10,218     $ 3,322     $ 6,896  

 

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 15  

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 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 will generate revenue from long-term, non-cancellable contracts to provide service and repair services. Future revenue to be recognized over the following four years as of December 31, 2020 is as follows:

 

2022     $ 853
2023       827
2024       752
2025       96
Total     $ 2,528

 

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 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 66% and 60% of the PCs’ net revenues for the three months ended December 31, 2020 and 2019, respectively, were derived from no-fault and personal injury protection claims. Approximately 66% and 63% of the PCs’ net revenue for the six months ended December 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 16  

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 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 12.7% and 11.1% of the consolidated net revenues for the three months ended December 31, 2020 and 2019, respectively. Net revenues from management and other fees charged to the related PCs accounted for approximately 12.8% and 11.1% of the consolidated net revenues for the six months ended December 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 six months ended December 31, 2020 and 2019 are summarized in the following table.

 

   

For the Three Months Ended

December 31,

    2020   2019
Commercial Insurance/ Managed Care   $ 966     $ 1,335  
Medicare/Medicaid     206       276  
Workers' Compensation/Personal Injury     3,543       4,112  
Other     523       273  
Patient Fee Revenue, net of contractual allowances and discounts   $ 5,238     $ 5,996  

 

 

   

For the Six Months Ended

December 31,

    2020   2019
Commercial Insurance/ Managed Care   $ 1,912     $ 2,689  
Medicare/Medicaid     404       542  
Workers' Compensation/Personal Injury     6,930       8,406  
Other     1,084       404  
Patient Fee Revenue, net of contractual allowances and discounts   $ 10,330     $ 12,041  

 

  Page 17  

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 and 2019

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

(UNAUDITED)

 

 

 

NOTE 4 – OPERATING & FINANCING LEASES

 

During February 2016, FASB 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 foOTr operating leases. The standard was effective for us beginning July 1, 2019. We have elected the optional transition method to apply the standard as of the effective date and therefore, we will not apply the standard to the comparative periods presented in the consolidated financial statements. We have also elected the transition package of the practical expedients permitted within the standard which eliminates the requirements to reassess prior conclusions about lease identification, lease classification and indirect costs. 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. At the time of adoption of this guidance we had no significant financing leases.

 

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. Our most common initial term varies in length from 2 to 10 years. Including renewal options negotiated with the landlord, we have a total span of 2 to 16 years at the facilities we 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 $202 receivable from a landlord for tenant improvements. Our incremental borrowing rate (“IBR”) used to discount the stream of operating lease payments is closely related to the interest rates available to the Company.

 

A reconciliation of operating and financing lease payments undiscounted cash flows to lease liabilities recognized as of December 31, 2020 is as follows:

 

Year Ending

December 31,

 

Operating Lease

Payments

  Financing Lease Payments
  2021     $ 4,960     $ 244  
  2022       4,877       244  
  2023       4,599       244  
  2024       4,480       244  
  2025       4,301       244  
  Thereafter       17,505       287  
  Present value discount       (8,904 )     (156 )
  Total lease liability     $ 31,818     $ 1,351  

 

 

  Page 18  

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 and 2019

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

(UNAUDITED)

 

 

  

NOTE 5 - INVENTORIES

 

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

 

   

December 31,

2020

 

June 30,

2020

Purchased parts, components and supplies   $ 1,614     $ 1,544  
Work-in-process     230       105  
Total Inventories   $ 1,844     $ 1,649  

 

 

 

 

NOTE 6 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

 

Information relating to uncompleted contracts is as follows:

 

   

December 31,

2020

 

June 30,

 2020

Costs incurred on uncompleted contracts   $ 448     $ 448  
Estimated earnings     309       309  
Subtotal     757       757  
Less: Billings to date     604       604  
Total Costs and estimated earnings in excess of billings on uncompleted contracts   $ 153     $ 153  

 

 

  Page 19  

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECMEBER 31, 2020 and 2019

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

(UNAUDITED)

 

 

NOTE 7 – OTHER INTANGIBLE ASSETS

 

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

 

   

December 31,

2020

 

June 30,

2020

Capitalized software development costs   $ 7,005     $ 7,005  
Patents and copyrights     5,171       5,082  
Non-compete     4,100       4,100  
Customer relationships     3,800       3,800  
Gross Other intangible assets     20,076       19,987  
Less: Accumulated amortization     16,062       15,878  
Other Intangible Assets   $ 4,014     $ 4,109  

 

  

Amortization of patents and copyrights for the three months ended December 31, 2020 and 2019 amounted to $44 and $47, respectively.

