For the nine month period ended March 31, 2022, we reported a net income of
$13.6 million on revenues of $72.8 million as compared to net income of $11.5
million on revenues of $65.2 million for the nine month period ended March 31,
2021. Operating income increased from $13.3 million for the nine month period
ended March 31, 2021 to $17.9 million for the nine month period ended March 31,
2022.
For the three month period ended March 31, 2022, we reported a net income of
$3.3 million on revenues of $24.6 million as compared to net income of $4.3
million on revenues of $23.1 million for the three month period ended March 31,
2021.
The revenue increase, from $65.2 million for the first nine months of fiscal
2021 to $72.8 million for the first nine months of fiscal 2022, was primarily
due to increases in patient fee revenue of $5.6 million, from $16.4 million for
the first nine months of fiscal 2021 to $21.9 million for the first nine months
of fiscal 2022. Revenues from product sales and service and repair fees
decreased by 0.5% from $6.31 million for the first nine months of fiscal 2021 to
$6.28 million for the first nine months of fiscal 2022.
While our revenues increased, our costs and expenses also increased, but by a
lesser amount resulting in our operating income increasing to $17.9 million for
the nine months ended March 31, 2022 as compared to $13.3 million for the nine
months ended March 31, 2021. In terms of percentages, costs and expenses
increased 5.7% from $52.0 million for the first nine months of fiscal 2021 to
$54.9 million for the first nine months of fiscal 2022, while revenues increased
11.6%, from $65.2 million for the first nine months of fiscal 2021 to $72.8
million for the first nine months of fiscal 2022.
Fonar's wholly owned subsidiary, Health Management Corporation of America
("HMCA"), has the controlling interest, in Health Diagnostics Management, LLC
("HDM"). HMCA presently has a direct ownership interest of 70.8% in HDM, and the
investors in HDM have a 29.2% ownership interest, as compared to HMCA's 70%
ownership interest and the investors' 30% ownership interest in HDM in fiscal
2021. This change resulted from the Company's purchase of non-controlling
interests from the minority shareholders for $546,000 in the second quarter of
fiscal 2022. The management of the diagnostic imaging centers business segment
is being conducted by HDM, operating under the name "Health Management Company
of America". For the sake of simplicity, HMCA, and HDM are referred to as
"HMCA", unless otherwise indicated.
The most significant adverse impact on our Company in fiscal 2020 and the first
half of fiscal 2021 has been the COVID-19 pandemic. Although it had seemed the
worst had passed, by August 2020, subsequent events have shown a spike in new
cases and the emergence of new strains of the virus. This is by no means a
problem confined to our Company, but despite our best efforts and improved
ability to cope with the pandemic, the impact on our results of operation and
financial condition is potentially volatile and severe.
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FONAR CORPORATION AND SUBSIDIARIES
Since March 2020 the global pandemic of COVID-19 has caused turbulence and
uncertainty in the United States and international markets and economies which
have adversely affected our workforce, liquidity, financial conditions,
revenues, profitability and business operations. Generally COVID-19 caused us to
require that a portion of our workforce work from home and restricted the
ability of our personnel to travel for marketing purposes or to service our
customers. During the fourth quarter of fiscal 2020, the Company was able to
enact certain decisions to allow the Company to survive during the global
pandemic and prevent further losses or additional decreases in scan volume.
Although we are unable to predict if there will be additional consequences on
our operations from the continuing global pandemic of COVID-19, the Company
believes with the positive cash flows, low debt and cash on hand, it will be
able to continue operations going forward.
One of the concerns we have is the increased strictness in enforcement of
certain COVID-19 mandates, such as the requirement that employees in healthcare
facilities be vaccinated. Another concern we have is the newer variants that are
more transmissible. We are in fact facing some of these challenges now. As a
result, between absences due to illness and the loss of unvaccinated employees
whose duties required them to be in contact with patients, we were sometimes
unable to keep a scanning facility open for all shifts. During the third quarter
of fiscal 2022, the aggregate number of scans performed by the sites we manage
or own declined to 46,190 scans from 48,469 scans in the first quarter of fiscal
2022. In comparison, the actual number of scans performed in the third quarter
of fiscal 2022 was 46,190 as compared to 44,515 performed in fiscal 2021.
