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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 12 Months Ended
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Jun. 30, 2020
Accounting Policies [Abstract] |
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of FONAR Corporation, its majority and wholly-owned subsidiaries and partnerships. The operating activities of subsidiaries are included in the accompanying consolidated statements from the date of acquisition. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The most significant estimates relate to receivable allowances, intangible assets, income taxes and related tax asset valuation allowances, useful lives of property and equipment, contingencies, revenue recognition and the assessment of litigation. In addition, healthcare industry reforms and reimbursement practices will continue to impact the Company's operations and the determination of contractual and other allowance estimates. Actual results could differ from those estimates. Inventories Inventories consist of purchased parts, components and supplies, as well as work-in-process, and are stated at the lower of cost, determined on the first-in, first-out method, or market. Property and Equipment Property and equipment procured in the normal course of business is stated at cost. Property and equipment purchased in connection with an acquisition is stated at its estimated fair value, generally based on an appraisal. Property and equipment is being depreciated for financial accounting purposes using the straight-line method over their estimated useful lives. Leasehold improvements are being amortized over the shorter of the useful life or the remaining lease term. Upon retirement or other disposition of these assets, the cost and related accumulated depreciation of these assets are removed from the accounts and the resulting gains or losses are reflected in the results of operations. Expenses for maintenance and repairs are charged to operations. Renewals and betterments are capitalized. Maintenance and repair expenses totaled approximately $1,870,000 and $1,557,000 for the years ended June 30, 2020 and 2019 respectively. The estimated useful lives in years are generally as follows:
Diagnostic equipment | 5–13
Research, development and demonstration equipment | 3-7
Machinery and equipment | 2-7
Furniture and fixtures | 3-9
Leasehold improvements | 2–10
Building | 28
Long-Lived Assets The Company periodically assesses the recoverability of long-lived assets, including property and equipment and intangibles, other than goodwill, 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. Other Intangible Assets 1) Patents and Copyrights Amortization is calculated on the straight-line basis over 15 years. 2) Non-Competition Agreements The non-competition agreements are being amortized on the straight line basis over the length of the agreement (7 years). 3) Customer Relationships Amortization is calculated on the straight line basis over 20 years. Goodwill Generally accepted accounting principles in the United States require the Company to perform a goodwill impairment test annually and more frequently when negative conditions or a triggering event arises. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill to the fair value of the reporting unit. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered potentially impaired and a second step is performed to measure the amount of impairment loss, if any. Acquired assets and assumed liabilities Pursuant to ASC No. 805-10-25, if the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, but during the allowed measurement period not to exceed one year from the acquisition date, the Company adjusts the provisional amounts recognized at the acquisition date by means of adjusting the amount recognized for goodwill. Revenue Recognition Revenue on sales contracts for scanners, included in “product sales” in the accompanying consolidated statements of operations, is recognized under the percentage-of-completion method in accordance with FASB ASC 605-35, “Revenue Recognition – Construction-Type and Production-Type Contracts”. The Company manufactures its scanners under specific contracts that provide for progress payments. Production and installation take approximately three to six months. Revenue on scanner service contracts is recognized on the straight-line method over the related contract period, usually one year. Revenue from product sales (upgrades and supplies) is recognized upon shipment. Revenue under management contracts is recognized based upon contractual agreements for management services rendered by the Company primarily under various long-term agreements with various medical providers (the "PCs"). As of June 30, 2020, the Company has twenty one management agreements of which three are with PC’s owned by Raymond V. Damadian, M.D., Chairman of the