ASSETS
| |
| | | |
| | |
| |
March
31, 2023 | |
June
30, 2022 * |
Current
Assets: | |
| | | |
| | |
Cash
and cash equivalents | |
$ | 49,640 | | |
$ | 48,723 | |
Short
term investments | |
| 32 | | |
| 32 | |
Accounts
receivable – net | |
| 3,720 | | |
| 4,336 | |
Accounts
receivable - related party | |
| 30 | | |
| — | |
Medical
receivable – net | |
| 20,460 | | |
| 20,109 | |
Management
and other fees receivable – net | |
| 35,201 | | |
| 33,419 | |
Management
and other fees receivable – related medical practices – net | |
| 9,088 | | |
| 8,603 | |
Inventories | |
| 2,661 | | |
| 2,360 | |
Prepaid
expenses and other current assets | |
| 1,166 | | |
| 1,104 | |
Total
Current Assets | |
| 121,998 | | |
| 118,686 | |
| |
| | | |
| | |
Accounts
receivable – long term | |
| 1,003 | | |
| 1,872 | |
Deferred
income tax asset - net | |
| 10,911 | | |
| 12,843 | |
Property
and equipment – net | |
| 22,775 | | |
| 22,282 | |
Right-of-use
Asset – operating lease | |
| 33,581 | | |
| 34,232 | |
Right-of-use
Asset – financing lease | |
| 779 | | |
| 928 | |
Goodwill | |
| 4,269 | | |
| 4,269 | |
Other
intangible assets – net | |
| 3,494 | | |
| 3,704 | |
Other
assets | |
| 526 | | |
| 526 | |
Total
Assets | |
$ | 199,336 | | |
$ | 199,342 | |
*Condensed
from audited financial statements.
See
accompanying notes to condensed consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
LIABILITIES
AND STOCKHOLDERS’ EQUITY
| |
March
31, 2023 | |
June
30, 2022 * |
Current
Liabilities: | |
| | | |
| | |
Current
portion of long-term debt | |
$ | 43 | | |
$ | 40 | |
Accounts
payable | |
| 1,719 | | |
| 1,552 | |
Other
current liabilities | |
| 3,496 | | |
| 6,417 | |
Unearned
revenue on service contracts | |
| 3,615 | | |
| 4,289 | |
Unearned
revenue on service contracts – related party | |
| 28 | | |
| — | |
Operating
lease liability - current portion | |
| 3,981 | | |
| 3,880 | |
Financing
lease liability - current portion | |
| 217 | | |
| 210 | |
Customer
deposits | |
| 826 | | |
| 361 | |
Total
Current Liabilities | |
| 13,925 | | |
| 16,749 | |
| |
| | | |
| | |
Long-Term
Liabilities: | |
| | | |
| | |
Unearned
revenue on service contracts | |
| 1,015 | | |
| 1,857 | |
Deferred
income tax liability | |
| 216 | | |
| 216 | |
Due
to related medical practices | |
| 93 | | |
| 93 | |
Operating
lease liability – net of current portion | |
| 32,630 | | |
| 33,091 | |
Financing
lease liability – net of current portion | |
| 657 | | |
| 838 | |
Long-term
debt less current portion | |
| 126 | | |
| 155 | |
Other
liabilities | |
| 57 | | |
| 107 | |
Total
Long-Term Liabilities | |
| 34,794 | | |
| 36,357 | |
Total
Liabilities | |
| 48,719 | | |
| 53,106 | |
*Condensed
from audited financial statements.
See
accompanying notes to condensed consolidated financial statements.
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, 2023 | |
June
30, 2022* |
Class
A non-voting preferred stock $.0001 par value; 453 shares authorized at March 31, 2023 and June 30, 2022, 313 issued and outstanding
at March 31, 2023 and June 30, 2022 | |
$ | — | | |
$ | — | |
Preferred
stock $.001 par value; 567 shares authorized at March 31, 2023 and June 30, 2022, issued and outstanding – none | |
| — | | |
| — | |
Common
Stock $.0001 par value; 8,500 shares authorized at March 31, 2023 and June 30, 2022, 6,607 and 6,566 issued at March 31, 2023 and
June 30, 2022, respectively 6,538 and 6,554 outstanding at March 31, 2023 and June 30, 2022 respectively | |
| 1 | | |
| 1 | |
Class
B Common Stock (10 votes per share) $.0001 par value; 227 shares authorized at March 31, 2023 and June 30, 2022, .146 issued and
outstanding at March 31, 2023 and June 30, 2022 | |
| — | | |
| — | |
Class
C Common Stock (25 votes per share) $.0001 par value; 567 shares authorized at March 31, 2023 and June 30, 2022, 383 issued and outstanding
at March 31, 2023 and June 30, 2022 | |
| — | | |
| — | |
Paid-in
capital in excess of par value | |
| 184,130 | | |
| 184,531 | |
Accumulated
deficit | |
| (25,428 | ) | |
| (33,567 | ) |
Treasury
stock, at cost - 69 shares of common stock at March 31, 2023 and 12 shares of common stock at June 30, 2022 | |
| (1,522 | ) | |
| (675 | ) |
Total
Fonar Corporation’s Stockholders’ Equity | |
| 157,181 | | |
| 150,290 | |
Noncontrolling
interests | |
| (6,564 | ) | |
| (4,054 | ) |
Total
Stockholders' Equity | |
| 150,617 | | |
| 146,236 | |
Total
Liabilities and Stockholders' Equity | |
$ | 199,336 | | |
$ | 199,342 | |
*Condensed
from audited financial statements.
See
accompanying notes to condensed consolidated financial statements.
