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EX-32.1 - CERTIFICATION AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 20 - FONAR CORPfonar_exhibit-32.htm
EX-31.1 - CERTIFICATION - FONAR CORPfonar_exhibit-31.htm

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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

 For the quarterly period ended DECEMBER 31, 2019

  

Commission file number 0-10248

 

 

 

FONAR CORPORATION

(Exact name of registrant as specified in its charter)

  

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

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

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

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

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

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

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

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

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

 Page 1 

 

 FONAR CORPORATION AND SUBSIDIARIES

 

INDEX

 

PART I - FINANCIAL INFORMATION   PAGE
Item 1. Financial Statements   3  
Condensed Consolidated Balance Sheets - December 31, 2019 (Unaudited) and June 30, 2019   3  
Condensed Consolidated Statements of Income for the Three Months Ended December 31, 2019 and December 31, 2018 (Unaudited)   
Condensed Consolidated Statements of Income for the Six Months Ended December 31, 2019 and December 31, 2018 (Unaudited)   
Condensed Consolidated Statements of Changes in Equity for the Three Months Ended December 31, 2019 and December 31, 2018 (Unaudited)   
Condensed Consolidated Statements of Changes in Equity for the Six Months Ended December 31, 2019 and December 31, 2018 (Unaudited)   
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2019 and December 30, 2018 (Unaudited)   10  
Notes to Condensed Consolidated Financial Statements (Unaudited)   11  
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations   24  
Item 3. Quantitative and Qualitative Disclosures About Market Risk   34  
Item 4. Controls and Procedures   35  
PART II - OTHER INFORMATION   36  
Item 1. Legal Proceedings   36  
Item 1A. Risk Factors   36  
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   39  
Item 3. Defaults Upon Senior Securities   39  
Item 4. Mine Safety Disclosures   39  
Item 5. Other Information   39  
Item 6. Exhibits   39  
Signatures   40  

 

 Page 2 

 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(UNAUDITED)

 

ASSETS

 

 

   December 31,
2019
  June 30,
2019 *
Current Assets:          
 Cash and cash equivalents  $15,393   $13,882 
 Short term investments   15,294    15,095 
 Accounts receivable – net   4,128    3,737 
 Accounts receivable - related party   60    —   
 Medical receivable – net   16,151    15,729 
 Management and other fees receivable – net   27,282    25,709 
Management and other fees receivable – related medical practices – net   7,013    6,501 
 Inventories   1,751    1,798 
Costs and estimated earnings in excess of billings on uncompleted contracts   153    525 
 Income tax receivable   600    600 
 Prepaid expenses and other current assets   2,176    1,513 
 Total Current Assets   90,001    85,089 
           
Accounts receivable    2,321    —   
 Income taxes receivable   600    600 
 Deferred income tax asset   19,122    20,937 
 Property and equipment – net   20,121    16,986 
 Right-of-use asset – net   29,994    —   
 Goodwill   3,985    3,985 
 Other intangible assets – net   4,336    4,756 
 Other assets   1,197    1,207 
  Total Assets  $171,677   $133,560 

 

*Condensed from audited financial statements.

 

See accompanying notes to condensed consolidated financial statements.

 

 Page 3 

 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(UNAUDITED)

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

   December 31,
2019
  June 30,
2019 *
Current Liabilities:          
Current portion of long-term debt and capital leases  $34   $41 
Accounts payable   1,285    1,861 
Other current liabilities   5,519    7,577 
 Unearned revenue on service contracts   4,005    3,812 
 Unearned revenue on service contracts – related party   55    —   
 Lease liability - current portion   3,185    —   
Customer deposits   827    799 
Billings in excess of costs and estimated earnings on uncompleted contracts   12    —   
Total Current Liabilities   14,922    14,090 
           
Long-Term Liabilities:          
 Unearned revenue on service contracts   2,241    —   
 Deferred income tax liability   243    243 
 Due to related medical practices   93    93 
 Long-term debt and capital leases, less current portion   256    273 
 Lease liability - net of current portion   28,682    —   
 Other liabilities   157    749 
           
Total Long-Term Liabilities   31,672    1,358 
 Total Liabilities   46,594    15,448 

 

 

 

*Condensed from audited financial statements.

 

See accompanying notes to condensed consolidated financial statements.

 Page 4 

 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(UNAUDITED)

  

LIABILITIES AND STOCKHOLDERS’ EQUITY (Continued)

 

STOCKHOLDERS' EQUITY:  December 31, 2019  June 30,
2019 *
 Class A non-voting preferred stock $.0001 par value; 453 shares authorized at December 31, 2019 and June 30, 2019, 313 issued and outstanding at December 31, 2019 and June 30, 2019  $—     $—   
 Preferred stock $.001 par value; 567 shares authorized at December 31, 2019 and June 30, 2019, issued and outstanding – none   —      —   
 Common Stock $.0001 par value; 8,500 shares authorized at December 31, 2019 and June 30, 2019, 6,459 and 6,369 issued at December 31, 2019 and June 30, 2019, 6,447 and 6,357 outstanding at December 31, 2019 and June 30, 2019   1    1 
 Class B Common Stock (10 votes per share) $.0001 par value; 227 shares authorized at December 31, 2019 and June 30, 2019; .146 issued and outstanding at December 31, 2019 and June 30, 2019   —      —   
  Class C Common Stock (25 votes per share) $.0001 par value; 567 shares authorized at December 31, 2019 and June 30, 2019, 383 issued and outstanding at December 31, 2019 and June 30, 2019   —      —   
 Paid-in capital in excess of par value   183,076    181,086 
 Accumulated deficit   (58,053)   (64,456)
Treasury stock, at cost - 12 shares of common stock at December 31, 2019 and June 30, 2019   (675)   (675)
 Total Fonar Corporation’s Stockholders’ Equity   124,349    115,956 
 Noncontrolling interests   734    2,156 
 Total Stockholders' Equity   125,083    118,112 
 Total Liabilities and Stockholders' Equity  $171,677   $133,560 

 

*Condensed from audited financial statements.

See accompanying notes to condensed consolidated financial statements.    