Nevertheless, we have been able to navigate through these challenges and avoid
any significant disruption to our business
Forward Looking Statements
Certain statements made in this Quarterly Report on Form 10-Q are
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of Management
for future operations. Such statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. The
forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. Our plans and objectives are
based, in part, on assumptions involving the expansion of business. Assumptions
relating to the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond our control. Although we believe that our assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
forward-looking statements included in this Report will prove to be accurate. In
light of the significant uncertainties inherent in the forward-looking statement
included herein, the inclusion of such information should not be regarded as a
representation by us or any other person that our objectives and plans will be
achieved.
Results of Operations
We operate in two industry segments: the manufacture and servicing of medical
(MRI) equipment, which is conducted by Fonar, and diagnostic facilities
management services, which is conducted through HMCA.
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FONAR CORPORATION AND SUBSIDIARIES
Manufacturing and Service of MRI Equipment
Revenues from MRI product sales decreased to $481,000 for the first nine months
of fiscal 2022 from $534,000 for the first nine months of fiscal 2021. Costs
related to product sales decreased from $477,000 for the nine month period ended
March 31, 2021 to $352,000 for the nine month period ended March 31, 2022.
Economic uncertainty and lower reimbursement rates for MRI scans, have depressed
the market for our MRI scanner products, notwithstanding our scanners' unique
technological capabilities (e.g. multi positional scanning). Due to the low
sales volumes of our MRI product, period to period comparisons are not
necessarily indicative of any trends.
Service revenues remained constant at $5.8 million for the nine month period
ended March 31, 2022 and the nine month period ended March 31, 2021.
Costs relating to providing service were $1.9 million in the first nine months
of fiscal 2021 and $2.2 million in the first nine months of fiscal 2022. Because
of our ability to monitor the performance of customers' scanners from our
facilities in Melville, New York on a daily basis and to detect and repair any
irregularities before more serious and costly problems develop, we have been
able to reduce our costs of providing service.
There were approximately $466,000 in foreign revenues for the first nine months
of fiscal 2022 as compared to approximately $755,000 in foreign revenues for the
first nine months of fiscal 2021, representing an decrease in foreign revenues
of 38.3%. We do not regard this as a material trend, but as part of a normal
although sometimes volatile variation resulting from low volumes of foreign
sales.
We recognize MRI scanner sales revenues on the "percentage of completion" basis,
which means the revenues are recognized as the scanner is manufactured. Revenues
recognized in a particular quarter do not necessarily reflect new orders or
progress payments made by customers in that quarter. We build the scanner as the
customer meets certain benchmarks in site preparation and our installation of
the scanner, in order to minimize the time lag between incurring costs of
manufacturing and our receipt of the cash progress payments from the customer
which are due upon delivery. Consequently, there can be a disparity between the
revenues recognized in a fiscal period and the number of product sales.
Generally, the revenues from a scanner sale are recognized in a fiscal quarter
or quarters following the quarter in which the sale was made.
Revenues for the medical equipment segment remained constant at $6.3 million for
the first nine months of fiscal 2022 and the first nine months of fiscal 2021.
Operating losses for our medical equipment segment decreased to an operating
loss of $1.1 million, for the first nine months of fiscal 2022 as compared to an
operating loss of $242,000 for the first nine months of fiscal 2021.
Diagnostic Facilities Management Services
HMCA revenues increased in the first nine months of fiscal 2022 by 12.9% to
$66.5 million from $58.9 million for the first nine months of fiscal 2021. The
percentage of our revenues derived from our diagnostic facilities management
segment relative to the percentage of our revenues derived from our medical
equipment segment increased slightly to 91.4% for the first nine months of
fiscal 2022, from 90.3% for the first nine months of fiscal 2021.
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FONAR CORPORATION AND SUBSIDIARIES
HMCA's current strategy is to counter the effects of lower reimbursement rates
by increasing the scan volume of the facilities it owns or manages by adding
additional scanners at current centers and increasing our marketing efforts. As
a result of the COVID-19 virus, however, the Company had seen decreases in its
scan volume. Nevertheless, the Company continued its program of adding
additional scanners. The scan volume increased slightly in the third quarter of
2022 and continues to recover in the fourth quarter of fiscal 2022. The
continuation of the COVID-19 virus and its various variants that are more
transmittable may delay the completion of the installation of some of the
scanners. If scan volumes decrease however, and remain at lower volumes, the
Company, notwithstanding its ample cash reserves, may need to consider reducing
the size of its operations temporarily as a last resort.