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 | |
2023 | |
2022 |
Patient
fee revenue – net of contractual allowances and discounts | |
$ | 8,188 | | |
$ | 7,641 | |
Product
sales – net | |
| 25 | | |
| 135 | |
Service
and repair fees – net | |
| 1,831 | | |
| 1,876 | |
Service
and repair fees - related parties – net | |
| 28 | | |
| 28 | |
Management
and other fees – net | |
| 12,375 | | |
| 11,904 | |
Management
and other fees - related medical practices – net | |
| 2,975 | | |
| 2,987 | |
Total
Revenues – Net | |
| 25,422 | | |
| 24,571 | |
COSTS
AND EXPENSES | |
| | | |
| | |
Costs
related to patient fee revenue | |
| 4,056 | | |
| 3,306 | |
Costs
related to product sales | |
| 196 | | |
| 53 | |
Costs
related to service and repair fees | |
| 801 | | |
| 747 | |
Costs
related to service and repair fees - related parties | |
| 12 | | |
| 11 | |
Costs
related to management and other fees | |
| 7,157 | | |
| 6,696 | |
Costs
related to management and other fees – related medical practices | |
| 1,455 | | |
| 1,698 | |
Research
and development | |
| 435 | | |
| 354 | |
Selling,
general and administrative | |
| 7,143 | | |
| 6,068 | |
Total
Costs and Expenses | |
| 21,255 | | |
| 18,933 | |
Other
Expense | |
| (6 | ) | |
| — | |
Interest
(Expense) Income | |
| (15 | ) | |
| 31 | |
Investment
Income | |
| 356 | | |
| 58 | |
Provision
for Income Taxes | |
| (17 | ) | |
| (2,465 | ) |
Net
Income | |
| 4,485 | | |
| 3,262 | |
Net
Income - Noncontrolling Interests | |
| (625 | ) | |
| (971 | ) |
Net
Income – Attributable to FONAR | |
$ | 3,860 | | |
$ | 2,291 | |
STATEMENT
OF INCOME | |
| | | |
| | |
Net
Income Available to Common Stockholders | |
$ | 3,627 | | |
$ | 2,153 | |
Net
Income Available to Class A Non-Voting Preferred Stockholders | |
$ | 174 | | |
$ | 103 | |
Net
Income Available to Class C Common Stockholders | |
$ | 59 | | |
$ | 35 | |
Basic
Net Income Per Common Share Available to Common Stockholders | |
$ | 0.56 | | |
$ | 0.33 | |
Diluted
Net Income Per Common Share Available to Common Stockholders | |
$ | 0.55 | | |
$ | 0.32 | |
Basic
and Diluted Income Per Share – Class C Common | |
$ | 0.16 | | |
$ | 0.09 | |
Weighted
Average Basic Shares Outstanding – Common Stockholders | |
| 6,481 | | |
| 6,554 | |
Weighted
Average Diluted Shares Outstanding - Common Stockholders | |
| 6,609 | | |
| 6,682 | |
Weighted
Average Basic and Diluted Shares Outstanding – Class C Common | |
| 383 | | |
| 383 | |
See
accompanying notes to condensed consolidated financial statements.
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 | |
2023 | |
2022 |
Patient
fee revenue – net of contractual allowances and discounts | |
$ | 21,393 | | |
$ | 21,935 | |
Product
sales – net | |
| 225 | | |
| 481 | |
Service
and repair fees – net | |
| 5,489 | | |
| 5,720 | |
Service
and repair fees - related parties – net | |
| 83 | | |
| 83 | |
Management
and other fees – net | |
| 36,717 | | |
| 35,985 | |
Management
and other fees - related medical practices – net | |
| 8,962 | | |
| 8,576 | |
Total
Revenues – Net | |
| 72,869 | | |
| 72,780 | |
COSTS
AND EXPENSES | |
| | | |
| | |
Costs
related to patient fee revenue | |
| 11,879 | | |
| 9,785 | |
Costs
related to product sales | |
| 580 | | |
| 352 | |
Costs
related to service and repair fees | |
| 2,241 | | |
| 2,190 | |
Costs
related to service and repair fees - related parties | |
| 34 | | |
| 32 | |
Costs
related to management and other fees | |
| 20,281 | | |
| 20,497 | |
Costs
related to management and other fees – related medical practices | |
| 4,345 | | |
| 5,024 | |
Research
and development | |
| 1,126 | | |
| 1,109 | |
Selling,
general and administrative | |
| 20,074 | | |
| 15,928 | |
Total
Costs and Expenses | |
| 60,560 | | |
| 54,917 | |
Other
(Expense) Income | |
| (203 | ) | |
| 858 | |
Interest
Expense | |
| (41 | ) | |
| (9 | ) |
Investment
Income | |
| 770 | | |
| 180 | |
Provision
for Income Taxes | |
| (2,889 | ) | |
| (5,311 | ) |
Net
Income | |
| 9,946 | | |
| 13,581 | |
Net
Income - Noncontrolling Interests | |
| (1,807 | ) | |
| (3,383 | ) |
Net
Income – Attributable to FONAR | |
$ | 8,139 | | |
$ | 10,198 | |
STATEMENT
OF INCOME | |
| | | |
| | |
Net
Income Available to Common Stockholders | |
$ | 7,647 | | |
$ | 9,583 | |
Net
Income Available to Class A Non-Voting Preferred Stockholders | |
$ | 367 | | |
$ | 458 | |
Net
Income Available to Class C Common Stockholders | |
$ | 125 | | |
$ | 157 | |
Basic
Net Income Per Common Share Available to Common Stockholders | |
$ | 1.18 | | |
$ | 1.46 | |
Diluted
Net Income Per Common Share Available to Common Stockholders | |
$ | 1.16 | | |
$ | 1.43 | |
Basic
and Diluted Income Per Share – Class C Common | |
$ | 0.33 | | |
$ | 0.41 | |
Weighted
Average Basic Shares Outstanding – Common Stockholders | |
| 6,487 | | |
| 6,554 | |
Weighted
Average Diluted Shares Outstanding - Common Stockholders | |
| 6,615 | | |
| 6,682 | |
Weighted
Average Basic and Diluted Shares Outstanding – Class C Common | |
| 383 | | |
| 383 | |
See
accompanying notes to condensed consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
For
the Three Months Ending March 31, 2023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid in capital in excess of par value |
|
Accumulated Deficit |
|
Treasury Stock |
|
Non Controlling Interests |
|
Total |
Balance – December 31, 2022 |
|
$ |
1 |
|
|
$ |
184,130 |
|
|
$ |
(29,288 |
) |
|
$ |
(751 |
) |
|
$ |
(6,022 |
) |
|
$ |
148,070 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
3,860 |
|
|
|
— |
|
|
|
— |
|
|
|
3,860 |
|
Purchase of Treasury stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(771 |
) |
|
|
— |
|
|
|
(771 |
) |
Distributions - Non controlling |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,167 |
