FORM
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For
the quarterly period ended
Commission
file number
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction
of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| Address of principal executive offices) | (Zip Code) |
Registrant's
telephone number, including area code:
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. _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 _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 ___
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ___
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol | Name of each exchange on which registered | ||
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, 2022 | |
| Common Stock, par value $.0001 | ||
| Class B Common Stock, par value $.0001 | ||
| Class C Common Stock, par value $.0001 | ||
| Class A Preferred Stock, par value $.0001 |
| Page 1 |
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)
ASSETS
| March
31, 2022 | June
30, 2021 * | |||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Short term investments | ||||||||
| Accounts receivable – net | ||||||||
| Accounts receivable - related party | ||||||||
| Medical receivable – net | ||||||||
| Management and other fees receivable – net | ||||||||
| Management and other fees receivable – related medical practices – net | ||||||||
| Contract assets | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Accounts receivable – long term | ||||||||
| Deferred income tax asset | ||||||||
| Property and equipment – net | ||||||||
| Right-of-use Asset – operating lease | ||||||||
| Right-of-use Asset – financing lease | ||||||||
| Goodwill | ||||||||
| Other intangible assets – net | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
*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, 2022 | June
30, 2021 * | |||||||
| Current Liabilities: | ||||||||
| Current portion of long-term debt and capital leases | $ | $ | ||||||
| Accounts payable | ||||||||
| Other current liabilities | ||||||||
| Unearned revenue on service contracts | ||||||||
| Unearned revenue on service contracts – related party | ||||||||
| Contract liabilities | ||||||||
| Operating lease liability - current portion | ||||||||
| Financing lease liability - current portion | ||||||||
| Customer deposits | ||||||||
| Total Current Liabilities | ||||||||
| Long-Term Liabilities: | ||||||||
| Unearned revenue on service contracts | ||||||||
| Deferred income tax liability | ||||||||
| Due to related medical practices | ||||||||
| Operating lease liability – net of current portion | ||||||||
| Financing lease liability – net of current portion | ||||||||
| Long-term debt and capital leases, less current portion | ||||||||
| Other liabilities | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
*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, 2022 | June
30, 2021 * | ||||||
| Class A non-voting preferred stock $ par value; shares authorized at March 31, 2022 and June 30, 2021, issued and outstanding at March 31, 2022 and June 30, 2021 | $ | $ | ||||||
| Preferred stock $ par value; shares authorized at March 31, 2022 and June 30, 2021, issued and outstanding – | ||||||||
| Common Stock $ par value; shares authorized at March 31, 2022 and June 30, 2021, issued at March 31, 2022 and June 30, 2021, outstanding at March 31, 2022 and June 30, 2021 | ||||||||
| Class B Common Stock (10 votes per share) $ par value; shares authorized at March 31, 2022 and June 30, 2021; . issued and outstanding at March 31, 2022 and June 30, 2021 | ||||||||
| Class C Common Stock (25 votes per share) $ par value; shares authorized at March 31, 2022 and June 30, 2021, issued and outstanding at March 31, 2022 and June 30, 2021 | ||||||||
| Paid-in capital in excess of par value | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Treasury stock, at cost - shares of common stock at March 31, 2022 and June 30, 2021 | ( | ) | ( | ) | ||||
| Total Fonar Corporation’s Stockholders’ Equity | ||||||||
| Noncontrolling interests | ( | ) | ( | ) | ||||
| Total Stockholders' Equity | ||||||||
| Total Liabilities and Stockholders' Equity | $ | $ | ||||||
*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 | 2022 | 2021 | ||||||
| Patient fee revenue – net of contractual allowances and discounts | $ | $ | ||||||
| Product sales – net | ||||||||
| Service and repair fees – net | ||||||||
| Service and repair fees - related parties – net | ||||||||
| Management and other fees – net | ||||||||
| Management and other fees - related medical practices – net | ||||||||
| Total Revenues – Net | ||||||||
| COSTS AND EXPENSES | ||||||||
| Costs related to patient fee revenue | ||||||||
| Costs related to product sales | ||||||||
| Costs related to service and repair fees | ||||||||
| Costs related to service and repair fees - related parties | ||||||||
| Costs related to management and other fees | ||||||||
| Costs related to management and other fees – related medical practices | ||||||||
| Research and development | ||||||||
| Selling, general and administrative | ||||||||
| Total Costs and Expenses | ||||||||
| Income From Operations | ||||||||
| Other Income | ||||||||
| Interest Expense | ( | ) | ||||||
| Investment Income | ||||||||
| Income Before Provision for Income Taxes and Noncontrolling Interests | ||||||||
| Provision for Income Taxes | ( | ) | ( | ) | ||||
| Net Income | ||||||||
| Net Income - Noncontrolling Interests | ( | ) | ( | ) | ||||
| Net Income – Attributable to FONAR | $ | $ | ||||||
| Net Income Available to Common Stockholders | $ | $ | ||||||
| Net Income Available to Class A Non-Voting Preferred Stockholders | $ | $ | ||||||
| Net Income Available to Class C Common Stockholders | $ | $ | ||||||
| Basic Net Income Per Common Share Available to Common Stockholders | $ | $ | ||||||
| Diluted Net Income Per Common Share Available to Common Stockholders | $ | $ | ||||||
| Basic and Diluted Income Per Share – Class C Common | $ | $ | ||||||
| Weighted Average Basic Shares Outstanding – Common Stockholders | ||||||||
| Weighted Average Diluted Shares Outstanding - Common Stockholders | ||||||||
| Weighted Average Basic and Diluted Shares Outstanding – Class C Common | ||||||||
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 | 2022 | 2021 | ||||||
| Patient fee revenue – net of contractual allowances and discounts | $ | $ | ||||||
| Product sales – net | ||||||||
| Service and repair fees – net | ||||||||
| Service and repair fees - related parties – net | ||||||||
| Management and other fees – net | ||||||||
| Management and other fees - related medical practices – net | ||||||||
| Total Revenues – Net | ||||||||
| COSTS AND EXPENSES | ||||||||
| Costs related to patient fee revenue | ||||||||
| Costs related to product sales | ||||||||
| Costs related to service and repair fees | ||||||||
| Costs related to service and repair fees - related parties | ||||||||
| Costs related to management and other fees | ||||||||
| Costs related to management and other fees – related medical practices | ||||||||
| Research and development | ||||||||
| Selling, general and administrative | ||||||||
| Total Costs and Expenses | ||||||||
| Income From Operations | ||||||||
| Other Income/(Expense) | ||||||||
| Interest Expense | ( | ) | ( | ) | ||||
| Investment Income | ||||||||
| Income Before Provision for Income Taxes and Noncontrolling Interests | ||||||||
