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
Page 2 |
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts and shares in thousands, except per share amounts)
(UNAUDITED)
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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FONAR CORPORATION AND SUBSIDIARIES
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
We operate in two industry segments: the manufacture and servicing of medical (MRI) equipment, which is conducted by Fonar, and diagnostic facilities management services, which is conducted through HMCA.
Manufacturing and Service of MRI Equipment
Revenues from MRI product sales decreased to $288,000 for the first nine months of fiscal 2020 from $1.2 million for the first nine months of fiscal 2019. Costs related to product sales increased, from $539,000 for the nine- month period ended March 31, 2019 to $685,000 for the nine-month period ended March 31, 2020. Economic uncertainty and lower reimbursement rates for MRI scans, have depressed the market for our MRI scanner products, notwithstanding our scanners’ unique technological capabilities (e.g. multi positional scanning). Due to the low sales volumes of out MRI product, period to period comparisons are not necessarily indicative of any trends.
Service revenues decreased slightly by 1.2% from $6.2 million for the nine- month period ended March 31, 2019 to $6.1 million for the nine- month period ended March 31, 2020. Continuing lower sales volumes have been a factor ultimately contributing to the decrease in service revenues, as the revenue from new scanners being placed under service agreements, following the expiration of their warranties, is insufficient to replace the revenue lost as a result of older scanners being taken out of service.
Costs relating to providing service was $2.2 million in the first nine months of fiscal 2019 and $2.3 million in the first nine months of fiscal 2020. Because of our ability to monitor the performance of customers’ scanners from our facilities in Melville, New York on a daily basis and to detect and repair any irregularities before more serious and costly problems developed, we have been able to control our costs of providing service.
There were approximately $417,000 in foreign revenues for the first nine months of fiscal 2020 as compared to approximately $393,000 in foreign revenues for the first nine months of fiscal 2019, representing an increase in foreign revenues of 6.1%. We do not regard this as a material trend, but as part of a normal although sometimes volatile variation resulting from low volumes of foreign sales.
We recognize MRI scanner sales revenues on the “percentage of completion” basis, which means the revenues are recognized as the scanner is manufactured. Revenues recognized in a particular quarter do not necessarily reflect new orders or progress payments made by customers in that quarter. We build the scanner as the customer meets certain benchmarks in its site preparation in order to minimize the time lag between incurring costs of manufacturing and our receipt of the cash progress payments from the customer which are due upon delivery. Consequently, there can be a disparity between the revenues recognized in a fiscal period and the number of product sales. Generally, the revenues from a scanner sale are recognized in a fiscal quarter or quarters following the quarter in which the sale was made.
Revenues for the medical equipment segment decreased to $6.4 million for the first nine months of fiscal 2020 from $7.4 million for the first nine months of fiscal 2019. Operating losses for our medical equipment segment increased to an operating loss of $3.3 million, for the first nine months of fiscal 2020 as compared to an operating loss of $665,000 for the first nine months of fiscal 2019.
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Diagnostic Facilities Management Services
HMCA revenues increased in the first nine months of fiscal 2020 by 2.1% to $58.5 million from $57.3 million for the first nine months of fiscal 2019. The percentage of our revenues derived from our diagnostic facilities management segment relative to the percentage of our revenues derived from our medical equipment segment increased slightly to 90.1% for the first nine months of fiscal 2020, from 88.5% for the first nine months of fiscal 2019.
The increase in HMCA revenues is principally due to HMCA’s success in marketing the scanning services of the facilities managed or owned by HMCA, notwithstanding the decrease in reimbursement rates paid for MRI scans by insurers, Medicare and other government programs and the lockdowns imposed as a result of the COVID-19 virus. The reductions in reimbursement rates are not unique to HMCA or HMCA’s clients but are being experienced by the industry in general.
HMCA’s strategy is to counter the effects of lower reimbursement rates by increasing the scan volume of the facilities it owns or manages by adding additional scanners at current centers and increasing our marketing efforts. As a result of the COVID-19 virus, however, the Company has seen its scan volume decrease by approximately 50%. Nevertheless, the Company is continuing its program of adding additional scanners, even though the COVID-19 virus may delay the completion of the installation of some of the scanners. If scan volumes decrease further, or remain at lower volumes, the Company, notwithstanding its ample cash reserves, may need to reduce the size of its operations as a last resort.
Although the COVID-19 virus has adversely affected our marketing efforts our scan volumes in the third quarter of fiscal 2020, the number of scans performed at our centers and at our client’s centers increased from approximately 136,000 in the first nine months of fiscal 2019 to approximately 139,000 in the first nine months of fiscal 2020. Our scan volume began to decline in late March 2020 as a result of the impact of the pandemic on referral sources, stay-at-home orders and travel restrictions.The scan volumes for the fourth quarter of fiscal 2020 can be expected to be adversely affected, if the lockdowns are not lifted or relaxed for a prolonged period.