New York State mandated that as of October 7, 2021, all workers at hospitals,
long-term care facilities and diagnostic centers be COVID-19-vaccinated.
Workers who were not vaccinated either resigned, were transferred to a
non-diagnostic facility within the company, or were dismissed. The resulting
reduction in the number of workers available at sites owned or managed by HMCA,
has been challenging and has significantly reduced the pool of qualified and
vaccinated workers. Also this is combined with the emergence of the new highly
transmissible variants. HMCA owned or managed sites struggling with reduced
staff either have cut their business hours and therefore scan fewer patients or,
when possible, maintain regular business hours by paying employees who are
willing to work extra hours at overtime rates. While it is too early to assess
the ultimate impact, New York's vaccination mandate and the emergence of the new
variants are having a negative effect on our business in fiscal 2022.
Although the COVID-19 virus and government mandates have adversely affected our
marketing efforts our scan volumes in fiscal 2020 and the beginning of fiscal
2021, the number of scans performed at our centers and at our client's centers
has recovered to pre-COVID-19 levels and has increased from approximately
131,000 in the first nine months of fiscal 2021 to approximately 141,000 in the
first nine months of fiscal 2022.
We now manage or own a total of 40 MRI scanners. Twenty-five (25) MRI scanners
are located in New York and fifteen (15) are located in Florida. HMCA
experienced an operating income of $18.9 million for the first nine months of
fiscal 2022 compared to operating income of $13.5 million for the first nine
months of fiscal 2021.
The ability of HMCA to maintain its profitability is principally due to HMCA's
success in marketing the scanning services of the facilities managed or owned by
HMCA, notwithstanding the decrease in reimbursement rates paid for MRI scans by
insurers, Medicare and other government programs and the lockdowns imposed as a
result of the COVID-19 virus. The reductions in reimbursement rates are not
unique to HMCA or HMCA's clients but are being experienced by the industry in
general.
HMCA's cost of revenues for the first nine months of fiscal 2022 as compared to
the first nine months of fiscal 2021 increased by 12.8% from $31.6 million to
$35.6 million primarily as a result of an increase in scan volume.
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FONAR CORPORATION AND SUBSIDIARIES
Consolidated
For the first nine months of fiscal 2022, our consolidated net revenues
increased by 11.6% to $72.8 million from $65.2 million for the first nine months
of fiscal 2021, and total costs and expenses increased by 5.7% to $54.9 million
from $52.0 million for the first nine months of fiscal 2022 and for the first
nine months of fiscal 2021 respectively. As a result, our operating income
increased to $17.9 million in the first nine months of fiscal 2022 as compared
to $13.3 million in the first nine months of fiscal 2021. A decrease in selling,
general and other administrative costs in particular resulted in the smaller
increase of cost and expenses as compared to the increase in net revenues.
Selling, general and administrative expenses decreased to $15.9 million in the
first nine months of fiscal 2022 from $16.8 million in the first nine months of
fiscal 2021. This decrease in selling, general and administrative expenses was
due mainly to less reserves taken on management fees. Some of these reserves had
been taken in the ordinary course of business and some in connection with the
impact of the COVID-19 virus. The compensatory element of stock issuances, which
is included in selling, general and administrative expenses, decrease to $0 for
the first nine months of fiscal 2022 from $83,000 in the first nine months of
fiscal 2021.
Research and development expenses decreased by 10.8% to $1.1 million for the
first nine months of fiscal 2022 from $1.2 million for the first nine months of
fiscal 2021.
Interest expense in the first nine months of fiscal 2022 decreased by 84.2% to
$9,000 from $57,000 in the first nine months of fiscal 2021.
Inventories increased to $2.4 million at March 31, 2022 as compared to $1.7
million at June 30, 2021.
Net management fee and medical receivables increased by 7.4% to $60.8 million at
March 31, 2022 from $56.7 million at June 30, 2021 as a result of slower
collections and increased scan volume. The slower collections were primarily due
to an increase in no-fault and workers' compensation revenue, which typically
takes longer to collect.
The results of operations for the first nine months of fiscal 2022 reflect an
increase in revenues from management, patient and other fees, as compared to the
first nine months of fiscal 2021 ($72.8 million for the first nine months of
fiscal 2022 as compared to $65.2 million for the first nine months of fiscal
2021), and a increase in Diagnostic facilities management services segment
revenues ($66.5 million as compared to $58.9 million). Revenues were 8.6% from
the MRI equipment segment as compared to 91.4% from HMCA, for the first nine
months of fiscal 2022, as compared to 9.7% from the MRI equipment segment and
90.3% from HMCA for the first nine months of fiscal 2021.
