FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

☐

For the quarterly period ended SEPTEMBER 30, 2021

Commission file number 0-10248

FONAR CORPORATION

(Exact name of registrant as specified in its charter)

delaware		11-2464137
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

110 Marcus Drive Melville, New York		11747
Address of principal executive offices)		(Zip Code)

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

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

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

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

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

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

Class	Outstanding at November 3, 2021
Common Stock, par value $.0001		6,554,210
Class B Common Stock, par value $.0001		146
Class C Common Stock, par value $.0001		382,513
Class A Preferred Stock, par value $.0001		313,438

Page 1

FONAR CORPORATION AND SUBSIDIARIES

INDEX

PART I - FINANCIAL INFORMATION		PAGE

Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 2021 (Unaudited) and June 30, 2021		3
Condensed Consolidated Statements of Income for the Three Months Ended September 30, 2021 and September 30, 2020 (Unaudited)		6
Condensed Consolidated Statements of Changes in Equity for the Three Months Ended September 30, 2021 and September 30, 2020 (Unaudited)		7
Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2021 and September 30, 2020 (Unaudited)		8
Notes to Condensed Consolidated Financial Statements (Unaudited)		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3. Quantitative and Qualitative Disclosures About Market Risk		33
Item 4. Controls and Procedures		34
PART II - OTHER INFORMATION		34
Item 1. Legal Proceedings		34
Item 1A. Risk Factors		34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 3. Defaults Upon Senior Securities		37
Item 4. Mine Safety Disclosures		37
Item 5. Other Information		37
Item 6. Exhibits		37
Signatures		37

Page 2

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(UNAUDITED)

ASSETS


	September 30, 2021		June 30, 2021 *
Current Assets:
Cash and cash equivalents	$	43,405	$	44,460
Short term investments		32		32
Accounts receivable – net		4,548		4,526
Accounts receivable - related party		102		12
Medical receivable – net		18,356		17,901
Management and other fees receivable - net		31,695		30,948
Management and other fees receivable – related medical practices – net		7,998		7,814
Inventories		1,835		1,663
Prepaid expenses and other current assets		1,416		1,227
Total Current Assets		109,387		108,583

Accounts receivable – long term		2,609		2,880
Deferred income tax asset		14,764		15,959
Property and equipment – net		21,971		21,850
Right-of-use Asset – operating lease		29,535		30,133
Right-of-use Asset – financing lease		1,077		1,127
Goodwill		4,269		4,269
Other intangible assets – net		3,957		4,038
Other assets		660		667
Total Assets	$	188,229	$	189,506

*Condensed from audited financial statements.

See accompanying notes to condensed consolidated financial statements.

Page 3

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(UNAUDITED)

LIABILITIES AND STOCKHOLDERS’ EQUITY

	September 30, 2021		June 30, 2021 *
Current Liabilities:
Current portion of long-term debt and capital leases	$	35	$	173
Accounts payable		1,133		1,866
Other current liabilities		5,990		9,162
Unearned revenue on service contracts		4,328		4,366
Unearned revenue on service contracts – related party		83		—
Contract liabilities		15		15
Operating lease liability – current portion		3,669		3,533
Financing lease liability – current portion		205		203
Customer deposits		789		731
Total Current Liabilities		16,247		20,049

Long-Term Liabilities:
Unearned revenue on service contracts		2,545		2,801
Deferred income tax liability		238		238
Due to related medical practices		93		93
Operating lease liability – net of current portion		28,292		28,975
Financing lease liability – net of current portion		997		1,049
Long-term debt and capital leases, less current portion		190		760
Other liabilities		155		171
Total Long-Term Liabilities		32,510		34,087
Total Liabilities		48,757		54,136

*Condensed from audited financial statements.

See accompanying notes to condensed consolidated financial statements.