We manage twenty-five sites, twenty-three of which are equipped with Fonar Upright® MRI scanners (our Upright® MRI Scanners are also called Stand-Up® MRI Scanners). HMCA experienced an operating income of $16.4 million for the first nine months of fiscal 2020 compared to operating income of $18.8 million for the first nine months of fiscal 2019, the decrease being due to greater increase in costs and expenses.
HMCA’s cost of revenues for the first nine months of fiscal 2020 as compared to the first nine months of fiscal 2019 increased by 5.8% from $29.9 million to $31.6 million primarily as a result of the higher volume of scans performed and an increase in selling, general and administrative expense which outpaced revenue growth.
Consolidated
For the first nine months of fiscal 2020, our consolidated net revenues increased by 0.3% to $64.9 million from $64.7 million for the first nine months of fiscal 2019, and total costs and expenses increased by 11.1% to $51.8 million from $46.6 million for the first nine months of fiscal 2020 and for the first nine months of fiscal 2019 respectively. As a result, our operating income decreased to $13.1 million in the first nine months of fiscal 2020 as compared to $18.1 million in the first nine months of fiscal 2019. An increased selling, general and other administrative costs in particular resulted in the growth of cost and expenses.
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Selling, general and administrative expenses increased to $15.7 million in the first nine months of fiscal 2020 from $12.5 million in the first nine months of fiscal 2019. The greater part of the increase was due to a $2.6 million increase in the third quarter of fiscal 2020 ($7.2 million in the third quarter of fiscal 2020 as compared to $4.6 million in the third quarter of 2019). This increase in selling, general and administrative expenses 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. The compensatory element of stock issuances, which is included in selling, general and administrative expenses, remained constant at $0 for the first nine months of fiscal 2020 and 2019.
Research and development expenses increased by 16.2% to $1.6 million for the first nine months of fiscal 2020 from $1.4 million for the first nine months of fiscal 2019.
Interest expense in the first nine months of fiscal 2020 decreased by 26.9% to $57,000 from $78,000 in the first nine months of fiscal 2019. The decrease was due to the repayment of debt.
Inventories remained constant at $1.8 million at March 31, 2020 and at June 30, 2019.
Net management fee and medical receivables increased by 7.5% to $51.5 million at March 31, 2020 from $47.9 million at June 30, 2019 as a result of slower collections. The slower collections were primarily due to an increase in no-fault and workers’ compensation revenue, which typically takes longer to collect.
The results of operations for the first nine months of fiscal 2020 reflect an increase in revenues from management, patient and other fees, as compared to the first nine months of fiscal 2019 ($58.5 million for the first nine months of fiscal 2020 as compared to $57.3 million for the first nine months of fiscal 2019), and an decrease in MRI equipment segment revenues ($6.4 million as compared to $7.4 million). Revenues were 9.9% from the MRI equipment segment as compared to 90.1% from HMCA, for the first nine months of fiscal 2020, as compared to 11.5% from the MRI equipment segment and 88.5% from HMCA for the first nine months of fiscal 2019.
On March 27, 2020, the CARES Act was signed into law and is intended to provide over $2 trillion in stimulus benefits for the U.S. economy. The CARES Act provides for certain federal income tax changes, including an increase in the interest expense tax deduction limitation, the deferral of the employer portion of Social Security payroll taxes, refundable payroll tax credits, net operating loss carryback periods, alternative minimum tax credit refunds and bonus depreciation of qualified improvement property. The federal income tax changes brought about by the CARES Act are complex and further guidance is expected. We are still reviewing and determining the extent to which the tax provisions of the CARES Act will effect the Company. We will expect a cash benefit from the ability to receive a full reimbursement of $1,200 of tax credits relating to the alternative minimum tax credits in the current year plus additional cash benefits from the deferral of the employer portion of Social Security payroll taxes.
The implementation of the Patient Protection and Affordable Care Act (PPACA) has had a profound impact on the healthcare industry. We are experiencing some of the impact of the Act on our business in the reduction of reimbursement rates and fewer sales of our MRI equipment. Efforts to repeal and replace, or modify the PPACA may result in further significant changes in the healthcare industry and our business.
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We are committed to improving our operating results and dealing with the challenges posed by legislative and regulatory requirements. Nevertheless, factors beyond our control, such as the COVID-19 virus, the timing and rate of market growth, economic conditions, the availability of credit and payor reimbursement rates, or unexpected expenditures and the timing of such expenditures, make it difficult to forecast future operating results.