On March 27, 2020, the CARES Act was signed into law and is intended to provide
over $2 trillion in stimulus benefits for the U.S. economy. The CARES Act
provides for certain federal income tax changes, including an increase in the
interest expense tax deduction limitation, the deferral of the employer portion
of Social Security payroll taxes, refundable payroll tax credits, net operating
loss carryback periods, alternative minimum tax credit refunds and bonus
depreciation of qualified improvement property. The federal income tax changes
brought about by the CARES Act are complex and further guidance is expected. We
received a cash benefit from the ability to receive a full reimbursement of $1.3
million of tax credits relating to the alternative minimum tax credits in the
prior fiscal year plus additional cash benefits from the deferral of the
employer portion of Social Security payroll taxes.
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FONAR CORPORATION AND SUBSIDIARIES
As a result of the Patient Protection and Affordable Care Act (PPACA) we have
experienced a reduction of reimbursement rates and less interest in our MRI
equipment. Any changes to the PPACA may result in further changes in the
healthcare industry and our business.
We are committed to improving our operating results and dealing with the
challenges posed by legislative and regulatory requirements. Nevertheless,
factors beyond our control, such as the COVID-19 virus, the timing and rate of
market growth, economic conditions, the availability of credit and payor
reimbursement rates, or unexpected expenditures and the timing of such
expenditures, make it difficult to forecast future operating results.
As mentioned, one of the effects of the PPACA on our business has been the
reduction in Medicare reimbursement rates for MRI scans. This also has resulted
in a reduction in the reimbursement rates by commercial insurers and government
programs which tie their reimbursement rates to the Medicare rates.
Nevertheless, the patient volume of the scanning centers we manage or own has
enabled us to maintain healthy operating results in spite of these challenges.
We believe we are pursuing the correct policies to cope with these problems and
the problems caused by the COVID-19 pandemic, and to improve the Company's
operating results.
Our Upright® MRI (also referred to as the Stand-Up® MRI), together with our
works-in-progress, are intended to significantly improve our competitive
position.
The Upright® MRI scanner, which operates at 6000 gauss (.6 Tesla) field
strength, allows patients to be scanned while standing, sitting, reclining and
in multiple flexion and extension positions. It is common in visualizing the
spine that abnormalities are visualized in some positions and not others. This
enables surgical corrections that heretofore would not have been addressable for
lack of visualizing the symptom causing the pathology and therefore, in general
enables the treating physician to achieve a better treatment outcome for his
patient. A floor-recessed elevator brings the patient to the height appropriate
for the targeted image region. A custom-built multi-position adjustable bed will
allow patients to sit or lie on their backs, sides or stomachs at any angle.
This allows the MRI technologist to ask the patient to position himself/herself
in the exact position that generates his/her pain so that images of the patient
in the position that explicitly generates the patient's pain can be nailed down.
Full-range-of-motion studies of the joints in virtually any direction are
possible, a particularly promising feature for sports injuries.
In addition, FONAR has announced the publication of a book "THE CRANIOCERVICAL
SYNDROME and MRI" that highlights the unique attributes of FONAR UPRIGHT® MRI
Imaging (S. Karger, A.G. based in Basel, Switzerland-
www.karger.com/Book/Home/261956) which has been published by S. Karger, an
approximately 125 year old company and an academic publisher of scientific and
medical journals and books. The seven chapter monograph examines the rapid
advances in MRI made possible by the FONAR UPRIGHT® Multi-Position MRI that are
transforming the treatment of patients suffering from the craniocervical
syndrome (CCS). It is written by leading international experts in the field to
practitioners with a better understanding of the subtle anatomy and MRI
appearances at the craniocervical junction, along with insight into the clinical
significance of cerebrospinal fluid (CSF) flow measurements and its potential
role in generating the devastating impairments of the neurodegenerative
diseases: Alzheimer's (5.1 million patients in the United States), childhood and
adult Autism (3.0 million), Parkinson's (1.0 million), Multiple Sclerosis
(250,000-350,000) and Amyotrophic Lateral Sclerosis (ALS) (30,000). It calls
attention to the revolutionary importance of FONAR's UPRIGHT® MRI imaging
technology and the prospect of significantly relieving the suffering of the
above totaled 9.38 million patients afflicted with these disorders.