 

Amortization of non-compete for the three months ended December 31, 2020 and 2019 amounted to $0 and $147, respectively.

 

Amortization of customer relationships for the three months ended December 31, 2020 and 2019 amounted to $47 and $47, respectively.

 

Amortization of patents and copyrights for the six months ended December 31, 2020 and 2019 amounted to $89 and $94, respectively.

 

Amortization of non-compete for the six months ended December 31, 2020 and 2019 amounted to $0 and $293, respectively.

 

Amortization of customer relationships for the six months ended December 31, 2020 and 2019 amounted to $95 and $95, respectively.

 

  Page 20  

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 and 2019

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

(UNAUDITED)

 

 

NOTE 8 – OTHER CURRENT LIABILITIES

 

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

 

   

December 31,

2020

 

June 30,

2020

Accrued salaries, commissions and payroll taxes   $ 2,573     $ 4,492  
Litigation accruals     9       443  
Sales tax payable     1,123       1,353  
Legal and other professional fees     276       113  
Accounting fees     180       120  
Self-funded health insurance reserve     123       87  
Accrued interest and penalty     511       877  
Other     789       700  
Other Current Liabilities   $ 5,584     $ 8,185  

 

 

 

 NOTE 9 – STOCKHOLDERS EQUITY

 

Common Stock

 

During the six months ended December 31, 2020, the Company issued 102 shares of common stock for costs and expenses of $1,941 and 4 shares of common stock to employees and consultants as compensation valued at $83.

 

During the six months ended December 31, 2019, the Company issued 90 shares of common stock for costs and expenses of $1,990.

 

 

NOTE 10 - SEGMENT AND RELATED INFORMATION

 

The Company operates in two industry segments - manufacturing and the servicing of medical equipment and management of diagnostic imaging centers.

 

The accounting policies of the segments are the same as those described in the summary of significant accounting policies as disclosed in the Company’s 10-K as of June 30, 2020. All inter-segment sales are market-based. The Company evaluates performance based on income or loss from operations.

 

  Page 21  

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 and 2019

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

(UNAUDITED)

 

 

NOTE 10 - SEGMENT AND RELATED INFORMATION (Continued)

 

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, 2020. 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 Dec. 31, 2020                        
Net revenues from external customers   $ 1,893     $ 19,271     $ 21,164  
Inter-segment net revenues   $ 219     $ —       $ 219  
(Loss) Income from operations   $ (8 )   $ 4,990     $ 4,982  
Depreciation and amortization   $ 65     $ 977     $ 1,042  
Capital expenditures   $ 70     $ 1,728     $ 1,798  
                         
For the three months ended Dec. 31, 2019                        
Net revenues from external customers   $ 2,069     $ 19,382     $ 21,451  
Inter-segment net revenues   $ 219     $ —       $ 219  
(Loss) Income from operations   $ (790 )   $ 5,811     $ 5,021  
Depreciation and amortization   $ 94     $ 914     $ 1,008  
Capital expenditures   $ 153     $ 2,116     $ 2,269  

 

    Medical
Equipment
  Management
of Diagnostic
Imaging
Centers
  Totals
For the six months ended Dec. 31, 2020                        
Net revenues from external customers   $ 3,874     $ 38,270     $ 42,144  
Inter-segment net revenues   $ 438     $ —       $ 438  
(Loss) Income from operations   $ (569 )   $ 9,701     $ 9,132  
Depreciation and amortization   $ 132     $ 1,878     $ 2,010  
Capital expenditures   $ 90     $ 2,143     $ 2,233  
                         
For the six months ended Dec. 31, 2019                        
Net revenues from external customers   $ 4,352     $ 38,845     $ 43,197  
Inter-segment net revenues   $ 438     $ —       $ 438  
(Loss) Income from operations   $ (1,526 )   $ 12,033     $ 10,507  
Depreciation and amortization   $ 185     $ 1,818     $ 2,003  
Capital expenditures   $ 1,754     $ 2,964     $ 4,718  

 

 

  Page 22  

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 and 2019

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

(UNAUDITED)

 

 

NOTE 11 – SUPPLEMENTAL CASH FLOW INFORMATION

 

During the six months ended December 31, 2020 and December 31, 2019, the Company paid $35 and $14 for interest, respectively.

 

During the six months ended December 31, 2020 and December 31, 2019, the Company paid $145 and $228 for income taxes, respectively.

