ASSETS
| |
| | | |
| | |
| |
September
30, 2022 | |
June
30, 2022 * |
Current
Assets: | |
| | | |
| | |
Cash
and cash equivalents | |
$ | 48,696 | | |
$ | 48,723 | |
Short
term investments | |
| 32 | | |
| 32 | |
Accounts
receivable – net | |
| 4,161 | | |
| 4,336 | |
Accounts
receivable - related party | |
| 90 | | |
| — | |
Medical
receivable – net | |
| 19,216 | | |
| 20,109 | |
Management
and other fees receivable – net | |
| 34,582 | | |
| 33,419 | |
Management
and other fees receivable – related medical practices – net | |
| 8,723 | | |
| 8,603 | |
Inventories | |
| 2,458 | | |
| 2,360 | |
Prepaid
expenses and other current assets | |
| 1,108 | | |
| 1,104 | |
Total
Current Assets | |
| 119,066 | | |
| 118,686 | |
| |
| | | |
| | |
Accounts
receivable – long term | |
| 1,575 | | |
| 1,872 | |
Deferred
income tax asset | |
| 11,697 | | |
| 12,843 | |
Property
and equipment – net | |
| 22,207 | | |
| 22,282 | |
Right-of-use
Asset – operating lease | |
| 34,180 | | |
| 34,232 | |
Right-of-use
Asset – financing lease | |
| 878 | | |
| 928 | |
Goodwill | |
| 4,269 | | |
| 4,269 | |
Other
intangible assets – net | |
| 3,624 | | |
| 3,704 | |
Other
assets | |
| 526 | | |
| 526 | |
Total
Assets | |
$ | 198,022 | | |
$ | 199,342 | |
*Condensed
from audited financial statements.
See
accompanying notes to condensed consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
LIABILITIES
AND STOCKHOLDERS’ EQUITY
| |
September
30, 2022 | |
June
30, 2022 * |
Current
Liabilities: | |
| | | |
| | |
Current
portion of long-term debt and capital leases | |
$ | 42 | | |
$ | 40 | |
Accounts
payable | |
| 773 | | |
| 1,552 | |
Other
current liabilities | |
| 5,201 | | |
| 6,417 | |
Unearned
revenue on service contracts | |
| 4,123 | | |
| 4,289 | |
Unearned
revenue on service contracts – related party | |
| 82 | | |
| — | |
Operating
lease liability - current portion | |
| 3,908 | | |
| 3,880 | |
Financing
lease liability - current portion | |
| 212 | | |
| 210 | |
Customer
deposits | |
| 532 | | |
| 361 | |
Total
Current Liabilities | |
| 14,873 | | |
| 16,749 | |
| |
| | | |
| | |
Long-Term
Liabilities: | |
| | | |
| | |
Unearned
revenue on service contracts | |
| 1,576 | | |
| 1,857 | |
Deferred
income tax liability | |
| 216 | | |
| 216 | |
Due
to related medical practices | |
| 93 | | |
| 93 | |
Operating
lease liability – net of current portion | |
| 33,112 | | |
| 33,091 | |
Financing
lease liability – net of current portion | |
| 784 | | |
| 838 | |
Long-term
debt and capital leases, less current portion | |
| 148 | | |
| 155 | |
Other
liabilities | |
| 90 | | |
| 107 | |
| |
| | | |
| | |
Total
Long-Term Liabilities | |
| 36,019 | | |
| 36,357 | |
Total
Liabilities | |
| 50,892 | | |
| 53,106 | |
*Condensed
from audited financial statements.
See
accompanying notes to condensed consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
LIABILITIES
AND STOCKHOLDERS’ EQUITY (Continued)
STOCKHOLDERS'
EQUITY: | |
September
30, 2022 | |
June
30, 2022 * |
Class
A non-voting preferred stock $.0001 par value; 453 shares authorized at September 30, 2022 and June 30, 2022, 313 issued and outstanding
at September 30, 2022 and June 30, 2022 | |
$ | — | | |
$ | — | |
Preferred
stock $.001 par value; 567 shares authorized at September 30, 2022 and June 30, 2022, issued and outstanding – none | |
| — | | |
| — | |
Common
Stock $.0001 par value; 8,500 shares authorized at September 30, 2022 and June 30, 2022, 6,566 issued at September 30, 2022 and June
30, 2022, 6,545 and 6,554 outstanding at September 30, 2022 and June 30, 2022, respectively | |
| 1 | | |
| 1 | |
Class
B Common Stock (10 votes per share) $.0001 par value; 227 shares authorized at September 30, 2022 and June 30, 2022; .146 issued
and outstanding at September 30, 2022 and June 30, 2022 | |
| — | | |
| — | |
Class
C Common Stock (25 votes per share) $.0001 par value; 567 shares authorized at September 30, 2022 and June 30, 2022, 383 issued and
outstanding at September 30, 2022 and June 30, 2022 | |
| — | | |
| — | |
Paid-in
capital in excess of par value | |
| 184,531 | | |
| 184,531 | |
Accumulated
deficit | |
| (31,520 | ) | |
| (33,567 | ) |
Treasury
stock, at cost – 20 shares of common stock at September 30, 2022 and 12 shares of common stock at June 30, 2022 | |
| (797 | ) | |
| (675 | ) |
Total
Fonar Corporation’s Stockholders’ Equity | |
| 152,215 | | |
| 150,290 | |
Noncontrolling
interests | |
| (5,085 | ) | |
| (4,054 | ) |
Total
Stockholders' Equity | |
| 147,130 | | |
| 146,236 | |
Total
Liabilities and Stockholders' Equity | |
$ | 198,022 | | |
$ | 199,342 | |
| |
| | | |
| | |
*Condensed
from audited financial statements.
