For the nine month period ended March 31, 2021, we reported a net income of
$11.5 million on revenues of $65.2 million as compared to net income of $10.6
million on revenues of $64.9 million for the nine month period ended March 31,
2020. Operating income increased from $13.1 million for the nine month period
ended March 31, 2020 to $13.3 million for the nine month period ended March 31,
2021.
For the three month period ended March 31, 2021, we reported a net income of
$4.3 on revenues of $23.1 as compared to net income of $1.9 million on revenues
of $21.7 million for the three month period ended March 31, 2020.
The revenue increase, from $64.9 million for the first nine months of fiscal
2020 to $65.2 million for the first nine months of fiscal 2021, was primarily
due to an increase in management and other fees revenues of $1.8 million, from
$40.7 million for the first nine months of fiscal 2020 to $42.5 million for the
first nine months of fiscal 2021. Revenues from product sales and service and
repair fees decreased by 1.5% from $6.4 million for the first nine months of
fiscal 2020 to $6.3 million for the first nine months of fiscal 2021.
While our revenues increased, our costs and expenses also increased, resulting
in our operating income increasing to $13.3 million for the nine months ended
March 31, 2021 as compared to $13.1 million for the nine months ended March 31,
2020. In terms of percentages, costs and expenses increased 0.4% from $51.8
million for the first nine months of fiscal 2020 to $52.0 million for the first
nine months of fiscal 2021, while revenues increased, from $64.9 million for the
first nine months of fiscal 2020 to $65.2 million for the first nine months of
fiscal 2021. The increase in costs and expenses was due to a $1.1 million
increase in selling, general and administrative expenses, from $15.7 million to
$16.8 million, consisting largely of increases in reserves for management fees
offset by a decrease in costs related to patient fee revenue of $660,000 from
$8.7 million to $8.0 million.
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 70.0% in HDM, and the
investors in HDM have a 30.0% ownership interest. 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
three quarters of fiscal 2021 has been the COVID-19 pandemic. Although it had
seemed the worst had passed, events in the last months of 2020 and beginning of
2021 have shown a spike in new cases, including mutations. Although a vaccine
has been developed, its distribution is still in the early stages. This is by no
means a problem confined to our Company, but regardless of our best efforts, the
impact on our results of operation and financial condition is potentially
volatile and severe. Nevertheless, the significant improvement in our results of
operations in the third quarter of fiscal 2021 ($4.3 million in net income on
revenues of $23.1 million) compared to the third quarter of fiscal 2020 ($1.9
million in net income on revenues of $21.7 million) may indicate that the impact
of COVID-19 on our business is decreasing.
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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 in the beginning
COVID-19 caused us to require that much of our workforce work from home and
restricted the ability of our personnel to travel for marketing purposes or to
service our customers. The Company experienced a sudden drop in scan volume for
a short term period and while the Company is not back to pre-COVID-19 levels,
the scan volume has risen. 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,
particularly in light of recent spikes in new COVID-19 cases, the Company
believes with the positive cash flows, low debt and cash on hand, it will be
able to continue operations going forward.
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.
Manufacturing and Service of MRI Equipment
Revenues from MRI product sales increased to $534,000 for the first nine months
of fiscal 2021 from $288,000 for the first nine months of fiscal 2020. Costs
related to product sales decreased from $685,000 for the nine month period ended
March 31, 2020 to $477,000 for the nine month period ended March 31, 2021.
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 by 5.6% from $6.1 million for the nine month period
ended March 31, 2020 to $5.8 million for the nine month period ended March 31,
2021. Continuing low sales volumes have been a factor ultimately contributing to
the decrease in service revenues, as the revenue from new scanners being placed
under service agreements, following the expiration of their warranties, is
insufficient to replace the revenue lost as a result of older scanners being
taken out of service.
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FONAR CORPORATION AND SUBSIDIARIES
Costs relating to providing service were $2.2 million in the first nine months
of fiscal 2020 and $1.9 million in the first nine months of fiscal 2021. 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 control our costs of providing service.
There were approximately $755,000 in foreign revenues for the first nine months
of fiscal 2021 as compared to approximately $417,000 in foreign revenues for the
first nine months of fiscal 2020, representing an increase in foreign revenues
of 81.0%. We do not regard this as a material trend, but as part of a sometimes
volatile variation resulting from low sales volumes.
We recognize MRI scanner sales revenues on the "percentage of completion" basis,
which means the revenues are recognized as the scanner is manufactured. Revenues
recognized in a particular quarter do not necessarily reflect new orders or
progress payments made by customers in that quarter. We build the scanner as the
customer meets certain benchmarks in its site preparation in order to minimize
the time lag between incurring costs of manufacturing and our receipt of the
cash progress payments from the customer which are due upon delivery.