) |
|
|
(1,167 |
) |
Income - Non controlling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
625 |
|
|
|
625 |
|
Balance – March 31, 2023 |
|
$ |
1 |
|
|
$ |
184,130 |
|
|
$ |
(25,428 |
) |
|
$ |
(1,522 |
) |
|
$ |
(6,564 |
) |
|
$ |
150,617 |
|
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 | |
$ | 1 | | |
$ | 184,531 | | |
$ | (38,101 | ) | |
$ | (675 | ) | |
$ | (3,314 | ) | |
$ | 142,442 | |
Net
income | |
| — | | |
| — | | |
| 2,291 | | |
| — | | |
| — | | |
| 2,291 | |
Distributions
- Non controlling | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1,430 | ) | |
| (1,430 | ) |
Income
- Non controlling interests | |
| — | | |
| — | | |
| — | | |
| — | | |
| 971 | | |
| 971 | |
Balance
- March 31, 2022 | |
$ | 1 | | |
$ | 184,531 | | |
$ | (35,810 | ) | |
$ | (675 | ) | |
$ | (3,773 | ) | |
$ | 144,274 | |
See
accompanying notes to condensed consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
For
the Nine Months Ending March 31, 2023
|
|
Common Stock |
|
|
Paid in capital in excess of par value |
|
Accumulated Deficit |
|
Treasury Stock |
|
Non Controlling Interests |
|
Total |
Balance - June 30, 2022 |
|
$ |
1 |
|
|
$ |
184,531 |
|
|
$ |
(33,567 |
) |
|
$ |
(675 |
) |
|
$ |
(4,054 |
) |
|
$ |
146,236 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
8,139 |
|
|
|
— |
|
|
|
— |
|
|
|
8,139 |
|
Purchase of Treasury stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,249 |
) |
|
|
— |
|
|
|
(1,249 |
) |
Cancellation of shares |
|
|
— |
|
|
|
(401 |
) |
|
|
— |
|
|
|
402 |
|
|
|
— |
|
|
|
1 |
|
Distributions - Non controlling |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,317 |
) |
|
|
(4,317 |
) |
Income - Non controlling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,807 |
|
|
|
1,807 |
|
Balance - March 31, 2023 |
|
$ |
1 |
|
|
$ |
184,130 |
|
|
$ |
(25,428 |
) |
|
$ |
(1,522 |
) |
|
$ |
(6,564 |
) |
|
$ |
150,617 |
|
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 | |
$ | 1 | | |
$ | 185,101 | | |
$ | (46,008 | ) | |
$ | (675 | ) | |
$ | (3,049 | ) | |
$ | 135,370 | |
Net
income | |
| — | | |
| — | | |
| 10,198 | | |
| | | |
| — | | |
| 10,198 | |
Purchase
of Non controlling interests | |
| — | | |
|
(570 | ) | |
| — | | |
| — | | |
| 24 | | |
| (546 | ) |
Distributions
- Non controlling | |
| — | | |
| — | | |
| — | | |
| — | | |
| (4,131 | ) | |
| (4,131 | ) |
Income
- Non controlling interests | |
| — | | |
| — | | |
| — | | |
| — | | |
| 3,383 | | |
| 3,383 | |
Balance
- March 31, 2022 | |
$ | 1 | | |
$ | 184,531 | | |
$ | (35,810 | ) | |
$ | (675 | ) | |
$ | (3,773 | ) | |
$ | 144,274 | |
See
accompanying notes to condensed consolidated financial statements.
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, |
| |
2023 | |
2022 |
Cash
Flows from Operating Activities: | |
| | | |
| | |
Net
income | |
$ | 9,946 | | |
$ | 13,581 | |
Adjustments
to reconcile net income to net cash provided by operating activities: | |
| | | |
| | |
Depreciation
and amortization | |
| 3,357 | | |
| 3,543 | |
Amortization
on right-of-use assets | |
| 3,306 | | |
| 2,953 | |
Provision
for bad debts | |
| 4,441 | | |
| 2,150 | |
Deferred
income tax – net | |
| 1,931 | | |
| 3,484 | |
Gain
on forgiveness of PPP loan | |
| — | | |
| (701 | ) |
(Increase)
decrease in operating assets, net: | |
| | | |
| | |
Accounts,
medical and management fee receivable(s) | |
| (5,604 | ) | |
| (4,950 | ) |
Notes
receivable | |
| 11 | | |
| 32 | |
Contract
assets | |
| — | | |
| (15 | ) |
Inventories | |
| (301 | ) | |
| (705 | ) |
Prepaid
expenses and other current assets | |
| (73 | ) | |
| 112 | |
Other
assets | |
| — | | |
| 132 | |
Increase
(decrease) in operating liabilities, net: | |
| | | |
| | |
Accounts
payable | |
| 168 | | |
| (855 | ) |
Other
current liabilities | |
| (4,409 | ) | |
| (5,480 | ) |
Operating
lease liabilities | |
| (2,865 | ) | |
| (2,579 | ) |
Financing
lease liabilities | |
| (175 | ) | |
| (151 | ) |
Customer
deposits | |
| 465 | | |
| (370 | ) |
Contract
liabilities | |
| — | | |
| (15 | ) |
Other
liabilities | |
| (49 | ) | |
| (49 | ) |
Net
cash provided by operating activities | |
| 10,149 | | |
| 10,117 | |
Cash
Flows from Investing Activities: | |
| | | |
| | |
Purchases
of property and equipment | |
| (3,553 | ) | |
| (3,807 | ) |
Purchase
of noncontrolling interests | |
| — | | |
| (546 | ) |
Cost
of patents | |
| (87 | ) | |
| (60 | ) |
Net
cash used in investing activities | |
| (3,640 | ) | |
| (4,413 | ) |
Cash
Flows from Financing Activities: | |
| | | |
| | |
Repayment
of borrowings and capital lease obligations | |
| (26 | ) | |
| (23 | ) |
Purchase
of treasury stock | |
| (1,249 | ) | |
| — | |
Distributions
to noncontrolling interests | |
| (4,317 | ) | |
| (4,131 | ) |
Net
cash used in financing activities | |
| (5,592 | ) | |
| (4,154 | ) |
Net
Increase in Cash and Cash Equivalents | |
| 917 | | |
| 1,550 | |
Cash
and Cash Equivalents - Beginning of Period | |
| 48,723 | | |
| 44,460 | |
Cash
and Cash Equivalents - End of Period | |
$ | 49,640 | | |
$ | 46,010 | |
See
accompanying notes to condensed consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023 and 2022
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description
of Business
FONAR
Corporation (the "Company" or "FONAR") is a Delaware corporation, which was incorporated
on July 17, 1978. FONAR is engaged in the research, development, production and manufacturing of medical scanning equipment, which
uses principles of Magnetic Resonance Imaging ("MRI") for the detection and diagnosis of human diseases. In addition to deriving
revenues from the direct sale of MRI equipment, revenue is also generated from our installed-base of customers through service and upgrade
programs.