See
accompanying notes to condensed consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
| |
| | | |
| | |
| |
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, |
REVENUES | |
2022 | |
2021 |
Patient
fee revenue – net of contractual allowances and discounts | |
$ | 6,076 | | |
$ | 6,851 | |
Product
sales – net | |
| 30 | | |
| 148 | |
Service
and repair fees – net | |
| 1,820 | | |
| 1,936 | |
Service
and repair fees - related parties – net | |
| 28 | | |
| 28 | |
Management
and other fees – net | |
| 12,250 | | |
| 11,972 | |
Management
and other fees - related medical practices – net | |
| 2,987 | | |
| 2,795 | |
Total
Revenues – Net | |
| 23,191 | | |
| 23,730 | |
COSTS
AND EXPENSES | |
| | | |
| | |
Costs
related to patient fee revenue | |
| 3,800 | | |
| 3,156 | |
Costs
related to product sales | |
| 169 | | |
| 109 | |
Costs
related to service and repair fees | |
| 718 | | |
| 724 | |
Costs
related to service and repair fees - related parties | |
| 11 | | |
| 10 | |
Costs
related to management and other fees | |
| 6,501 | | |
| 6,877 | |
Costs
related to management and other fees – related medical practices | |
| 1,398 | | |
| 1,637 | |
Research
and development | |
| 349 | | |
| 386 | |
Selling,
general and administrative | |
| 6,334 | | |
| 5,090 | |
Total
Costs and Expenses | |
| 19,280 | | |
| 17,989 | |
Other
Income | |
| 11 | | |
| 811 | |
Interest
Expense | |
| (14 | ) | |
| (17 | ) |
Investment
Income | |
| 151 | | |
| 63 | |
Provision
for Income Taxes | |
| (1,409 | ) | |
| (1,416 | ) |
Net
Income | |
| 2,650 | | |
| 5,182 | |
Net
Income - Noncontrolling Interests | |
| (603 | ) | |
| (1,295 | ) |
Net
Income – Attributable to FONAR | |
$ | 2,047 | | |
$ | 3,887 | |
Net
Income Available to Common Stockholders | |
$ | 1,923 | | |
$ | 3,652 | |
Net
Income Available to Class A Non-Voting Preferred Stockholders | |
$ | 92 | | |
$ | 175 | |
Net
Income Available to Class C Common Stockholders | |
$ | 32 | | |
$ | 60 | |
Basic
Net Income Per Common Share Available to Common Stockholders | |
$ | 0.29 | | |
$ | 0.56 | |
Diluted
Net Income Per Common Share Available to Common Stockholders | |
$ | 0.29 | | |
$ | 0.55 | |
Basic
and Diluted Income Per Share – Class C Common | |
$ | 0.08 | | |
$ | 0.16 | |
Weighted
Average Basic Shares Outstanding – Common Stockholders | |
| 6,545 | | |
| 6,554 | |
Weighted
Average Diluted Shares Outstanding - Common Stockholders | |
| 6,673 | | |
| 6,682 | |
Weighted
Average Basic and Diluted Shares Outstanding – Class C Common | |
| 383 | | |
| 383 | |
See
accompanying notes to condensed consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
For
the Three Months Ending September 30, 2022
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Common
Stock | |
Paid
in capital in excess of par value | |
Accumulated
Deficit | |
Treasury
Stock | |
Non
Controlling Interests | |
Total |
Balance
– June 30, 2022 | |
$ | 1 | | |
$ | 184,531 | | |
$ | (33,567 | ) | |
$ | (675 | ) | |
$ | (4,054 | ) | |
$ | 146,236 | |
Net
income | |
| — | | |
| — | | |
| 2,047 | | |
| — | | |
| — | | |
| 2,047 | |
Purchase
of Treasury stock | |
| — | | |
| — | | |
| — | | |
| (122 | ) | |
| — | | |
| (122 | ) |
Distributions
- Non controlling | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1,634 | ) | |
| (1,634 | ) |
Income
- Non controlling interests | |
| — | | |
| — | | |
| — | | |
| — | | |
| 603 | | |
| 603 | |
Balance
– September 30, 2022 | |
$ | 1 | | |
$ | 184,531 | | |
$ | (31,520 | ) | |
$ | (797 | ) | |
$ | (5,085 | ) | |
$ | 147,130 | |
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 | |
See
accompanying notes to condensed consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
| |
| | | |
| | |
| |
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, |
| |
2022 | |
2021 |
Cash
Flows from Operating Activities: | |
| | | |
| | |
Net
income | |
$ | 2,650 | | |
$ | 5,182 | |
Adjustments
to reconcile net income to net cash provided by operating activities: | |
| | | |
| | |
Depreciation
and amortization | |
| 1,118 | | |
| 1,169 | |
Amortization
on right-of-use assets | |
| 1,061 | | |
| 648 | |
Provision
for bad debts | |
| 1,398 | | |
| 502 | |
Deferred
income tax – net | |
| 1,146 | | |
| 1,195 | |
Gain
on forgiveness of PPP loan | |
| — | | |
| (701 | ) |
(Increase)
decrease in operating assets, net: | |
| | | |
| | |
Accounts,
medical and management fee receivable(s) | |
| (1,407 | ) | |
| (1,730 | ) |
Notes
receivable | |
| 11 | | |
| 11 | |
Inventories | |
| (98 | ) | |
| (172 | ) |
Prepaid
expenses and other current assets | |
| (14 | ) | |
| (188 | ) |
Other
assets | |
| — | | |
| (4 | ) |
Increase
(decrease) in operating liabilities, net: | |
| | | |
| | |
Accounts
payable | |
| (779 | ) | |
| (733 | ) |
Other
current liabilities | |
| (1,580 | ) | |
| (3,383 | ) |
Operating
lease liabilities | |
| (912 | ) | |
| (547 | ) |
Financing
lease liabilities | |
| (52 | ) | |
| (50 | ) |
Customer
deposits | |
| 171 | | |
| 58 | |
Other
liabilities | |
| (16 | ) | |
| (16 | ) |
Net
cash provided by operating activities | |
| 2,697 | | |
| 1,241 | |
Cash
Flows from Investing Activities: | |
| | | |
| | |
Purchases
of property and equipment | |
| (939 | ) | |
| (1,180 | ) |
| |
| | | |
| | |
Cost
of patents | |
| (24 | ) | |
| (29 | ) |
Net
cash used in investing activities | |
| (963 | ) | |
| (1,209 | ) |
Cash
Flows from Financing Activities: | |
| | | |
| | |
| |
| | | |
| | |
Repayment
of borrowings and capital lease obligations | |
| (5 | ) | |
| (7 | ) |
Purchase
of treasury stock | |
| (122 | ) | |
| — | |
Distributions
to noncontrolling interests | |
| (1,634 | ) | |
| (1,080 | ) |
Net
cash used in financing activities | |
| (1,761 | ) | |
| (1,087 | ) |
Net
Decrease in Cash and Cash Equivalents | |
| (27 | ) | |
| (1,055 | ) |
Cash
and Cash Equivalents - Beginning of Period | |
| 48,723 | | |
| 44,460 | |
Cash
and Cash Equivalents - End of Period | |
$ | 48,696 | | |
$ | 43,405 | |
See
accompanying notes to condensed consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022 and 2021
(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. During the fiscal year ended June 30, 2022, the Company
purchased non-controlling interests from the minority shareholders for $546,000. Currently the Company has a direct ownership interest
of 70.8% and the investors’ have a 29.2% ownership interest. The entire management of diagnostic imaging centers business segment
is now being conducted by HDM, operating under the name “Health Management Company of America”.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America
for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the three months ended September 30, 2022, are not necessarily
indicative of the results that may be expected for the fiscal year ending June 30, 2023. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K filed on September 28, 2022 for the fiscal
year ended June 30, 2022.
Since
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 affected 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. 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. The Company has been able to navigate through these challenges and avoid any significant disruption of the
business and the volume has recently risen back almost to pre- COVID-19 levels. 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 positive cash flows, low debt
and cash on hand, it will be able to maintain operations to pre COVID-19 levels going forward.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022 and 2021
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
unaudited condensed consolidated financial statements include the accounts of FONAR Corporation, its majority and wholly-owned subsidiaries
and partnerships (collectively the “Company”). All significant intercompany accounts and transactions have been eliminated
in consolidation.
Revenues
The
revenue recognition standard in ASC 606 outlines a single comprehensive model for recognizing revenue as performance obligations, defined
in a contract with a customer as goods or services transferred to the customer in exchange for consideration, are satisfied. The standard
also requires expanded disclosures regarding the Company’s revenue recognition policies and significant judgements employed in
the determination of revenue.
