FONAR CORP – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
INTRODUCTION.
and selling MRI scanners. HMCA, a subsidiary of
services to diagnostic imaging facilities.
scanner. The Upright® MRI allows patients to be scanned for the first time under
weight-bearing conditions. The Stand-Up® MRI is the only MRI capable of
producing images in the weight-bearing state.
At 0.6 Tesla field strength, the Upright® MRI is among the highest field open
MRI scanners in the industry, offering non-claustrophobic MRI together with
high-field image quality.
strength open MRI scanners in the industry.
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FONAR CORPORATION AND SUBSIDIARIES
HMCA generates revenues from providing comprehensive management services,
including development, administration, accounting, billing and collection
services, together with office space, medical equipment, supplies and
non-medical personnel to its clients. Revenues are in the form of fees which are
earned under contracts with HMCA's clients except for its three
subsidiaries which engage in the practice of medicine, and bill and collect fees
from patients, insurers and other third party payors directly.
The most significant adverse impact on on our Company in fiscal 2020 has been
the COVID-19 pandemic. Although it had seemed the worst had passed, events have
shown a spike in new cases due primarily to the new Delta strain in the viruses.
This is by no means a problem confined to our Company, but regardless of our
best efforts, our results of operation and financial condition are potentially
volatible and severe.
Since March, 2020 the global pandemic of COVID-19 has caused turbulence and
uncertainty in
adversely affected our 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 while we are 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 measures to allow the Company to survive during the global
pandemic and to prevent further losses or additional decreases in scan volume.
The Company immediately enacted wide scale furloughs, deferment of up to 50% of
management salaries, halted variable compensation plans. Rent deferrals were
negotiated with nearly all landlords. Reductions of the salaries of
non-controlling interest group members, who were actively involved in the
management of the Company, accounted for most of the payroll savings. The
Company also received some government stimulus funds from the Paycheck
Protection Program ("PPP) and Medicare advances/stimulus payments. 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 are the increased
strictness in enforcement of COVID-19 mandates, such as the requirement that
employees in healthcare facilities be vaccinated or frequently test. We are in
fact facing some of these challenges now. So far we have been able to navigate
through these requirements and avoid any significant disruption to our business.
Critical Accounting Policies
Our discussion and analysis of financial condition and results of operations are
based on our consolidated financial statements that were prepared in accordance
with
estimates and assumptions when preparing financial statements. These estimates
and assumptions affect various matters, including:
our reported amounts of assets and liabilities in our consolidated balance
sheets at the dates of the financial statements
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FONAR CORPORATION AND SUBSIDIARIES
our disclosure of contingent assets and liabilities at the dates of the
financial statements; and
our reported amounts of net revenue and expenses in our consolidated statements
of operations during the reporting periods
These estimates involve judgments with respect to numerous factors that are
difficult to predict and are beyond management's control. As a result, actual
amounts could differ materially from these estimates.
those that are both most important to the portrayal of a company's financial
condition and results of operations and require management's most difficult,
subjective or complex judgment, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods. In the notes to our consolidated financial statements, we
discuss our significant accounting policies.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. We recognize revenue and related costs of revenue from
sales contracts for our MRI scanners and major upgrades, under the
percentage-of-completion method. Under this method, we recognize revenue and
related costs of revenue, as each sub-assembly is completed. Amounts received in
advance of our commencement of production are recorded as customer advances.
We continuously, qualitatively and quantitatively evaluate the realizability
(including both positive and negative evidence) of the net deferred tax assets
and assess the valuation allowance periodically. Our evaluation considers the
financial condition of the Company and both the business conditions and
regulatory environment of the industry. If future taxable income or other
factors are not consistent with our expectations, an adjustment to our allowance
for net deferred tax assets may be required. For net deferred tax assets we
consider estimates of future taxable income, including tax planning strategies,
in determining whether our net deferred tax assets are more likely than not to
be realized. Our ability to project future taxable income may be significantly
affected by our ability to determine the impact of regulatory changes which
could adversely affect our future profits. As a result, the benefits of our net
operating loss carry forwards could expire before they are utilized.
At
30, 2021
We depreciate our long-lived assets over their estimated economic useful lives
with the exception of leasehold improvements where we use the shorter of the
assets useful lives or the lease term of the facility for which these assets are
associated.
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FONAR CORPORATION AND SUBSIDIARIES
The Company provides for medical receivables that could become uncollectible by
establishing an allowance for doubtful accounts in order to adjust medical
receivables to estimated net realizable value. In evaluating the collectability
of medical receivables, the Company considers a number of factors, including the
age of the account, historical collection experiences, payor type, current
economic conditions and other relevant factors. There are various factors that
impact collection trends, such as payor mix, changes in the economy, increase
burden on copayments to be made by patients with insurance and business
practices related to collection efforts. These factors continuously change and
can have an impact on collection trends and the estimation process.