| Provision for Income Taxes | ( | ) | ( | ) | ||||
| Net Income | ||||||||
| Net Income - Noncontrolling Interests | ( | ) | ( | ) | ||||
| Net Income – Attributable to FONAR | $ | $ | ||||||
| Net Income Available to Common Stockholders | $ | $ | ||||||
| Net Income Available to Class A Non-Voting Preferred Stockholders | $ | $ | ||||||
| Net Income Available to Class C Common Stockholders | $ | $ | ||||||
| Basic Net Income Per Common Share Available to Common Stockholders | $ | $ | ||||||
| Diluted Net Income Per Common Share Available to Common Stockholders | $ | $ | ||||||
| Basic and Diluted Income Per Share – Class C Common | $ | $ | ||||||
| Weighted Average Basic Shares Outstanding – Common Stockholders | ||||||||
| Weighted Average Diluted Shares Outstanding - Common Stockholders | ||||||||
| Weighted Average Basic and Diluted Shares Outstanding – Class C Common | ||||||||
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, 2022
| Common Stock | Paid in capital in excess of par value | Accumulated Deficit | Treasury Stock | Non Controlling Interests | Total | |||||||||||||||||||
| Balance – December 31, 2021 | $ | $ | ($ | ) | ($ | ) | ($ | ) | $ | |||||||||||||||
| Net income | ||||||||||||||||||||||||
| Purchase of Non controlling interest | ||||||||||||||||||||||||
| Distributions - Non controlling | ( | ) | ( | ) | ||||||||||||||||||||
| Income - Non controlling interests | ||||||||||||||||||||||||
| Balance – March 31, 2022 | $ | $ | ($ | ) | ($ | ) | ($ | ) | $ | |||||||||||||||
For the Three Months Ending March 31, 2021
| Common Stock | Paid in capital in excess of par value | Accumulated Deficit | Treasury Stock | Non Controlling Interests | Total | |||||||||||||||||||
| Balance - December 30, 2021 | $ | $ | ($ | ) | ($ | ) | ($ | ) | $ | |||||||||||||||
| Net income | ||||||||||||||||||||||||
| Distributions - Non controlling | ( | ) | ( | ) | ||||||||||||||||||||
| Income - Non controlling interests | ||||||||||||||||||||||||
| Balance - March 31, 2021 | $ | $ | ($ | ) | ($ | ) | ($ | ) | $ | |||||||||||||||
| 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, 2022
| Common Stock | Paid in capital in excess of par value | Accumulated Deficit | Treasury Stock | Non Controlling Interests | Total | |||||||||||||||||||
| Balance - June 30, 2021 | $ | $ | ($ | ) | ($ | ) | ($ | ) | $ | |||||||||||||||
| Net income | ||||||||||||||||||||||||
| Purchase of Non controlling interest | ( | ) | ( | ) | ||||||||||||||||||||
| Distributions - Non controlling | ( | ) | ( | ) | ||||||||||||||||||||
| Income - Non controlling interests | ||||||||||||||||||||||||
| Balance - March 31, 2022 | $ | $ | ($ | ) | ($ | ) | ($ | ) | $ | |||||||||||||||
For the Nine Months Ending March 31, 2021
| Common Stock | Paid in capital in excess of par value | Accumulated Deficit | Treasury Stock | Non Controlling Interests | Total | |||||||||||||||||||
| Balance - June 30, 2020 | $ | $ | ($ | ) | ($ | ) | $ | $ | ||||||||||||||||
| Issuance of Common Stock | ||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Distributions - Non controlling | ( | ) | ( | ) | ||||||||||||||||||||
| Income - Non controlling interests | ||||||||||||||||||||||||
| Balance - March 31, 2021 | $ | $ | ($ | ) | ($ | ) | ($ | ) | $ | |||||||||||||||
| 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, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization on right-of-use assets | ||||||||
| Provision for bad debts | ||||||||
| Deferred income tax – net | ||||||||
| Compensatory element of stock issuances | ||||||||
| Stock issued for costs and expenses | ||||||||
| Abandoned patents | ||||||||
| Gain on forgiveness of PPP loan | ( | ) | ||||||
| (Increase) decrease in operating assets, net: | ||||||||
| Accounts, medical and management fee receivable(s) | ( | ) | ( | ) | ||||
| Notes receivable | ||||||||
| Contract assets | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Income tax receivable | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Other assets | ( | ) | ||||||
| Increase (decrease) in operating liabilities, net: | ||||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Other current liabilities | ( | ) | ( | ) | ||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Financing lease liabilities | ( | ) | ( | ) | ||||
| Customer deposits | ( | ) | ||||||
| Contract liabilities | ( | ) | ||||||
| Other liabilities | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| Cash Flows from Investing Activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Purchase of noncontrolling interests | ( | ) | ||||||
| Purchases of imaging facility | ( | ) | ||||||
| Cost of patents | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Repayment of borrowings and capital lease obligations | ( | ) | ( | ) | ||||
| Proceeds from debt | ||||||||
| Distributions to noncontrolling interests | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net Increase in Cash and Cash Equivalents | ||||||||
| Cash and Cash Equivalents - Beginning of Period | ||||||||
| Cash and Cash Equivalents - End of Period | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
| Page 10 |
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022 and 2021
(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
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 nine months ended March 31, 2022, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2022. 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 13, 2021 for the fiscal year ended June 30, 2021.
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. 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 also received some government stimulus funds from the Paycheck Protection Program (“PPP”) and Medicare advances/stimulus payments. During the nine months ended March 31, 2022 the PPP loan was forgiven in its entirety. During fiscal 2022, the Company had to deal with the increased strictness in the enforcement of COVID-19 mandates, such as the requirement that employees in healthcare facilities be vaccinated, along with the newer variants that are more transmissible. As a result, the Company experienced absences due to illness and the loss of unvaccinated employees whose duties required them to be in contact with patients. Due to these conditions, the Company was sometimes unable to keep scanning facilities open for all shifts and as a result there was a slight decrease in scans during the second quarter of fiscal 2022. The Company has been able to navigate through these challenges and avoid any significant disruption of the business and the volume has recently risen back almost to pre- COVID-19 levels. 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
MARCH 31, 2022 and 2021
(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
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 judgements 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.
BUSINESS COMBINATION
When the qualifications for business combination accounting treatment are met, it requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period of final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.
| Page 12 |
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022 and 2021
(Amounts and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 2022 and 2021.
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, 2022 and 2021, diluted EPS for common shareholders includes shares upon conversion of Class C Common.