 Page 5 

 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

(UNAUDITED)

   FOR THE THREE MONTHS ENDED DECEMBER 31,
REVENUES  2019  2018
Patient fee revenue – net of contractual allowances and discounts  $5,996   $5,921 
Product sales – net   3    395 
Service and repair fees – net   2,038    2,021 
Service and repair fees - related parties – net   28    28 
Management and other fees – net   10,996    10,573 
Management and other fees - related medical practices – net   2,390    2,287 
Total Revenues – Net   21,451    21,225 
COSTS AND EXPENSES          
Costs related to patient fee revenue   2,958    2,702 
Costs related to product sales   120    317 
Costs related to service and repair fees   772    746 
Costs related to service and repair fees - related parties   10    11 
Costs related to management and other fees   6,203    5,904 
Costs related to management and other fees – related medical practices   1,621    1,405 
Research and development   583    550 
Selling, general and administrative   4,163    3,610 
Total Costs and Expenses   16,430    15,245 
Income From Operations   5,021    5,980 
Interest Expense   (19)   (25)
Investment Income   139    122 
Income Before Provision for Income Taxes and Noncontrolling Interests   5,141    6,077 
Provision for Income Taxes   (932)   (1,213)
Net Income   4,209    4,864 
Net Income - Noncontrolling Interests   (1,105)   (1,312)
Net Income - Controlling Interests  $3,104   $3,552 
Net Income Available to Common Stockholders  $2,914   $3,332 
Net Income Available to Class A Non-Voting Preferred Stockholders  $142   $164 
Net Income Available to Class C Common Stockholders  $48   $56 
Basic Net Income Per Common Share Available to Common Stockholders  $0.45   $0.52 
Diluted Net Income Per Common Share Available to Common Stockholders  $0.44   $0.51 
Basic and Diluted Income Per Share – Class C Common  $0.13   $0.15 
Weighted Average Basic Shares Outstanding – Common Stockholders   6,447    6,357 
Weighted Average Diluted Shares Outstanding - Common Stockholders   6,575    6,485 
Weighted Average Basic Shares Outstanding – Class C Common   383    383 
Weighted Average Diluted Shares Outstanding – Class C Common   383    383 

See accompanying notes to condensed consolidated financial statements. 

 Page 6 

 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

(UNAUDITED)

   FOR THE SIX MONTHS ENDED DECEMBER 31,
REVENUES  2019  2018
Patient fee revenue – net of contractual allowances and discounts  $12,041   $11,446 
Product sales – net   195    445 
Service and repair fees – net   4,102    4,152 
Service and repair fees - related parties – net   55    55 
Management and other fees – net   22,024    21,257 
Management and other fees - related medical practices – net   4,780    4,575 
Total Revenues – Net   43,197    41,930 
COSTS AND EXPENSES          
Costs related to patient fee revenue   5,820    5,276 
Costs related to product sales   450    322 
Costs related to service and repair fees   1,522    1,491 
Costs related to service and repair fees - related parties   20    20 
Costs related to management and other fees   12,208    11,660 
Costs related to management and other fees – related medical practices   3,157    2,787 
Research and development   1,055    987 
Selling, general and administrative   8,458    7,869 
Total Costs and Expenses   32,690    30,412 
Income From Operations   10,507    11,518 
Interest Expense   (40)   (50)
Investment Income   287    230 
Income Before Provision for Income Taxes and Noncontrolling Interests   10,754    11,698 
Provision for Income Taxes   (2,039)   (2,341)
Net Income   8,715    9,357 
Net Income - Noncontrolling Interests   (2,313)   (2,486)
Net Income - Controlling Interests  $6,402   $6,871 
Net Income Available to Common Stockholders  $6,010   $6,444 
Net Income Available to Class A Non-Voting Preferred Stockholders  $292   $318 
Net Income Available to Class C Common Stockholders  $100   $109 
Basic Net Income Per Common Share Available to Common Stockholders  $0.93   $1.01 
Diluted Net Income Per Common Share Available to Common Stockholders  $0.92   $0.99 
Basic and Diluted Income Per Share – Class C Common  $0.26   $0.28 
Weighted Average Basic Shares Outstanding – Common Stockholders   6,440    6,351 
Weighted Average Diluted Shares Outstanding - Common Stockholders   6,568    6,479 
Weighted Average Basic Shares Outstanding – Class C Common   383    383 
Weighted Average Diluted Shares Outstanding – Class C Common   383    383 

See accompanying notes to condensed consolidated financial statements. 

 Page 7 

 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

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

(UNAUDITED) 

For the Three Months Ending December 31, 2019

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

 

For the Three Months Ending December 31, 2018

   Common Stock  Paid in capital in excess of par value  Accumulated Deficit  Notes receivable from employee stockholders  Treasury Stock  Non Controlling Interests  Total
Balance - September 30, 2018  1    $181,086   (76,454)   $(9)   $(675)  2,993    $106,942 
Net income   —      —      3,552    —      —      —      3,552 
Distributions - Non controlling   —      —      —      —      —      (1,950)   (1,950)
Income - Non controlling interests   —      —      —      —      —      1,312    1,312 
Balance - December 31, 2018   $1    $181,086    $(72,902)   $(9)   $(675)   $2,355   109,856 

 

 Page 8 

 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

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

(UNAUDITED) 

For the Six Months Ending December 31, 2019

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

 

For the Six Months Ending December 31, 2018

   Common Stock  Paid in capital in excess of par value  Accumulated Deficit  Notes receivable from employee stockholders  Treasury Stock  Non Controlling Interests  Total
Balance - June 30, 2018   $1   179,131   (79,773)  (9)   $(675)   $3,559   102,234 
Issuance of Common Stock   —      1,955    —      —      —      —      1,955 
Net income   —      —      6,871    —      —      —      6,871 
Distributions - Non controlling   —      —      —      —      —      (3,690)   (3,690)
Income - Non controlling interests   —      —      —      —      —      2,486    2,486 
Balance - December 31, 2018   $1    $181,086    $(72,902)   $(9)   $(675)   $2,355    $109,856 

 

 Page 9 

 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

(UNAUDITED)

  