We amortize our intangible assets, including patents, and capitalized software
development costs, over the shorter of the contractual/legal life or the
estimated economic life. Our amortization life for patents and capitalized
software development costs is 15 to 17 years and 5 years, respectively. Our
amortization of the non-competition agreements entered into with certain
individuals in connection with the HDM transaction are depreciated over seven
years, and customer relationships are amortized over 20 years.
goodwill, at a minimum, on an annual basis and whenever events and changes in
circumstances suggest that the carrying amount may not be recoverable.
Impairment of goodwill is tested by comparing the reporting unit's carrying
amount, including goodwill, to the fair value of the reporting unit. The fair
value of a reporting unit is estimated using a combination of the income or
discounted cash flows approach and the market approach, which uses comparable
market data. If the carrying amount of the reporting unit exceeds its fair
value, goodwill is considered impaired and a second step is performed to measure
the amount of impairment loss, if any. Based on our test for goodwill
impairment, we noted no impairment related to goodwill. However, if estimates or
the related assumptions change in the future, we may be required to record
impairment charges to reduce the carrying amount of goodwill.
We periodically assess the recoverability of long-lived assets, including
property and equipment, intangibles and management agreements, when there are
indications of potential impairment, based on estimates of undiscounted future
cash flows. The amount of impairment is calculated by comparing anticipated
discounted future cash flows with the carrying value of the related asset. In
performing this analysis, management considers such factors as current results,
trends, and future prospects, in addition to other economic factors.
RESULTS OF OPERATIONS. FISCAL 2021 COMPARED TO FISCAL 2020
In fiscal 2021, we recognized net income of
million
for fiscal 2020. This represents an increase in revenues of 4.9%. Patient fee
revenue net of contractual allowances increased by 3.6%. Total costs and
expenses increased by 1.1%. Our consolidated operating results increased by
million
operating income of
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FONAR CORPORATION AND SUBSIDIARIES
Discussion of Operating Results of Medical Equipment Segment
Fiscal 2021 Compared to Fiscal 2020
Revenues attributable to our medical equipment segment increased by 6.8% to
million
revenues increasing by 332.9% from
fiscal 2021. Service revenue decreased from
million
The Upright® MRI is unique in that it permits MRI scans to be performed on
patients upright in the weight-bearing state and in multiple positions that
correlate with symptoms.
Product sales to unrelated parties increased by 332.9% in fiscal 2021 from
sales to related parties in fiscal 2021 or 2020.
We believe that one of our principal challenges in achieving greater market
penetration is attributable to the better name recognition and larger sales
forces of our larger competitors such as General Electric, Siemens, Hitachi,
Philips and Toshiba and the ability of some of our competitors to offer
attractive financing terms through affiliates, such as
In addition, lower reimbursement rates have reduced the demand for our MRI
products, resulting in lower sales volumes. As a result of fewer sales, service
revenues have decreased since as older scanners are taken out of service, there
are fewer new scanners available to sign service contracts.
The operating loss for the medical equipment segment decreased from an operating
loss of
fiscal 2021. The losses are attributable most significantly to the fact that
costs increased by a greater amount than revenues. The increase in costs was
primarily due to the increase in business activity which resulted in our
increased revenues.
We recognized revenues of
fiscal 2021, while in fiscal 2020, we recognized revenues of
sale of Upright® MRI scanners.
Research and development expenses decreased to
research and development of various upgrades for the Upright® MRI scanner. The
reason for the decrease in research and development was due mainly to supply
chain related delays due to the COVID-19 pandemic.
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FONAR CORPORATION AND SUBSIDIARIES
Discussion of Operating Results of Physician and Diagnostic Services Management
Segment.
Fiscal 2021 Compared to Fiscal 2020
Revenues attributable to the Company's physician and diagnostic services
management segment, HMCA, increased to
to
patient fees (net of contractual allowances and discounts less provision for bad
debts) from patient and third party payors recognized by five of the facilities
in
additional scanners being installed in existing facilities.
Cost of revenues as a percentage of the related revenues for our physician and
diagnostic services management segment increased from
related revenues for the year ended
related revenues for the year ended
than the costs relating to these revenues.
Operating results of this segment increased from operating income of
million
believe that our efforts to expand and improve the operation of our physician
and diagnostic services management segment are directly responsible for the
profitability of this segment and our company as a whole.