Earnings Per Share
| Three
months ended March 31, 2022 | Three
months ended March 31, 2021 | |||||||||||||||||||||||
| Total | Common Stock | Class
C Common Stock | Total | Common Stock | Class
C Common Stock | |||||||||||||||||||
| Basic | ||||||||||||||||||||||||
| Numerator:
Net income available to common stockholders | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Denominator: | ||||||||||||||||||||||||
| Weighted average shares outstanding | ||||||||||||||||||||||||
| Basic income per common share | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Diluted | ||||||||||||||||||||||||
| Denominator: Weighted average shares outstanding | ||||||||||||||||||||||||
| Convertible Class C Stock | ||||||||||||||||||||||||
| Total Denominator for diluted earnings per share | ||||||||||||||||||||||||
| Diluted income per common share | $ | $ | $ | $ | ||||||||||||||||||||
| Page 13 |
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022 and 2021
(Amounts and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings Per Share (Continued)
| Nine
months ended March 31, 2022 | Nine
months ended March 31, 2021 | |||||||||||||||||||||||
| Total | Common Stock | Class
C Common Stock | Total | Common Stock | Class
C Common Stock | |||||||||||||||||||
| Basic | ||||||||||||||||||||||||
| Numerator:
Net income available to common stockholders | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Denominator: | ||||||||||||||||||||||||
| Weighted average shares outstanding | ||||||||||||||||||||||||
| Basic income per common share | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Diluted | ||||||||||||||||||||||||
| Denominator: Weighted average shares outstanding | ||||||||||||||||||||||||
| Convertible Class C Stock | ||||||||||||||||||||||||
| Total Denominator for diluted earnings per share | ||||||||||||||||||||||||
| Diluted income per common share | $ | $ | $ | $ | ||||||||||||||||||||
Recent Accounting Pronouncements
FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of March 31, 2022 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 2021 or 2020, 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.
| Page 14 |
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022 and 2021
(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, 2022, and June 30, 2021:
| March 31, 2022 | ||||||||||||
| Gross Receivable | Allowance for doubtful accounts | Net | ||||||||||
| Accounts receivable | $ | $ | $ | |||||||||
| Accounts receivable - related party | $ | $ | ||||||||||
| Medical receivable | $ | $ | $ | |||||||||
| Management and other fees receivable | $ | $ | $ | |||||||||
| Management and other fees receivable from related medical practices ("PC’s") | $ | $ | $ | |||||||||
| June 30, 2021 | ||||||||||||
| Gross Receivable | Allowance for doubtful accounts | Net | ||||||||||
| Accounts receivable | $ | $ | $ | |||||||||
| Accounts receivable - related party | $ | $ | ||||||||||
| Medical receivable | $ | $ | $ | |||||||||
| Management and other fees receivable | $ | $ | $ | |||||||||
| Management and other fees receivable from related medical practices ("PC’s") | $ | $ | $ | |||||||||
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
MARCH 31, 2022 and 2021
(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 and Unearned Revenue
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 March 31, 2022 is as follows:
| 2024 | $ | |||||
| 2025 | ||||||
| 2026 | ||||||
| 2027 | ||||||
| Total | $ |
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
| Page 16 |
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022 and 2021
(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
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, 2022 and 2021 are summarized in the following table.
| For
the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Commercial Insurance/ Managed Care | $ | $ | ||||||
| Medicare/Medicaid | ||||||||
| Workers' Compensation/Personal Injury | ||||||||
| Other | ||||||||
| Patient Fee Revenue, net of contractual allowances and discounts | $ | $ | ||||||
| For
the Nine Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Commercial Insurance/ Managed Care | $ | $ | ||||||
| Medicare/Medicaid | ||||||||
| Workers' Compensation/Personal Injury | ||||||||
| Other | ||||||||
| Patient Fee Revenue, net of contractual allowances and discounts | $ | $ | ||||||
| Page 17 |
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022 and 2021
(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 for 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 $
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. 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 March 31, 2022 is as follows:
| Twelve
Months Ending March 31, | Operating
Lease Payments | Financing Lease Payments | ||||||||
| 2023 | $ | $ | ||||||||
| 2024 | ||||||||||
| 2025 | ||||||||||
| 2026 | ||||||||||
| 2027 | ||||||||||
| Thereafter | ||||||||||
| Present value discount | ( | ) | ( | ) | ||||||
| Total lease liability | $ | $ | ||||||||
| Page 18 |
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022 and 2021
(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:
| March
31, 2022 | June
30, 2021 | |||||||
| Purchased parts, components and supplies | $ | $ | ||||||
| Work-in-process | ||||||||
| Total Inventories | $ | $ | ||||||
NOTE 6 – CONTRACT ASSETS AND LIABILITIES
Information relating to uncompleted contracts about contract assets and (liabilities) is as follows:
| ` | ||||||||
| March
31, 2022 | June
30, 2021 | |||||||
| Costs incurred on uncompleted contracts | $ | $ | ||||||
| Estimated earnings | ||||||||
| Costs and estimated earnings on uncompleted contracts | ||||||||
| Less: Billings to date | ||||||||
| Total Contract Assets (Liabilities) | $ | $ | ( | ) | ||||
NOTE 7 – OTHER INTANGIBLE ASSETS
Other intangible assets, net of accumulated amortization, in the accompanying condensed consolidated balance sheets consist of the following:
| March
31, 2022 | June
30, 2021 | |||||||
| Capitalized software development costs | $ | $ | ||||||
| Patents and copyrights | ||||||||
| Non-compete | ||||||||
| Customer relationships | ||||||||
| Gross Other intangible assets | ||||||||
| Less: Accumulated amortization | ||||||||
| Other Intangible Assets | $ | $ | ||||||
| Page 19 |
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022 and 2021
(Amounts and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE 7 – OTHER INTANGIBLE ASSETS (CONTINUED)
Amortization
of patents and copyrights for the three months ended March 31, 2022 and 2021 amounted to $
Amortization
of non-compete for the three months ended March 31, 2022 and 2021 amounted to $
Amortization
of customer relationships for the three months ended March 31, 2022 and 2021 amounted to $
Amortization
of patents and copyrights for the nine months ended March 31, 2022 and 2021 amounted to $
Amortization
of non-compete for the nine months ended March 31, 2022 and 2021 amounted to $
Amortization
of customer relationships for the nine months ended March 31, 2022 and 2021 amounted to $
NOTE 8 – OTHER CURRENT LIABILITIES
Other current liabilities in the accompanying condensed consolidated balance sheets consist of the following:
| March
31, 2022 | June
30, 2021 | |||||||
| Accrued salaries, commissions and payroll taxes | $ | $ | ||||||
| Litigation accruals | ||||||||
| Sales tax payable | ||||||||
| State income taxes payable | ||||||||
| Legal and other professional fees | ||||||||
| Accounting fees | ||||||||
| Self-funded health insurance reserve | ||||||||
| Accrued interest and penalty | ||||||||
| Other general & administrative expenses | ||||||||
| Other Current Liabilities | $ | $ | ||||||
| Page 20 |
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022 and 2021