Board of FONAR (“the Related medical practices”) and eighteen are with PC’s, which are all located in the state of New York (“the New York PC’s”), owned by two unrelated radiologists. The contractual fees for services rendered to the PCs consists of fixed monthly fees per diagnostic imaging facility ranging from approximately $77,000 to $522,000. All fees are re-negotiable at the anniversary of the agreements and each year thereafter. The Company records a provision for bad debts for estimated uncollectible fees, which is reflected in other operating expenses on the Statement of Operations. All fees are re-negotiable at the anniversary of the agreements and each year thereafter. On July 1, 2018, the Company adopted the new revenue recognition accounting standard issued by the Financial Accounting Standards Board (“FASB”) and codified in the ASC as topic 606 (“ASC 606”). The revenue recognition standard in ASC 606 outlines a single comprehensive model for recognizing revenue as performance obligations, defined in a contract with a customer as goods or services transferred to the customer in exchange for consideration, are satisfied. The standard also requires expanded disclosures regarding the Company’s revenue recognition policies and significant judgments employed in the determination of revenue. The Company applied the modified retrospective approach to all contracts when adopting ASC 606. As a result, at the adoption of ASC 606 the majority of what was previously classified as the provision for bad debts in the statement of operations is now reflected as implicit price concessions (as defined in ASC 606) and therefore included as a reduction to net operating revenues in 2019. For changes in credit issues not assessed at the date of service, the Company will prospectively recognize those amounts in other operating expenses on the statement of operations. For periods prior to the adoption of ASC 606, the provision for bad debts has been presented consistent with the previous revenue recognition standards that required it to be presented separately as a component of net operating revenues. Additionally, upon adoption of ASC 606 the allowance for doubtful accounts of approximately $22.7 million as of July 1, 2018 was reclassified as a component of net patient accounts receivable. Other than these changes in presentation on the condensed consolidated statement of operations and condensed consolidated balance sheet, the adoption of ASC 606 did not have a material impact on the consolidated results of operations for the year ended June 30, 2018 and did not have a material impact on its consolidated results of operations on a prospective basis. 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. The Company’s patient fee revenues, net of contractual allowances and discounts less the provision for bad debts for the years ended June 30, 2020 and 2019 are summarized in the following table.
|  | For the Years Ended June 30
|  | 2020 |  | 2019
Commercial Insurance/ Managed Care |  | $ | 4,545,987 |  |  | $ | 5,218,656 |
Medicare/Medicaid |  |  | 1,038,288 |  |  |  | 1,172,543 |
Workers' Compensation/Personal Injury |  |  | 16,028,737 |  |  |  | 16,790,025 |
Other |  |  | 882,248 |  |  |  | 1,026,312 |
Net Patient Fee Revenue |  | $ | 22,495,260 |  |  | $ | 24,207,536 |
Research and Development Costs Research and development costs are charged to expense as incurred. The costs of equipment that are acquired or constructed for research and development activities, and have alternative future uses (either in research and development, marketing or production), are classified as property and equipment and depreciated over their estimated useful lives. Advertising Costs Advertising costs are expensed as incurred. Advertising expense approximated $566,000 and $538,000 and for the years ended June 30, 2020 and 2019, respectively. Shipping Costs The Company’s shipping and handling costs are included in revenue from product sales and the related expense included in costs related to product sales is $12,056 and $13,695 for the years ended June 30, 2020 and 2019 respectively. Income Taxes Deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Customer Advances Cash advances and progress payments received on sales orders are reflected as customer advances until such time as revenue recognition occurs. Earnings Per Share Basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. In accordance with ASC topic 260-10, “Participating Securities and the Two-Class Method”, the Company used the Two-Class method for calculating basic earnings per share and applied the if converted method in calculating diluted earnings per share for the years ended June 30, 2020 and 2019. 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 years ended June 30, 2020 and 2019, diluted EPS for common shareholders includes 127,504 shares upon conversion of Class C Common.
