FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 2007
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-10248
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FONAR CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 11-2464137
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110 Marcus Drive Melville, New York 11747
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 694-2929
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES _X_ NO ___
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
one): Large accelerated filer___ Accelerated filer___ Non-accelerated filer_X_
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES ___ NO _X_
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at January 31, 2008
----------------------------------------- -------------------------------
Common Stock, par value $.0001 4,904,261
Class B Common Stock, par value $.0001 158
Class C Common Stock, par value $.0001 382,513
Class A Preferred Stock, par value $.0001 313,451
FONAR CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 2007
(Unaudited) and June 30, 2007
Condensed Consolidated Statements of Operations for
the Three Months Ended December 31, 2007 and
December 31, 2006 (Unaudited)
Condensed Consolidated Statements of Operations for
the Six Months Ended December 31, 2007 and
December 31, 2006 (Unaudited)
Condensed Consolidated Statements of Comprehensive
Loss for the Three Months Ended
December 31, 2007 and December 31, 2006 (Unaudited)
Condensed Consolidated Statements of Comprehensive
Loss for the Six Months Ended
December 31, 2007 and December 31, 2006 (Unaudited)
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended December 31, 2007 and
December 31, 2006 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
ASSETS December 31, June 30,
2007 2007
(UNAUDITED)
Current Assets: --------- ---------
Cash and cash equivalents $ 1,488 $ 1,470
Marketable securities 1,740 1,979
Accounts receivable - net 5,235 3,528
Accounts receivable - related parties - net 562 445
Medical receivables - net 1,779 2,781
Management fee receivable - net 5,388 5,096
Management fee receivable - related medical
practices - net 1,325 1,354
Inventories 4,206 4,466
Current portion of advances and notes to related
medical practices 258 216
Current portion of notes receivable less discount
for below market interest 600 578
Prepaid expenses and other current assets 1,437 1,103
--------- ---------
Total Current Assets 24,018 23,016
--------- ---------
Property and equipment - net 4,509 5,159
Advances and notes to related medical practices - net 352 474
Notes receivable less discount for below market interest 5,245 5,528
Other intangible assets - net 5,343 5,345
Other assets 1,758 1,688
--------- ---------
Total Assets $ 41,225 $ 41,210
========= =========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
December 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2007 2007
(UNAUDITED)
Current Liabilities: --------- ---------
Current portion of long-term debt and
capital leases $ 252 $ 257
Accounts payable 3,819 3,940
Other current liabilities 7,973 7,755
Unearned revenue on service contracts 5,665 4,607
Unearned revenue on service contracts - related parties 563 460
Customer advances 11,207 10,039
Customer advances - related party 492 42
Billings in excess of costs and estimated
earnings on uncompleted contracts 4,867 3,481
--------- ---------
Total Current Liabilities 34,838 30,581
Long-Term Liabilities:
Due to related medical practices 93 93
Long-term debt and capital leases,
less current portion 850 956
Other liabilities 111 150
--------- ---------
Total Long-Term Liabilities 1,054 1,199
--------- ---------
Total Liabilities 35,892 31,780
--------- ---------
Minority interest 145 532
--------- ---------
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, June 30,
(continued) 2007 2007
(UNAUDITED)
STOCKHOLDERS' EQUITY --------- ---------
Class A non-voting preferred stock $.0001 par value;
1,600,000 authorized, 313,451 issued and outstanding
at December 31, 2007 and June 30, 2007 - -
Common Stock $.0001 par value; 30,000,000 shares
authorized at December 31, 2007 and June 30, 2007,
4,915,904 issued at December 31, 2007
and 4,885,850 at June 30, 2007; 4,904,261 outstanding at
December 31, 2007 and 4,874,207 at June 30, 2007 1 1
Class B Common Stock $ .0001 par value; 800,000
shares authorized, (10 votes per share), 158 issued
and outstanding at December 31, 2007 and June 30, 2007 - -
Class C Common Stock $.0001 par value; 2,000,000 shares
authorized, (25 votes per share), 382,513 issued
and outstanding at December 31, 2007 and June 30, 2007 - -
Paid-in capital in excess of par value 172,276 172,072
Accumulated other comprehensive loss ( 97) ( 104)
Accumulated deficit (165,919) (161,872)
Notes receivable from employee stockholders ( 398) ( 524)
Treasury stock, at cost - 11,643 shares of common stock
at December 31, 2007 and June 30, 2007 ( 675) ( 675)
--------- ---------
Total Stockholders' Equity 5,188 8,898
--------- ---------