FONAR,
through its wholly-owned subsidiary Health Management Corporation of America ("HMCA")
provides comprehensive management services to diagnostic imaging facilities. These services
provided by the Company include development, administration, leasing of office spaces, facilities and medical equipment, provision
of supplies, staffing and supervision of non-medical personnel, legal services, accounting, billing and collections and the development
and implementation of practice growth and marketing strategies.
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. During the fiscal year ended June 30, 2022, the Company
purchased non-controlling interests from the minority shareholders for $546,000. Currently the Company has a direct ownership interest
of 70.8% and the investors’ have a 29.2% ownership interest. The entire management of diagnostic imaging centers business segment
is now being conducted by HDM, operating under the name “Health Management Company of America”.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America
for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the three and nine months ended March 31, 2023, are not necessarily
indicative of the results that may be expected for the fiscal year ending June 30, 2023. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K filed on September 28, 2022 for the fiscal
year ended June 30, 2022.
The
global pandemic of COVID-19 has caused turbulence and uncertainty in the United States and international markets and economies which
has adversely affected our workforce, liquidity, financial conditions, revenues, profitability and business operations. The Company
was able to enact certain decisions to allow the Company to sustain operations 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. 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 to almost pre- COVID-19 levels. Recent
legislation was passed to end the national emergency for COVID-19 which the Company believes with positive cash flows, low debt and
cash on hand, it will be able to maintain operations to pre COVID-19 levels going forward.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023 and 2022
(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.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023 and 2022
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings
Per Share
Basic
earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted average number
of shares of common stock outstanding during the period. In accordance with ASC Topic 260-10, “Participating Securities and the
Two-Class method”, the Company uses 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, 2023 and 2022.
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, 2023 and 2022, diluted EPS
for common shareholders includes 128
shares
upon conversion of Class C Common.
Earnings
Per Share
Schedule of earning per share | |
| |
| |
| |
| |
| |
|
| |
Three
months ended March 31, 2023 | |
Three
months ended March 31, 2022 |
| |
Total | |
Common
Stock | |
Class
C Common Stock | |
Total | |
Common
Stock | |
Class
C Common Stock |
Basic | |
| |
| |
| |
| |
| |
|
Numerator:
Net income available to common stockholders | |
$ | 3,860 | | |
$ | 3,627 | | |
$ | 59 | | |
$ | 2,291 | | |
$ | 2,153 | | |
$ | 35 | |
Denominator: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Weighted
average shares outstanding | |
| 6,481 | | |
| 6,481 | | |
| 383 | | |
| 6,554 | | |
| 6,554 | | |
| 383 | |
Basic
income per common share | |
$ | 0.60 | | |
$ | 0.56 | | |
$ | 0.16 | | |
$ | 0.35 | | |
$ | 0.33 | | |
$ | 0.09 | |
Diluted | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Denominator:
Weighted average shares outstanding | |
| | | |
| 6,481 | | |
| 383 | | |
| | | |
| 6,554 | | |
| 383 | |
Convertible
Class C Stock | |
| | | |
| 128 | | |
| — | | |
| | | |
| 128 | | |
| — | |
Total
Denominator for diluted earnings per share | |
| | | |
| 6,609 | | |
| 383 | | |
| | | |
| 6,682 | | |
| 383 | |
Diluted
income per common share | |
| | | |
$ | 0.55 | | |
$ | 0.16 | | |
| | | |
$ | 0.32 | | |
$ | 0.09 | |
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023 and 2022
(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, 2023 | |
Nine
months ended March 31, 2022 |
| |
Total | |
Common
Stock | |
Class
C Common Stock | |
Total | |
Common
Stock | |
Class
C Common Stock |
Basic | |
| |
| |
| |
| |
| |
|
Numerator:
Net income available to common stockholders | |
$ | 8,139 | | |
$ | 7,647 | | |
$ | 125 | | |
$ | 10,198 | | |
$ | 9,583 | | |
$ | 157 | |
Denominator: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Weighted
average shares outstanding | |
| 6,487 | | |
| 6,487 | | |
| 383 | | |
| 6,554 | | |
| 6,554 | | |
| 383 | |
Basic
income per common share | |
$ | 1.25 | | |
$ | 1.18 | | |
$ | 0.33 | | |
$ | 1.56 | | |
$ | 1.46 | | |
$ | 0.41 | |
Diluted | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Denominator:
Weighted average shares outstanding | |
| | | |
| 6,487 | | |
| 383 | | |
| | | |
| 6,554 | | |
| 383 | |
Convertible
Class C Stock | |
| | | |
| 128 | | |
| — | | |
| | | |
| 128 | | |
| — | |
Total
Denominator for diluted earnings per share | |
| | | |
| 6,615 | | |
| 383 | | |
| | | |
| 6,682 | | |
| 383 | |
Diluted
income per common share | |
| | | |
$ | 1.16 | | |
$ | 0.33 | | |
| | | |
$ | 1.43 | | |
$ | 0.41 | |
Recent
Accounting Standards
FASB,
the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of March 31, 2023
that will become effective in subsequent periods; however, management does not believe that any of those updates would have significantly
affected the Company’s financial accounting measures or disclosures had they been in effect during 2023 or 2022, and it does not
believe that any of those standards will have a significant impact on our consolidated condensed financial statements at the time they
become effective.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023 and 2022
(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, 2023, and June 30, 2022:
Financing receivable noncurrent allowance for Credit loss | |
| |
| |
|
| |
March
31, 2023 |
| |
Gross
Receivable | |
Allowance
for doubtful accounts | |
Net |
Accounts
receivable | |
$ | 3,925 | | |
$ | 205 | | |
$ | 3,720 | |
Accounts
receivable - related party | |
$ | 30 | | |
| — | | |
$ | 30 | |
Medical
receivable | |
$ | 20,460 | | |
$ | — | | |
$ | 20,460 | |
Management
and other fees receivable | |
$ | 55,043 | | |
$ | 19,842 | | |
$ | 35,201 | |
Management
and other fees receivable from related medical practices ("PC’s") | |
$ | 15,002 | | |
$ | 5,914 | | |
$ | 9,088 | |
| |
June
30, 2022 |
| |
Gross
Receivable | |
Allowance
for doubtful accounts | |
Net |
Accounts
receivable | |
$ | 4,541 | | |
$ | 205 | | |
$ | 4,336 | |
Medical
receivable | |
$ | 20,109 | | |
$ | — | | |
$ | 20,109 | |
Management
and other fees receivable | |
$ | 50,047 | | |
$ | 16,628 | | |
$ | 33,419 | |
Management
and other fees receivable from related medical practices ("PC’s") | |
$ | 13,290 | | |
$ | 4,687 | | |
$ | 8,603 | |
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.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023 and 2022
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE (CONTINUED)
Long
Term Accounts Receivable
The
Company will generate revenue from long-term, non-cancellable contracts to provide service and repair services. Future revenue to be
recognized over the following three years as of March 31, 2023 is as follows:
| Schedule of facilities owned or managed | | |
| | |
| 2025 | | |
$ | 792 | |
| 2026 | | |
| 216 | |
| 2027 | | |
| 7 | |
| Total | | |
$ | 1,015 | |
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 67.6%
and 66.6% of the PCs’ net revenues for the three months ended March 31, 2023 and 2022 respectively, were derived from no-fault
and personal injury protection claims. Approximately 67.9% and 66.6% of the PCs’ net revenue for the nine months ended March 31,
2023 and 2022, 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.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023 and 2022
(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 11.7% and 12.2% of the consolidated net
revenues for the three months ended March 31, 2023 and 2022, respectively. Net revenues from management and other fees charged to the
related PCs accounted for approximately 12.3% and 11.8% of the consolidated net revenues for the nine months ended March 31, 2023 and
2022, respectively.