FOR THE SIX MONTHS

ENDED DECEMBER 31,

   2019  2018
Cash Flows from Operating Activities:          
 Net income  $8,715   $9,357 
 Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   2,003    1,874 
Amortization on right-of-use assets   1,656    —   
Provision for bad debts   (978)   (593)
Deferred income tax – net   1,816    2,341 
Stock issued for costs and expenses   1,990    1,955 
(Increase) decrease in operating assets, net:          
Accounts, medical and management fee receivable(s)   (4,300)   (2,309)
Notes receivable   11    (13)
Costs and estimated earnings in excess of billings on uncompleted contracts   372    —   
Inventories   47    (225)
Prepaid expenses and other current assets   330    304 
Other assets   (45)   2 
Increase (decrease) in operating liabilities, net:          
Accounts payable   (576)   (6)
Other current liabilities   430    (3,003)
Operating lease liabilities   (1,447)   —   
Customer deposits   28    71 
Billings in excess of costs and estimated earnings on uncompleted contracts   12    —   
Other liabilities   123    21 
Due to related medical practices   —      (135)
Net cash provided by operating activities   10,187    9,641 
 Cash Flows from Investing Activities:          
Purchases of property and equipment   (4,656)   (2,238)
Short term investment   (199)   —   
Cost of patents   (62)   (45)
Net cash used in investing activities   (4,917)   (2,283)
 Cash Flows from Financing Activities:          
 Repayment of borrowings and capital lease obligations   (24)   (15)
 Distributions to noncontrolling interests   (3,735)   (3,690)
Net cash used in financing activities   (3,759)   (3,705)
 Net Increase in Cash and Cash Equivalents   1,511    3,653 
Cash and Cash Equivalents - Beginning of Period   13,882    19,634 
Cash and Cash Equivalents - End of Period  $15,393   $23,287 

 See accompanying notes to condensed consolidated financial statements. 

 Page 10 

 

 FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 and 2018

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

(UNAUDITED)

  

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Description of Business

 

Effective July 1, 2015, the Company restructured the corporate organization of the management of diagnostic imaging centers segment of our business. The reorganization was structured to more completely integrate the operations of Health Management Corporation of America and HDM. Imperial contributed all of its assets (which were utilized in the business of Health Management Corporation of America) to HDM and received a 24.2% interest in HDM. Health Management Corporation of America retained a direct ownership interest of 45.8% in HDM, and the original investors in HDM retained a 30.0% ownership interest in the newly expanded HDM. The entire management of diagnostic imaging centers business segment is now being conducted by HDM, operating under the name “Health Management Company of America”.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months and six months ended December 31, 2019, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2020. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K filed on December 31, 2019 for the fiscal year ended June 30, 2019.

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The unaudited condensed consolidated financial statements include the accounts of FONAR Corporation, its majority and wholly-owned subsidiaries and partnerships (collectively the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Revenues

 

On July 1, 2018, the Company adopted the new revenue recognition accounting standard issued by the Financial Accounting Standards Board (“FASB”) and codified in the ASC as topic 606 (“ASC 606”). The revenue recognition standard in ASC 606 outlines a single comprehensive model for recognizing revenue as performance obligations, defined in a contract with a customer as goods or services transferred to the customer in exchange for consideration, are satisfied. The standard also requires expanded disclosures regarding the Company’s revenue recognition policies and significant judgments employed in the determination of revenue.

 Page 11 

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 and 2018

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

(UNAUDITED)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Revenues (Continued)

 

Our revenues generally relate to net patient fees received from various payers and patients themselves under contracts in which our performance obligations are to provide diagnostic services to the patients. Revenues are recorded during the period our obligations to provide diagnostic services are satisfied. Our performance obligations for diagnostic services are generally satisfied over a period of less than one day. The contractual relationships with patients, in most cases, also involve a third-party payer (Medicare, Medicaid, managed care health plans and commercial insurance companies, including plans offered through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated with (managed care health plans and commercial insurance companies) the third-party payers. The payment arrangements with third-party payers for the services we provide to the related patients typically specify payments at amounts less than our standard charges and generally provide for payments based upon predetermined rates per diagnostic services or discounted fee-for-service rates. Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms resulting from contract renegotiations and renewals.

 

Earnings Per Share

 

Basic earnings per share (“EPS”) is computed based upon the weighted average number of shares of common stock and stock equivalents outstanding, net of common stock. In accordance with ASC topic 260-10, “Participating Securities and the Two-Class method”, the Company used the Two-Class method for calculating basic income per share and applied the if converted method in calculating diluted income per share for the three and six months ended December 31, 2019 and 2018.

 

Diluted EPS reflects the potential dilution from the exercise or conversion of all dilutive securities into common stock based on the average market price of common shares outstanding during the period. For the three and six months ended December 31, 2019 and 2018, diluted EPS for common shareholders includes 128 shares upon conversion of Class C Common.

 

 Page 12 

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 and 2018

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

(UNAUDITED)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Earnings Per Share (Continued)

   Three months ended
December 31, 2019
  Three months ended
December 31, 2018
   Total  Common Stock  Class C Common
Stock
  Total  Common Stock  Class C Common
Stock
Basic                  
Numerator: 
Net income available to common stockholders
  $3,104   $2,914   $48   $3,552   $3,332   $56 
Denominator:                              
Weighted average shares outstanding   6,447    6,447    383    6,357    6,357    383 
Basic income per common share  $0.48   $0.45   $0.13   $0.56   $0.52   $0.15 
Diluted                              
Denominator:
Weighted average shares outstanding
        6,447    383         6,357    383 
Convertible Class C Stock        128    —           128    —   
Total Denominator for diluted earnings per share        6,575    383         6,485    383 
Diluted income per common share       $0.44   $0.13        $0.51   $0.15 

 

 

   Six months ended
December 31, 2019
  Six months ended
December 31, 2018
   Total  Common Stock  Class C Common
Stock
  Total  Common Stock  Class C Common
Stock
Basic                  
Numerator: 
Net income available to common stockholders
  $6,402   $6,010   $100   $6,871   $6,444   $109 
Denominator:                              
Weighted average shares outstanding   6,440    6,440    383    6,351    6,351    383 
Basic income per common share  $0.99   $0.93   $0.26   $1.08   $1.01   $0.28 
Diluted                              
Denominator:
Weighted average shares outstanding
        6,440    383         6,351    383 
Convertible Class C Stock        128    —           128    —   
Total Denominator for diluted earnings per share        6,568    383         6,479    383 
Diluted income per common share       $0.92   $0.26        $0.99   $0.28 

 Page 13 

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 and 2018

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

(UNAUDITED)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent Accounting Pronouncements

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

In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and Other (Topic 350). The amendments in this update simplify the test for goodwill impairment by eliminating Step 2 from the impairment test, which required the entity to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining fair value of assets acquired and liabilities assumed in a business combination. The amendments in this update are effective for public companies for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We are evaluating the impact of adopting this guidance on our condensed consolidated condensed financial statements.