(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, 2021. 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 March 31, 2022 | ||||||||||||
| Net revenues from external customers | $ | $ | $ | |||||||||
| Inter-segment net revenues | $ | $ | $ | |||||||||
| (Loss) Income from operations | $ | ( | ) | $ | $ | |||||||
| Depreciation and amortization | $ | $ | $ | |||||||||
| Capital expenditures | $ | $ | $ | |||||||||
| For the three months ended March 31, 2021 | ||||||||||||
| Net revenues from external customers | $ | $ | $ | |||||||||
| Inter-segment net revenues | $ | $ | $ | |||||||||
| Income from operations | $ | $ | $ | |||||||||
| Depreciation and amortization | $ | $ | $ | |||||||||
| Capital expenditures | $ | $ | $ | |||||||||
| Medical
Equipment | Management
of Diagnostic Imaging Centers | Totals | ||||||||||
| For the nine months ended March 31, 2022 | ||||||||||||
| Net revenues from external customers | $ | $ | $ | |||||||||
| Inter-segment net revenues | $ | $ | $ | |||||||||
| (Loss) Income from operations | $ | ( | ) | $ | $ | |||||||
| Depreciation and amortization | $ | $ | $ | |||||||||
| Capital expenditures | $ | $ | $ | |||||||||
| For the six months ended March 31, 2021 | ||||||||||||
| Net revenues from external customers | $ | $ | $ | |||||||||
| Inter-segment net revenues | $ | $ | $ | |||||||||
| (Loss) Income from operations | $ | ( | ) | $ | $ | |||||||
| Depreciation and amortization | $ | $ | $ | |||||||||
| Capital expenditures | $ | $ | $ | |||||||||
| Page 21 |
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022 and 2021
(Amounts and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE 10 – SUPPLEMENTAL CASH FLOW INFORMATION
During
the nine months ended March 31, 2022 and March 31, 2021, the Company paid $
During
the nine months ended March 31, 2022 and March 31, 2021, the Company paid $
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, 2021.
Other Matters
In September 2019, the Company was notified by one of its landlords that it was required to vacate the premises within 180 days under the demolition clause in the lease. The Company believed the lease renewal which was not negotiated in good faith since the renewal was negotiated in February 2018. The Company has recently relocated to a new space but the original lease provided for penalty payments in the event that the Company had not vacated the lease space. The Company had been making normal rent payments throughout the course of the arbitration proceedings. The case was settled for $900 of leasehold holdover charges which was paid in August 2021.
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 $
| Page 22 |
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022 and 2021
(Amounts and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE 11 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company regularly analyzes its reserves for incurred but not reported claims, and for reported but not paid claims related to its reinsurance and self-funded insurance programs. The Company believes its reserves are adequate. However, significant judgment is involved in assessing these reserves such as assessing historical paid claims, average lags between the claims’ incurred date, reported dates and paid dates, and the frequency and severity of claims. There may be differences between actual settlement amounts and recorded reserves and any resulting adjustments are included in expense once a probable amount is known. There were no significant adjustments recorded in the periods covered by this report.
NOTE 12 - INCOME TAXES
In
accordance with ASC 740-270, Income Taxes – Interim Reporting, the Company is required at the end of each interim period to determine
the best estimate of its annual effective tax rate and apply that rate to year-to-date ordinary income or loss. The resulting tax expense
(or benefit) is adjusted for the tax effect of specific events, if any, required to be discretely recognized in the interim period as
they occur. For the nine months ended March 31, 2022 and 2021, the Company recorded income tax expense of $
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 2017.
| Page 23 |
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022 and 2021
(Amounts and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE 12 - INCOME TAXES (CONTINUED)
The
Company recorded a deferred tax asset of $
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.
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, 2022, 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.
| Page 24 |
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022 and 2021
(Amounts and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE 13 – ACQUISITION
On March 29, 2021, the Company completed the acquisition of certain assets of Rockland Management Group, located in West Yonkers. The Company used an incremental borrowing rate of 4% to value the right to use asset in connection with the assumed operating lease obligation. We made a preliminary fair value determination of the acquired assets and assumed liabilities as follows:
| Property and equipment | $ | |||
| Right to use assets | ||||
| Intangible assets | ||||
| Security Deposit | ||||
| Right to use liability | ( | ) | ||
| Goodwill | ||||
| Total purchase consideration | $ |
In accordance with ASC 805-10-25-1, Business Combinations – Overall Recognition, the Company recorded the transaction as a business combination. ASC 805-10-25-1 provides the requirements of recording the transaction by applying the acquisition method. The acquisition method requires the Company to determine if the assets and liabilities acquired are a business or not. Under ASC 805-10-25-1, it must be determined if there is a specific acquisition party, acquisition date, identifiable assets acquired and liabilities assumed and you must be able to recognized and measure goodwill or a gain from the purchase. Based upon this guidance, the acquisition had been recorded as a business combination.
The net assets acquired and consideration is as follow:
| Leasehold Improvements | $ | |
| Diagnostic Equipment | ||
| Customer Lists | ||
| Covenant Not to Compete | ||
| Security Deposit | ||
| Closing costs – expensed | ||
| Goodwill | | |
| Cash Consideration Paid | $ |
The results of operations of Rockland Management Group were diminutive and did not affect the pro forma results of operations.
NOTE 14 – SUBSEQUENT EVENTS
The Company has evaluated events that occurred subsequent to March 31, 2022 and through the date the condensed consolidated financial statements were issued.
Page 25
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, 2022, we reported a net income of $13.6 million on revenues of $72.8 million as compared to net income of $11.5 million on revenues of $65.2 million for the nine month period ended March 31, 2021. Operating income increased from $13.3 million for the nine month period ended March 31, 2021 to $17.9 million for the nine month period ended March 31, 2022.
For the three month period ended March 31, 2022, we reported a net income of $3.3 million on revenues of $24.6 million as compared to net income of $4.3 million on revenues of $23.1 million for the three month period ended March 31, 2021.
The revenue increase, from $65.2 million for the first nine months of fiscal 2021 to $72.8 million for the first nine months of fiscal 2022, was primarily due to increases in patient fee revenue of $5.6 million, from $16.4 million for the first nine months of fiscal 2021 to $21.9 million for the first nine months of fiscal 2022. Revenues from product sales and service and repair fees decreased by 0.5% from $6.31 million for the first nine months of fiscal 2021 to $6.28 million for the first nine months of fiscal 2022.