Tallahassee
Magnetic Resonance Imaging, PA, Stand Up MRI of Boca Raton, PA and Stand Up MRI & Diagnostic Center, PA (all related medical practices)
entered into a guaranty agreement, pursuant to which they cross guaranteed all management fees which are payable to the Company, which
have arisen under each individual management agreement. Additional Company managed entities also operate under a guaranty agreement,
pursuant to which management fees are payable to the Company.
The
Company’s patient fee revenue, net of contractual allowances and discounts for the three and nine months ended March 31, 2023 and
2022 are summarized in the following table.
Schedule of patient fee revenue | |
| | | |
| | |
| |
For
the Three Months
Ended
March 31, |
| |
2023 | |
2022 |
Commercial
Insurance/ Managed Care | |
$ | 1,037 | | |
$ | 1,095 | |
Medicare/Medicaid | |
| 303 | | |
| 287 | |
Workers'
Compensation/Personal Injury | |
| 5,186 | | |
| 4,624 | |
Other | |
| 1,662 | | |
| 1,635 | |
Patient
Fee Revenue, net of contractual allowances and discounts | |
$ | 8,188 | | |
$ | 7,641 | |
| |
For
the Nine Months
Ended
March 31, |
| |
2023 | |
2022 |
Commercial
Insurance/ Managed Care | |
$ | 2,905 | | |
$ | 3,249 | |
Medicare/Medicaid | |
| 788 | | |
| 809 | |
Workers'
Compensation/Personal Injury | |
| 13,683 | | |
| 13,092 | |
Other | |
| 4,017 | | |
| 4,785 | |
Patient
Fee Revenue, net of contractual allowances and discounts | |
$ | 21,393 | | |
$ | 21,935 | |
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023 and 2022
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
4 – OPERATING & FINANCING LEASES
In
July 2019, the Company adopted ASU 2016-02, Leases (Topic 842). This 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. 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 condensed 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
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, 2023
is as follows:
Lessee operating leases liability maturity | |
| |
|
Twelve
Months Ending March 31, | |
Operating
Lease Payments | |
Financing
Lease Payments |
| 2024 | | |
$ | 5,613 | | |
$ | 244 | |
| 2025 | | |
| 5,661 | | |
| 244 | |
| 2026 | | |
| 5,304 | | |
| 244 | |
| 2027 | | |
| 4,520 | | |
| 204 | |
| 2028 | | |
| 3,642 | | |
| — | |
| Thereafter | | |
| 21,835 | | |
| — | |
| Present
value discount | | |
| (9,964 | ) | |
| (62 | ) |
| Total
lease liability | | |
$ | 36,611 | | |
$ | 874 | |
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023 and 2022
(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:
Schedule of inventories | |
| | | |
| | |
| |
March
31, 2023 | |
June
30, 2022 |
Purchased
parts, components and supplies | |
$ | 2,456 | | |
$ | 2,126 | |
Work-in-process | |
| 205 | | |
| 234 | |
Total
Inventories | |
$ | 2,661 | | |
$ | 2,360 | |
NOTE
6 – OTHER INTANGIBLE ASSETS
Other
intangible assets, net of accumulated amortization, in the accompanying condensed consolidated balance sheets consist of the following:
Schedule of other intangible assets - net | |
| | | |
| | |
| |
March
31, 2023 | |
June
30, 2022 |
Capitalized
software development costs | |
$ | 7,005 | | |
$ | 7,005 | |
Patents
and copyrights | |
| 5,420 | | |
| 5,333 | |
Non-compete | |
| 4,150 | | |
| 4,150 | |
Customer
relationships | |
| 3,900 | | |
| 3,900 | |
Gross
Other intangible assets | |
| 20,475 | | |
| 20,388 | |
Less:
Accumulated amortization | |
| 16,981 | | |
| 16,684 | |
Other
Intangible Assets - net | |
$ | 3,494 | | |
$ | 3,704 | |
Amortization
of patents and copyrights for the three months ended March 31, 2023 and 2022 amounted to $46 and $44, respectively.
Amortization
of non-compete for the three months ended March 31, 2023 and 2022 amounted to $0 and $13, respectively.
Amortization
of customer relationships for the three months ended March 31, 2023 and 2022 amounted to $50 and $50, respectively.
Amortization
of patents and copyrights for the nine months ended March 31, 2023 and 2022 amounted to $147 and $140, respectively.
Amortization
of non-compete for the nine months ended March 31, 2023and 2022 amounted to $0 and $38, respectively.