|  | June 30, 2020
Basic |  | Total |  | Common Stock |  | Class C Common Stock
Numerator: |  |  |  |  |  |
Net income available to common stockholders |  | $ | 8,240,205 |  |  | $ | 7,735,650 |  |  | $ | 128,500 |
Denominator: |  |  |  |  |  |  |  |  |  |  |  |
Weighted average shares outstanding |  |  | 6,443,713 |  |  |  | 6,443,713 |  |  |  | 382,513 |
Basic income per common share |  | $ | 1.28 |  |  | $ | 1.20 |  |  | $ | 0.34 |
Diluted |  |  |  |  |  |  |  |  |  |  |  |
Denominator: |  |  |  |  |  |  |  |  |  |  |  |
Weighted average shares outstanding |  |  |  |  |  |  | 6,443,713 |  |  |  | 382,513 |
Class C Common Stock |  |  |  |  |  |  | 127,504 |  |  |  | — |
Total Denominator for diluted earnings per share |  |  |  |  |  |  | 6,571,217 |  |  |  | 382,513 |
Diluted income per common share |  |  |  |  |  | $ | 1.18 |  |  | $ | 0.34 |
|  | June 30, 2019
Basic |  | Total |  | Common Stock |  | Class C Common Stock
Numerator: |  |  |  |  |  |
Net income available to common stockholders |  | $ | 15,371,131 |  |  | $ | 14,366,798 |  |  | $ | 242,031 |
Denominator: |  |  |  |  |  |  |  |  |  |  |  |
Weighted average shares outstanding |  |  | 6,354,103 |  |  |  | 6,354,103 |  |  |  | 382,513 |
Basic income per common share |  | $ | 2.41 |  |  | $ | 2.26 |  |  | $ | 0.63 |
Diluted |  |  |  |  |  |  |  |  |  |  |  |
Denominator: |  |  |  |  |  |  |  |  |  |  |  |
Weighted average shares outstanding |  |  |  |  |  |  | 6,354,103 |  |  |  | 382,513 |
Class C Common Stock |  |  |  |  |  |  | 127,504 |  |  |  | — |
Total Denominator for diluted earnings per share |  |  |  |  |  |  | 6,481,607 |  |  |  | 382,513 |
Diluted income per common share |  |  |  |  |  | $ | 2.22 |  |  | $ | 0.63 |
Cash and Cash Equivalents Cash and cash equivalents includes cash on hand, cash in banks, investments in certificates of deposit with original maturities of 90 days or less, and money market funds. Short Term Investments Short term investments include certificates of deposit with original maturities of greater than 90 days. Concentration of Credit Risk Cash: The Company maintains its cash and cash equivalents with various financial institutions, which exceed federally insured limits throughout the year. At June 30, 2020, the Company had cash on deposit of approximately $33,444,000 in excess of federally insured limits of $250,000. Related Parties: Net revenues from related parties accounted for approximately 12% and 11% of the consolidated net revenues for the years ended June 30, 2020 and 2019, respectively. Net management fee receivables from the related party medical practices accounted for approximately 13% and 13% of the consolidated accounts receivable for the years ended June 30, 2020 and 2019, respectively. See Note 3 regarding the Company’s concentrations in the healthcare industry. Fair Value of Financial Instruments The financial statements include various estimated fair value information at June 30, 2020 and 2019, as required by ASC topic 820, "Disclosures about Fair Value of Financial Instruments". Such information, which pertains to the Company's financial instruments, is based on the requirements set forth in that Statement and does not purport to represent the aggregate net fair value to the Company. The Company has established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring and revaluing fair value. These tiers include, Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents: The carrying amount approximates fair value because of the short-term maturity of those instruments. Short term investments: The carrying amount approximates fair value because of the short-term maturity of those instruments. Such amounts include Certificates of Deposits with original maturities greater than 90 days. These securities are classified as Level 1. Receivable and accounts payable: The carrying amounts approximate fair value because of the short maturity of those instruments. Notes receivable: The carrying amount approximates fair value because the discounted present value of the cash flow generated by the parties approximates the carrying value of the amounts due to the Company. Long-term debt and notes payable: The carrying amounts of debt and notes payable approximate fair value due to the length of the maturities, the interest rates being tied to market indices and/or due to the interest rates not being significantly different from the current market rates available to the Company. All of the Company's financial instruments are held for purposes other than trading. Recent Accounting Pronouncements In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and Other (Topic 350). The amendments in this update simplify the test for goodwill impairment by eliminating Step 2 from the impairment test, which required the entity to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining fair value of assets acquired and liabilities assumed in a business combination. The amendments in this update are effective for public companies for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company adopted the Standard on July 1, 2020 and the impact of adopting this guidance will have no material impact on our Consolidated Financial Statements. During February 2016, FAS issued ASU 2016-02, Leases (Topic 842). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based upon the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Lease with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. The standard was effective for us beginning July 1, 2019. We have elected the optional transition method to apply the standard as of the effective date and therefore, we will not apply the standard to the comparative periods presented in the consolidated financial statements. We have also elected the transition package of thee practical expedients permitted within the standard which eliminates the requirements to reassess prior conclusions about lease identification, lease classification and indirect costs. The adoption of this guidance had a material impact on the Company’s balance sheet by virtue of including the present value of its future operating lease payments as a liability of $33.3 million and related right-to-use lease assets as of July 1, 2019. At the time of adoption of this guidance we had no significant financing leases. The Company accounts for its various operating leases in accordance with Accounting Standards Codification (‘ASC’) 842 – Lease, as updated by ASU 2016-02. At the inception of a lease, the Company recognizes right-of-use lease assets and related lease liabilities measured at present value of future lease payments on its balance sheet. Lease expense is recognized on a straight-line basis over the term of the lease. Our most common initial term varies in length from 2 to 10 years. Including renewal options negotiated with the landlord, we have a total span of 2 to 16 years at the facilities we lease. The Company reviewed its contracts with vendors and customers, determining that its right-to-use lease assets consisted of only office space operating leases. In determining the right-to-use lease assets and liabilities, the Company did recognize lease extension options which the Company feels would be reasonably exercised. Also included in other current assets is a $202,268 receivable from a landlord for tenant improvements. 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. A reconciliation of operating and financing lease payments undiscounted cash flows to lease liabilities recognized as of June 30, 2020 is as follows:
Year Ending June 30, |  | Operating Lease Payments |  | Financing Lease Payments
| 2021 |  |  |  | $ | 5,078,892 |  |  |  | $ | 122,172 |
| 2022 |  |  |  |  | 4,826,934 |  |  |  |  | 244,343 |
| 2023 |  |  |  |  | 4,787,845 |  |  |  |  | 244,343 |
| 2024 |  |  |  |  | 4,501,027 |  |  |  |  | 244,343 |
| 2025 |  |  |  |  | 4,445,344 |  |  |  |  | 244,343 |
| Thereafter |  |  |  |  | 19,607,295 |  |  |  |  | 407,240 |
| Present value discount |  |  |  |  | (9,772,724 | ) |  |  |  | (180,914 | )
| Total lease liability |  |  |  | $ | 33,474,613 |  |  |  | $ | 1,325,870 |
Weighted Average Remaining Lease Term |  |
Operating leases - years |  |  | 10.4 |
Finance lease - years |  |  | 6.6 |
Weighted Average Discount Rate |  |  |  |
Operating leases |  |  | 5.5 | %
Finance lease |  |  | 3.6 | %
The components of lease expense were as follows:
|  | For year ended June 30, 2020
Operating lease cost |  | $ | 5,135,604 |
Finance lease cost: |  |  |  |
Depreciation of leased equipment |  | $ | — |
Interest on lease liabilities |  |  | — |
Total finance lease cost |  | $ | — |
Supplemental cash flow information related to leases was as follows:
|  | For year ended June 30, 2020
Cash paid for amounts included in the measurement of lease liabilities: |  |  |  |
Operating cash flows from operating leases |  | $ | 4,170,977 |
Financing cash flows from financing leases |  |  | — |
Right-of-use & equipment assets obtained in exchange for lease obligations: |  |  |  |
Operating leases(1) |  |  | 34,786,611 |
Financing leases |  |  | 1,325,871 |
(1) Amounts for the year ended June 30, 2020 include the transition adjustment for the adoption of topic 842 of $31,651,110. FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of June 30, 2020 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 2020 or 2019, and it does not believe that any of those pronouncements will have a significant impact on our consolidated financial statements at the time they become effective. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. The reclassifications did not have any effect on reported net income for any periods presented.

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