For the fiscal years ended
respectively, of total revenues were derived from contracts with facilities
owned by Dr.
stockholder of
terms which renew automatically on an annual basis, unless terminated. The fees
for these sites, which are located in
Discussion of Certain Consolidated Results of Operations
Fiscal 2021 Compared to Fiscal 2020
Interest and investment income decreased in 2021 compared to 2020. We recognized
interest income of
representing a decrease of 37.8%.
Interest expense of
interest expense of
attributable to an assessment of additional taxes and interest in connection
with a state income tax audit.
The 30% noncontrolling interest allocations of
fiscal 2021 and fiscal 2020 respectively, have been calculated by Income from
operations, and adding depreciation and amortization net of miscellaneous losses
and other income from the Physician and Diagnostic Service Management segment
(See Note 17).
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FONAR CORPORATION AND SUBSIDIARIES
While revenue increased by 4.9% selling, general and administrative expenses
decreased by 7.4% to
2020. This increase was almost exclusively due to reserves placed on service
contracts and management fees and other receivables resulting from the COVID-19
pandemic. It is too early to know how much of these reserves will be recovered.
Also
to reverse accrued interest and penalties of
selling, general and administrative expenses.
The compensatory element of stock issuances increased from
Revenue from service and repair fees decreased from
to
Continuing our tradition as the originator of MRI, we remain committed to
maintaining our position as the leading innovator of the industry through
investing in research and development. In fiscal 2021 we continued our
investment in the development of various upgrades for the UPRIGHT® MRI, with an
investment of
capitalized, as compared to
2020. The research and development expenditures were approximately 18.1% of
revenues attributable to our medical equipment segment and 1.8% of total
revenues in 2021, and 23.9% of medical equipment segment revenues and 2.4% of
total revenues in fiscal 2020. This represented a 19.2% decrease in research and
development expenditures in fiscal 2021 as compared to fiscal 2020.
For the physician and diagnostic services management segment, HMCA, revenues
increased to
2020. This is primarily attributable to an increase in patient scans resulting
from our marketing efforts.
For the fiscal year 2021 the Company recorded an income tax expense of
million
tax benefits are attributable to the expected tax benefits associated with the
projected realization and utilization of our net operating losses in future
periods. The Company has recorded a deferred tax asset of
loss carry forwards available to offset future taxable income. The utilization
of these tax benefits is dependent on the Company generating future taxable
income. Although the Company is expecting to generate taxable income in future
periods, they cannot accurately measure the full impact of the adoption of
healthcare regulations, including the impact of continuing changes in MRI
scanning reimbursement rates, and the severity and the duration of the COVID-19
virus, which could materially impact operations. A partial valuation allowance
will be maintained until evidence exists to support that it is no longer needed.
We have been taking steps to improve HMCA revenues by our marketing efforts,
which focus on the unique capability of our Upright® MRI scanners to scan
patients in different positions. We have also been increasing the number of
health insurance plans in which our clients participate. The utilization of
these tax benefits is dependent on the Company generating future taxable income
and other factors. A partial valuation allowance will be maintained until
evidence exists to support that it is no longer needed, (principally related to
research and development credits).
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FONAR CORPORATION AND SUBSIDIARIES
Our management fees are dependent on collection by our clients of fees from
reimbursements from Medicare, Medicaid, private insurance, no fault and workers'
compensation carriers, self-pay and other third-party payors. The health care
industry is experiencing the effects of the federal and state governments' trend
toward cost containment, as governments and other third-party payors seek to
impose lower reimbursement and utilization rates and negotiate reduced payment
schedules with providers. The cost-containment measures, consolidated with the
increasing influence of managed-care payors and competition for patients, have
resulted in reduced rates of reimbursement for services provided by our clients
from time to time. Our future revenues and results of operations may be
adversely impacted by future reductions in reimbursement rates.
Certain third-party payors have proposed and implemented changes in the methods
and rates of reimbursement that have had the effect of substantially decreasing
reimbursement for diagnostic imaging services that HMCA's clients provide. To
the extent reimbursement from third-party payors is reduced, it will likely have
an adverse impact on the rates they pay us, as they would need to reduce the
management fees they pay HMCA to offset such decreased reimbursement rates.
Furthermore, many commercial health care insurance arrangements are changing, so
that individuals bear greater financial responsibility through high deductible
plans, co-insurance and higher co-payments, which may result in patients
delaying or foregoing medical procedures. More frequently, however, patients are
scanned and we experience difficulty in collecting deductibles and co-payments.
We expect that any further changes to the rates or methods of reimbursement for
services, which reduce the reimbursement per scan of our clients may partially
offset the increases in scan volume we are working to achieve for our clients,
and indirectly will result in a decline in our revenues.