Amortization
of customer relationships for the nine months ended March 31, 2023 and 2022 amounted to $150 and $150, respectively.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023 and 2022
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
7 – OTHER CURRENT LIABILITIES
Other
current liabilities in the accompanying condensed consolidated balance sheets consist of the following:
Schedule of other current liabilities | |
| |
|
| |
March
31, 2023 | |
June
30, 2022 |
Accrued
salaries, commissions and payroll taxes | |
$ | 2,046 | | |
$ | 4,653 | |
Sales
tax payable | |
| 210 | | |
| 249 | |
State
income taxes payable | |
| 200 | | |
| 382 | |
Legal
and other professional fees | |
| 11 | | |
| 21 | |
Accounting
fees | |
| 89 | | |
| 120 | |
Self-funded
health insurance reserve | |
| 35 | | |
| 79 | |
Accrued
interest and penalty | |
| 3 | | |
| 59 | |
Other
general and administrative expenses | |
| 902 | | |
| 854 | |
Other
Current Liabilities | |
$ | 3,496 | | |
$ | 6,417 | |
NOTE
8 - 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, 2022. All inter-segment sales are market-based. The Company evaluates performance
based on income or loss from operations.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023 and 2022
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
8 - SEGMENT AND RELATED INFORMATION (CONTINUED)
Summarized
financial information concerning the Company's reportable segments is shown in the following table:
Summarized segment financial information | |
| | | |
| | | |
| | |
For the three
months ended March, 31, 2023 | |
Medical
Equipment | |
Management
of Diagnostic Imaging Centers | |
Totals |
Net
revenues from external customers | |
$ | 1,884 | | |
$ | 23,538 | | |
$ | 25,422 | |
Inter-segment
net revenues | |
$ | 245 | | |
$ | — | | |
$ | 245 | |
(Loss)
Income from operations | |
$ | (1,141 | ) | |
$ | 5,308 | | |
$ | 4,167 | |
Depreciation
and amortization | |
$ | 64 | | |
$ | 1,075 | | |
$ | 1,139 | |
Capital
expenditures | |
$ | 13 | | |
$ | 2,191 | | |
$ | 2,204 | |
| |
| | | |
| | | |
| | |
For
the three months ended March 31, 2022 | |
| | | |
| | | |
| | |
Net
revenues from external customers | |
$ | 2,039 | | |
$ | 22,532 | | |
$ | 24,571 | |
Inter-segment
net revenues | |
$ | 245 | | |
$ | — | | |
$ | 245 | |
(Loss)
Income from operations | |
$ | (537 | ) | |
$ | 6,175 | | |
$ | 5,638 | |
Depreciation
and amortization | |
$ | 64 | | |
$ | 1,121 | | |
$ | 1,185 | |
Capital
expenditures | |
$ | 43 | | |
$ | 1,620 | | |
$ | 1,663 | |
For the nine
months ended March 31, 2023 | |
Medical
Equipment | |
Management
of Diagnostic Imaging Centers | |
Totals |
Net
revenues from external customers | |
$ | 5,797 | | |
$ | 67,072 | | |
$ | 72,869 | |
Inter-segment
net revenues | |
$ | 735 | | |
$ | — | | |
$ | 735 | |
(Loss)
Income from operations | |
$ | (2,495 | ) | |
$ | 14,804 | | |
$ | 12,309 | |
Depreciation
and amortization | |
$ | 201 | | |
$ | 3,156 | | |
$ | 3,357 | |
Capital
expenditures | |
$ | 87 | | |
$ | 3,553 | | |
$ | 3,640 | |
| |
| | | |
| | | |
| | |
For
the nine months ended March 31, 2022 | |
| | | |
| | | |
| | |
Net
revenues from external customers | |
$ | 6,284 | | |
$ | 66,496 | | |
$ | 72,780 | |
Inter-segment
net revenues | |
$ | 720 | | |
$ | — | | |
$ | 720 | |
(Loss)
Income from operations | |
$ | (1,054 | ) | |
$ | 18,917 | | |
$ | 17,863 | |
Depreciation
and amortization | |
$ | 199 | | |
$ | 3,344 | | |
$ | 3,543 | |
Capital
expenditures | |
$ | 230 | | |
$ | 3,577 | | |
$ | 3,807 | |
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023 and 2022
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
9 – SUPPLEMENTAL CASH FLOW INFORMATION
During
the nine months ended March 31, 2023 and March 31, 2022, the Company paid $42 and $279 for interest, respectively.
During
the nine months ended March 31, 2023 and March 31, 2022, the Company paid $1,140 and $1,105 for income taxes, respectively.
NOTE
10 – 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, 2022.
Other
Matters
On
September 13, 2022, the Company adopted a stock repurchase plan. The plan has no expiration date and cannot determine the number of shares
which will be repurchased. On September 26, 2022, the Board of Directors has approved up to $9 million to be repurchased under the plan
which will be purchased on the publicly traded open market at prevailing prices. During the nine months ended March 31, 2023, the Company
repurchased 70 shares at a cost of $1,249.
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 $150 per person and for a maximum potential claim liability based on member enrollment.
With respect to this program, the Company considers historical and projected medical utilization data when estimating its health insurance
program liability and related expense. As of March 31, 2023 and June 30, 2022, the Company had approximately $35 and $79, 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.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023 and 2022
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
11 - 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, 2023 and 2022, the Company recorded income tax expense of $2,889 in 2023 as compared
to $5,311 in 2022. The 2023 provision is comprised of a current income tax component of $958 and a deferred income tax component of $1,931.
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 2019.
The
Company recorded a deferred tax asset of $10,911 and a deferred tax liability of $ as of March 31, 2023, primarily relating to net
operating loss carryforwards of approximately $5,191 available to offset future taxable income through 2032. The net operating losses
begin to expire in 2023 for federal tax and state income tax purposes.
Future
ownership changes as determined under Section 382 of the Internal Revenue Code could further limit the utilization of net operating loss
carryforwards. As of March 31, 2023, no such changes in ownership have occurred.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023 and 2022
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
11 - INCOME TAXES (CONTINUED)
The
Inflation Reduction Act (“IRA”) was enacted on August 16, 2022. The IRA includes provisions imposing a 1% excise tax on share
repurchases that occur after December 31, 2022 and introduces a 15% corporate alternative minimum tax (“CAMT”) on adjusted
financial statement income. The CAMT will be effective for tax years beginning after December 31, 2022. Currently, the Company does not
expect the IRA to have a material impact to the Company’s financial statements.
The
ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those
temporary differences become deductible or when such net operating losses can be utilized. The Company considers projected future taxable
income, the regulatory environment of the industry and tax planning strategies in making this assessment. At present, the Company believes
that it is more likely than not that the benefits from certain deferred tax asset carryforwards, will not all be fully realized. In recognition
of this inherent risk, a valuation allowance was established for the partial value of the deferred tax asset, which principally related
to research and development tax credits. A valuation allowance will be maintained until sufficient positive evidence exists to support
the reversal of the remainder of the valuation.