Consequently, there can be a disparity between the revenues recognized in a
fiscal period and the number of product sales. Generally, the revenues from a
scanner sale are recognized in a fiscal quarter or quarters following the
quarter in which the sale was made.
Revenues for the medical equipment segment decreased to $6.3 million for the
first nine months of fiscal 2021 from $6.4 million for the first nine months of
fiscal 2020. Operating losses for our medical equipment segment decreased to an
operating loss of $242,000 for the first nine months of fiscal 2021 as compared
to an operating loss of $3.3 million for the first nine months of fiscal 2020.
Diagnostic Facilities Management Services
HMCA revenues increased in the first nine months of fiscal 2021 by 0.8% to $58.9
million from $58.5 million for the first nine months of fiscal 2020. The
percentage of our revenues derived from our diagnostic facilities management
segment relative to the percentage of our revenues derived from our medical
equipment segment increased slightly to 90.3% for the first nine months of
fiscal 2021, from 90.1% for the first nine months of fiscal 2020.
HMCA's strategy is to counter the effects of lower reimbursement rates by
increasing the scan volume of the facilities it owns or manages by adding
additional scanners at current centers and increasing our marketing efforts. As
a result of the COVID-19 virus, however, the Company has seen its scan volume
decrease. Nevertheless, the Company is continuing its program of adding
additional scanners at existing centers and also acquired a new center in New
York from a third party at the end of the third quarter of fiscal 2021. If scan
volumes decrease further, or remain at lower volumes, the Company,
notwithstanding its ample cash reserves, may need to reduce the size of its
operations as a last resort.
The COVID-19 virus adversely affected our marketing efforts and scan volumes in
fiscal 2020. The number of scans performed at our centers and at our client's
centers has still not recovered to pre-COVID-19 levels, decreasing from
approximately 139,000 in the first nine months of fiscal 2020 to approximately
131,000 in the first nine months of fiscal 2021. Our scan volume began to
decline in late March 2020 as a result of the impact of the pandemic on referral
sources, stay-at-home orders and travel restrictions. The scan volumes going
forward in fiscal 2021 may be adversely affected by additional spikes in the
COVID-19 virus if sufficiently severe, but so far, this has not occurred.
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FONAR CORPORATION AND SUBSIDIARIES
We now manage/own a total of 39 MRI scanners. Twenty-five (25) MRI scanners are
located in New York and fourteen (14) are located in Florida. HMCA experienced
an operating income of $13.5 million for the first nine months of fiscal 2021
compared to operating income of $16.5 million for the first nine months of
fiscal 2020, the decrease being due to greater increase in costs and expenses.
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 2021 as compared to
the first nine months of fiscal 2020 remained constant at $31.6 million.
Consolidated
For the first nine months of fiscal 2021, our consolidated net revenues
increased by 0.5% to $65.2 million from $64.9 million for the first nine months
of fiscal 2020, and total costs and expenses increased by 0.4% to $52.0 million
from $51.8 million for the first nine months of fiscal 2021 and for the first
nine months of fiscal 2020 respectively. As a result, our operating income
increased slightly to $13.3 million in the first nine months of fiscal 2021 as
compared to $13.1 million in the first nine months of fiscal 2020. An increased
selling, general and other administrative costs in particular resulted in the
growth of cost and expenses.
Selling, general and administrative expenses increased to $16.8 million in the
first nine months of fiscal 2021 from $15.7 million in the first nine months of
fiscal 2020. This increase in selling, general and administrative expenses was
due mainly to additional reserves taken on Management Fees. Some of these
reserves have been taken in the ordinary course of business and some in
connection with the impact of the COVID-19 virus. The compensatory element of
stock issuances, which is included in selling, general and administrative
expenses, increased from $0 for the first nine months of fiscal 2020 to $83,000
for the first nine months of fiscal 2021.
Research and development expenses decreased by 21.8% to $1.2 million for the
first nine months of fiscal 2021 from $1.6 million for the first nine months of
fiscal 2020.
Interest expense in the first nine months of fiscal 2021 and 2020 remained
constant at $57,000.
Inventories increased to $2.0 million at March 31, 2021 as compared to $1.6
million at June 30, 2020.
Net management fee and medical receivables increased by 8.6% to $54.9 million at
March 31, 2021 from $50.5 million at June 30, 2020 as a result of slower
collections and the addition of 2 additional scanners installed in existing
locations. The slower collections were primarily due to COVID-19 lockdowns and
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 2021 reflect an
increase in revenues from management, patient and other fees, as compared to the
first nine months of fiscal 2020 ($58.9 million for the first nine months of
fiscal 2021 as compared to $58.5 million for the first nine months of fiscal
2020), and a decrease in MRI equipment segment revenues ($6.3 million as
compared to $6.4 million). Revenues were 9.7% from the MRI equipment segment as
compared to 90.3% from HMCA, for the first nine months of fiscal 2021, as
compared to 9.9% from the MRI equipment segment and 90.1% from HMCA for the
first nine months of fiscal 2020.