On
in the form of the Patient Protection and Affordable Care Act, or PPACA. The
ultimate impact of the PPACA is uncertain but to date has reduced our revenues
from what they otherwise would have been.
In addition, the use of radiology benefit managers, or RBM's has increased in
recent years. It is common practice for health insurance carriers to contract
with RBMs to manage utilization of diagnostic imaging procedures for their
insureds. In many cases, this leads to lower utilization of imaging procedures
based on a determination of medical necessity. The efficacy of RBMs is still a
highly controversial topic. We cannot predict whether the healthcare legislation
or the use of RBMs will negatively impact our business, but it is possible that
our financial position and results of operations could be negatively affected.
LIQUIDITY AND CAPITAL RESOURCES
Cash, and cash equivalents increased by 20.8% from
2020
Cash provided by operating activities for fiscal 2021 approximated
million
income of
income tax expense benefit of
accounts, and medical and management fee receivables of
Page 43
FONAR CORPORATION AND SUBSIDIARIES
Cash used in investing activities for fiscal 2021 approximated
cash used in investing activities was attributable to purchases of property and
equipment of
and costs of patents of
Cash used in financing activities for fiscal 2021 approximated
principal uses of cash used in financing activities included the proceeds from
loans and capital lease obligations of
capital lease obligations of
interests of
Total liabilities increased slightly by 0.2% during fiscal 2021, from
approximately
As at
state sales taxes, inclusive of penalties and interest. The Company is in the
process of negotiating settlements of these obligations.
At
compared to working capital of
equity of
net income of
Our principal sources of liquidity are derived from revenues.
Our business plan includes a program for manufacturing and selling our Upright®
MRI scanners. In addition, we are enhancing our revenue by participating in the
physician and diagnostic services management business through our subsidiary,
HMCA and have upgraded the facilities which it manages, most significantly by
the replacement of the original MRI scanners with new Upright® MRI scanners. As
of
scanners are located in
intensified our marketing activities through the hiring of additional marketers
for HMCA's clients.
Our business plan also calls for a continuing emphasis on providing our
customers with enhanced equipment service and maintenance capabilities and
delivering state-of-the-art, innovative and high quality equipment upgrades at
competitive prices. Fees for on-going service and maintenance from our installed
base of scanners were
million
In order to promote profitability and to reduce demands on our cash and other
liquid reserves, we maintain an aggressive program of cost cutting. Previously,
these measures included consolidating HMCA's office space with
space and reducing the size of our workforce, compensation and benefits. We
continue to reduce and contain expenses across the board. The cost reductions
are intended to enable us to withstand periods of low volumes of MRI scanner
sales, by keeping expenditures at levels which can be supported by service
revenues and HMCA revenues.
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FONAR CORPORATION AND SUBSIDIARIES
Current economic credit conditions have contributed to a slower than optimal
business environment. As a result our business may suffer, should the credit
markets not improve in the near future. The direct impact of these conditions is
not fully known.
Revenues from HMCA have been the principal reason for our profitability, and we
have so far been able to maintain and increase such revenues by increasing the
number of scans being performed by the sites we manage and those we own,
notwithstanding reductions in reimbursement rates from third party payors. The
likelihood and effect of any subsequent reductions is not fully known.
Capital expenditures for fiscal 2021 approximated
patent costs were approximately
were approximately
In July, 2020, we completed the installation of a new MRI facility in
Pine
In
services to
provide equipment, supplies and non-medical services at other facilities as
well.
placing three additional scanners at facilities located in
One of the facilities in
will be the addition of an additional machine in
York
these capital expenditures is approximately
The Company believes that its business plan has been responsible for the past
five consecutive fiscal years of profitability (fiscal 2021, fiscal 2020, fiscal
2019, fiscal 2018 and fiscal 2017) and that its capital resources will be
adequate to support operations at current levels through
On
Protection Program ("PPP") under the CARES Act. Due to an abundance of caution,
however, on
became increasingly unclear whether or not a public company would be required to
seek other sources of financing.
On
under the Paycheck Protection Program ("PPP"). The PPP, established as part of
the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), provides
for loans to qualifying businesses for amount up to 2.5 times of the average
monthly payroll expenses of the qualifying business. The Company applied for
this additional loan exclusively for the
to the fact that the COVID-19 virus was increasing in
accrued interest are forgivable after 24 weeks as long as the borrower uses the
loan proceeds for eligible purposes, including payroll, benefits, rent and
utilities, and maintains its 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
Page 45
FONAR CORPORATION AND SUBSIDIARIES
During
terms include borrowing limits of up to
extended to
along with certain financial covenants still applicable.
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