Page 4

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(UNAUDITED)

LIABILITIES AND STOCKHOLDERS’ EQUITY (Continued)

	September 30, 2021			June 30, 2021 *
Class A non-voting preferred stock $.0001 par value; 453 shares authorized at September 30, 2021 and June 30, 2021, 313 issued and outstanding at September 30, 2021 and June 30, 2021	$	—		$	—
Preferred stock $.001 par value; 567 shares authorized at September 30, 2021 and June 30, 2021, issued and outstanding – none		—			—
Common Stock $.0001 par value; 8,500 shares authorized at September 30, 2021 and June 30, 2021, 6,566 issued at September 30, 2021 and June 30, 2021, 6,554 outstanding at September 30, 2021 and June 30, 2021		1			1
Class B Common Stock (10 votes per share) $.0001 par value; 227 shares authorized at September 30, 2021 and June 30, 2021; .146 issued and outstanding at September 30, 2021 and June 30, 2021		—			—
Class C Common Stock (25 votes per share) $.0001 par value; 567 shares authorized at September 30, 2021 and June 30, 2021, 383 issued and outstanding at September 30, 2021 and June 30, 2021		—			—
Paid-in capital in excess of par value		185,101			185,101
Accumulated deficit		(42,121	)		(46,008	)
Treasury stock, at cost - 12 shares of common stock at September 30, 2021 and June 30, 2021		(675	)		(675	)
Total Fonar Corporation’s Stockholders’ Equity		142,306			138,419
Noncontrolling interests		(2,834	)		(3,049	)
Total Stockholders’ Equity		139,472			135,370
Total Liabilities and Stockholders’ Equity	$	188,229		$	189,506

*Condensed from audited financial statements.

See accompanying notes to condensed consolidated financial statements.

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

(UNAUDITED)


	FOR THE THREE MONTHS ENDED SEPTEMBER 30,
REVENUES	2021			2020
Patient fee revenue – net of contractual allowances and discounts	$	6,851		$	5,091
Product sales – net		148			28
Service and repair fees – net		1,936			1,925
Service and repair fees - related parties – net		28			28
Management and other fees – net		11,972			11,214
Management and other fees - related medical practices – net		2,795			2,693
Total Revenues – Net		23,730			20,979
COSTS AND EXPENSES
Costs related to patient fee revenue		3,156			2,521
Costs related to product sales		109			132
Costs related to service and repair fees		724			626
Costs related to service and repair fees - related parties		10			9
Costs related to management and other fees		6,877			5,550
Costs related to management and other fees – related medical practices		1,637			1,428
Research and development		386			400
Selling, general and administrative		5,090			6,163
Total Costs and Expenses		17,989			16,829
Income From Operations		5,741			4,150
Other Income (Expenses)		811			(140	)
Interest Expense		(17	)		(22	)
Investment Income		63			112
Income Before Provision for Income Taxes and Noncontrolling Interests		6,598			4,100
Provision for Income Taxes		(1,416	)		(849	)
Net Income		5,182			3,251
Net Income - Noncontrolling Interests		(1,295	)		(743	)
Net Income – Attributable to FONAR	$	3,887		$	2,508
Net Income Available to Common Stockholders	$	3,652		$	2,355
Net Income Available to Class A Non-Voting Preferred Stockholders	$	175		$	114
Net Income Available to Class C Common Stockholders	$	60		$	39
Basic Net Income Per Common Share Available to Common Stockholders	$	0.56		$	0.37
Diluted Net Income Per Common Share Available to Common Stockholders	$	0.55		$	0.36
Basic and Diluted Income Per Share – Class C Common	$	0.16		$	0.10
Weighted Average Basic Shares Outstanding – Common Stockholders		6,554			6,447
Weighted Average Diluted Shares Outstanding - Common Stockholders		6,682			6,575
Weighted Average Basic and Diluted Shares Outstanding – Class C Common		383			383

See accompanying notes to condensed consolidated financial statements.

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

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

(UNAUDITED)

For the Three Months Ending September 30, 2021


	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		—		—		3,887			—			—			3,887
Distributions - Non controlling		—		—		—			—			(1,080	)		(1,080	)
Income - Non controlling interests		—		—		—			—			1,295			1,295
Balance - September 30, 2021	$	1	$	185,101	$	(42,121	)	$	(675	)	$	(2,834	)	$	139,472

For the Three Months Ending September 30, 2020

	Common Stock		Paid in capital in excess of par value		Accumulated Deficit			Treasury Stock			Non Controlling Interests			Total
Balance June 30, 2020	$	1	$	183,076	$	(56,215	)	$	(675	)	$	55		$	126,242
Net income		—		—		2,508			—			—			2,508
Distributions - Non controlling		—		—		—			—			(1,440	)		(1,440	)
Income - Non controlling interests		—		—		—			—			743			743
Balance September 30, 2020	$	1	$	183,076	$	(53,707	)	$	(675	)	$	(642	)	$	128,053

See accompanying notes to condensed consolidated financial statements.