While our revenues increased, our costs and expenses also increased, but by a lesser amount resulting in our operating income increasing to $17.9 million for the nine months ended March 31, 2022 as compared to $13.3 million for the nine months ended March 31, 2021. In terms of percentages, costs and expenses increased 5.7% from $52.0 million for the first nine months of fiscal 2021 to $54.9 million for the first nine months of fiscal 2022, while revenues increased 11.6%, from $65.2 million for the first nine months of fiscal 2021 to $72.8 million for the first nine months of fiscal 2022.
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 70.8% in HDM, and the investors in HDM have a 29.2% ownership interest, as compared to HMCA’s 70% ownership interest and the investors’ 30% ownership interest in HDM in fiscal 2021. This change resulted from the Company’s purchase of non-controlling interests from the minority shareholders for $546,000 in the second quarter of fiscal 2022. 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 half of fiscal 2021 has been the COVID-19 pandemic. Although it had seemed the worst had passed, by August 2020, subsequent events have shown a spike in new cases and the emergence of new strains of the virus. This is by no means a problem confined to our Company, but despite our best efforts and improved ability to cope with the pandemic, the impact on our results of operation and financial condition is potentially volatile and severe.
Page 26
FONAR CORPORATION AND SUBSIDIARIES
Since March 2020 the global pandemic of COVID-19 has caused turbulence and uncertainty in the United States and international markets and economies which have adversely affected our workforce, liquidity, financial conditions, revenues, profitability and business operations. Generally COVID-19 caused us to require that a portion of our workforce work from home and restricted the ability of our personnel to travel for marketing purposes or to service our customers. During the fourth quarter of fiscal 2020, the Company was able to enact certain decisions to allow the Company to survive during the global pandemic and prevent further losses or additional decreases in scan volume. 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 the positive cash flows, low debt and cash on hand, it will be able to continue operations going forward.
One of the concerns we have is the increased strictness in enforcement of certain COVID-19 mandates, such as the requirement that employees in healthcare facilities be vaccinated. Another concern we have is the newer variants that are more transmissible. We are in fact facing some of these challenges now. As a result, between absences due to illness and the loss of unvaccinated employees whose duties required them to be in contact with patients, we were sometimes unable to keep a scanning facility open for all shifts. During the third quarter of fiscal 2022, the aggregate number of scans performed by the sites we manage or own declined to 46,190 scans from 48,469 scans in the first quarter of fiscal 2022. In comparison, the actual number of scans performed in the third quarter of fiscal 2022 was 46,190 as compared to 44,515 performed in fiscal 2021. Nevertheless, we have been able to navigate through these challenges and avoid any significant disruption to our business
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.
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.
Page 27
FONAR CORPORATION AND SUBSIDIARIES
Manufacturing and Service of MRI Equipment
Revenues from MRI product sales decreased to $481,000 for the first nine months of fiscal 2022 from $534,000 for the first nine months of fiscal 2021. Costs related to product sales decreased from $477,000 for the nine month period ended March 31, 2021 to $352,000 for the nine month period ended March 31, 2022. 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 our MRI product, period to period comparisons are not necessarily indicative of any trends.
Service revenues remained constant at $5.8 million for the nine month period ended March 31, 2022 and the nine month period ended March 31, 2021.
Costs relating to providing service were $1.9 million in the first nine months of fiscal 2021 and $2.2 million in the first nine months of fiscal 2022. 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 develop, we have been able to reduce our costs of providing service.
There were approximately $466,000 in foreign revenues for the first nine months of fiscal 2022 as compared to approximately $755,000 in foreign revenues for the first nine months of fiscal 2021, representing an decrease in foreign revenues of 38.3%. 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 site preparation and our installation of the scanner, 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 remained constant at $6.3 million for the first nine months of fiscal 2022 and the first nine months of fiscal 2021. Operating losses for our medical equipment segment decreased to an operating loss of $1.1 million, for the first nine months of fiscal 2022 as compared to an operating loss of $242,000 for the first nine months of fiscal 2021.
Diagnostic Facilities Management Services
HMCA revenues increased in the first nine months of fiscal 2022 by 12.9% to $66.5 million from $58.9 million for the first nine months of fiscal 2021. 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 91.4% for the first nine months of fiscal 2022, from 90.3% for the first nine months of fiscal 2021.
Page 28
FONAR CORPORATION AND SUBSIDIARIES
HMCA’s current 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 had seen decreases in its scan volume. Nevertheless, the Company continued its program of adding additional scanners. The scan volume increased slightly in the third quarter of 2022 and continues to recover in the fourth quarter of fiscal 2022. The continuation of the COVID-19 virus and its various variants that are more transmittable may delay the completion of the installation of some of the scanners. If scan volumes decrease however, and remain at lower volumes, the Company, notwithstanding its ample cash reserves, may need to consider reducing the size of its operations temporarily as a last resort.
New York State mandated that as of October 7, 2021, all workers at hospitals, long-term care facilities and diagnostic centers be COVID-19-vaccinated. Workers who were not vaccinated either resigned, were transferred to a non-diagnostic facility within the company, or were dismissed. The resulting reduction in the number of workers available at sites owned or managed by HMCA, has been challenging and has significantly reduced the pool of qualified and vaccinated workers. Also this is combined with the emergence of the new highly transmissible variants. HMCA owned or managed sites struggling with reduced staff either have cut their business hours and therefore scan fewer patients or, when possible, maintain regular business hours by paying employees who are willing to work extra hours at overtime rates. While it is too early to assess the ultimate impact, New York’s vaccination mandate and the emergence of the new variants are having a negative effect on our business in fiscal 2022.
Although the COVID-19 virus and government mandates have adversely affected our marketing efforts our scan volumes in fiscal 2020 and the beginning of fiscal 2021, the number of scans performed at our centers and at our client’s centers has recovered to pre-COVID-19 levels and has increased from approximately 131,000 in the first nine months of fiscal 2021 to approximately 141,000 in the first nine months of fiscal 2022.
We now manage or own a total of 40 MRI scanners. Twenty-five (25) MRI scanners are located in New York and fifteen (15) are located in Florida. HMCA experienced an operating income of $18.9 million for the first nine months of fiscal 2022 compared to operating income of $13.5 million for the first nine months of fiscal 2021.
The ability of HMCA to maintain its profitability 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 cost of revenues for the first nine months of fiscal 2022 as compared to the first nine months of fiscal 2021 increased by 12.8% from $31.6 million to $35.6 million primarily as a result of an increase in scan volume.