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FONAR CORPORATION AND SUBSIDIARIES
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 $1.2
million of tax credits relating to the alternative minimum tax credits in the
current year plus additional cash benefits from the deferral of the employer
portion of Social Security payroll taxes.
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.
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FONAR CORPORATION AND SUBSIDIARIES
In addition FONAR has announced the publication of a book "THE CRANIOCERVICAL
SYNDROME and MRI" which highlights the unique attributes of FONAR UPRIGHT® MRI
Imaging (S. Karger, A.G. based in Basel, Switzerland-
www.karger.com/Book/Home/261956), published by S. Karger, an approximately 125
year old company and an academic publisher of scientific and medical journals
and books. The seven chapter monograph examines the rapid advances in MRI made
possible by the FONAR UPRIGHT® Multi-Position MRI that are transforming the
treatment of patients suffering from the craniocervical syndrome (CCS). It is
written by leading international experts in the field to practitioners with a
better understanding of the subtle anatomy and MRI appearances at the
craniocervical junction, along with insight into the clinical significance of
cerebrospinal fluid (CSF) flow measurements and its potential role in generating
the devastating impairments of the neurodegenerative diseases: Alzheimer's (5.1
million patients in the United States), childhood and adult Autism (3.0
million), Parkinson's (1.0 million), Multiple Sclerosis (250,000-350,000) and
Amyotrophic Lateral Sclerosis (ALS) (30,000). It calls attention to the
revolutionary importance of FONAR's UPRIGHT® MRI imaging technology and the
prospect of significantly relieving the suffering of the above totaled 9.38
million patients afflicted with these disorders.
Fonar also announced a major diagnostic breakthrough in multiple sclerosis
diagnosis achieved with advanced Upright® MRI. Medical researchers at FONAR
published a paper reporting a diagnostic breakthrough in multiple sclerosis
(MS), based on observations made possible by the Company's unique Upright®
Multi-Position™ MRI scanner. The findings reveal that the cause of multiple
sclerosis may be biomechanical and related to earlier trauma to the neck, which
can result in obstruction of the flow of cerebrospinal fluid (CSF), which is
produced and stored in the central anatomic structures of the brain known as the
ventricles. Since the ventricles produce a large net volume of CSF each day (500
cc), the obstruction can result in a build up of pressure within the ventricles,
resulting in leakage of the CSF and the antigenic polypeptides it contains into
the surrounding brain tissue. This leakage could be responsible for generating
the brain lesions of multiple sclerosis.
The paper, titled "The Possible Role of Cranio-Cervical Trauma and Abnormal CSF
Hydrodynamics in the Genesis of Multiple Sclerosis," appears in the journal
Physiological Chemistry and Physics and Medical NMR (Sept. 20, 2011).
This capability of the Fonar Upright® technology has demonstrated its key value
on patients with the Arnold-Chiari syndrome [Cerebellar Tonsil Extopia (CTE)],
which is believed to affect 200,000 to 500,000 Americans. In this syndrome,
brain stem compression and subsequent severe neurological symptoms occur in
these patients, because the brain stem descends and is compressed at the base of
the skull in the foramen magnum, which is the circular bony opening at the base
of the skull where the spinal cord exits the skull. Conventional lie-down MRI
scanners cannot make an adequate evaluation of this pathology since the
patient's pathology is most visible and the symptoms most acute when the patient
is scanned in the upright fully weight-bearing position.
A combined study of 1,200 neck pain patients published in "Brain Injury" (July
2010) by eight university medical centers reported that cerebellar tonsil
ectopia (CTE) of 1mm or greater was found and visualized 2.5 times (250%) more
frequently when patients who had sustained automobile whiplash injuries were
scanned upright rather than lying down.
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.
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FONAR CORPORATION AND SUBSIDIARIES
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).
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) and the response of
these VITAL TISSUES to treatment.
Liquidity and Capital Resources
Cash and cash equivalents, and short term investments increased by 10.9% from
$36.8 million at June 30, 2020 to $40.8 million at March 31, 2021.
Cash provided by operating activities for the first nine months of fiscal 2021
was $13.1 million. Cash provided by operating activities was attributable
principally to net income of $11.5 million, depreciation and amortization of
$3.1 million, amortization on right-to-use assets of $1.5 million, provision for
bad debts of $5.1 million and deferred income tax of $1.7 million, offset by an
increase in accounts, management fee receivables and medical receivables of $9.6
million, a decrease in other current liabilities of $1.8 million and a decrease
in operating lease liabilities of $1.2 million.