Total Liabilities and Stockholders' Equity $ 41,225 $ 41,210
========= =========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(000's OMITTED, except per share data)
FOR THE THREE MONTHS ENDED
DECEMBER 31,
---------------------
2007 2006
REVENUES --------- ---------
Product sales - net $ 4,003 $ 2,082
Product sales - related parties - net - 2
Service and repair fees - net 2,463 2,211
Service and repair fees - related parties - net 262 238
Management and other fees - net 2,047 -
Management and other fees - related medical
practices - net 747 3,139
License fees and royalties 1,158 -
--------- ---------
Total Revenues - Net 10,680 7,672
--------- ---------
COSTS AND EXPENSES
Costs related to product sales 3,518 2,369
Costs related to product sales - related parties - 2
Costs related to service and repair fees 1,208 1,056
Costs related to service and repair
fees - related parties 129 114
Costs related to management and other fees 1,466 -
Costs related to management and other
fees - related medical practices 543 2,220
Research and development 1,323 1,379
Selling, general and administrative,
inclusive of compensatory element of stock
issuances of $ 0 and $ 23 for the three months
ended December 31, 2007 and 2006, respectively 5,945 5,795
Provision for bad debts 424 136
--------- ---------
Total Costs and Expenses 14,556 13,071
--------- ---------
Loss From Operations ( 3,876) ( 5,399)
Interest Expense ( 156) ( 73)
Investment Income 195 230
Interest Income - Related Parties 10 11
Other Income 1 39
Minority Interest in Income of Partnerships ( 12) ( 278)
--------- ---------
NET LOSS $( 3,838) $( 5,470)
========= =========
Basic and Diluted Loss Per Common Share $ ( .78) $ (1.13)
========= =========
Weighted Average Number of Common Shares Outstanding 4,899,252 4,855,073
========= =========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(000's OMITTED, except per share data)
FOR THE SIX MONTHS ENDED
DECEMBER 31,
---------------------
2007 2006
REVENUES --------- ---------
Product sales - net $ 6,592 $ 4,400
Product sales - related parties - net - 142
Service and repair fees - net 4,928 4,491
Service and repair fees - related parties - net 516 479
Management and other fees - net 4,244 -
Management and other fees - related medical
practices - net 1,912 5,943
License fees and royalties 1,158 -
--------- ---------
Total Revenues - Net 19,350 15,455
--------- ---------
COSTS AND EXPENSES
Costs related to product sales 6,330 4,811
Costs related to product sales - related parties - 146
Costs related to service and repair fees 2,398 2,299
Costs related to service and repair
fees - related parties 251 245
Costs related to management and other fees 2,556 -
Costs related to management and other
fees - related medical practices 1,490 4,224
Research and development 2,486 2,811
Selling, general and administrative,
inclusive of compensatory element of stock
issuances of $ 0 and $ 121 for the six months
ended December 31, 2007 and 2006, respectively 11,232 12,223
Provision for bad debts 589 186
--------- ---------
Total Costs and Expenses 27,332 26,945
--------- ---------
Loss From Operations ( 7,982) (11,490)
Interest Expense ( 258) ( 144)
Investment Income 375 429
Interest Income - Related Parties 19 22
Other Income 7 78
Minority Interest in Income of Partnerships ( 174) ( 470)
Gain on Sale of Investment 571 -
Gain on Sale of Consolidated Subsidiary 3,395 -
--------- ---------
NET LOSS $( 4,047) $(11,575)
========= =========
Basic and Diluted Loss Per Common Share $ ( .83) $ (2.41)
========= =========
Weighted Average Number of Common Shares Outstanding 4,891,730 4,796,581
========= =========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
(000'S OMITTED)
FOR THE THREE MONTHS ENDED
DECEMBER 31,
---------------------
2007 2006
--------- ---------
Net loss $ (3,838) $ (5,470)
Other comprehensive income, net of tax:
Unrealized gains on marketable securities,
net of tax 9 27
--------- ---------
Total comprehensive loss $ (3,829) $ (5,443)
========= =========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
(000'S OMITTED)
FOR THE SIX MONTHS ENDED
DECEMBER 31,
---------------------
2007 2006
--------- ---------
Net loss $( 4,047) $ (11,575)
Other comprehensive income, net of tax:
Unrealized gains on marketable securities,
net of tax 7 113
--------- ---------
Total comprehensive loss $( 4,040) $(11,462)
========= =========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED)
FOR THE SIX MONTHS ENDED
DECEMBER 31,
---------------------
2007 2006
--------- ---------
Cash Flows from Operating Activities:
Net loss $( 4,047) $(11,575)
Adjustments to reconcile net loss to
net cash used in operating activities:
Minority interest in income of partnerships 174 470
Depreciation and amortization 1,144 1,321
Provision for bad debts 589 186
Compensatory element of stock issuances - 121
Stock issued for costs and expenses 205 1,815
Gain on sale of consolidated subsidiary ( 3,395) -
Gain on sale of investment ( 571) -
(Increase) decrease in operating assets, net:
Accounts, management fee and medical receivable(s) ( 2,842) ( 43)
Notes receivable 262 194
Costs and estimated earnings in excess of
billings on uncompleted contracts - 2,831
Inventories 260 730
Principal payments received on sales type lease - 279
Prepaid expenses and other current assets ( 334) ( 315)
Other assets ( 73) ( 49)
Advances and notes to related medical practices 68 35
Increase (decrease) in operating liabilities, net:
Accounts payable ( 121) ( 957)
Other current liabilities 1,379 1,472
Customer advances 1,618 4,638
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,386 ( 1,357)
Other liabilities ( 39) ( 23)
Income taxes payable - ( 8)
--------- ---------
Net cash used in operating activities ( 4,337) ( 235)
--------- ---------
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED)
FOR THE SIX MONTHS ENDED
DECEMBER 31,
---------------------
2007 2006
--------- ---------
Cash Flows from Investing Activities:
Sales of marketable securities 1,011 1,345
Purchases of marketable securities ( 765) -
Purchases of property and equipment ( 151) ( 164)
Costs of capitalized software development ( 318) ( 340)
Cost of patents ( 45) ( 235)
Proceeds from sale of investment 571 -
Proceeds from sale of consolidated subsidiary 4,142 -
--------- ---------
Net cash provided by investing activities 4,445 606
--------- ---------
Cash Flows from Financing Activities:
Distributions to holders of minority interest ( 105) ( 475)
Repayment of long-term debt and capital leases ( 111) ( 94)
Net proceeds from exercise of stock options
and warrants - 50
Net proceeds from sale of common stock - 373
Collection of notes receivable from employee
stockholders 126 182
--------- ---------
Net cash (used in) provided by financing activities ( 90) 36
--------- ---------
Net Increase in Cash and Cash Equivalents 18 407
Cash and Cash Equivalents - Beginning of Period 1,470 4,557
--------- ---------
Cash and Cash Equivalents - End of Period $ 1,488 $ 4,964
========= =========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION & LIQUIDITY & CAPITAL RESOURCES
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 and six months ended December 31, 2007 are not necessarily indicative of
the results that may be expected for the fiscal year ending June 30, 2008. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K filed on
October 2, 2007 for the fiscal year ended June 30, 2007.
Liquidity and Capital Resources
The Company's principal source of liquidity has been derived from revenues, as
well as cash provided by previous debt and equity financing. The Company's
management currently expects this to continue. At December 31, 2007, the Company
had a working capital deficit of approximately $10.8 million. For the six months
ended December 31, 2007, the Company incurred a net loss of approximately $4.0
million. Cash used in operating activities for the first six months of fiscal
2008 was approximately $4.3 million, which included non-cash charges of
approximately $1.9 million.
In July 2007, the Company sold its 50% interest (to an unrelated third party) in
an entity that provided management services to a diagnostic center in Orlando,
Florida and 20% interest in an unconsolidated entity and received proceeds of
approximately $4.8 million.
Sales levels remain weak and the Company continues to focus its efforts on
increased advertising and marketing campaigns, and distribution programs to
strengthen the demand for Fonar's products. Management anticipates that Fonar's
capital resources will improve as Fonar's MRI scanner products gain wider market
recognition and acceptance resulting in increased product sales. If the Company
is not successful with its current marketing efforts to increase sales, then the
Company will experience a shortfall in cash necessary to sustain operations at
their current levels. Should weak product demand continue, the Company has
determined it will be necessary to reduce overhead expenses or seek other
sources of funds through the issuance of equity or debt financing in order to
maintain sufficient funds available to operate subsequent to December 31, 2008.
The reduction in overhead expenses might need to be substantial in order for the
Company to streamline operations to an efficient level.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The 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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reverse Stock Split
On April 17, 2007, the Company effected a one-for-twenty-five reverse split of
its issued and outstanding common stock, Treasury Shares of the Common Stock,
the Class B Common Stock, the Class C Common Stock, the Class A Non-Voting
Preferred Stock and Preferred Stock. At such time, the Company also reduced the
number of its authorized shares available for issuance for each class of stock.
The accompanying condensed consolidated financial statements, notes and other
references to share and per share data have been retroactively restated to
reflect the reverse stock splits for all periods presented.