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

(UNAUDITED)


	FOR THE THREE MONTHS ENDED SEPTEMBER 30,
	2021			2020
Cash Flows from Operating Activities:
Net income	$	5,182		$	3,251
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,169			968
Amortization on right-of-use assets		648			953
Provision (Recovery) for bad debts		502			2,227
Deferred income tax – net		1,195			849
Abandoned patents		—			1
Gain on forgiveness of PPP loan		(701	)		—
(Increase) decrease in operating assets, net:
Accounts, medical and management fee receivable(s)		(1,730	)		(4,109	)
Notes receivable		11			14
Inventories		(172	)		(49	)
Income tax receivable		—			671
Prepaid expenses and other current assets		(188	)		(125	)
Other assets		(4	)		—
Increase (decrease) in operating liabilities, net:
Accounts payable		(733	)		(117	)
Other current liabilities		(3,383	)		(36	)
Operating lease liabilities		(547	)		(796	)
Financing lease liability		(50	)		12
Customer advances		58			58
Other liabilities		(16	)		10
Net cash provided by operating activities		1,241			3,782
Cash Flows from Investing Activities:
Purchases of property and equipment		(1,180	)		(415	)
Cost of patents		(29	)		(20	)
Net cash used in investing activities		(1,209	)		(435	)
Cash Flows from Financing Activities:
Repayment of borrowings and capital lease obligations		(7	)		(9	)
Proceeds from debt		—			63
Distributions to noncontrolling interests		(1,080	)		(1,440	)
Net cash used in financing activities		(1,087	)		(1,386	)
Net (Decrease) Increase in Cash and Cash Equivalents		(1,055	)		1,961
Cash and Cash Equivalents - Beginning of Period		44,460			36,802
Cash and Cash Equivalents - End of Period	$	43,405		$	38,763

See accompanying notes to condensed consolidated financial statements.

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 and 2020

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

(UNAUDITED)

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

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

Basis of Presentation and Liquidity

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended September 30, 2021, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2022. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K filed on October 13, 2021 for the fiscal year ended June 30, 2021.

During March 2020 the global pandemic of COVID-19 has caused turbulence and uncertainty in the United States and international markets and economies which has adversely effected our workforce, liquidity, financial conditions, revenues, profitability and business operations. Generally COVID-19 had caused us to require that much of our workforce work from home and has restricted the ability of our personnel to travel for marketing purposes or to service our customers. The Company experienced a sudden drop in scan volume for a short term period and the Company has recovered to pre-COVID-19 levels. At the end of fiscal year ending June 30, 2020, the Company was able to enact certain decisions to allow the Company to survive during the global pandemic and from further losses or additional decreases in scan volume. The Company also received some government stimulus funds from the Paycheck Protection Program (“PPP”) and Medicare advances/stimulus payments. During the three months ended September 30, 2021 the PPP loan was forgiven in its entirety. Although we are unable to predict if there will be additional consequences on our operations from the continuing global pandemic of COVID-19 and the new variants, the Company believes with positive cash flows, low debt and cash on hand, it will be able to continue operations going forward.

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 and 2020

(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 judgments employed in the determination of revenue.

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

Business Combination

When the qualifications for business combination accounting treatment are met, it requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition dated is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period of final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 and 2020

(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 based upon the weighted average number of shares of common stock and stock equivalents outstanding, net of common stock. In accordance with ASC topic 260-10, “Participating Securities and the Two-Class method”, the Company used the Two-Class method for calculating basic income per share and applied the if converted method in calculating diluted income per share for the three months ended September 30, 2021 and 2020.

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 months ended September 30, 2021 and 2020, diluted EPS for common shareholders includes 128 shares upon conversion of Class C Common.

Earnings Per Share
	Three months ended September 30, 2021						Three months ended September 30, 2020
	Total		Common Stock		Class C Common Stock		Total		Common Stock		Class C Common Stock
Basic
Numerator: Net income available to common stockholders	$	3,887	$	3,652	$	60	$	2,508	$	2,355	$	39
Denominator:
Weighted average shares outstanding		6,554		6,554		383		6,447		6,447		383
Basic income per common share	$	0.59	$	0.56	$	0.16	$	0.39	$	0.37	$	0.10
Diluted
Denominator: Weighted average shares outstanding				6,554		383				6,447		383
Convertible Class C Stock				128		—				128		—
Total Denominator for diluted earnings per share				6,682		383				6,575		383
Diluted income per common share			$	0.55	$	0.16			$	0.36	$	0.10

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 and 2020

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

(UNAUDITED)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Standards

FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of September 30, 2021 that will become effective in subsequent periods; however, management does not believe that any of those updates would have significantly affected our financial accounting measures or disclosures had they been in effect during 2021 or 2020, and it does not believe that any of those standards will have a significant impact on our consolidated financial statements at the time they become effective.