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Consolidated
For the first nine months of fiscal 2022, our consolidated net revenues increased by 11.6% to $72.8 million from $65.2 million for the first nine months of fiscal 2021, and total costs and expenses increased by 5.7% to $54.9 million from $52.0 million for the first nine months of fiscal 2022 and for the first nine months of fiscal 2021 respectively. As a result, our operating income increased to $17.9 million in the first nine months of fiscal 2022 as compared to $13.3 million in the first nine months of fiscal 2021. A decrease in selling, general and other administrative costs in particular resulted in the smaller increase of cost and expenses as compared to the increase in net revenues.
Selling, general and administrative expenses decreased to $15.9 million in the first nine months of fiscal 2022 from $16.8 million in the first nine months of fiscal 2021. This decrease in selling, general and administrative expenses was due mainly to less reserves taken on management fees. Some of these reserves had 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, decrease to $0 for the first nine months of fiscal 2022 from $83,000 in the first nine months of fiscal 2021.
Research and development expenses decreased by 10.8% to $1.1 million for the first nine months of fiscal 2022 from $1.2 million for the first nine months of fiscal 2021.
Interest expense in the first nine months of fiscal 2022 decreased by 84.2% to $9,000 from $57,000 in the first nine months of fiscal 2021.
Inventories increased to $2.4 million at March 31, 2022 as compared to $1.7 million at June 30, 2021.
Net management fee and medical receivables increased by 7.4% to $60.8 million at March 31, 2022 from $56.7 million at June 30, 2021 as a result of slower collections and increased scan volume. 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 2022 reflect an increase in revenues from management, patient and other fees, as compared to the first nine months of fiscal 2021 ($72.8 million for the first nine months of fiscal 2022 as compared to $65.2 million for the first nine months of fiscal 2021), and a increase in Diagnostic facilities management services segment revenues ($66.5 million as compared to $58.9 million). Revenues were 8.6% from the MRI equipment segment as compared to 91.4% from HMCA, for the first nine months of fiscal 2022, as compared to 9.7% from the MRI equipment segment and 90.3% from HMCA for the first nine months of fiscal 2021.
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 received a cash benefit from the ability to receive a full reimbursement of $1.3 million of tax credits relating to the alternative minimum tax credits in the prior fiscal year plus additional cash benefits from the deferral of the employer portion of Social Security payroll taxes.
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As a result of the Patient Protection and Affordable Care Act (PPACA) we have experienced a reduction of reimbursement rates and less interest in our MRI equipment. Any changes to the PPACA may result in further changes in the healthcare industry and our business.
We are committed to improving our operating results and dealing with the challenges posed by legislative and regulatory requirements. Nevertheless, factors beyond our control, such as the 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 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 COVID-19 pandemic, and to improve the Company’s operating results.
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 canresult 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.
The Upright® MRI has also demonstrated its value for patients suffering from scoliosis. Scoliosis patients have been typically subjected to routine x-ray exams for years and must be imaged upright for an adequate evaluation of their scoliosis. Because the patient must be standing for a complete evaluation of the extent of the patient’s scoliosis, an x-ray machine has been the only modality that could provide that service. The Upright® MRI is the only MRI scanner which allows the patient to stand during the MRI exam. Fonar has developed an RF receiver and scanning protocol that for the first time allows scoliosis patients to obtain diagnostic pictures of their spines without the risks of x-rays. A study by the National Cancer Institute (2000) of 5,466 women with scoliosis reported a 70% increase in breast cancer resulting from 24.7 chest x-rays these patients received on the average in the course of their scoliosis treatment. The Upright® MRI examination of scoliosis enables the needed imaging evaluation of the degree of spine scoliosis without exposing the patient to the risk of breast cancer from x-radiation. Currently scoliosis affects more than 3,000,000 American women.
In addition, the University of California, Los Angeles (UCLA) reported their results of their study of 1,302 patients utilizing the Fonar Upright® MRI at the 22nd Annual Meeting of the North American Spine Society on October 23, 2007. The UCLA study showed the superior ability of the Fonar Upright® MRI to detect spine pathology, including spondylolisthesis, disc herniations and disc degeneration, as compared to visualizations of the spine produced by traditional single position static MRIs.
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The UCLA study by MRI of 1,302 back pain patients when they were in the Fonar Upright® MRI and examined in a full range of flexion and extension positions made possible by Fonar’s new Upright® technology established that significant “misses” of pathology were occurring with static single position MRI imaging. At L4-5, the vertebral level responsible for 49.8% of lumbar disc herniations, 35.1% of the spondylolistheses (vertebral instabilities) visualized by the Upright® MRI, were being missed by static single position MRI (510 patients). Since this vertebral segment is responsible for the majority of all disc herniations, the finding may reveal a significant cause of failed back surgeries. The UCLA study further showed the “miss-rate” of vertebral instabilities by static only MRI was even higher, 38.7%, at the L3-4 vertebral segment. Additionally, the UCLA study showed that MRI examinations of the cervical spine that did not perform extension images of the neck “missed” disc bulges 23.75% of the time (163 patients).
The UCLA study further reported that they were able to quantitatively measure the dimensions of the central spinal canal with the “highest accuracy” using the FONAR Upright® MRI thereby enabling the extent of spinal canal stenosis that existed in patients to be measured. Spinal canal stenosis gives rise to the symptom complex intermittent neurogenic claudication manifest as debilitating pain in the back and lower extremities, weakness and difficulties in ambulation and leg paresthesias. Spinal canal stenosis is a spinal compression syndrome separate and distinct from the more common nerve compression syndrome of the spinal nerves as they exit the vertebral column through the bony neural foramen.
The Fonar Upright® MRI can also be useful for MRI directed emergency neuro-surgical procedures as the surgeon would have unhindered access to the patient’s head when the patient is supine with no restrictions in the vertical direction. This easy-entry, mid-field-strength scanner could prove ideal for trauma centers where a quick MRI-screening within the first critical hour of treatment will greatly improve patients’ chances for survival and optimize the extent of recovery.
MRI has brought a new dimension to MEDICAL TREATMENT, the power to VISUALIZE ANATOMIC DETAIL in the body's VITAL SOFT TISSUES (brain, heart, kidney, liver, spleen, lungs, pancreas, intestines) plus MRI's new power to non-invasively QUANTIFY (e.g. measure T1, T2, diffusion, chemical spectra) the response of these VITAL TISSUES to treatment.
Liquidity and Capital Resources
Cash and cash equivalents, and short term investments increased by 3.5% from $44.5 million at June 30, 2021 to $46.0 million at March 31, 2022.