Earnings (Loss) Per Share
Basic earnings (loss) per share ("EPS") is computed based on weighted average
shares outstanding and excludes any potential dilution. In accordance with EITF
03-6, "Participating Securities and the Two-Class method under FASB Statement
No. 128" ("EITF 03-6"), the Company's participating convertible securities,
which include Class B common stock and Class C common stock, are not included in
the computation of basic EPS for six months ended December 31, 2007 and 2006,
because the participating securities do not have a contractual obligation to
share in the losses of the Company.
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. The number of common shares
potentially issuable upon the exercise of certain options and warrants or
conversion of the participating convertible securities that were excluded from
the diluted EPS calculation was approximately 279,000 because they were
antidilutive as a result of net losses for both six month periods ended December
31, 2007 and 2006.
Stock Options and Warrants and Similar Equity Instruments
In December 2004, the Financial Accounting Standard Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
"Share-Based Payment" SFAS 123R. SFAS 123R requires the compensation cost
relating to stock-based payment transactions be recognized in financial
statements. That cost will be measured based on the fair value of the equity or
liability instruments issued on the grant date of such instruments, and will be
recognized over the period during which an individual is required to provide
service in exchange for the award (typically the vesting period). SFAS 123R
covers a wide range of stock-based compensation arrangements including stock
options, restricted stock plans, performance-based awards, stock appreciation
rights, and employee stock purchase plans. SFAS 123R replaces SFAS 123 and
supersedes APB Opinion 25.
On July 1, 2005, the Company adopted SFAS 123R using the modified prospective
method, in which compensation cost is recognized beginning with the effective
date (a) based on the requirements of SFAS 123R for all share-based payments
granted after the effective date and (b) based on the fair value as measured
under SFAS 123 for all awards granted to employees prior to the effective date
of SFAS 123R that remain unvested on the effective date.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Options and Warrants and Similar Equity Instruments (Continued)
The adoption of SFAS 123R's fair value method did not have a significant impact
on our result of operations. SFAS 123R requires the benefits of tax deductions
in excess of recognized compensation cost to be reported as a financing cash
flow, rather than as an operating cash flow as required under current
literature. It is unlikely that the Company will have near term benefits from
tax deductions. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after adoption. The Company cannot
estimate what those amounts will be in the future because of various factors,
including but not limited to the timing of employee exercises and whether the
Company will be in a taxable position. At this time, there would be no tax
impact related to the prior periods since the Company has a net loss.
For the period ending prior to July 1, 2005, as permitted under SFAS No. 148,
"Accounting for Stock-Based Compensation Transactions and Disclosure", which
amended SFAS No. 123, "Accounting for Stock-Based Compensation", the Company had
elected to continue to follow the intrinsic value method in accounting for its
stock-based employee compensation arrangements as defined by Accounting
Principles Board Opinion ("APB") No. 25 "Accounting for Stock Issued to
Employees", and related interpretations including FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation", an
interpretation of APB No. 25. No stock-based employee compensation cost was
reflected in operations, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant.
Recent Accounting Pronouncements
In February 2006, the FASB issued SFAS NO. 155, Accounting for Certain Hybrid
Financial Instruments--An Amendment of FASB No. 133 and 140. The purpose of SFAS
statement No. 155 is to simplify the accounting for certain hybrid financial
instruments by permitting fair value re-measurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation. SFAS No. 155 also eliminates the restriction on passive derivative
instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is
effective for all financial instruments acquired or issued after the beginning
of any entity's first fiscal year beginning after September 15, 2006. The
adoption of this standard on July 1, 2007 did not have a material effect on the
Company's consolidated financial statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets, an Amendment of SFAS No. 140. SFAS No. 156 requires separate
recognition of a servicing asset and a servicing liability each time an entity
undertakes an obligation to service a financial asset by entering into a
servicing contract. This statement also requires that servicing assets and
liabilities be initially recorded at fair value and subsequently adjusted to the
fair value at the end of each reporting period. This statement is effective in
fiscal years beginning after September 15, 2006. The adoption of this standard
on July 1, 2007 did not have a material effect on the Company's consolidated
financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
In September, 2006, the FASB issued SFAS No. 157, "Fair Value Measurements",
which defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. This standard applies under
other accounting pronouncements that require or permit fair value measurements,
but does not require any new fair value measurements. SFAS No. 157 will become
effective for the Company in fiscal 2009. We are currently assessing the impact
of SFAS No. 157; however, we do not believe the adoption of this standard will
have a material effect on the Company's condensed consolidated financial
statements.