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

Receivables, net is comprised of the following at September 30, 2021, and June 30, 2021:

Receivables - Non Current - net
	September 30, 2021
	Gross Receivable		Allowance for doubtful accounts		Net
Accounts receivable	$	4,990	$	442	$	4,548
Accounts receivable - related party	$	102		—	$	102
Medical receivable	$	18,356	$	—	$	18,356
Management and other fees receivable	$	47,975	$	16,280	$	31,695
Management and other fees receivable from related medical practices (“PC’s”)	$	12,191	$	4,193	$	7,998

	June 30, 2021
	Gross Receivable		Allowance for doubtful accounts		Net
Accounts receivable	$	4,968	$	442	$	4,526
Accounts receivable - related party	$	12		—	$	12
Medical receivable	$	17,901	$	—	$	17,901
Management and other fees receivable	$	46,735	$	15,787	$	30,948
Management and other fees receivable from related medical practices (“PC’s”)	$	11,998	$	4,184	$	7,814

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

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 and 2020

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

(UNAUDITED)

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

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.

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 four years at September 30, 2021 are as follows:

Total Facilities
2022	$	1,020
2023		1,020
2024		413
2025		92
Total	$	2,545

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.

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 and 2020

(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)

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 66.7% and 66% of the PCs’ net revenues for the three months ended September 30, 2021 and 2020, 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.

Net revenues from management and other fees charged to the related PCs accounted for approximately 11.8% and 12.8% of the consolidated net revenues for the three months ended September 30, 2021 and 2020, 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 months ended September 30, 2021 and 2020 are summarized in the following table.

Schedule of patient fee revenue
	For the Three Months Ended September 30,
	2021		2020
Commercial Insurance/ Managed Care	$	1,086	$	946
Medicare/Medicaid		249		197
Workers’ Compensation/Personal Injury		4,124		3,387
Other		1,392		561
Patient Fee Revenue, net of contractual allowances and discounts	$	6,851	$	5,091

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 and 2020

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

(UNAUDITED)

NOTE 4 – OPERATING & FINANCING LEASES

During February 2016, FAS issued ASU 2016-02, Leases (Topic 842). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based upon the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Lease with a term of 12 months or less will be accounted for similar to previous guidance for operating leases. The standard was effective for us beginning July 1, 2019. We have elected the optional transition method to apply the standard as of the effective date and therefore, we will not apply the standard to the comparative periods presented in the consolidated financial statements. We have also elected the transition package of the practical expedients permitted within the standard which eliminates the requirements to reassess prior conclusions about lease identification, lease classification and indirect costs. The adoption of this guidance had a material impact on the Company’s balance sheet by virtue of including the present value of its future operating lease payments as a liability of $33.3 million and related right-to-use lease assets as of July 1, 2019. At the time of adoption of this guidance we had no significant financing leases.

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.

Page 15

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 and 2020

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

(UNAUDITED)

NOTE 4 – OPERATING & FINANCING LEASES (CONTINUED)

A reconciliation of operating and financing lease payments undiscounted cash flows to lease liabilities recognized as of September 30, 2021 is as follows:


Year Ending September 30,	Operating Lease Payments			Financing Lease Payments
2022	$	5,166		$	244
2023		5,170			244
2024		4,895			244
2025		4,711			244
2026		4,248			244
Thereafter		15,928			104
Present value discount		(8,157	)		(122	)
Total lease liability	$	31,961		$	1,202

NOTE 5 - INVENTORIES

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

Inventories
	September 30, 2021		June 30, 2021
Purchased parts, components and supplies	$	1,553	$	1,393
Work-in-process		282		270
TOTAL INVENTORIES	$	1,835	$	1,663

NOTE 6 – CONTRACT ASSETS AND LIABILITIES

Information relating to uncompleted contracts about contract assets and (liabilities) is as follows:


	September 30, 2021			June 30, 2021
Costs incurred on uncompleted contracts	$	295		$	295
Estimated earnings		568			568
Costs and estimated earnings on uncompleted contracts		863			863
Less: Billings to date		878			878
Total costs and estimated earnings in excess of billings on uncompleted contracts	$	(15	)	$	(15	)

Page 16

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 and 2020

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

(UNAUDITED)

NOTE 7 – OTHER INTANGIBLE ASSETS

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

Other Intagible Assets - Net
	September 30, 2021		June 30, 2021
Capitalized software development costs	$	7,005	$	7,005
Patents and copyrights		5,274		5,245
Non-compete		4,150		4,150
Customer relationships		3,900		3,900
Gross Other intangible assets		20,329		20,300
Less: Accumulated amortization		16,372		16,262
Other Intangible Assets	$	3,957	$	4,038

Amortization of patents and copyrights for the three months ended September 30, 2021 and 2020 amounted to $47 and $45, respectively.

Amortization of non-compete for the three months ended September 30, 2021 and 2020 amounted to $13 and $0, respectively.

Amortization of customer relationships for the three months ended September 30, 2021 and 2020 amounted to $50 and $48, respectively.

NOTE 8 – OTHER CURRENT LIABILITIES

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

Other Current Liabilities
	September 30, 2021		June 30, 2021
Accrued salaries, commissions and payroll taxes	$	3,595	$	5,407
Litigation accruals		—		900
Sales tax payable		674		645
State income taxes payable		351		774
Legal and other professional fees		29		38
Accounting fees		131		127
Self-funded health insurance reserve		24		62
Accrued interest and penalty		279		493
Other		907		716
Other Current Liabilities	$	5,990	$	9,162

Page 17

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 and 2020

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

(UNAUDITED)

NOTE 9 - SEGMENT AND RELATED INFORMATION

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

The accounting policies of the segments are the same as those described in the summary of significant accounting policies as disclosed in the Company’s 10-K as of June 30, 2021. All inter-segment sales are market-based. The Company evaluates performance based on income or loss from operations.

NOTE 9 - SEGMENT AND RELATED INFORMATION (Continued)

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


	Medical Equipment			Management of Diagnostic Imaging Centers		Totals
For the three months ended Sept. 30, 2021
Net revenues from external customers	$	2,112		$	21,618	$	23,730
Inter-segment net revenues	$	236		$	—	$	236
(Loss) Income from operations	$	(490	)	$	6,231	$	5,741
Depreciation and amortization	$	67		$	1,102	$	1,169
Capital expenditures	$	121		$	1,088	$	1,209

For the three months ended Sept. 30, 2020
Net revenues from external customers	$	1,981		$	18,998	$	20,979
Inter-segment net revenues	$	219		$	—	$	219
(Loss) Income from operations	$	(561	)	$	4,711	$	4,150
Depreciation and amortization	$	67		$	901	$	968
Capital expenditures	$	20		$	415	$	435

NOTE 10 – SUPPLEMENTAL CASH FLOW INFORMATION

During the three months ended September 30, 2021 and September 30, 2020, the Company paid $189 and $19 for interest, respectively.

During the three months ended September 30, 2021 and September 30, 2020, the Company paid $221 and $145 for income taxes, respectively.

Page 18

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021 and 2020

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

(UNAUDITED)

NOTE 11 – COMMITMENTS AND CONTINGENCIES

Litigation

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

There were no material changes in litigation from that reported in our Form 10-K for the fiscal year ended June 30, 2021.

Other Matters

In September 2019, the Company was notified by one of its landlords that it was required to vacate the premises within 180 days under the demolition clause in the lease. The Company believed the lease renewal which was not negotiated in good faith since the renewal was negotiated in February 2018. The Company is in the process of relocating to a new location but the original lease provided for penalty payments in the event that the Company had not vacated the lease space. The Company had been making normal rent payments throughout the course of the arbitration proceedings. The case was settled for $900 of leasehold holdover charges which was paid in August 2021.

In September 2020, the Company entered into a settlement agreement with an unrelated third party for a claim made during March 2018 which was scheduled for arbitration. The settlement was for $1.2 million of which $900 was paid by the Company’s insurance in September 2020. The Company paid the remaining balance of $315 in September 2020.

The Company has satisfied most of its delinquencies in filing sales tax returns for certain states, for which the Company has transacted business. The Company has recorded tax obligations of approximately $

SEC Form 10-Q filed by Fonar Corporation