Our
revenues generally relate to net patient fees received from various payers and patients themselves under contracts in which our
performance obligations are to provide diagnostic services to the patients. Revenues are recorded during the period our obligations to
provide diagnostic services are satisfied. Our performance obligations for diagnostic services are generally satisfied over a period
of less than one day. The contractual relationships with patients, in most cases, also involve a third-party payer (Medicare, Medicaid,
managed care health plans and commercial insurance companies, including plans offered through the health insurance exchanges) and the
transaction prices for the services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated with (managed
care health plans and commercial insurance companies) the third-party payers. The payment arrangements with third-party payers for the
services we provide to the related patients typically specify payments at amounts less than our standard charges and generally provide
for payments based upon predetermined rates per diagnostic services or discounted fee-for-service rates. Management continually reviews
the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care
contractual terms resulting from contract renegotiations and renewals.
BUSINESS
COMBINATION
When
the qualifications for business combination accounting treatment are met, it requires the Company to recognize separately from goodwill
the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date 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 the Company uses their 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.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022 and 2021
(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, 2022 and 2021.
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, 2022 and 2021, diluted EPS for
common shareholders includes 128 shares upon conversion of Class C Common.
Earnings
Per Share
Quarterly Financial Data | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Three
months ended September 30, 2022 | |
Three
months ended September 30, 2021 |
| |
Total | |
Common
Stock | |
Class
C Common Stock | |
Total | |
Common
Stock | |
Class
C Common Stock |
Basic | |
| |
| |
| |
| |
| |
|
Numerator:
Net income available to common stockholders | |
$ | 2,047 | | |
$ | 1,923 | | |
$ | 32 | | |
$ | 3,887 | | |
$ | 3,652 | | |
$ | 60 | |
Denominator: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Weighted
average shares outstanding | |
| 6,545 | | |
| 6,545 | | |
| 383 | | |
| 6,554 | | |
| 6,554 | | |
| 383 | |
Basic
income per common share | |
$ | 0.31 | | |
$ | 0.29 | | |
$ | 0.08 | | |
$ | 0.59 | | |
$ | 0.56 | | |
$ | 0.16 | |
Diluted | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Denominator:
Weighted average shares outstanding | |
| | | |
| 6,545 | | |
| 383 | | |
| | | |
| 6,554 | | |
| 383 | |
Convertible
Class C Stock | |
| | | |
| 128 | | |
| — | | |
| | | |
| 128 | | |
| — | |
Total
Denominator for diluted earnings per share | |
| | | |
| 6,673 | | |
| 383 | | |
| | | |
| 6,682 | | |
| 383 | |
Diluted
income per common share | |
| | | |
$ | 0.29 | | |
$ | 0.08 | | |
| | | |
$ | 0.55 | | |
$ | 0.16 | |
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,
2022 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 2022 or 2021, and it does not believe that any
of those standards will have a significant impact on our consolidated condensed financial statements at the time they become effective.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022 and 2021
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE
Receivables,
net is comprised of the following at September 30, 2022, and June 30, 2022:
Financing Receivable, Noncurrent, Allowance for Credit Loss | |
| | | |
| | | |
| | |
| |
September
30, 2022 |
| |
Gross
Receivable | |
Allowance
for doubtful accounts | |
Net |
Accounts
receivable | |
$ | 4,366 | | |
$ | 205 | | |
$ | 4,161 | |
Accounts
receivable - related party | |
$ | 90 | | |
| — | | |
$ | 90 | |
Medical
receivable | |
$ | 19,216 | | |
$ | — | | |
$ | 19,216 | |
Management
and other fees receivable | |
$ | 52,331 | | |
$ | 17,749 | | |
$ | 34,582 | |
Management
and other fees receivable from related medical practices ("PC’s") | |
$ | 13,687 | | |
$ | 4,964 | | |
$ | 8,723 | |
| |
June
30, 2022 |
| |
Gross
Receivable | |
Allowance
for doubtful accounts | |
Net |
Accounts
receivable | |
$ | 4,541 | | |
$ | 205 | | |
$ | 4,336 | |
Medical
receivable | |
$ | 20,109 | | |
$ | — | | |
$ | 20,109 | |
Management
and other fees receivable | |
$ | 50,047 | | |
$ | 16,628 | | |
$ | 33,419 | |
Management
and other fees receivable from related medical practices ("PC’s") | |
$ | 13,290 | | |
$ | 4,687 | | |
$ | 8,603 | |
The
Company's customers are concentrated in the healthcare industry.
Accounts
Receivable
Credit
risk with respect to the Company’s accounts receivable related to product sales and service and repair fees is limited due to the
customer advances received prior to the commencement of work performed and the billing of amounts to customers as sub-assemblies are
completed. Service and repair fees are billed on a monthly or quarterly basis and the Company does not continue providing these services
if accounts receivable become past due. The Company controls credit risk with respect to accounts receivable from service and repair
fees through its credit evaluation process, credit limits, monitoring procedures and reasonably short collection terms. The Company performs
ongoing credit authorizations before a product sales contract is entered into or service and repair fees are provided.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022 and 2021
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE (CONTINUED)
Long
Term Accounts Receivable
The
Company will generate revenue from long-term, non-cancellable contracts to provide service and repair services. Future revenue to be
recognized over the following three years as of September 30, 2022 is as follows:
| Schedule of Facilities Owned Or Managed | | |
| | |
| 2024 | | |
$ | 1,072 | |
| 2025 | | |
| 420 | |
| 2026 | | |
| 84 | |
| Total | | |
$ | 1,576 | |
Medical
Receivables
Medical
receivables are due under fee-for-service contracts from third party payors, such as hospitals, government sponsored healthcare programs,
patient’s legal counsel and directly from patients. Substantially all the revenue relates to patients residing in Florida. The
carrying amount of the medical receivable is reduced by an allowance that reflects management’s best estimate of the amounts that
will not be collected. The Company determines allowances for contractual adjustments and uncollectible accounts based on specific agings,
specific payor collection issues that have been identified and based on payor classifications and historical experience at each site.
Management
and Other Fees Receivable
The
Company's receivables from the related and non-related professional corporations (PC's) substantially consist of fees outstanding under
management agreements. Payment of the outstanding fees is dependent on collection by the PC's of fees from third party medical reimbursement
organizations, principally insurance companies and health management organizations.
Payment
of the management fee receivables from the PC’s may be impaired by the inability of the PC’s to collect in a timely manner
their medical fees from the third party payors, particularly insurance carriers covering automobile no-fault and workers compensation
claims due to longer payment cycles and rigorous informational requirements and certain other disallowed claims. Approximately 69.0%
and 66.7% of the PCs’ net revenues for the three months ended September 30, 2022 and 2021, 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 12.9% and 11.8% of the consolidated net
revenues for the three months ended September 30, 2022 and 2021, respectively.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022 and 2021
(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)
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, 2022 and 2021
are summarized in the following table.