During February 2016, FAS issued ASU 2016-02, Leases (Topic 842). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based upon the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Lease with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. The new guidance will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period and is applied retrospectively. The Company adopted this guidance on July 1, 2019, as required, electing to apply retrospectively at the period of adoption with practical expedients. The adoption of this guidance had a material impact on the Company’s balance sheet by virtue of including the present value of its future operating lease payments as a liability of $33.3 million and related right-to-use lease assets as of July 1, 2019.

 

 Page 14 

 

 FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 and 2018

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

(UNAUDITED)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent Accounting Pronouncements (Continued)

The Company accounts for its various operating leases in accordance with Accounting Standards Codification (‘ASC’) 842 – Lease, as updated by ASU 2016-02. At the inception of a lease, the Company recognizes right-of-use lease assets and related lease liabilities measured at present value of future lease payments on its balance sheet. Lease expense is recognized on a straight-line basis over the term of the lease. The Company reviewed its contracts with vendors and customers, determining that its right-to-use lease assets consisted of only office space operating leases. In determining the right-to-use lease assets and liabilities, the Company did recognize lease extension options which the Company feels would be reasonably exercised. Also included in other current assets is a $950 receivable from a landlord for tenant improvements. A reconciliation of operating lease payments undiscounted cash flows to lease liabilities recognized as of December 31, 2019 is as follows:

    Operating Lease Payments
2020 (Six Months)   2,412
2021   4,782
2022   4,463
2023   4,415
2024   4,120
Thereafter   21,545
Present Value discount (5.5% weighted average)   (9,870)
   Total lease liability   31,867

 

FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of December 31, 2019 that will become effective in subsequent periods; however, management does not believe that any of those updates would have significantly affected our financial accounting measures or disclosures had they been in effect during 2019 or 2018, and it does not believe that any of those pronouncements will have a significant impact on our consolidated condensed financial statements at the time they become effective.

Reclassifications 

Certain prior year amounts have been reclassified to conform to the current year presentation. The reclassifications did not have any effect on reported consolidated net income for any periods presented.

 

 Page 15 

 

 FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 and 2018

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

(UNAUDITED)

 

 

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

 

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

 

   December 31, 2019
   Gross Receivable  Allowance for doubtful accounts  Net
Accounts receivable  $4,318   $190   $4,128 
Accounts receivable - related party  $60    —     $60 
Medical receivable  $16,151   $—     $16,151 
Management and other fees receivable  $35,884   $8,602   $27,282 
Management and other fees receivable from related medical practices ("PC’s")  $9,129   $2,116   $7,013 

 

 

   June 30, 2019
   Gross Receivable  Allowance for doubtful accounts  Net
Accounts receivable  $3,927   $190   $3,737 
Accounts receivable - related party  $—      —     $—   
Medical receivable  $15,729   $—     $15,729 
Management and other fees receivable  $35,114   $9,405   $25,709 
Management and other fees receivable from related medical practices ("PC’s")  $8,812   $2,311   $6,501 

 

The Company's customers are concentrated in the healthcare industry.

 

Accounts Receivable

 

Credit risk with respect to the Company’s accounts receivable related to product sales and service and repair fees is limited due to the customer advances received prior to the commencement of work performed and the billing of amounts to customers as sub-assemblies are completed. Service and repair fees are billed on a monthly or quarterly basis and the Company does not continue providing these services if accounts receivable become past due. The Company controls credit risk with respect to accounts receivable from service and repair fees through its credit evaluation process, credit limits, monitoring procedures and reasonably short collection terms. The Company performs ongoing credit authorizations before a product sales contract is entered into or service and repair fees are provided.

 

 Page 16 

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 and 2018

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

(UNAUDITED)

 

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

 

 

Long Term Accounts Receivable

 

The Company generated revenue from long-term, non-cancellable contracts to provide service and repair services. Future revenue to be received over the next four years at December 31, 2019 are as follows:

 

2021   $619 
2022    619 
2023    619 
2024    464 
Total   $2,321 

Medical Receivables

 

Medical receivables are due under fee-for-service contracts from third party payors, such as hospitals, government sponsored healthcare programs, patient’s legal counsel and directly from patients. Substantially all the revenue relates to patients residing in Florida. The carrying amount of the medical receivable is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected. The Company continuously monitors collections from its clients and maintains an allowance for bad debts based upon the Company’s historical collection experience. The Company determines allowances for contractual adjustments and uncollectible accounts based on specific agings, specific payor collection issues that have been identified and based on payor classifications and historical experience at each site.

 

Management and Other Fees Receivable

 

The Company's receivables from the related and non-related professional corporations (PC's) substantially consist of fees outstanding under management agreements. Payment of the outstanding fees is dependent on collection by the PC's of fees from third party medical reimbursement organizations, principally insurance companies and health management organizations.

 

Payment of the management fee receivables from the PC’s may be impaired by the inability of the PC’s to collect in a timely manner their medical fees from the third party payors, particularly insurance carriers covering automobile no-fault and workers compensation claims due to longer payment cycles and rigorous informational requirements and certain other disallowed claims. Approximately 60% and 66% of the PCs’ net revenues for the three months ended December 31, 2019 and 2018, respectively, were derived from no-fault and personal injury protection claims. Approximately 63% and 67% of the PCs’ net revenues for the six months ended December 31, 2019 and 2018, respectively, were derived from no-fault and personal injury protection claims. The Company considers the aging of its accounts receivable in determining the amount of allowance for doubtful accounts. The Company generally takes all legally available steps to collect its receivables. Credit losses associated with the receivables are provided for in the condensed consolidated financial statements and have historically been within management's expectations.