 

 

NOTE 12 – COMMITMENTS AND CONTINGENCIES

 

Litigation

 

The Company is subject to legal proceedings and claims arising from the ordinary course of its business, including personal injury, customer contract and employment claims. In the opinion of management, the aggregate liability, if any, with respect to such actions, will not have a material adverse effect on the consolidated financial position or results of operations of the Company.

 

There were no material changes in litigation from that reported in our Form 10-K for the fiscal year ended June 30, 2020.

 

Other Matters

 

In September 2020, the Company entered into a settlement agreement with an unrelated third party for a claim made during March 2018 which was scheduled for arbitration. The settlement was for $1.2 million of which $900 was paid by the Company’s insurance in September 2020. The Company paid the remaining balance of $315 in September 2020.

 

The Company is also delinquent in filing sales tax returns for certain states, for which the Company has transacted business. As of December 31, 2020, the Company has recorded tax obligations of approximately $1.1 million plus interest and penalties of approximately $466. 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 $110 per person and for a maximum potential claim liability based on member enrollment. With respect to this program, the Company considers historical and projected medical utilization data when estimating its health insurance program liability and related expense. As of December 31, 2020 and June 30, 2020, the Company had approximately $123 and $87, 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 23  

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 and 2019

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

(UNAUDITED)

 

 

NOTE 13 - 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 six months ended December 31, 2020 and 2019, the Company recorded income tax expense of $1,962 in 2020 as compared to $2,039 in 2019. The 2020 provision is comprised of a current income tax component of $0 and a deferred income tax component of $1,962. 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 2016. 

 

The Company recorded a deferred tax asset of $16,848 and a deferred tax liability of $234 as of December 31, 2020, primarily relating to net operating loss carryforwards of approximately $47,208 available to offset future taxable income through 2031. The net operating losses begin to expire in 2023 for federal tax and state income tax purposes.

 

  Page 24  

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 and 2019

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

(UNAUDITED)

 

 

NOTE 13 - INCOME TAXES (Continued)

 

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 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 enhanced recoverability of AMT tax credits.

 

At the present time, the only impact of the CARES Act to the Company is allowing a full reimbursement of $1,342 of tax credits relating to the alternative minimum tax credits. The Company received the first half payment in June 2020. The balance of alternative minimum tax credits of $671 was received in July 2020. 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.

 

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 December 31, 2020, 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, which 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 14 – SUBSEQUENT EVENTS

 

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

 

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FONAR CORPORATION AND SUBSIDIARIES

 

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

 

For the six month period ended December 31, 2020, we reported a net income of $7.2 million on revenues of $42.1 million as compared to net income of $8.7 million on revenues of $43.2 million for the six month period ended December 31, 2019. Operating income decreased from $10.5 million for the six month period ended December 31, 2019 to $9.1 million for the six month period ended December 31, 2020.

 

For the three month period ended December 31, 2020, we reported a net income of $3.9 on revenues of $21.2 as compared to net income of $4.2 million on revenues of $21.5 million for the three month period ended December 31, 2019.

 

The revenue decreased, from $43.2 million for the first six months of fiscal 2020 to $42.1 million for the first six months of fiscal 2021, was primarily due to a decrease in patient fee revenue of $1.7 million, from $12.0 million for the first six months of fiscal 2020 to $10.3 million for the first six months of fiscal 2021. Revenues from product sales and service and repair fees decreased by 11.1% from $4.4 million for the first six months of fiscal 2020 to $3.9 million for the first six months of fiscal 2021.

 

While our revenues decreased, our costs and expenses increased, resulting in our operating income decreasing to $9.1 million for the six months ended December 31, 2020 as compared to $10.5 million for the six months ended December 31, 2019. In terms of percentages, costs and expenses increased 1.0% from $32.7 million for the first six months of fiscal 2020 to $33.0 million for the first six months of fiscal 2021, while revenues decreased, from $43.2 million for the first six months of fiscal 2020 to $42.1 million for the first six months of fiscal 2021. The increase in costs and expenses was due to a $2.2 million increase in selling, general and administrative expenses, from $8.5 million to $10.7 million, consisting largely of increases in reserves for management fees.

 

Fonar’s wholly owned subsidiary, Health Management Corporation of America (“HMCA”), has the controlling interest, in 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 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.

 

The most significant adverse impact on our Company in fiscal 2020 and the first two quarters of fiscal 2021 has been the COVID-19 pandemic. Although it had seemed the worst had passed, events in the l