Schedule Of Patient Fee Revenue | |
| | | |
| | |
| |
For
the Three Months Ended September 30, |
| |
2022 | |
2021 |
Commercial
Insurance/ Managed Care | |
$ | 911 | | |
$ | 1,086 | |
Medicare/Medicaid | |
| 238 | | |
| 249 | |
Workers'
Compensation/Personal Injury | |
| 4,235 | | |
| 4,124 | |
Other | |
| 692 | | |
| 1,392 | |
Patient
Fee Revenue, net of contractual allowances and discounts | |
$ | 6,076 | | |
$ | 6,851 | |
NOTE
4 – OPERATING & FINANCING LEASES
In
July 2019, the Company adopted ASU 2016-02, Leases (Topic 842). This standard requires lessees to apply a dual approach, classifying
leases as either finance or operating leases based upon the principle of whether or not the lease is effectively a financed purchase
by the lessee. We have elected the optional transition method to apply the standard as of the effective date and therefore, we will not
apply the standard to the comparative periods presented in the consolidated financial statements. We have also elected the transition
package of the practical expedients permitted within the standard which eliminates the requirements to reassess prior conclusions about
lease identification, lease classification and indirect costs.
The
Company accounts for its various operating leases in accordance with Accounting Standards Codification (‘ASC’) 842 –
Lease, as updated by ASU 2016-02. At the inception of a lease, the Company recognizes right-of-use lease assets and related lease liabilities
measured at present value of future lease payments on its balance sheet. Lease expense is recognized on a straight-line basis over the
term of the lease. Our most common initial term varies in length from 2 to 10 years. Including renewal options negotiated with the landlord,
we have a total span of 2 to 16 years at the facilities we lease. The Company reviewed its contracts with vendors and customers, determining
that its right-to-use lease assets consisted of only office space operating leases. In determining the right-to-use lease assets and
liabilities, the Company did recognize lease extension options which the Company feels would be reasonably exercised. Our incremental
borrowing rate (“IBR”) used to discount the stream of operating lease payments is closely related to the interest rates available
to the Company.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022 and 2021
(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,
2022 is as follows:
| Lessee Operating Leases Liability Maturity | | |
| | | |
| | |
Twelve
Months Ending September 30, | |
Operating
Lease Payments | |
Financing
Lease Payments |
| 2023 | | |
$ | 5,525 | | |
$ | 244 | |
| 2024 | | |
| 5,427 | | |
| 244 | |
| 2025 | | |
| 5,315 | | |
| 244 | |
| 2026 | | |
| 4,865 | | |
| 244 | |
| 2027 | | |
| 3,596 | | |
| 102 | |
| Thereafter | | |
| 22,380 | | |
| — | |
| Present
value discount | | |
| (10,088 | ) | |
| (82 | ) |
| Total
lease liability | | |
$ | 37,020 | | |
$ | 996 | |
NOTE
5 - INVENTORIES
Inventories
included in the accompanying condensed consolidated balance sheets consist of the following:
Inventories | |
| | | |
| | |
| |
September
30, 2022 | |
June
30, 2022 |
Purchased
parts, components and supplies | |
$ | 2,182 | | |
$ | 2,126 | |
Work-in-process | |
| 276 | | |
| 234 | |
Total
Inventories | |
$ | 2,458 | | |
$ | 2,360 | |
NOTE
6 – OTHER INTANGIBLE ASSETS
Other
intangible assets, net of accumulated amortization, in the accompanying condensed consolidated balance sheets consist of the following:
Other Intangible Assets - Net |
|
|
|
|
|
|
|
|
|
|
September
30,
2022 |
|
June
30,
2022 |
Capitalized
software development costs |
|
$ |
7,005 |
|
|
$ |
7,005 |
|
Patents
and copyrights |
|
|
5,357 |
|
|
|
5,333 |
|
Non-compete |
|
|
4,150 |
|
|
|
4,150 |
|
Customer
relationships |
|
|
3,900 |
|
|
|
3,900 |
|
Gross
Other intangible assets |
|
|
20,412 |
|
|
|
20,388 |
|
Less:
Accumulated amortization |
|
|
16,788 |
|
|
|
16,684 |
|
Other
Intangible Assets |
|
$ |
3,624 |
|
|
$ |
3,704 |
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022 and 2021
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
6 – OTHER INTANGIBLE ASSETS (CONTINUED)
Amortization
of patents and copyrights for the three months ended September 30, 2022 and 2021 amounted to $54 and $47, respectively.
Amortization
of non-compete for the three months ended September 30, 2022, and 2021 amounted to $0 and $13, respectively.
Amortization
of customer relationships for the three months ended September 30, 2022 and 2021 amounted to $50 and $50, respectively.
NOTE
7 – OTHER CURRENT LIABILITIES
Other
current liabilities in the accompanying condensed consolidated balance sheets consist of the following:
Other Current Liabilities |
|
|
|
|
|
|
|
|
|
|
September
30,
2022 |
|
June
30,
2022 |
Accrued
salaries, commissions and payroll taxes |
|
$ |
3,037 |
|
|
$ |
4,653 |
|
Sales
tax payable |
|
|
269 |
|
|
|
249 |
|
State
income taxes payable |
|
|
250 |
|
|
|
382 |
|
Legal
and other professional fees |
|
|
20 |
|
|
|
21 |
|
Accounting
fees |
|
|
76 |
|
|
|
120 |
|
Self-funded
health insurance reserve |
|
|
45 |
|
|
|
79 |
|
Accrued
interest and penalty |
|
|
59 |
|
|
|
59 |
|
Other
general & administrative expenses |
|
|
1,445 |
|
|
|
854 |
|
Other
Current Liabilities |
|
$ |
5,201 |
|
|
$ |
6,417 |
|
NOTE
8 - SEGMENT AND RELATED INFORMATION
The
Company operates in two industry segments - manufacturing and the servicing of medical equipment and management of diagnostic imaging
centers. The accounting policies of the segments are the same as those described in the summary of significant accounting policies as
disclosed in the Company’s 10-K as of June 30, 2022. All inter-segment sales are market-based. The Company evaluates performance
based on income or loss from operations.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022 and 2021
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
8 - SEGMENT AND RELATED INFORMATION (CONTINUED)
Summarized
financial information concerning the Company's reportable segments is shown in the following table:
Summarized Segment Financial Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
Equipment |
|
Management
of Diagnostic
Imaging
Centers |
|
Totals |
For
the three months ended September 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues from external customers |
|
$ |
1,878 |
|
|
$ |
21,313 |
|
|
$ |
23,191 |
|
Inter-segment
net revenues |
|
$ |
245 |
|
|
$ |
— |
|
|
$ |
245 |
|
(Loss)
Income from operations |
|
$ |
(802 |
) |
|
$ |
4,713 |
|
|
$ |
3,911 |
|
Depreciation
and amortization |
|
$ |
72 |
|
|
$ |
1,046 |
|
|
$ |
1,118 |
|
Capital
expenditures |
|
$ |
24 |
|
|
$ |
939 |
|
|
$ |
963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended September 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 |
|
NOTE
9 – SUPPLEMENTAL CASH FLOW INFORMATION
During
the three months ended September 30, 2022 and September 30, 2021, the Company paid $15 and $189 for interest, respectively.
During
the three months ended September 30, 2022 and September 30, 2021, the Company paid $395 and $221 for income taxes, respectively.
NOTE
10 – COMMITMENTS AND CONTINGENCIES
Litigation
The
Company is subject to legal proceedings and claims arising from the ordinary course of its business, including personal injury, customer
contract and employment claims. In the opinion of management, the aggregate liability, if any, with respect to such actions, will not
have a material adverse effect on the consolidated financial position or results of operations of the Company.