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FONAR CORPORATION AND SUBSIDIARIES
Fonar also announced a major diagnostic breakthrough in multiple sclerosis
achieved with advanced Upright® MRI. Medical researchers at FONAR published a
paper reporting a diagnostic breakthrough in multiple sclerosis (MS), based on
observations made possible by the Company's unique Upright® Multi-Position™ MRI
scanner. The findings reveal that the cause of multiple sclerosis may be
biomechanical and related to earlier trauma to the neck, which canresult in
obstruction of the flow of cerebrospinal fluid (CSF), which is produced and
stored in the central anatomic structures of the brain known as the ventricles.
Since the ventricles produce a large net volume of CSF each day (500 cc), the
obstruction can result in a build up of pressure within the ventricles,
resulting in leakage of the CSF and the antigenic polypeptides it contains into
the surrounding brain tissue. This leakage could be responsible for generating
the brain lesions of multiple sclerosis.
The paper, titled "The Possible Role of Cranio-Cervical Trauma and Abnormal CSF
Hydrodynamics in the Genesis of Multiple Sclerosis," appears in the journal
Physiological Chemistry and Physics and Medical NMR (Sept. 20, 2011).
This capability of the Fonar Upright® technology has demonstrated its key value
on patients with the Arnold-Chiari syndrome [Cerebellar Tonsil Extopia (CTE)],
which is believed to affect 200,000 to 500,000 Americans. In this syndrome,
brain stem compression and subsequent severe neurological symptoms occur in
these patients, because the brain stem descends and is compressed at the base of
the skull in the foramen magnum, which is the circular bony opening at the base
of the skull where the spinal cord exits the skull. Conventional lie-down MRI
scanners cannot make an adequate evaluation of this pathology since the
patient's pathology is most visible and the symptoms most acute when the patient
is scanned in the upright fully weight-bearing position.
A combined study of 1,200 neck pain patients published in "Brain Injury" (July
2010) by eight university medical centers reported that cerebellar tonsil
ectopia (CTE) of 1mm or greater was found and visualized 2.5 times (250%) more
frequently when patients who had sustained automobile whiplash injuries were
scanned upright rather than lying down.
The Upright® MRI has also demonstrated its value for patients suffering from
scoliosis. Scoliosis patients have been typically subjected to routine x-ray
exams for years and must be imaged upright for an adequate evaluation of their
scoliosis. Because the patient must be standing for a complete evaluation of the
extent of the patient's scoliosis, an x-ray machine has been the only modality
that could provide that service. The Upright® MRI is the only MRI scanner which
allows the patient to stand during the MRI exam. Fonar has developed an RF
receiver and scanning protocol that for the first time allows scoliosis patients
to obtain diagnostic pictures of their spines without the risks of x-rays. A
study by the National Cancer Institute (2000) of 5,466 women with scoliosis
reported a 70% increase in breast cancer resulting from 24.7 chest x-rays these
patients received on the average in the course of their scoliosis treatment. The
Upright® MRI examination of scoliosis enables the needed imaging evaluation of
the degree of spine scoliosis without exposing the patient to the risk of breast
cancer from x-radiation. Currently scoliosis affects more than 3,000,000
American women.
In addition, the University of California, Los Angeles (UCLA) reported their
results of their study of 1,302 patients utilizing the Fonar Upright® MRI at the
22nd Annual Meeting of the North American Spine Society on October 23, 2007. The
UCLA study showed the superior ability of the Fonar Upright® MRI to detect spine
pathology, including spondylolisthesis, disc herniations and disc degeneration,
as compared to visualizations of the spine produced by traditional single
position static MRIs.
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FONAR CORPORATION AND SUBSIDIARIES
The UCLA study by MRI of 1,302 back pain patients when they were in the Fonar
Upright® MRI and examined in a full range of flexion and extension positions
made possible by Fonar's new Upright® technology established that significant
"misses" of pathology were occurring with static single position MRI imaging. At
L4-5, the vertebral level responsible for 49.8% of lumbar disc herniations,
35.1% of the spondylolistheses (vertebral instabilities) visualized by the
Upright® MRI, were being missed by static single position MRI (510 patients).