 Page 17 

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 and 2018

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

(UNAUDITED)

 

 

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

 

Management and Other Fees Receivable (Continued)

 

Net revenues from management and other fees charged to the related PCs accounted for approximately 11.1% and 10.8% of the consolidated net revenues for the three months ended December 31, 2019 and 2018, respectively. Net revenues from management and other fees charged to the related PCs accounted for approximately 11.1% and 10.9% of the consolidated net revenues for the six months ended December 31, 2019 and 2018, respectively.

 

Tallahassee Magnetic Resonance Imaging, PA, Stand Up MRI of Boca Raton, PA and Stand Up MRI & Diagnostic Center, PA (all related medical practices) entered into a guaranty agreement, pursuant to which they cross guaranteed all management fees which are payable to the Company, which have arisen under each individual management agreement. Additional Company managed entities also operate under a guaranty agreement, pursuant to which management fees are payable to the Company.

 

The Company’s patient fee revenue, net of contractual allowances and discounts for the three and six months ended December 31, 2019 and 2018 are summarized in the following table.

 

   For the Three Months Ended
December 31,
   2019  2018
Commercial Insurance/ Managed Care  $1,335   $1,335 
Medicare/Medicaid   276    270 
Workers' Compensation/Personal Injury   4,112    3,956 
Other   273    360 
Patient Fee Revenue, net of contractual allowances and discounts  $5,996   $5,921 

 

 

   For the Six Months Ended
December 31,
   2019  2018
Commercial Insurance/ Managed Care  $2,689   $2,515 
Medicare/Medicaid   542    561 
Workers' Compensation/Personal Injury   8,406    7,658 
Other   404    712 
Patient Fee Revenue, net of contractual allowances and discounts  $12,041   $11,446 

 

 

 Page 18 

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 and 2018

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

(UNAUDITED)

 

 

NOTE 4 - INVENTORIES

 

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

 

   December 31,
2019
  June 30,
2019
Purchased parts, components and supplies  $1,644   $1,640 
Work-in-process   107    158 
TOTAL INVENTORIES  $1,751   $1,798 

 

 

NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

 

Information relating to uncompleted contracts is as follows:

 

   December 31,
2019
  June 30,
 2019
Costs incurred on uncompleted contracts  $584   $448 
Estimated earnings   994    1,089 
Subtotal   1,578    1,537 
Less: Billings to date   1,437    1,012 
Total Costs and estimated earnings in excess of billings on uncompleted contracts - net  $141   $525 

 

 

NOTE 6 – OTHER INTANGIBLE ASSETS

 

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

 

   December 31,
2019
  June 30,
2019
Capitalized software development costs  $7,005   $7,005 
Patents and copyrights   5,026    4,964 
Non-compete   4,100    4,100 
Customer relationships   3,800    3,800 
Gross Other intangible assets   19,931    19,869 
Less: Accumulated amortization   15,595    15,113 
Other Intangible Assets  $4,336   $4,756 

 

 Page 19 

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 and 2018

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

(UNAUDITED)

 

NOTE 6 – OTHER INTANGIBLE ASSETS (CONTINUED)

 

 Amortization of patents and copyrights for the three months ended December 31, 2019 and 2018 amounted to $47 and $49, respectively.

 

Amortization of non-compete for the three months ended December 31, 2019 and 2018 amounted to $147 and $147, respectively.

 

Amortization of customer relationships for the three months ended December 31, 2019 and 2018 amounted to $47 and $47, respectively.

 

 Amortization of patents and copyrights for the six months ended December 31, 2019 and 2018 amounted to $94 and $99, respectively.

 

Amortization of non-compete for the six months ended December 31, 2019 and 2018 amounted to $293 and $293, respectively.

 

Amortization of customer relationships for the six months ended December 31, 2019 and 2018 amounted to $95 and $95, respectively.

 

NOTE 7 – OTHER CURRENT LIABILITIES

 

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

 

   December 31,
2019
  June 30,
2019
Accrued salaries, commissions and payroll taxes  $1,697   $3,898 
Litigation accruals   145    145 
Sales tax payable   1,544    1,671 
Legal and other professional fees   111    126 
Accounting fees   60    105 
Self-funded health insurance reserve   —      68 
Accrued interest and penalty   1,080    1,054 
Other   882    510 
Other Current Liabilities  $5,519   $7,577 

 

 

NOTE 8 – STOCKHOLDERS EQUITY

 

Common Stock

 

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

 Page 20 

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 and 2018

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

(UNAUDITED)

NOTE 9 - SEGMENT AND RELATED INFORMATION

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

The accounting policies of the segments are the same as those described in the summary of significant accounting policies as disclosed in the Company’s 10-K as of June 30, 2019. All inter-segment sales are market-based. The Company evaluates performance based on income or loss from operations.

Summarized financial information concerning the Company's reportable segments is shown in the following table:

   Medical
Equipment
  Management
of Diagnostic
Imaging
Centers
  Totals
For the three months ended Dec. 31, 2019               
Net revenues from external customers  $2,069   $19,382   $21,451 
Inter-segment net revenues  $219   $—     $219 
(Loss) Income from operations  $(790)  $5,811   $5,021 
Depreciation and amortization  $94   $914   $1,008 
Capital expenditures  $153   $2,116   $2,269 
                
For the three months ended Dec. 31, 2018               
Net revenues from external customers  $2,444   $18,781   $21,225 
Inter-segment net revenues  $227   $—     $227 
(Loss) Income from operations  $(409)  $6,389   $5,980 
Depreciation and amortization  $91   $861   $952 
Capital expenditures  $25   $1,789   $1,814 

 

   Medical
Equipment
  Management
of Diagnostic
Imaging
Centers
  Totals
For the six months ended Dec. 31, 2019               
Net revenues from external customers  $4,352   $38,845   $43,197 
Inter-segment net revenues  $438   $—     $438 
(Loss) Income from operations  $(1,526)  $12,033   $10,507 
Depreciation and amortization  $185   $1,818   $2,003 
Capital expenditures  $1,754   $2,964   $4,718 
                
For the six months ended Dec. 31, 2018               
Net revenues from external customers  $4,652   $37,278   $41,930 
Inter-segment net revenues  $455   $—     $455 
(Loss) Income from operations  $(638)  $12,156   $11,518 
Depreciation and amortization  $184   $1,690   $1,874 
Capital expenditures  $45   $2,238   $2,283 

 

 Page 21 

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 and 2018

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

(UNAUDITED)

 

NOTE 10 – SUPPLEMENTAL CASH FLOW INFORMATION

 

During the six months ended December 31, 2019 and December 31, 2018, the Company paid $14 and $147 for interest, respectively.