There
were no material changes in litigation from that reported in our Form 10-K for the fiscal year ended June 30, 2022.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022 and 2021
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
10 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Other
Matters
On
September 13, 2022, the Company adopted a stock repurchase plan. The plan has no expiration date and cannot determine the number of shares
which will be repurchased. On September 26, 2022, the Board of Directors has approved up to $9 million to be repurchased under the plan
which will be purchased on the publicly traded open market at prevailing prices. During the quarter ended September 30, 2022, the Company
repurchased 9 shares at a cost of $122.
The
Company maintains a self-funded health insurance program with a stop-loss umbrella policy with a third party insurer to limit the maximum
potential liability for individual claims to $150 per person and for a maximum potential claim liability based on member enrollment.
With respect to this program, the Company considers historical and projected medical utilization data when estimating its health insurance
program liability and related expense. As of September 30, 2022 and June 30, 2022, the Company had approximately $45 and $79, respectively,
in reserve for its self-funded health insurance programs. The reserves are included in “Other current liabilities” in the
condensed consolidated balance sheets.
The
Company regularly analyzes its reserves for incurred but not reported claims, and for reported but not paid claims related to its reinsurance
and self-funded insurance programs. The Company believes its reserves are adequate. However, significant judgment is involved in assessing
these reserves such as assessing historical paid claims, average lags between the claims’ incurred date, reported dates and paid
dates, and the frequency and severity of claims. There may be differences between actual settlement amounts and recorded reserves and
any resulting adjustments are included in expense once a probable amount is known. There were no significant adjustments recorded in
the periods covered by this report.
NOTE
11 - INCOME TAXES
In
accordance with ASC 740-270, Income Taxes – Interim Reporting, the Company is required at the end of each interim period to determine
the best estimate of its annual effective tax rate and apply that rate to year-to-date ordinary income or loss. The resulting tax expense
(or benefit) is adjusted for the tax effect of specific events, if any, required to be discretely recognized in the interim period as
they occur. For the three months ended September 30, 2022 and 2021, the Company recorded income tax expense of $1,409 in 2022 as compared
to $1,416 in 2021. The 2022 provision is comprised of a current income tax component of $263 and a deferred income tax component of $1,146.
Obligations for any liability associated with the current income tax provision, has been reduced, primarily resulting from the benefits
and utilization of net operating loss carryforwards.
ASC
topic 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax
positions taken or expected to be taken in a corporate tax return. For those benefits to be recognized, a tax position must be more-likely-than-not
to be sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return
and the benefit recognized and measured pursuant to the interpretation are referred to as unrecognized benefits. A liability is recognized
(or amount of net operating loss carryforward or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents
an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying
the provisions of ASC topic 740. The Company believes there are no uncertain tax positions in prior years tax filings and therefore it
has not recorded a liability for unrecognized tax benefits.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022 and 2021
(Amounts
and shares in thousands, except per share amounts)
(UNAUDITED)
NOTE
11 - INCOME TAXES (CONTINUED)
In
accordance with ASC topic 740, interest costs related to unrecognized tax benefits are required to be calculated (if applicable) and
would be classified as “Interest expense, net”. Penalties if incurred would be recognized as a component of “Selling,
general and administrative” expenses.
The
Company files corporate income tax returns in the United States (federal) and in various state and local jurisdictions. In most instances,
the Company is no longer subject to federal, state and local income tax examinations by tax authorities for years prior to 2017.
The
Company recorded a deferred tax asset of $11,697 and a deferred tax liability of $ as of September 30, 2022, primarily relating to
net operating loss carryforwards of approximately $15,640 available to offset future taxable income through 2032. The net operating losses
begin to expire in 2023 for federal tax and state income tax purposes.
Future
ownership changes as determined under Section 382 of the Internal Revenue code could further limit the utilization of net operating loss
carryforwards. As of September, 2022, no such changes in ownership have occurred.
The Inflation Reduction Act (“IRA”)
was enacted on August 16, 2022. The IRA includes provisions imposing a 1% excise tax on share repurchases that occur after December 31,
2022 and introduces a 15% corporate alternative minimum tax (“CAMT”) on adjusted financial statement income. The CAMT will
be effective for tax years beginning after December 31, 2022. Currently, the Company is expecting the IRA to have a material impact to
the Company’s financial statements.
The
ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those
temporary differences become deductible or when such net operating losses can be utilized. The Company considers projected future taxable
income, the regulatory environment of the industry and tax planning strategies in making this assessment. At present, the Company believes
that it is more likely than not that the benefits from certain deferred tax asset carryforwards, will not all be fully realized. In recognition
of this inherent risk, a valuation allowance was established for the partial value of the deferred tax asset, which principally related
to research and development tax credits. A valuation allowance will be maintained until sufficient positive evidence exists to support
the reversal of the remainder of the valuation.
NOTE
12 – SUBSEQUENT EVENTS
The
Company has evaluated events that occurred subsequent to September 30, 2022 and through the date the condensed consolidated financial
statements were issued.
During
October 2022, the Company cancelled 16 shares of common stock which were held as treasury stock at September 30, 2022.
During
October 2022, the Company amended the revolving credit agreement. The agreement was extended to January 6, 2023. The interest rate on
borrowings is at the current prime rate of 6.25% along with certain financial covenants.
FONAR
CORPORATION AND SUBSIDIARIES
Item
2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
For
the three month period ended September 30, 2022, we reported a net income of $2.7 million on revenues of $23.2 million as compared to
net income of $5.2 million on revenues of $23.7 million for the three month period ended September 30, 2021. Operating income decreased
from $5.7 million for the three month period ended September 30, 2021 to $3.9 million for the three month period ended September 30,
2022.
The
revenue decrease, from $23.7 million for the first three months of fiscal 2022 to $23.2 million for the first three months of fiscal
2023, was primarily due to decreases in patient fee revenue of $775,000, from $6.9 million for the first three months of fiscal 2022
to $6.1 million for the first three months of fiscal 2023. Revenues from product sales and service and repair fees decreased by 11.1%
from $2.1 million for the first three months of fiscal 2022 to $1.9 million for the first three months of fiscal 2023.
While
our revenues decreased, our costs and expenses increased, but by a greater amount resulting in our operating income decreasing to $3.9
million for the three months ended September 30, 2022 as compared to $5.7 million for the three months ended September 30, 2021. In terms
of percentages, costs and expenses increased 7.2% from $18.0 million for the first three months of fiscal 2022 to $19.3 million for the
first three months of fiscal 2023, while revenues increased 2.3%, from $23.7 million for the first three months of fiscal 2022 to $23.2
million for the first three months of fiscal 2023.
Fonar’s
wholly owned subsidiary, Health Management Corporation of America (“HMCA”), has the controlling interest, in Health Diagnostics
Management, LLC (“HDM”). HMCA presently has a direct ownership interest of 70.8% in HDM, and the investors in HDM have a
29.2% ownership interest, as compared to HMCA’s 70% ownership interest and the investors’ 30% ownership interest in HDM in
fiscal 2021. This change resulted from the Company’s purchase of non-controlling interests from the minority shareholders for $546,000
in the second quarter of fiscal 2022. The management of the diagnostic imaging centers business segment is being conducted by HDM, operating
under the name “Health Management Company of America”. For the sake of simplicity, HMCA, and HDM are referred to as “HMCA”,
unless otherwise indicated.
The
most significant adverse impact on our Company in fiscal 2022 and the first quarter of fiscal 2023 has been the continuing COVID-19 pandemic.