As mentioned, one of the effects of the PPACA on our business has been the reduction in Medicare reimbursement rates for MRI scans. This also has resulted in a reduction in the reimbursement rates by commercial insurers and government programs which tie their reimbursement rates to the Medicare rates. Nevertheless, the increased patient volume of the scanning centers we manage or own has enabled us to maintain healthy operating results in spite of these challenges. We believe we are pursuing the correct policies to cope with these problems and the problems caused by the pandemic, and to improve the Company’s operating results. However, our future revenues and results of operations may be adversely impacted by future reductions in reimbursement rates.
Our Upright® MRI (also referred to as the Stand-Up® MRI), together with our works-in-progress, are intended to significantly improve our competitive position.
The Upright® MRI scanner, which operates at 6000 gauss (.6 Tesla) field strength, allows patients to be scanned while standing, sitting, reclining and in multiple flexion and extension positions. It is common in visualizing the spine that abnormalities are visualized in some positions and not others. This enables surgical corrections that heretofore would not have been addressable for lack of visualizing the symptom causing the pathology and therefore, in general enables the treating physician to achieve a better treatment outcome for his patient. A floor-recessed elevator brings the patient to the height appropriate for the targeted image region. A custom-built multi-position adjustable bed will allow patients to sit or lie on their backs, sides or stomachs at any angle. This allows the MRI technologist to ask the patient to position himself/herself in the exact position that generates his/her pain so that images of the patient in the position that explicitly generates the patient’s pain can be nailed down. Full-range-of-motion studies of the joints in virtually any direction are possible, a particularly promising feature for sports injuries.
In addition FONAR has announced the publication of a book “THE CRANIOCERVICAL SYNDROME and MRI” that highlights the unique attributes of FONAR UPRIGHT® MRI Imaging (S. Karger, A.G. based in Basel, Switzerland- www.karger.com/Book/Home/261956) which has been published by S. Karger, an approximately 125 year old company and an academic publisher of scientific and medical journals and books. The seven chapter monograph examines the rapid advances in MRI made possible by the FONAR UPRIGHT® Multi-Position MRI that are transforming the treatment of patients suffering from the craniocervical syndrome (CCS). It is written by leading international experts in the field to practitioners with a better understanding of the subtle anatomy and MRI appearances at the craniocervical junction, along with insight into the clinical significance of cerebrospinal fluid (CSF) flow measurements and its potential role in generating the devastating impairments of the neurodegenerative diseases: Alzheimer’s (5.1 million patients in the United States), childhood and adult Autism (3.0 million), Parkinson’s (1.0 million), Multiple Sclerosis (250,000-350,000) and Amyotrophic Lateral Sclerosis (ALS) (30,000). It calls attention to the revolutionary importance of FONAR’s UPRIGHT® MRI imaging technology and the prospect of significantly relieving the suffering of the above totaled 9.38 million patients afflicted with these disorders.
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Fonar also announced a major diagnostic breakthrough in multiple sclerosis achieved with advanced Upright® MRI. Medical researchers at FONAR published a paper reporting a diagnostic breakthrough in multiple sclerosis (MS), based on observations made possible by the Company’s unique Upright® Multi-Position™ MRI scanner. The findings reveal that the cause of multiple sclerosis may be biomechanical and related to earlier trauma to the neck, which can result in obstruction of the flow of cerebrospinal fluid (CSF), which is produced and stored in the central anatomic structures of the brain known as the ventricles. Since the ventricles produce a large net volume of CSF each day (500 cc), the obstruction can result in a build up of pressure within the ventricles, resulting in leakage of the CSF and the antigenic polypeptides it contains into the surrounding brain tissue. This leakage could be responsible for generating the brain lesions of multiple sclerosis.
The paper, titled “The Possible Role of Cranio-Cervical Trauma and Abnormal CSF Hydrodynamics in the Genesis of Multiple Sclerosis," appears in the journal Physiological Chemistry and Physics and Medical NMR (Sept. 20, 2011).
This capability of the Fonar Upright® technology has demonstrated its key value on patients with the Arnold-Chiari syndrome [Cerebellar Tonsil Extopia (CTE)], which is believed to affect 200,000 to 500,000 Americans. In this syndrome, brain stem compression and subsequent severe neurological symptoms occur in these patients, because the brain stem descends and is compressed at the base of the skull in the foramen magnum, which is the circular bony opening at the base of the skull where the spinal cord exits the skull. Conventional lie-down MRI scanners cannot make an adequate evaluation of this pathology since the patient's pathology is most visible and the symptoms most acute when the patient is scanned in the upright fully weight-bearing position.
A combined study of 1,200 neck pain patients published in “Brain Injury” (July 2010) by eight university medical centers reported that cerebellar tonsil ectopia (CTE) of 1mm or greater was found and visualized 2.5 times (250%) more frequently when patients who had sustained automobile whiplash injuries were scanned upright rather than lying down.