Since this vertebral segment is responsible for the majority of all disc
herniations, the finding may reveal a significant cause of failed back
surgeries. The UCLA study further showed the "miss-rate" of vertebral
instabilities by static only MRI was even higher, 38.7%, at the L3-4 vertebral
segment. Additionally, the UCLA study showed that MRI examinations of the
cervical spine that did not perform extension images of the neck "missed" disc
bulges 23.75% of the time (163 patients).
The UCLA study further reported that they were able to quantitatively measure
the dimensions of the central spinal canal with the "highest accuracy" using the
FONAR Upright® MRI thereby enabling the extent of spinal canal stenosis that
existed in patients to be measured. Spinal canal stenosis gives rise to the
symptom complex intermittent neurogenic claudication manifest as debilitating
pain in the back and lower extremities, weakness and difficulties in ambulation
and leg paresthesias. Spinal canal stenosis is a spinal compression syndrome
separate and distinct from the more common nerve compression syndrome of the
spinal nerves as they exit the vertebral column through the bony neural foramen.
The Fonar Upright® MRI can also be useful for MRI directed emergency
neuro-surgical procedures as the surgeon would have unhindered access to the
patient's head when the patient is supine with no restrictions in the vertical
direction. This easy-entry, mid-field-strength scanner could prove ideal for
trauma centers where a quick MRI-screening within the first critical hour of
treatment will greatly improve patients' chances for survival and optimize the
extent of recovery.
MRI has brought a new dimension to MEDICAL TREATMENT, the power to VISUALIZE
ANATOMIC DETAIL in the body's VITAL SOFT TISSUES (brain, heart, kidney, liver,
spleen, lungs, pancreas, intestines) plus MRI's new power to non-invasively
QUANTIFY (e.g. measure T1, T2, diffusion, chemical spectra) the response of
these VITAL TISSUES to treatment.
Liquidity and Capital Resources
Cash and cash equivalents, and short term investments increased by 3.5% from
$44.5 million at June 30, 2021 to $46.0 million at March 31, 2022.
Cash provided by operating activities for the first nine months of fiscal 2022
was $10.1 million. Cash provided by operating activities was attributable
principally to net income of $13.6 million, depreciation and amortization of
$3.5 million, amortization on right-to-use assets of $2.6 million, provision for
bad debts of $2.2 million and deferred income tax of $3.5 million, offset by an
increase in accounts, management fee receivables and medical receivables of $5.0
million and a decrease in other current liabilities of $5.5 million.
Cash used in investing activities for the first nine months of fiscal 2022 was
$4.4 million. Cash used in investing activities during the first nine months of
fiscal 2022 consisted of patent costs of $60,000, purchase of non-controlling of
$546,000 and the purchase of property and equipment of $3.8 million.
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FONAR CORPORATION AND SUBSIDIARIES
Cash used in financing activities for the first nine months of fiscal 2022 was
$4.2 million. The principal uses of cash in financing activities during the
first nine months of fiscal 2022 were the repayment of principal on long-term
debt and capital lease obligations of $23,000 and distributions to
non-controlling interests of $4.1 million.
Total liabilities decreased by 5.1% to $51.4 million at March 31, 2022 from
$54.1 million at June 30, 2021. "Other" current liabilities decreased by 46.3%
to $4.9 million at March 31, 2022 from $9.2 million at June 30, 2021. The
current portion of our service contract liabilities decreased by 10.7% to $3.9
million at March 31, 2022 as compared to $4.4 million at June 30, 2021. Customer
deposits decreased from $731,000 at June 30, 2021 to $361,000 at March 31, 2022.
As of March 31, 2022, the total of $4.9 million in "other" current liabilities
included accrued salaries and payroll taxes of $2.3 million, state income taxes
payable of $1.1 million and other general and administrative expenses of $1.1
million.
Our working capital increased to $100.2 million at March 31, 2022 from $88.5
million at June 30, 2021. This resulted from an increase in current assets
($108.6 million at June 30, 2021 as compared to $114.3 million at March 31,
2022), and a decrease in current liabilities from $20.0 million at June 30, 2021
to $14.2 million at March 31, 2022.