During the six months ended December 31, 2019 and December 31, 2018, the Company paid $228 and $180 for income taxes, respectively.

During the six months ended December 31, 2019, the Company recorded a current receivable of $950 from a landlord for tenant improvements.  

 

 

NOTE 11 – COMMITMENTS AND CONTINGENCIES

 

Litigation

 

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

 

There were no material changes in litigation from that reported in our Form 10-K for the fiscal year ended June 30, 2019.

 

Other Matters

 

The Company is also delinquent in filing sales tax returns for certain states, for which the Company has transacted business. As of December 31, 2019, the Company has recorded tax obligations of approximately $1,544 plus interest and penalties of approximately $1,034. The Company is in the process of determining the regulatory requirements in order to become compliant.

 

The Company maintains a self-funded health insurance program with a stop-loss umbrella policy with a third party insurer to limit the maximum potential liability for individual claims to $100 per person and for a maximum potential claim liability based on member enrollment. With respect to this program, the Company considers historical and projected medical utilization data when estimating its health insurance program liability and related expense. As of December 31, 2019 and June 30, 2019, the Company had approximately $0 and $68, respectively, in reserve for its self-funded health insurance programs. The reserves are included in “Other current liabilities” in the condensed consolidated balance sheets.

 

The Company regularly analyzes its reserves for incurred but not reported claims, and for reported but not paid claims related to its reinsurance and self-funded insurance programs. The Company believes its reserves are adequate. However, significant judgment is involved in assessing these reserves such as assessing historical paid claims, average lags between the claims’ incurred date, reported dates and paid dates, and the frequency and severity of claims. There may be differences between actual settlement amounts and recorded reserves and any resulting adjustments are included in expense once a probable amount is known. There were no significant adjustments recorded in the periods covered by this report.

 Page 22 

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 and 2018

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

(UNAUDITED)

 

 

NOTE 12 - INCOME TAXES

 

In accordance with ASC 740-270, Income Taxes – Interim Reporting, the Company is required at the end of each interim period to determine the best estimate of its annual effective tax rate and apply that rate to year-to-date ordinary income or loss. The resulting tax expense (or benefit) is adjusted for the tax effect of specific events, if any, required to be discretely recognized in the interim period as they occur. For the six months ended December 31, 2019 and 2018, the Company recorded income tax expense of $2,039 in 2019 as compared to $2,341 in 2018. The 2019 provision is comprised of a current income tax component of $223 and a deferred income tax component of $1,816. Obligations for any liability associated with the current income tax provision, has been reduced, primarily resulting from the benefits and utilization of net operating loss carryforwards.

  

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

 

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

 

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

 

The Company recorded a deferred tax asset of $19,122 and a deferred tax liability of $243 as of December 31, 2019, primarily relating to net operating loss carryforwards of approximately $57,406 available to offset future taxable income through 2030. The net operating losses begin to expire in 2023 for federal tax and state income tax purposes.

 

Future ownership changes as determined under Section 382 of the Internal Revenue code could further limit the utilization of net operating loss carryforwards. As of December 31, 2019, no such changes in ownership have occurred.

 

 Page 23 

 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 and 2018

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

(UNAUDITED)

 

 

NOTE 12 - INCOME TAXES(CONTINUED)

 

The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible or when such net operating losses can be utilized. The Company considers projected future taxable income, the regulatory environment of the industry and tax planning strategies in making this assessment. At present, the Company believes that it is more likely than not that the benefits from certain deferred tax asset carryforwards, will not all be fully realized. In recognition of this inherent risk, a valuation allowance was established for the partial value of the deferred tax asset, (principally related to research and development tax credits).

 

A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of the remainder of the valuation.

 

 

NOTE 13 – SUBSEQUENT EVENTS

 

The Company has evaluated events that occurred subsequent to December 31, 2019 and through the date the condensed consolidated financial statements were issued.

 

 

 

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

  

For the six month period ended December 31, 2019, we reported a net income of $8.7 million on revenues of $43.2 million as compared to net income of $9.4 million on revenues of $41.9 million for the six month period ended December 31, 2018. Operating income decreased from $11.5 million for the six month period ended December 31, 2018 to $10.5 million for the six month period ended December 31, 2019.

 

For the three month period ended December 31, 2019, we reported a net income of $4.2 million on revenues of $21.5 million as compared to net income of $4.9 million on revenues of $21.2 million for the three month period ended December 31, 2018.

 

The revenue increase of 3.0%, from $41.9 million for the first six months of fiscal 2019 to $43.2 million for the first six months of fiscal 2020, was primarily due to increases in net management fees of $1.0 million, from $25.8 million for the first six months of fiscal 2019 to $26.8 million for the first six months of fiscal 2020. Revenues from product sales and service and repair fees decreased by $300,000 from $4.7 million for the first six months of fiscal 2019 to $4.4 million for the first six months of fiscal 2020.

 

 Page 24 

 

FONAR CORPORATION AND SUBSIDIARIES

 

While our revenues increased, our costs and expenses increased by a larger amount, resulting in our operating income decreasing to $10.5 million for the six months ended December 31, 2019 as compared to $11.5 million for the six months ended December 31, 2018. In terms of percentages, costs and expenses increased 7.5% from $30.4 million for the first six months of fiscal 2019 to $32.7 million for the first six months of fiscal 2020, while revenues increased 3.0%, from $41.9 million for the first six months of fiscal 2019 to $43.2 million for the first six months of fiscal 2020.