NOTE
12 – SUBSEQUENT EVENTS
The
Company has evaluated events that occurred subsequent to March 31, 2023 and through the date the condensed consolidated financial statements
were issued.
During
April 2023, the Company repurchased 6 shares at a cost of $101 which was authorized under the stock repurchase plan adopted in September
2022.
During
April 2023, the Company amended the revolving credit agreement. The agreement was extended to July 7, 2023. The interest rate on borrowings
is at the current prime rate of 8.00% along with certain financial covenants.
FONAR
CORPORATION AND SUBSIDIARIES
Item
2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited
condensed financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited
consolidated financial statements and notes thereto for the year ended June 30, 2022 included in our Annual Report on Form 10-K for the
fiscal year ended June 30, 2022 filed with the U.S. Securities and Exchange Commission (SEC) on September 28, 2022.
For
the nine month period ended March 31, 2023, we reported a net income of $9.9 million on revenues of $72.9 million as compared to net
income of $13.6 million on revenues of $72.8 million for the nine month period ended March 31, 2022. Operating income decreased from
$17.9 million for the nine month period ended March 31, 2022 to $12.3 million for the nine month period ended March 31, 2023.
For
the three month period ended March 31, 2023, we reported a net income of $3.9 million on revenues of $25.4 million as compared to net
income of $3.3 million on revenues of $24.6 million for the three month period ended March 31, 2022.
While
our revenues increased slightly, our costs and expenses increased, but by a greater amount resulting in our operating income decreasing
to $12.3 million for the nine months ended March 31, 2023 as compared to $17.9 million for the nine months ended March 31, 2022. In terms
of percentages, costs and expenses increased 10.2% from $54.9 million for the first nine months of fiscal 2022 to $60.6 million for the
first nine months of fiscal 2023, while revenues increased 0.1%, from $72.8 million for the first nine months of fiscal 2022 to $72.9
million for the first nine months of fiscal 2023.
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 2022 and fiscal 2023 has been the continuing effects of the COVID-19 pandemic.
During April 2023 legislation was passed to end the national emergency for COVID-19 and it seems the worst has passed. This is by no
means a problem confined to our Company, but despite our best efforts and improved ability to cope with the pandemic and the availability
of new vaccines, the impact on our results of operation and financial condition is potentially volatile and severe.
FONAR
CORPORATION AND SUBSIDIARIES
The
global pandemic of COVID-19 has caused disruptions in the United States and international markets which have adversely affected our workforce,
financial condition, profitability and business operations. 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 and its variants, the Company believes
with the ending of the national emergency and with its strong cash position and general financial condition, it will be able to continue
operations going forward.
One
of the concerns we have had is the increased strictness in enforcement of certain COVID-19 mandates, which directly impacts the
conduct of our business, 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. The New York State Supreme Court recently invalidated the requirement that
all medical employees must be vaccinated. This decision is currently under appeal and we are unsure of the outcome. Also at the end
of the first quarter of fiscal 2023, our Florida locations were effected by Hurricane Ian and had to be shut down for several days.
During the first nine months of fiscal 2023, the aggregate number of scans performed by the sites we manage or own declined slightly
to 139,339 scans from 140,650 scans in the first nine months of fiscal 2022. 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.
FONAR
CORPORATION AND SUBSIDIARIES
Results
of Operations
We
operate in two industry segments: the manufacture and servicing of medical (MRI) equipment, which is conducted by Fonar, and diagnostic
facilities management services, which is conducted through HMCA.
Manufacturing
and Service of MRI Equipment
Revenues
from MRI product sales decreased to $225,000 for the first nine months of fiscal 2023 from $481,000 for the first nine months of fiscal
2022. Costs related to product sales increased from $352,000 for the nine month period ended March 31, 2022 to $580,000 for the nine
month period ended March 31, 2023. 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 decreased to $5.6 million for the nine month period ended March 31, 2023 as compared to $5.8 million for the nine month period
ended March 31, 2022.
Costs
relating to providing service increased slightly to $2.3 million for the nine month period ended March 31, 2023 as compared to $2.2 million
for the nine month period ended March 31, 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 contain our costs of providing service.
There
were approximately $375,000 in foreign revenues for the first nine months of fiscal 2023 as compared to approximately $466,000 in foreign
revenues for the first nine months of fiscal 2022, representing a decrease in foreign revenues of 19.5%. 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 decreased to $5.8 million for the first nine months of fiscal 2023 from $6.3 million for the first
nine months of fiscal 2022. Operating losses for our medical equipment segment increased to an operating loss of $2.5 million, for the
first nine months of fiscal 2023 as compared to an operating loss of $1.1 million for the first nine months of fiscal 2022.
FONAR
CORPORATION AND SUBSIDIARIES
Diagnostic
Facilities Management Services
HMCA
revenues increased in the first nine months of fiscal 2023 by 0.8% to $67.1 million from $66.5 million for the first nine months of fiscal
2022. 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 92.0% for the first nine months of fiscal 2023, from 91.3% for the first
nine months of fiscal 2022.
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 decreased slightly in the first nine months of 2023. Other factors that have led to the slight decrease can also be attributable
to Hurricane Ian which caused the Florida locations to be closed for several days. 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, had been challenging and had 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 had cut their business hours and therefore scanned fewer patients or,
when possible, maintained regular business hours by paying employees who are willing to work extra hours at overtime rates. The
NYS Supreme Court recently invalidated the requirement that all medical employees must be vaccinated. This decision is currently under
appeal and we are unsure of the outcome.
Although
the number of scans performed at our centers and at our client’s centers has recovered to pre-COVID-19 levels, it has decreased
from approximately 140,600 in the first nine months of fiscal 2022 to approximately 139,300 in the first nine months of fiscal 2023.
The decrease in scans was due to a shortage of MRI technologists who operate the scanners, which is an industry-wide issue that caused
our centers to be open for fewer hours. We believe that the worst part of this shortage has passed and we just recently came back to
full employment.
We
now manage or own a total of 41 MRI scanners. Twenty-four (24) MRI scanners are located in New York and seventeen (17) are located in
Florida. HMCA experienced an operating income of $14.8 million for the first nine months of fiscal 2023 compared to operating income
of $18.9 million for the first nine months of fiscal 2022.
FONAR
CORPORATION AND SUBSIDIARIES
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 2023 as compared to the first nine months of fiscal 2022 increased by 3.3% from
$35.3 million to $36.5 million.
