FONAR CORP

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

On March 29, 2021, the Company completed the acquisition of certain assets of Rockland Management Group, located in West Yonkers. The Company used an incremental borrowing rate of 4% to value the right to use asset in connection with the assumed operating lease obligation. We made a preliminary fair value determination of the acquired assets and assumed liabilities as follows:

While our revenues increased, our costs and expenses also increased, resulting in our operating income increasing to $13.3 million for the nine months ended March 31, 2021 as compared to $13.1 million for the nine months ended March 31, 2020. In terms of percentages, costs and expenses increased 0.4% from $51.8 million for the first nine months of fiscal 2020 to $52.0 million for the first nine months of fiscal 2021, while revenues increased, from $64.9 million for the first nine months of fiscal 2020 to $65.2 million for the first nine months of fiscal 2021. The increase in costs and expenses was due to a $1.1 million increase in selling, general and administrative expenses, from $15.7 million to $16.8 million, consisting largely of increases in reserves for management fees offset by a decrease in costs related to patient fee revenue of $660,000 from $8.7 million to $8.0 million.

The most significant adverse impact on our Company in fiscal 2020 and the first three quarters of fiscal 2021 has been the COVID-19 pandemic. Although it had seemed the worst had passed, events in the last months of 2020 and beginning of 2021 have shown a spike in new cases, including mutations. Although a vaccine has been developed, its distribution is still in the early stages. This is by no means a problem confined to our Company, but regardless of our best efforts, the impact on our results of operation and financial condition is potentially volatile and severe. Nevertheless, the significant improvement in our results of operations in the third quarter of fiscal 2021 ($4.3 million in net income on revenues of $23.1 million) compared to the third quarter of fiscal 2020 ($1.9 million in net income on revenues of $21.7 million) may indicate that the impact of COVID-19 on our business is decreasing.

8. Possible changes in Florida Insurance Law. On April 30, 2021 the Florida State Senate and House passed a bill that replaces the current Florida Personal Injury Protection (“PIP”) law with one that instead requires mandatory bodily injury coverage with a Medical Payment option. The bill was passed on the last day of the legislative session and must still be signed or vetoed by the Governor. Passage of the bill may adversely affect the ability of facilities owned or managed by HMCA to collect scanning fees. It is too early to determine the extent of the bills’ effect on our business.