Although it had seemed the worst had passed, by August 2020, subsequent events have shown a spike in new cases and the emergence of new
strains of the virus. This is by no means a problem confined to our Company, but despite our best efforts and improved ability to cope
with the pandemic and the availability of new vaccines, the impact on our results of operation and financial condition is potentially
volatile and severe.
Since
March 2020 the global pandemic of COVID-19 has caused disruptions in the United States and international markets which have adversely
affected our workforce, financial condition, profitability and business operations. Generally COVID-19 caused us to require that a portion
of our workforce work from home and restricted the ability of our personnel to travel for marketing purposes or to service our customers.
During the fourth quarter of fiscal 2020, the Company was able to enact certain decisions to allow the Company to survive during the
global pandemic and prevent further losses or additional decreases in scan volume. Although we are unable to predict if there will be
additional consequences on our operations from the continuing global pandemic of COVID-19 and its variants, the Company believes with
its strong cash position and general financial condition, it will be able to continue operations going forward.
FONAR
CORPORATION AND SUBSIDIARIES
One
of the concerns we have had is the increased strictness in enforcement of certain COVID-19 mandates, which directly impact the conduct
of our business, such as the requirement that employees in healthcare facilities be vaccinated. Another concern we have is the newer
variants that are more transmissible. We are in fact facing some of these challenges now. As a result, between absences due to illness
and the loss of unvaccinated employees whose duties required them to be in contact with patients, we were sometimes unable to keep a
scanning facility open for all shifts. Also at the end of the first quarter of fiscal 2023, our Florida locations were effected by Hurricane
Ian and had to be shut down for several days. During the first quarter of fiscal 2023, the aggregate number of scans performed by the
sites we manage or own declined to 44,471 scans from 48,469 scans in the first quarter of fiscal 2022. Nevertheless, we have been able
to navigate through these challenges and avoid any significant disruption to our business
Forward
Looking Statements
Certain
statements made in this Quarterly Report on Form 10-Q are "forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of Management for future operations. Such statements involve known
and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements
included herein are based on current expectations that involve numerous risks and uncertainties. Our plans and objectives are based,
in part, on assumptions involving the expansion of business. Assumptions relating to the foregoing involve judgments with respect to,
among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible
to predict accurately and many of which are beyond our control. Although we believe that our assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking
statement included herein, the inclusion of such information should not be regarded as a representation by us or any other person that
our objectives and plans will be achieved.
Results
of Operations
We
operate in two industry segments: the manufacture and servicing of medical (MRI) equipment, which is conducted by Fonar, and diagnostic
facilities management services, which is conducted through HMCA.
Manufacturing
and Service of MRI Equipment
Revenues
from MRI product sales decreased to $30,000 for the first three months of fiscal 2023 from $148,000 for the first three months of fiscal
2022. Costs related to product sales increased from $109,000 for the three month period ended September 30, 2021 to $169,000 for the
three month period ended September 30, 2022. Economic uncertainty and lower reimbursement rates for MRI scans, have depressed the market
for our MRI scanner products, notwithstanding our scanners’ unique technological capabilities (e.g. multi positional scanning).
Due to the low sales volumes of our MRI product, period to period comparisons are not necessarily indicative of any trends.
Service
revenues decreased to $1.8 million for the three month period ended September 30, 2022 as compared to $2.0 million for the three month
period ended September 30, 2021.
FONAR
CORPORATION AND SUBSIDIARIES
Costs
relating to providing service were $734,000 in the first three months of fiscal 2022 and $729,000 in the first three months of fiscal
2023. Because of our ability to monitor the performance of customers’ scanners from our facilities in Melville, New York on a daily
basis and to detect and repair any irregularities before more serious and costly problems develop, we have been able to contain our costs
of providing service.
There
were approximately $99,000 in foreign revenues for the first three months of fiscal 2023 as compared to approximately $82,000 in foreign
revenues for the first three months of fiscal 2022, representing an decrease in foreign revenues of 20.7%. We do not regard this as a
material trend, but as part of a normal although sometimes volatile variation resulting from low volumes of foreign sales.
We
recognize MRI scanner sales revenues on the “percentage of completion” basis, which means the revenues are recognized as
the scanner is manufactured. Revenues recognized in a particular quarter do not necessarily reflect new orders or progress payments made
by customers in that quarter. We build the scanner as the customer meets certain benchmarks in site preparation and our installation
of the scanner, in order to minimize the time lag between incurring costs of manufacturing and our receipt of the cash progress payments
from the customer which are due upon delivery. Consequently, there can be a disparity between the revenues recognized in a fiscal period
and the number of product sales. Generally, the revenues from a scanner sale are recognized in a fiscal quarter or quarters following
the quarter in which the sale was made.
Revenues
for the medical equipment segment decreased to $1.9 million for the first three months of fiscal 2023 from $2.1 million for the first
three months of fiscal 2022. Operating losses for our medical equipment segment increased to an operating loss of $802,000, for the first
three months of fiscal 2023 as compared to an operating loss of $490,000 for the first three months of fiscal 2022.
Diagnostic
Facilities Management Services
HMCA
revenues decreased in the first three months of fiscal 2023 by 1.4% to $21.3 million from $21.6 million for the first three months of
fiscal 2022. The percentage of our revenues derived from our diagnostic facilities management segment relative to the percentage of our
revenues derived from our medical equipment segment increased slightly to 91.9% for the first three months of fiscal 2023, from 91.1%
for the first three months of fiscal 2022.
HMCA’s
current strategy is to counter the effects of lower reimbursement rates by increasing the scan volume of the facilities it owns or manages
by adding additional scanners at current centers and increasing our marketing efforts. As a result of the COVID-19 virus, however, the
Company had seen decreases in its scan volume. Nevertheless, the Company continued its program of adding additional scanners. The scan
volume decreased slightly in the first quarter of 2023. Other factors that have led to the slight decrease can also be attributable to
Hurricane Ian which cause the Florida locations to be closed for several days. The continuation of the COVID-19 virus and its various
variants that are more transmittable may delay the completion of the installation of some of the scanners. If scan volumes decrease however,
and remain at lower volumes, the Company, notwithstanding its ample cash reserves, may need to consider reducing the size of its operations
temporarily as a last resort.
New
York State mandated that as of October 7, 2021, all workers at hospitals, long-term care facilities and diagnostic centers be COVID-19-vaccinated.
Workers who were not vaccinated either resigned, were transferred to a non-diagnostic facility within the company, or were dismissed.
The resulting reduction in the number of workers available at sites owned or managed by HMCA, has been challenging and has significantly
reduced the pool of qualified and vaccinated workers. Also this is combined with the emergence of the new highly transmissible variants.
HMCA owned or managed sites struggling with reduced staff either have cut their business hours and therefore scan fewer patients or,
when possible, maintain regular business hours by paying employees who are willing to work extra hours at overtime rates.
FONAR
CORPORATION AND SUBSIDIARIES
Although
the COVID-19 virus and government mandates have adversely affected our marketing efforts our scan volumes in fiscal 2020 and the beginning
of fiscal 2021, the number of scans performed at our centers and at our client’s centers has recovered to pre-COVID-19 levels and
has decreased from approximately 48,000 in the first three months of fiscal 2022 to approximately 44,000 in the first three months of
fiscal 2023. The decrease in scans was due to a shortage of MRI technologists who operate the scanners, which was an industry-wide issue,
caused our centers to be open for fewer hours. We believe that the worst part of this shortage has past and we will be back to full employment
by December.