The ultimate realization of deferred tax assets is dependent on the generation
of future taxable income during the periods in which those temporary differences
become deductible or when such net operating losses can be utilized. The Company
considers projected future taxable income, the regulatory environment of the
industry, and tax planning strategies in making this assessment. At the present,
the Company believes that it is more likely than not that the benefits from
certain deferred tax asset carryforwards, will not all be fully realized. In
recognition of this inherent risk, a valuation allowance was established for the
partial value of the deferred tax asset, (principally related to research and
development tax credits and allowance for doubtful accounts). A valuation
allowance will be maintained until sufficient positive evidence exists to
support the reversal of any portion or all of the valuation allowance.
The Company's effective income tax rate is based on expected income, statutory
rates and tax planning opportunities available in the various jurisdictions in
which it operates. For interim financial reporting, the Company estimates the
annual income tax rate based on projected taxable income for the full year and
records a quarterly income tax provision or benefit in accordance with the
anticipated annual rate. The Company refines the estimates of the year's taxable
income on a periodic basis as new information becomes available, including
actual year-to-date financial results. This continual estimation process often
results in a change to the expected effective income tax rate for the year. When
this occurs, the Company adjusts the income tax provision during the quarter in
which the change in estimate occurs so that the year-to-date provision reflects
the expected income tax rate. Significant judgment is required in determining
the effective tax rate and in evaluating tax positions.
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FONAR CORPORATION AND SUBSIDIARIES
On March 27, 2020 Congress enacted the CARES Act (Coronavirus Aid, Relief and
Economic Security Act). The Act provides numerous tax provisions and other
stimulus measures, including temporary changes regarding prior and future
operating losses, temporary changes to the prior and future limitations on
interest deductions, temporary suspension of certain payment requirements for
the employer portion of Social Security taxes, technical corrections to prior
tax legislation for tax depreciation of certain qualified improvement property
and the creation of refundable employee retention credits. At the present time,
the only impact of the CARES Act to the Company is allowing a full reimbursement
of $1.3 million of tax credits relating to the alternative minimum tax credits
in prior fiscal years. Before the CARES Act, these credits were to be refunded
over a period of 3 years. We also realized a cash benefit from the deferral of
Social Security payroll taxes.
On June 30, 2020, we entered into a $701,000 loan agreement under the Paycheck
Protection Program (PPP) under the CARES Act that provides for loans to
qualifying businesses for amounts up to 2.5 times of the average monthly payroll
expenses. The Company applied for this additional loan exclusively for the
Florida locations during June 2020 due to the fact that the COIVD-19 virus was
increasing in Florida. The loans and accrued interest are forgivable after 24
weeks as long as the proceeds are used for eligible purposes, including payroll,
benefits, rent and utilities and maintains certain payroll levels. The amount of
loan forgiveness will be reduced if the borrower terminates employees or reduces
salaries during the 24 week period. This loan was forgiven during August 2021 in
its entirety.
Fonar is committed to making capital expenditures for the remainder of the 2022
fiscal year, for placing an additional scanner at a new stand-alone facility
located in Florida. The current estimated costs of these capital expenditures is
approximately $1.0 million.
Critical to our business plan are the improvement and expansion of the MRI
facilities managed or owned by HMCA, and increasing the number of scans
performed at those facilities. In addition, our business plan calls for a
continuing commitment to providing our customers with enhanced equipment service
and maintenance capabilities and delivering state-of-the-art, innovative and
high quality equipment and upgrades at competitive prices.
Management is seeking to promote wider market recognition of Fonar's scanner
products, and to increase demand for Upright® scanning at the facilities HMCA
owns or manages. Given the liquidity and credit constraints in the markets, the
uncertainty resulting from the Patient Protection and Affordable Care Act or its
repeal or modification, and the impact of the COVID-19 virus on the economy in
general, the sale of medical equipment has and may continue to suffer.
The Company believes that its business plan has been responsible for the past
eight consecutive fiscal years and first three fiscal quarters of fiscal 2022 of
profitability and that its capital resources will be adequate to support
operations through at least May 16, 2023. The future effects on our business of
healthcare legislation, the impact of the COVID-19 virus, the Deficit Reduction
Act, the 2.3% excise tax on sales of medical equipment, reimbursement rates,
public health conditions and the general economic and business climate are not
known at the present time. Nevertheless, there is a possibility of adverse
consequences to our business operations from these causes. Although the Company
can not predict the full effect of COVID-19 for the first three fiscal quarters
or any later period, the Company believes that it has adequate revenues, cash
reserves and other assets that will enable it to continue to operate until at
least May 16, 2023.
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