 

Fonar’s wholly-owned subsidiary, Health Management Corporation of America (“HMCA”), is the controlling interest, of Health Diagnostics Management, LLC (“HDM”). HMCA presently has a direct ownership interest of 70.0% in HDM, and the investors in HDM have a 30.0% ownership interest.The entire management of the diagnostic imaging centers business segment is being conducted by HDM, operating under the name “Health Management Company of America”. For the sake of simplicity, HMCA, and HDM are referred to as “HMCA”, unless otherwise indicated.

 

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 25 

 

FONAR CORPORATION AND SUBSIDIARIES

  

Manufacturing and Service of MRI Equipment

 

Revenues from MRI product sales decreased to $195,000 for the first six months of fiscal 2020 from $445,000 for the first six months of fiscal 2019. Costs related to product sales increased, from $322,000 for the six month period ended December 31, 2018 to $450,000 for the six month period ended December 31, 2019. Economic uncertainty and lower reimbursement rates for MRI scans, have depressed the market for our MRI scanner products, notwithstanding our scanners’ unique technological capabilities (e.g. multi positional scanning).

 

Service revenues decreased 1.2% from $4.2 million for the six month period ended December 31, 2018 to $4.1 million for the six month period ended December 31, 2019. Continuing lower sales volumes have been a factor ultimately contributing to the decrease in service revenues, as the revenue from new scanners being placed under service agreements, following the expiration of their warranties, is insufficient to replace the revenue lost as a result of older scanners being taken out of service.

 

Costs relating to providing service remained constant at $1.5 million in the first six months of fiscal 2019 and fiscal 2020. Because of our ability to monitor the performance of customers’ scanners from our facilities in Melville, New York on a daily basis and to detect and repair any irregularities before more serious and costly problems developed, we have been able to control our costs of providing service.

 

There were approximately $307,000 in foreign revenues for the first six months of fiscal 2020 as compared to approximately $288,000 in foreign revenues for the first six months of fiscal 2019, representing a decrease in foreign revenues of 6.6%. We do not regard this as a material trend, but as part of a normal although sometimes volatile variation resulting from low volumes of foreign sales.

 

We recognize MRI scanner sales revenues on the “percentage of completion” basis, which means the revenues are recognized as the scanner is manufactured. Revenues recognized in a particular quarter do not necessarily reflect new orders or progress payments made by customers in that quarter. We build the scanner as the customer meets certain benchmarks in its site preparation in order to minimize the time lag between incurring costs of manufacturing and our receipt of the cash progress payments from the customer which are due upon delivery. Consequently, there can be a disparity between the revenues recognized in a fiscal period and the number of product sales. Generally, the revenues from a scanner sale are recognized in a fiscal quarter or quarters following the quarter in which the sale was made.

 

Revenues for the medical equipment segment decreased to $4.4 million for the first six months of fiscal 2020 from $4.7 million for the first six months of fiscal 2019. Operating losses for our medical equipment segment increased to an operating loss of $1.5 million, for the first six months of fiscal 2020 as compared to an operating loss of $638,000 for the first six months of fiscal 2019.

 

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Diagnostic Facilities Management Services

HMCA revenues increased in the first six months of fiscal 2020 by 4.2% to $38.8 million from $37.3 million for the first six months of fiscal 2019. The percentage of our revenues derived from our diagnostic facilities management segment relative to the percentage of our revenues derived from our medical equipment segment increased slightly to 89.9% for the first six months of fiscal 2020, from 88.9% for the first six months of fiscal 2019.

 

The increase in HMCA revenues is principally due to HMCA’s success in marketing the scanning services of the facilities managed or owned by HMCA, notwithstanding the decrease in reimbursement rates paid for MRI scans by insurers, Medicare and other government programs. The reductions in reimbursement rates are not unique to HMCA or HMCA’s clients but are being experienced by the industry in general.

 

HMCA is countering the effects of lower reimbursement rates by increasing the scan volume of the facilities it owns or manages by adding additional scanners at current centers and increasing our marketing efforts.

 

As a result of our vigorous marketing efforts, the number of scans performed at our centers and at our client’s centers increased from approximately 89,000 in the first six months of fiscal 2019 to approximately 94,000 in the first six months of fiscal 2020.

 

We manage twenty-five sites, twenty-three of which are equipped with Fonar Upright® MRI scanners (our Upright® MRI Scanners are also called Stand-Up® MRI Scanners). HMCA experienced an operating income of $12.0 million for the first six months of fiscal 2020 compared to operating income of $12.2 million for the first six months of fiscal 2019 due to greater increase in costs and expenses.

 

HMCA’s cost of revenues for the first six months of fiscal 2020 as compared to the first six months of fiscal 2019 increased by 7.4% from $19.7 million to $21.2 million primarily as a result of the higher volume of scans performed and an increase in selling, general and administrative expense which outpaced revenue growth.

 

Consolidated

For the first six months of fiscal 2020, our consolidated net revenues increased by 3.0% to $43.2 million from $41.9 million for the first six months of fiscal 2019, and total costs and expenses increased by 7.5% to $32.7 million from $30.4 million for the first six months of fiscal 2020 and for the first six months of fiscal 2019 respectively. As a result, our operating income decreased to $10.5 million in the first six months of fiscal 2020 as compared to $11.5 million in the first six months of fiscal 2019. An increased selling, general and other administrative costs in particular resulted in the growth of cost and expenses.

 

Selling, general and administrative expenses increased to $8.5 million in the first six months of fiscal 2020 from $7.9 million in the first six months of fiscal 2019. The compensatory element of stock issuances, which is included in selling, general and administrative expenses, remained constant at $0 for the first six months of fiscal 2020 and 2019.

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Research and development expenses increased by 6.9% to $1.1 million for the first six months of fiscal 2020 from $1.0 million for the first six months of fiscal 2019.

 

Interest expense in the first six months of fiscal 2020 decreased by 20% to $40,000 from $50,000 in the first six months of fiscal 2019. The decrease was due to the repayment of debt.

 

Inventories remained constant at $1.8 million at December 31, 2019 and at June 30, 2019.

 

Net management fee and medical receivables increased by 5.2% to $50.4 million at December 31, 2019 from $47.9 million at June 30, 2019 as a result of slower collections. The slower collections were primarily due to an increase in no-fault and workers’ compensation revenue, which typically takes longer to collect.