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FONAR CORPORATION AND SUBSIDIARIES
Cash used by investing activities for the first nine months of fiscal 2021 was
$4.2 million. Cash used by investing activities was attributable during the
first nine months of fiscal 2021 consisted of expenditure for acquisition of
$1.1 million for an existing MRI center, patent costs of $108,000 and the
purchase of property and equipment of $2.9 million.
Cash used in financing activities for the first nine months of fiscal 2021 was
$5.0 million. The principal uses of cash in financing activities during the
first nine months of fiscal 2021 were the repayment of principal on long-term
debt and capital lease obligations of $73,000 and distributions to
non-controlling interests of $5.0 million, offset by the proceeds from debt of
$63,000.
Total liabilities decreased by 6.6% to $50.5 million at March 31, 2021 from
$54.0 million at June 30, 2020. "Other" current liabilities decreased by 23.6%
to $6.3 million at March 31, 2021 from $8.2 million at June 30, 2020. Long-term
debt and capital lease obligations decreased from $2.1 million at June 30, 2020
to $1.9 million at March 31, 2021. The current portion of our unearned revenue
on service contracts remained constant from $4.1 million at June 30, 2020 and
March 31, 2021. Customer deposits increased from $855,000 at June 30, 2020 to
$1.0 million at March 31, 2021 as a result of an increase in services performed.
As of March 31, 2021, the total of $6.3 million in "other" current liabilities
included accrued salaries and payroll taxes of $3.0 million, and sales taxes of
$816,000 plus accrued interest and penalties of $308,000.
Our working capital increased to $86.5 million at March 31, 2021 from $77.2
million at June 30, 2020. This resulted from an increase in current assets
($95.9 million at June 30, 2020 as compared to $103.6 million at March 31,
2021), and a decrease in current liabilities from $18.7 million at June 30, 2020
to $17.1 million at March 31, 2021. This results from the Company's care in
selecting investments and capital expenditures.
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
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with
Customers, (Topic 606). ASU 2014-09 requires an entity to recognize as revenue
the amount that reflects the consideration which it expects to be entitled in
exchange for goods and services as it transfers control to its customers. It
also requires more detailed disclosures to enable users of the financial
statements to understand the nature, amount, timing and uncertainty of revenue
and cash flows arising from contracts with customers. The Company earns revenue
from the sale of scanners, maintenance contracts, product upgrades, patient
services and management fees. Under the new guidance, the reporting for patient
services revenue is now reported differently. All other streams of revenue were
not impacted by the new guidance. The primary change for healthcare providers
under the new guidance relates to revenue generated from patient services, with
patient responsibility for payment. Under the new guidance, the Company is
required to report an implicit price concession (both initially and for the
subsequent changes in estimates) as a reduction of revenues as opposed to bad
debt expense as a component of operating expenses. The Company now records any
changes in expectation of collection amounts due to patient specific events that
suggests that the patient no longer has the ability and intent to pay the amount
due through the bad debt expense, as that is more indicative of a change in the
customer's credit worthiness as opposed to change in the transaction price.
The new standard supersedes most current revenue guidance, including
industry-specific guidance. The guidance became effective for the Company on
July 1, 2018 and as part of adopting the standard, the Company identified
revenue streams of like contracts to allow for ease of implementation. The
Company used primarily a portfolio approach to apply the new model to classes of
customers with similar characteristics. The impact of adopting the new standard
on our total revenue; and income from operations was not material. While the
adoption of ASU 2014-09 did impact the presentation of net operating revenues in
our Consolidated Statements of Operations and impacts certain disclosures, it
did not materially impact our financial position, results of operations or cash
flows. There was no cumulative effect of a change in accounting principle
recorded related to the adoption of ASU 2014-09 on July 1, 2018.
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 $1.2 million of tax credits relating to the alternative minimum tax credits
in the current year. Before the CARES Act, these credits were to be refunded
over a period of 3 years. We will also realize 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. The Company believes that most it not all of
the loan proceeds will be forgiven, however there is no assurance that it will
be forgiven until approval is received.
Fonar has not committed to making any significant capital expenditures for the
remainder of the 2021 fiscal year with the exception of placing a scanner at a
facility located in New York.
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FONAR CORPORATION AND SUBSIDIARIES
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 nine months of fiscal 2021
profitability and that its capital resources will be adequate to support
operations through at least March 31, 2022. 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 first fiscal quarter
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 March 31, 2022.
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FONAR CORPORATION 