Cash provided by operating activities for the first nine months of fiscal 2022 was $10.1 million. Cash provided by operating activities was attributable principally to net income of $13.6 million, depreciation and amortization of $3.5 million, amortization on right-to-use assets of $2.6 million, provision for bad debts of $2.2 million and deferred income tax of $3.5 million, offset by an increase in accounts, management fee receivables and medical receivables of $5.0 million and a decrease in other current liabilities of $5.5 million.
Cash used in investing activities for the first nine months of fiscal 2022 was $4.4 million. Cash used in investing activities during the first nine months of fiscal 2022 consisted of patent costs of $60,000, purchase of non-controlling of $546,000 and the purchase of property and equipment of $3.8 million.
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Cash used in financing activities for the first nine months of fiscal 2022 was $4.2 million. The principal uses of cash in financing activities during the first nine months of fiscal 2022 were the repayment of principal on long-term debt and capital lease obligations of $23,000 and distributions to non-controlling interests of $4.1 million.
Total liabilities decreased by 5.1% to $51.4 million at March 31, 2022 from $54.1 million at June 30, 2021. “Other” current liabilities decreased by 46.3% to $4.9 million at March 31, 2022 from $9.2 million at June 30, 2021. The current portion of our service contract liabilities decreased by 10.7% to $3.9 million at March 31, 2022 as compared to $4.4 million at June 30, 2021. Customer deposits decreased from $731,000 at June 30, 2021 to $361,000 at March 31, 2022.
As of March 31, 2022, the total of $4.9 million in “other” current liabilities included accrued salaries and payroll taxes of $2.3 million, state income taxes payable of $1.1 million and other general and administrative expenses of $1.1 million.
Our working capital increased to $100.2 million at March 31, 2022 from $88.5 million at June 30, 2021. This resulted from an increase in current assets ($108.6 million at June 30, 2021 as compared to $114.3 million at March 31, 2022), and a decrease in current liabilities from $20.0 million at June 30, 2021 to $14.2 million at March 31, 2022.
The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible or when such net operating losses can be utilized. The Company considers projected future taxable income, the regulatory environment of the industry, and tax planning strategies in making this assessment. At the present, the Company believes that it is more likely than not that the benefits from certain deferred tax asset carryforwards, will not all be fully realized. In recognition of this inherent risk, a valuation allowance was established for the partial value of the deferred tax asset, (principally related to research and development tax credits and allowance for doubtful accounts). A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of any portion or all of the valuation allowance.
The Company’s effective income tax rate is based on expected income, statutory rates and tax planning opportunities available in the various jurisdictions in which it operates. For interim financial reporting, the Company estimates the annual income tax rate based on projected taxable income for the full year and records a quarterly income tax provision or benefit in accordance with the anticipated annual rate. The Company refines the estimates of the year’s taxable income on a periodic basis as new information becomes available, including actual year-to-date financial results. This continual estimation process often results in a change to the expected effective income tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected income tax rate. Significant judgment is required in determining the effective tax rate and in evaluating tax positions.
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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 operating 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 $1.3 million of tax credits relating to the alternative minimum tax credits in prior fiscal years. Before the CARES Act, these credits were to be refunded over a period of 3 years. We also realized a cash benefit from the deferral of Social Security payroll taxes.
On June 30, 2020, we entered into a $701,000 loan agreement under the Paycheck Protection Program (PPP) under the CARES Act that provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses. The Company applied for this additional loan exclusively for the Florida locations during June 2020 due to the fact that the COIVD-19 virus was increasing in Florida. The loans and accrued interest are forgivable after 24 weeks as long as the proceeds are used for eligible purposes, including payroll, benefits, rent and utilities and maintains certain payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the 24 week period. This loan was forgiven during August 2021 in its entirety.
Fonar is committed to making capital expenditures for the remainder of the 2022 fiscal year, for placing an additional scanner at a new stand-alone facility located in Florida. The current estimated costs of these capital expenditures is approximately $1.0 million.
Critical to our business plan are the improvement and expansion of the MRI facilities managed or owned by HMCA, and increasing the number of scans performed at those facilities. In addition, our business plan calls for a continuing commitment to providing our customers with enhanced equipment service and maintenance capabilities and delivering state-of-the-art, innovative and high quality equipment and upgrades at competitive prices.
Management is seeking to promote wider market recognition of Fonar’s scanner products, and to increase demand for Upright® scanning at the facilities HMCA owns or manages. Given the liquidity and credit constraints in the markets, the uncertainty resulting from the Patient Protection and Affordable Care Act or its repeal or modification, and the impact of the COVID-19 virus on the economy in general, the sale of medical equipment has and may continue to suffer.
The Company believes that its business plan has been responsible for the past eight consecutive fiscal years and first three fiscal quarters of fiscal 2022 of profitability and that its capital resources will be adequate to support operations through at least May 16, 2023. The future effects on our business of healthcare legislation, the impact of the COVID-19 virus, the Deficit Reduction Act, the 2.3% excise tax on sales of medical equipment, reimbursement rates, public health conditions and the general economic and business climate are not known at the present time. Nevertheless, there is a possibility of adverse consequences to our business operations from these causes. Although the Company can not predict the full effect of COVID-19 for the first three fiscal quarters or any later period, the Company believes that it has adequate revenues, cash reserves and other assets that will enable it to continue to operate until at least May 16, 2023.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company maintains its funds in liquid accounts. None of our investments are in fixed rate instruments.
All of our revenue, expense and capital purchasing activities are transacted in United States dollars.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
We carried out an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon our evaluation, our chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures were effective as of the March 31, 2022, in ensuring that material information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the same time periods specified in the Securities and Exchange Commission rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes in our system of internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
| Item 1 – Legal Proceedings: There were no material changes in litigation from that reported in our Form 10-K for the fiscal year ended June 30, 2021 and Form 10-Q for the fiscal quarter ended December 30, 2021. |
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Item 1A – Risk Factors: An investment in the securities of the Company is subject to various risks, the most significant of which are summarized below.
1. Reduced Reimbursement Rates. Most of our revenues are derived from our scanning center business conducted by HMCA. Our scanning center clients and the Florida facilities owned by HMCA are experiencing lower reimbursement rates from Medicare, other government programs and private insurance companies. To date, the impact of these reductions has been countered by increasing scanning volume notwithstanding the COVID-19 pandemic, and reducing our operating expenses, thereby maintaining profitability in this business segment. There is, however, no assurance that we will be able to continue to do so.
2. Demand for MRI Scanners. The reduced reimbursement rates also affects our sales of MRI scanners negatively. With lower revenue projections, prospective customers would demand lower prices for scanners. Although the reduced reimbursements may not affect foreign demand, a lower number of sales in the aggregate could reduce economies of scale and consequently, profit margins.