 

The results of operations for the first six months of fiscal 2020 reflect an increase in revenues from management, patient and other fees, as compared to the first six months of fiscal 2019 ($38.8 million for the first six months of fiscal 2020 as compared to $37.3 million for the first six months of fiscal 2019), and an decrease in MRI equipment segment revenues ($4.4 million as compared to $4.7 million). Revenues were 10.1% from the MRI equipment segment as compared to 89.9% from HMCA, for the first six months of fiscal 2020, as compared to 11.1% from the MRI equipment segment and 88.9% from HMCA for the first six months of fiscal 2019.

 

The implementation of the Patient Protection and Affordable Care Act (PPACA) has had a profound impact on the healthcare industry. We are experiencing some of the impact of the Act on our business in the reduction of reimbursement rates and fewer sales of our MRI equipment. Efforts to repeal and replace, or modify the PPACA may result in further significant changes in the healthcare industry and our business.

 

We are committed to improving our operating results and dealing with the challenges posed by legislative and regulatory requirements. Nevertheless, factors beyond our control, such as the timing and rate of market growth, economic conditions, the availability of credit and payor reimbursement rates, or unexpected expenditures and the timing of such expenditures, make it difficult to forecast future operating results.

 

As mentioned, one of the effects of the PPACA on our business has been the reduction in Medicare reimbursement rates for MRI scans. This also has resulted in a reduction in the reimbursement rates by commercial insurers and government programs which tie their reimbursement rates to the Medicare rates. Nevertheless, the increased patient volume of the scanning centers we manage or own has enabled us to maintain a healthy profitability in spite of these challenges. We believe we are pursuing the correct policies to cope with these problems and to improve the Company’s operating results. However, our future revenues and results of operations may be adversely impacted by future reductions in reimbursement rates.

 

Our Upright® MRI (also referred to as the Stand-Up® MRI), together with our works-in-progress, are intended to significantly improve our competitive position.

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The Upright® MRI scanner, which operates at 6000 gauss (.6 Tesla) field strength, allows patients to be scanned while standing, sitting, reclining and in multiple flexion and extension positions. It is common in visualizing the spine that abnormalities are visualized in some positions and not others. This enables surgical corrections that heretofore would be unaddressable for lack of visualizing the symptom causing the pathology and therefore, in general enables the treating physician to achieve a better treatment outcome for his patient. A floor-recessed elevator brings the patient to the height appropriate for the targeted image region. A custom-built multi-position adjustable bed will allow patients to sit or lie on their backs, sides or stomachs at any angle. This allows the MRI technologist to ask the patient to position himself/herself in the exact position that generates his/her pain so that images of the patient in the position that explicitly generates the patient’s pain can be nailed down. Full-range-of-motion studies of the joints in virtually any direction are possible, a particularly promising feature for sports injuries.

 

In addition FONAR has announced the publication of a book “THE CRANIOCERVICAL SYNDROME and MRI” that highlights the unique attributes of FONAR UPRIGHT® MRI Imaging (S. Karger, A.G. based in Basel, Switzerland- www.karger.com/Book/Home/261956) which has been published by S. Karger, an approximately 125 year old company and an academic publisher of scientific and medical journals and books. The seven chapter monograph examines the rapid advances in MRI made possible by the FONAR UPRIGHT® Multi-Position MRI that are transforming the treatment of patients suffering from the craniocervical syndrome (CCS). It is written by leading international experts in the field to practitioners with a better understanding of the subtle anatomy and MRI appearances at the craniocervical junction, along with insight into the clinical significance of cerebrospinal fluid (CSF) flow measurements and its potential role in generating the devastating impairments of the neurodegenerative diseases: Alzheimer’s (5.1 million patients in the United States), childhood and adult Autism (3.0 million), Parkinson’s (1.0 million), Multiple Sclerosis (250,000-350,000) and Amyotrophic Lateral Sclerosis (ALS) (30,000). It calls attention to the revolutionary importance of FONAR’s UPRIGHT® MRI imaging technology and the prospect of significantly relieving the suffering of the above totaled 9.38 million patients afflicted with these disorders.

 

Fonar also announced a major diagnostic breakthrough in multiple sclerosis achieved with advanced Upright® MRI. Medical researchers at FONAR published a paper reporting a diagnostic breakthrough in multiple sclerosis (MS), based on observations made possible by the Company’s unique Upright® Multi-Position™ MRI scanner. The findings reveal that the cause of multiple sclerosis may be biomechanical and related to earlier trauma to the neck, which can result in obstruction of the flow of cerebrospinal fluid (CSF), which is produced and stored in the central anatomic structures of the brain known as the ventricles. Since the ventricles produce a large net volume of CSF each day (500 cc), the obstruction can result in a build up of pressure within the ventricles, resulting in leakage of the CSF and the antigenic polypeptides it contains into the surrounding brain tissue. This leakage could be responsible for generating the brain lesions of multiple sclerosis.

 

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The paper, titled “The Possible Role of Cranio-Cervical Trauma and Abnormal CSF Hydrodynamics in the Genesis of Multiple Sclerosis," appears in the of the journal Physiological Chemistry and Physics and Medical NMR (Sept. 20, 2011).

 

This capability of the Fonar Upright® technology has demonstrated its key value on patients with the Arnold-Chiari syndrome [Cerebellar Tonsil Extopia (CTE)], which is believed to affect 200,000 to 500,000 Americans. In this syndrome, brain stem compression and subsequent severe neurological symptoms occur in these patients, because the brain stem descends and is compressed at the base of the skull in the foramen magnum, which is the circular bony opening at the base of the skull where the spinal cord exits the skull. Conventional lie-down MRI scanners cannot make an adequate evaluation of this pathology since the patient's pathology is most visible and the symptoms most acute when the patient is scanned in the upright fully weight-bearing position.

 

A combined study of 1,200 neck pain patients published in “Brain Injury” (July 2010) by eight university medical centers reported that cerebellar tonsil ectopia (CTE) of 1mm or greater was found and visualized 2.5 times (250%) more frequently when patients who had sustained automobile whiplash injuries were scanned upright rather than lying down.

 

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 increased by 9.8% from $13.9 million at June 30, 2019 to $15.4 million at December 31, 2019.