Consolidated
For
the first nine months of fiscal 2023, our consolidated net revenues increased by 0.1% to $72.9 million from $72.8 million for the first
nine months of fiscal 2022, and total costs and expenses increased by 10.2% to $60.6 million from $54.9 million for the first nine months
of fiscal 2023 and for the first nine months of fiscal 2022 respectively. As a result, our operating income decreased to $12.3 million
in the first nine months of fiscal 2023 as compared to $17.9 million in the first nine months of fiscal 2022. An increase in selling,
general and other administrative costs in particular resulted in the increase of cost and expenses as compared to the increase in net
revenues.
Selling,
general and administrative expenses increased to $20.1 million in the first nine months of fiscal 2023 from $15.9 million in the first
nine months of fiscal 2022. This increase in selling, general and administrative expenses was due mainly to more 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.
Research
and development expenses remained constant at $1.1 million for the first nine months of fiscal 2023 and the first nine months of fiscal
2022.
Interest
expense in the first nine months of fiscal 2023 increased by 355% to $41,000 from $9,000 in the first nine months of fiscal 2022.
Inventories
increased to $2.7 million at March 31, 2023 as compared to $2.4 million at June 30, 2022.
Net
management fee and medical receivables increased by 4.2% to $64.7 million at March 31, 2023 from $62.1 million at June 30, 2022 as a
result of slower collections and increased scan volume due to the opening of a new location in Florida. The slower collections were primarily
due to an increase in no-fault and workers’ compensation revenue, which typically takes longer to collect.
FONAR
CORPORATION AND SUBSIDIARIES
The
results of operations for the first nine months of fiscal 2023 reflect an increase in revenues from management, patient and other fees,
as compared to the first nine months of fiscal 2022 ($67.1 million for the first nine months of fiscal 2023 as compared to $66.5 million
for the first nine months of fiscal 2022), and a decrease in the MRI equipment segment revenues ($5.8 million for the first nine months
of fiscal 2023 as compared to $6.3 million for the first nine months of fiscal 2022). Revenues were 8.0% from the MRI segment and 92.0% from HMCA, for the first nine months of fiscal 2023, as compared to 8.7% from the MRI equipment segment and 91.3% from HMCA
for the first nine months of fiscal 2022.
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.
FONAR
CORPORATION AND SUBSIDIARIES
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 had 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 had announced a major diagnostic breakthrough in multiple sclerosis achieved with advanced Upright® MRI. Medical researchers
at FONAR published a paper reporting a diagnostic breakthrough in multiple sclerosis (MS), based on observations made possible by the
Company’s unique Upright® Multi-Position™ MRI scanner. The findings reveal that the cause of multiple sclerosis may be
biomechanical and related to earlier trauma to the neck, which can result in obstruction of the flow of cerebrospinal fluid (CSF), which
is produced and stored in the central anatomic structures of the brain known as the ventricles. Since the ventricles produce a large
net volume of CSF each day (500 cc), the obstruction can result in a build up of pressure within the ventricles, resulting in leakage
of the CSF and the antigenic polypeptides it contains into the surrounding brain tissue. This leakage could be responsible for generating
the brain lesions of multiple sclerosis.
The
paper, titled “The Possible Role of Cranio-Cervical Trauma and Abnormal CSF Hydrodynamics in the Genesis of Multiple Sclerosis,"
appears in the journal Physiological Chemistry and Physics and Medical NMR (Sept. 20, 2011).
FONAR
CORPORATION AND SUBSIDIARIES
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.
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).
FONAR
CORPORATION AND SUBSIDIARIES
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 1.8% from $48.7 million at June 30, 2022 to $49.7 million at March 31,
2023.
Cash
provided by operating activities for the first nine months of fiscal 2023 was $10.1 million. Cash provided by operating activities was
attributable principally to net income of $9.9 million, depreciation and amortization of $3.4 million, amortization on right-to-use assets
of $3.3 million, provision for bad debts of $4.4 million and deferred income tax of $1.9 million, offset by an increase in accounts,
management fee receivables and medical receivables of $5.6 million and a decrease in other current liabilities of $4.4 million.
Cash
used in investing activities for the first nine months of fiscal 2023 was $3.6 million. Cash used in investing activities during the
first nine months of fiscal 2023 consisted of patent costs of $87,000 and the purchase of property and equipment of $3.6 million.
Cash
used in financing activities for the first nine months of fiscal 2023 was $5.6 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 $26,000,
the purchase of treasury stock of $1.2 million and distributions to non-controlling interests of $4.3 million.
Total
liabilities decreased by 8.2% to $48.7 million at March 31, 2023 from $53.1 million at June 30, 2022. “Other” current liabilities
decreased by 45.5% to $3.5 million at March 31, 2023 from $6.4 million at June 30, 2022. The current portion of our service contract
liabilities decreased by 15.0% to $3.6 million at March 31, 2023 as compared to $4.3 million at June 30, 2022. Customer deposits increased
from $361,000 at June 30, 2022 to $826,000 at March 31, 2023.
FONAR
CORPORATION AND SUBSIDIARIES
As
of March 31, 2023, the total of $3.5 million in “other” current liabilities included accrued salaries and payroll taxes of
$2.0 million, state income taxes payable of $200,000 and other general and administrative expenses of $900,000.
Our
working capital increased to $108.1 million at March 31, 2023 from $101.9 million at June 30, 2022. This resulted from an increase in
current assets ($118.7 million at June 30, 2022 as compared to $122.0 million at March 31, 2023), and a decrease in current liabilities
from $16.7 million at June 30, 2022 to $13.9 million at March 31, 2023.
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.
On
August 16, 2020 Congress enacted the Inflation Reduction Act (“IRA”). The IRA includes provisions imposing a 1% excise tax
on share repurchases that occur after December 31, 2022 and introduces a 15% corporate alternative minimum tax (“CAMT”) on
adjusted financial statement income. The CAMT will be effective for tax years beginning after December 31, 2022. Currently, the Company
does not expect the IRA to have a material impact to the Company’s financial statements.
Fonar
is committed to making capital expenditures for the remainder of the 2023 fiscal year, for placing a scanner at a new stand-alone facility
located in New York which is scheduled to open in May. The current estimated costs of these capital expenditures is approximately $150,000.
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.
FONAR
CORPORATION AND SUBSIDIARIES
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 nine consecutive fiscal years and first nine months of fiscal
2023 of profitability and that its capital resources will be adequate to support operations through at least May 15, 2024. 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 cannot predict the full effect of COVID-19 for the three fiscal 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 15, 2024.