3. Manufacturing Competition. Many if not most of our competing scanner manufacturers have significantly greater financial resources, production capacity, and other resources than we do. Such competitors would include General Electric, Siemens, Hitachi and Phillips. Although Fonar is the only company which can manufacture and sell the unique Stand-Up® (Upright®) MRI scanner, potential customers must be convinced that the purchase of a Fonar scanner is their best choice. We believe that with time, that objective will be reached, particularly with customers scanning patients having neck, back, knee and various orthopedic issues who would benefit from being scanned in weight-bearing positions.
4. Dependence on Referrals. HMCA derives substantially all of its revenue, directly or indirectly, from fees charged for the diagnostic imaging services performed at the facilities. We depend on referrals of patients from unaffiliated physicians and other third parties to the facilities we manage or own for the services we perform. If these physicians and other third parties were to reduce the number of patients they refer or discontinue referring patients, scan volumes could decrease, which would reduce our net revenue and operating margins.
5. Pressure to Control Healthcare Costs. One of the principal objectives of health maintenance organizations and preferred provider organizations is to control the cost of healthcare services. Healthcare providers participating in managed care plans may be required to refer diagnostic imaging tests to certain providers depending on the plan in which a covered patient is enrolled. In addition, managed care contracting has become very competitive. The expansion of health maintenance organizations, preferred provider organizations and other managed care organizations in New York or Florida could have a negative impact on the utilization and pricing of services performed at the facilities HMCA manages or owns to the extent these organizations exert control over patients’ access to diagnostic imaging services, selections of the provider of such services and reimbursement rates for those services.
6. Scanning Facility Competition. The market for diagnostic imaging services is highly competitive. The facilities we manage or own compete for patients on the basis of reputation, location and the quality of diagnostic imaging services. Groups of radiologists, established hospitals, clinics and other independent organizations that own and operate imaging equipment are the principal competitors.
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7. Eligibility Changes to Insurance Programs. Due to potential decreased availability of healthcare through private employers, the number of patients who are uninsured or participate in governmental programs may increase. Healthcare reform legislation will continue to increase the participation of individuals in the Medicaid program in states that elect to participate in the expanded Medicaid coverage. A shift in payor mix from managed care and other private payors to government payors or an increase in the number of uninsured patients may result in a reduction in the rates of reimbursement or an increase in uncollectible receivables or uncompensated care, with a corresponding decrease in net revenue. Policies now being offered under various insurance plans are expected to reduce demand for MRI scans as they become less affordable. Changes in the eligibility requirements for governmental programs such as the Medicaid program and state decisions on whether to participate in the expansion of such programs also could increase the number of patients who participate in such programs and the number of uninsured patients. Even for those patients who remain in private insurance plans, changes to those plans could increase patient financial responsibility, resulting in a greater risk of uncollectible receivables. These factors and events could have a material adverse effect on our business, financial condition, and results of operations.
8. Possible changes in Florida Insurance Law. In early 2019, two senate bills and one house bill in Florida were introduced, all of them calling for the repeal of PIP and replacing PI with $25,000 Bodily Injury Coverage and Property Damage Liability Coverage. Another Florida senate bill was introduced that would preserve PIP but dramatically cut reimbursement rates. None of the proposed bills ever made it onto the 2019 legislative agenda. During Fonar’s fiscal 2021, the Florida house and senate reached an agreement and passed similar legislation. It was, however, vetoed by the Governor. We cannot predict whether such efforts by the Florida legislature will continue or be successful. Currently, drivers and passengers get car damages and PIP, paid for up to $10,000, no matter who is at fault in an accident. Drivers have to pay an additional cost to insurance companies to pay for bodily injuries which covers them if they are at fault. While PIP is required, coverage for bodily injury is not.
Over the past several years there have been various bills introduced by a number of Florida legislators to eliminate PIP and instead mandate coverage including some combination of a minimum of bodily injury and a reduced or no amount of medical payments (Medpay coverage). Eliminating PIP would mean that the $10,000 drivers now get paid toward medical costs through their insurers might not be there for them to pay for injured drivers. Importantly, payments would be reduced by approximately 60% due to claims being paid at commercial rates or through legal settlements instead of at the presently prevailing PIP fee schedule. This would negatively impact our Florida diagnostic imaging facilities (both those we own and those we manage) with more unpaid bills, lower reimbursement rates and elongated waiting times. To date proponents of these changes have been unsuccessful.
9. Federal and state privacy and information security laws. We must comply with numerous federal and state laws and regulations governing the collection, dissemination, access, use, security and privacy of Protected Health Information (‘PHI’), including Health Insurance Portability and Accountability Act (‘HIPAA’) and its implementing privacy and security regulations, as amended by the federal Health Information Technology for Economic and Clinical Health (‘HITECH’) Act and collectively referred to as HIPAA. If we fail to comply with applicable privacy and security laws, regulations and standards, properly maintain the integrity of our data, protect our proprietary rights to our systems, or defend against cybersecurity attacks, our business, reputation, results of operations, financial position and cash flows could be materially and adversely affected.
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Information security risks have significantly increased in recent years because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct our operations, and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties, including foreign state agents. Our operations rely on the secure processing, transmission and storage of confidential, proprietary and other information in our computer systems and networks.
10. COVID-19. Although we believe we have taken the proper steps and are making a good recovery from the impact of the first wave of the COVID-19 virus, new strains of the disease have developed and future variants may continue to develop. The relatively recent new variants are particularly contagious and coupled with New York State requirements that medical employees must be vaccinated if they care for patients, including our technicians and support staff caring for scanning patients, has resulted in fewer available employees and adversely affected our ability to staff a full number of shifts. The course and severity of the virus in the following months, and the ultimate and economic and medical impact it will have worldwide and at home, is uncertain.
11. Other changes in Domestic and Worldwide Economic Conditions. We are subject to risk arising from adverse changes in general domestic and global economic and other conditions, including recessions or economic slowdowns, disruptions of credit markets and military conflicts. Turbulence and uncertainty in the United States and international markets, economies and affairs may adversely affect our workforce, liquidity, financial condition, revenues, profitability and business operations generally.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds: None
Item 3 - Defaults Upon Senior Securities: None
Item 4 - Mine Safety Disclosure: Not Applicable
Item 5 - Other Information: None
Item 6 - Exhibits and Reports on Form 8-K:
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FONAR CORPORATION
(Registrant)
________________
By: /s/ Timothy Damadian
Timothy Damadian
President and
Principal Executive Officer
________________
/s/ Raymond V. Damadian
Raymond V. Damadian
Chairman of the Board,
Treasurer and
Acting Principal Financial Officer
Dated: May 16, 2022
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