We
now manage or own a total of 41 MRI scanners. Twenty-six (26) MRI scanners are located in New York and fifteen (15) are located in Florida.
HMCA experienced an operating income of $4.7 million for the first three months of fiscal 2023 compared to operating income of $6.2 million
for the first three months of fiscal 2022.
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 three months of fiscal 2023 as compared to the first three months of fiscal 2022 remained constant at
$11.7 million.
Consolidated
For
the first three months of fiscal 2023, our consolidated net revenues decreased by 2.3% to $23.2 million from $23.7 million for the first
three months of fiscal 2022, and total costs and expenses increased by 7.2% to $19.3 million from $18.0 million for the first three months
of fiscal 2023 and for the first three months of fiscal 2022 respectively. As a result, our operating income decreased to $3.9 million
in the first three months of fiscal 2023 as compared to $5.7 million in the first three months of fiscal 2022. An increase in selling,
general and other administrative costs in particular resulted in the increase of cost and expenses as compared to the increase in net
revenues.
Selling,
general and administrative expenses increased to $6.3 million in the first three months of fiscal 2023 from $5.1 million in the first
three months of fiscal 2022. This increase in selling, general and administrative expenses was due mainly to more reserves taken on management
fees. Some of these reserves had been taken in the ordinary course of business and some in connection with the impact of the COVID-19
virus. The compensatory element of stock issuances, which is included in selling, general and administrative expenses, remained constant
at $0 for the first three months of fiscal 2023 and fiscal 2022.
Research
and development expenses decreased by 9.6% to $349,000 for the first three months of fiscal 2023 from $386,000 for the first three months
of fiscal 2022.
Interest
expense in the first three months of fiscal 2023 decreased by 17.6% to $17,000 from $14,000 in the first three months of fiscal 2022.
Inventories
increased to $2.5 million at September 30, 2022 as compared to $2.4 million at June 30, 2022.
Net
management fee and medical receivables increased by 0.6% to $62.5 million at September 30, 2022 from $62.1 million at June 30, 2022 as
a result of slower collections and increased scan volume. The slower collections were primarily due to an increase in no-fault and workers’
compensation revenue, which typically takes longer to collect.
FONAR
CORPORATION AND SUBSIDIARIES
The
results of operations for the first three months of fiscal 2023 reflect a decrease in revenues from management, patient and other fees,
as compared to the first three months of fiscal 2022 ($21.3 million for the first three months of fiscal 2023 as compared to $21.6 million
for the first three months of fiscal 2022), and a decrease in the MRI equipment segment revenues ($1.9 million for the first three months
of fiscal 2023 as compared to $2.1 million for the first three months of fiscal 2022). Revenues were 8.1% from the MRI as compared to
91.9% from HMCA, for the first three months of fiscal 2023, as compared to 8.9% from the MRI equipment segment and 91.1% from HMCA for
the first three months of fiscal 2022.
On
March 27, 2020, the CARES Act was signed into law and is intended to provide over $2 trillion in stimulus benefits for the U.S. economy.
The CARES Act provides for certain federal income tax changes, including an increase in the interest expense tax deduction limitation,
the deferral of the employer portion of Social Security payroll taxes, refundable payroll tax credits, net operating loss carryback periods,
alternative minimum tax credit refunds and bonus depreciation of qualified improvement property. The federal income tax changes brought
about by the CARES Act are complex and further guidance is expected. We received a cash benefit from the ability to receive a full reimbursement
of $1.3 million of tax credits relating to the alternative minimum tax credits in the prior fiscal years 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.
FONAR
CORPORATION AND SUBSIDIARIES
In
addition, FONAR had announced the publication of a book “THE CRANIOCERVICAL SYNDROME and MRI” that highlights the unique
attributes of FONAR UPRIGHT® MRI Imaging (S. Karger, A.G. based in Basel, Switzerland- www.karger.com/Book/Home/261956) which has
been published by S. Karger, an approximately 125 year old company and an academic publisher of scientific and medical journals and books.
The seven chapter monograph examines the rapid advances in MRI made possible by the FONAR UPRIGHT® Multi-Position MRI that are transforming
the treatment of patients suffering from the craniocervical syndrome (CCS). It is written by leading international experts in the field
to practitioners with a better understanding of the subtle anatomy and MRI appearances at the craniocervical junction, along with insight
into the clinical significance of cerebrospinal fluid (CSF) flow measurements and its potential role in generating the devastating impairments
of the neurodegenerative diseases: Alzheimer’s (5.1 million patients in the United States), childhood and adult Autism (3.0 million),
Parkinson’s (1.0 million), Multiple Sclerosis (250,000-350,000) and Amyotrophic Lateral Sclerosis (ALS) (30,000). It calls attention
to the revolutionary importance of FONAR’s UPRIGHT® MRI imaging technology and the prospect of significantly relieving the
suffering of the above totaled 9.38 million patients afflicted with these disorders.
Fonar
also had announced a major diagnostic breakthrough in multiple sclerosis achieved with advanced Upright® MRI. Medical researchers
at FONAR published a paper reporting a diagnostic breakthrough in multiple sclerosis (MS), based on observations made possible by the
Company’s unique Upright® Multi-Position™ MRI scanner. The findings reveal that the cause of multiple sclerosis may be
biomechanical and related to earlier trauma to the neck, which can result in obstruction of the flow of cerebrospinal fluid (CSF), which
is produced and stored in the central anatomic structures of the brain known as the ventricles. Since the ventricles produce a large
net volume of CSF each day (500 cc), the obstruction can result in a build up of pressure within the ventricles, resulting in leakage
of the CSF and the antigenic polypeptides it contains into the surrounding brain tissue. This leakage could be responsible for generating
the brain lesions of multiple sclerosis.
The
paper, titled “The Possible Role of Cranio-Cervical Trauma and Abnormal CSF Hydrodynamics in the Genesis of Multiple Sclerosis,"
appears in the journal Physiological Chemistry and Physics and Medical NMR (Sept. 20, 2011).
This
capability of the Fonar Upright® technology has demonstrated its key value on patients with the Arnold-Chiari syndrome [Cerebellar
Tonsil Extopia (CTE)], which is believed to affect 200,000 to 500,000 Americans. In this syndrome, brain stem compression and subsequent
severe neurological symptoms occur in these patients, because the brain stem descends and is compressed at the base of the skull in the
foramen magnum, which is the circular bony opening at the base of the skull where the spinal cord exits the skull. Conventional lie-down
MRI scanners cannot make an adequate evaluation of this pathology since the patient's pathology is most visible and the symptoms most
acute when the patient is scanned in the upright fully weight-bearing position.
A
combined study of 1,200 neck pain patients published in “Brain Injury” (July 2010) by eight university medical centers reported
that cerebellar tonsil ectopia (CTE) of 1mm or greater was found and visualized 2.5 times (250%) more frequently when patients who had
sustained automobile whiplash injuries were scanned upright rather than lying down.
The
Upright® MRI has also demonstrated its value for patients suffering from scoliosis. Scoliosis patients have been typically subjected
to routine x-ray exams for years and must be imaged upright for an adequate evaluation of their scoliosis. Because the patient must be
standing for a complete evaluation of the extent of the patient’s scoliosis, an x-ray machine has been the only modality that could
provide that service. The Upright® MRI is the only MRI scanner which allows the patient to stand during the MRI exam. Fonar has developed
an RF receiver and scanning protocol that for the first time allows scoliosis patients to obtain diagnostic pictures of their spines
without the risks of x-rays. A study by the National Cancer Institute (2000) of 5,466 women with scoliosis reported a 70% increase in
breast cancer resulting from 24.7 chest x-rays these patients received on the average in the course of their scoliosis treatment. The
Upright® MRI examination of scoliosis enables the needed imaging evaluation of the degree of spine scoliosis without exposing the
patient to the risk of breast cancer from x-radiation. Currently scoliosis affects more than 3,000,000 American women.
FONAR
CORPORATION AND SUBSIDIARIES
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) the response of these VITAL TISSUES to treatment.
Liquidity
and Capital Resources
Cash
and cash equivalents, and short term investments remained constant at $48.7 million at June 30, 2022 and at September 30, 2022.
Cash
provided by operating activities for the first three months of fiscal 2023 was $2.7 million. Cash provided by operating activities was
attributable principally to net income of $2.6 million, depreciation and amortization of $1.1 million, amortization on right-to-use assets
of $1.1 million, provision for bad debts of $1.4 million and deferred income tax of $1.1 million, offset by an increase in accounts,
management fee receivables and medical receivables of $1.4 million and a decrease in other current liabilities of $1.6 million.
Cash
used in investing activities for the first three months of fiscal 2023 was $963,000. Cash used in investing activities during the first
three months of fiscal 2023 consisted of patent costs of $24,000 and the purchase of property and equipment of $939,000.
FONAR
CORPORATION AND SUBSIDIARIES
Cash
used in financing activities for the first three months of fiscal 2023 was $1.8 million. The principal uses of cash in financing activities
during the first three months of fiscal 2022 were the repayment of principal on long-term debt and capital lease obligations of $5,000,
the purchase of treasury stock of $122,000 and distributions to non-controlling interests of $1.6 million.
Total
liabilities decreased by 4.2% to $50.9 million at September 30, 2022 from $53.1 million at June 30, 2022. “Other” current
liabilities decreased by 18.9% to $5.2 million at September 30, 2022 from $6.4 million at June 30, 2022. The current portion of our service
contract liabilities decreased by 2.0% to $4.2 million at September 30, 2022 as compared to $4.3 million at June 30, 2022. Customer deposits
increased from $361,000 at June 30, 2022 to $532,000 at September 30, 2022.
As
of September 30, 2022, the total of $5.2 million in “other” current liabilities included accrued salaries and payroll taxes
of $3.0 million, state income taxes payable of $250,000 and other general and administrative expenses of $1.4 million.
Our
working capital increased to $104.2 million at September 30, 2022 from $101.9 million at June 30, 2022. This resulted from an increase
in current assets ($118.7 million at June 30, 2022 as compared to $119.1 million at September 30, 2022), and a decrease in current liabilities
from $16.7 million at June 30, 2022 to $14.9 million at September 30, 2022.
The
ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those
temporary differences become deductible or when such net operating losses can be utilized. The Company considers projected future taxable
income, the regulatory environment of the industry, and tax planning strategies in making this assessment. At the present, the Company
believes that it is more likely than not that the benefits from certain deferred tax asset carryforwards, will not all be fully realized.
In recognition of this inherent risk, a valuation allowance was established for the partial value of the deferred tax asset, (principally
related to research and development tax credits and allowance for doubtful accounts). A valuation allowance will be maintained until
sufficient positive evidence exists to support the reversal of any portion or all of the valuation allowance.
The
Company’s effective income tax rate is based on expected income, statutory rates and tax planning opportunities available in the
various jurisdictions in which it operates. For interim financial reporting, the Company estimates the annual income tax rate based on
projected taxable income for the full year and records a quarterly income tax provision or benefit in accordance with the anticipated
annual rate. The Company refines the estimates of the year’s taxable income on a periodic basis as new information becomes available,
including actual year-to-date financial results. This continual estimation process often results in a change to the expected effective
income tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in
estimate occurs so that the year-to-date provision reflects the expected income tax rate. Significant judgment is required in determining
the effective tax rate and in evaluating tax positions.
On
March 27, 2020 Congress enacted the CARES Act (Coronavirus Aid, Relief and Economic Security Act). The Act provides numerous tax provisions
and other stimulus measures, including temporary changes regarding prior and future operating losses, temporary changes to the prior
and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social
Security taxes, technical corrections to prior tax legislation for tax depreciation of certain qualified improvement property and the
creation of refundable employee retention credits. At the present time, the only impact of the CARES Act to the Company is allowing a
full reimbursement of $1.3 million of tax credits relating to the alternative minimum tax credits in prior fiscal years. Before the CARES
Act, these credits were to be refunded over a period of 3 years. We also realized a cash benefit from the deferral of Social Security
payroll taxes.
FONAR
CORPORATION AND SUBSIDIARIES
On
June 30, 2020, we entered into a $701,000 loan agreement under the Paycheck Protection Program (PPP) under the CARES Act that provides
for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses. The Company applied for this
additional loan exclusively for the Florida locations during June 2020 due to the fact that the COIVD-19 virus was increasing in Florida.
The loans and accrued interest are forgivable after 24 weeks as long as the proceeds are used for eligible purposes, including payroll,
benefits, rent and utilities and maintains certain payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates
employees or reduces salaries during the 24 week period. This loan was forgiven during August 2021 in its entirety.
Fonar
is committed to making capital expenditures for the remainder of the 2023 fiscal year, for placing a scanner at a new stand-alone facility
located in Florida. The current estimated costs of these capital expenditures is approximately $1.0 million.
Critical
to our business plan are the improvement and expansion of the MRI facilities managed or owned by HMCA, and increasing the number of scans
performed at those facilities. In addition, our business plan calls for a continuing commitment to providing our customers with enhanced
equipment service and maintenance capabilities and delivering state-of-the-art, innovative and high quality equipment and upgrades at
competitive prices.
Management
is seeking to promote wider market recognition of Fonar’s scanner products, and to increase demand for Upright® scanning at
the facilities HMCA owns or manages. Given the liquidity and credit constraints in the markets, the uncertainty resulting from the Patient
Protection and Affordable Care Act or its repeal or modification, and the impact of the COVID-19 virus on the economy in general, the
sale of medical equipment has and may continue to suffer.
The
Company believes that its business plan has been responsible for the past nine consecutive fiscal years and first fiscal quarter of fiscal
2023 of profitability and that its capital resources will be adequate to support operations through at least November 14, 2023. The future
effects on our business of healthcare legislation, the impact of the COVID-19 virus, the Deficit Reduction Act, the 2.3% excise tax on
sales of medical equipment, reimbursement rates, public health conditions and the general economic and business climate are not known
at the present time. Nevertheless, there is a possibility of adverse consequences to our business operations from these causes. Although
the Company cannot predict the full effect of COVID-19 for the first three fiscal quarters or any later period, the Company believes
that it has adequate revenues, cash reserves and other assets that will enable it to continue to operate until at least November 14,
2023.