In February, 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 provides
Companies with an option to report selected financial assets and liabilities at
fair value. SFAS 159's objective is to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring related
assets and liabilities differently. SFAS 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between Companies
that choose different measurement attributes for similar types of assets and
liabilities. SFAS 159 requires Companies to provide additional information that
will help investors and other users of financial statements to more easily
understand the effect of the Company's choice to use fair value on its earnings.
It also requires entities to display the fair value of those assets and
liabilities for which the Company has chosen to use fair value on the face of
the balance sheet. SFAS 159 is effective as of the beginning of an entity's
first fiscal year beginning after November 15, 2007. Early adoption is permitted
as of the beginning of the previous fiscal year provided that the entity makes
that choice in the first 120 days of that fiscal year and also elects to apply
the provisions of SFAS 157. The Company did not early adopt SFAS 159. The
Company is currently assessing the impact of SFAS 159; however we do not believe
the adoption of this standard will have a material effect on its consolidated
financial statements.
In March 2007, the FASB ratified the Emerging Issues Task Force (EITF) consensus
on EITF Issue No. 06-10, "Accounting for Collateral Assignment Split Dollar Life
Insurance." This EITF indicates that an employer should recognize a liability
for postretirement benefits related to collateral assignment split-dollar life
insurance arrangements. In addition, the EITF provides guidance for the
recognition of an asset related to a collateral assignment split-dollar life
insurance arrangement. The EITF is effective for fiscal years beginning after
December 15, 2007. The Company will adopt the EITF as required and management
does not expect it to have any impact on the Company's results of operations,
financial condition and liquidity.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
In June 2006, the EITF reached a consensus on Issue No. 06-3 ("EITF 06-3"), "
Disclosure Requirements for Taxes Assessed by a Governmental Authority on
Revenue-Producing Transactions ." The consensus allows companies to choose
between two acceptable alternatives based on their accounting policies for
transactions in which the company collects taxes on behalf of a governmental
authority, such as sales taxes. Under the gross method, taxes collected are
accounted for as a component of sales revenue with an offsetting expense.
Conversely, the net method allows a reduction to sales revenue. If such taxes
are reported gross and are significant, companies should disclose the amount of
those taxes. The guidance should be applied to financial reports through
retrospective application for all periods presented, if amounts are significant,
for interim and annual reporting beginning after December 15, 2006 with early
adoption is permitted. The adoption of this standard on July 1, 2007 did not
have a material effect on the Company's condensed consolidated financial
statements.
Effective January 1, 2007, the Company adopted the provisions of FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" ("FIN 48). FIN 48 prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and 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 carry forward 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 FIN 48.
In accordance with FIN 48, 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 "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 2003.
The adoption of the provisions of FIN 48 did not have a material impact on the
Company's condensed consolidated financial position and results of operations.
As of December 31, 2007, no liability for unrecognized tax benefits was required
to be recorded.
The Company recognized a deferred tax asset of approximately $74 million as of
December 31, 2007, primarily relating to net operating loss carryforwards of
approximately $160 million, available to offset future taxable income through
2028.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences
become deductible. The Company considers projected future taxable income and tax
planning strategies in making this assessment. At present, the Company does not
have a sufficient history of income to conclude that it is more-likely-than-not
that the Company will be able to realize all of its tax benefits in the near
future and therefore a valuation allowance was established for the full value of
the deferred tax asset. A valuation allowance will be maintained until
sufficient positive evidence exists to support the reversal of any portion or
all of the valuation. Should the Company become profitable in future periods
with supportable trends, the valuation allowance will be reversed accordingly.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS
141R"), which replaces SFAS No. 141, "Business Combinations". SFAS 141R
establishes principles and requirements for determining how an enterprise
recognizes and measures the fair value of certain assets and liabilities
acquired in a business combination, including noncontrolling interests,
contingent consideration, and certain acquired contingencies. SFAS 141R also
requires acquisition-related transaction expenses and restructuring costs be
expensed as incurred rather than capitalized as a component of the business
combination. SFAS 141R will be applicable prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. SFAS 141R would have
an impact on accounting for any businesses acquired after the effective date of
this pronouncement.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary (previously referred to as minority interests). SFAS
160 also requires that a retained noncontrolling interest upon the
deconsolidation of a subsidiary be initially measured at its fair value. Upon
adoption of SFAS 160, the Company will be required to report its noncontrolling
interests as a separate component of stockholders' equity. The Company will also
be required to present net income allocable to the noncontrolling interest and
net income attributable to the stockholders of the Company separately in its
consolidated statements of income. Currently, minority interests are reported as
a liability in the Company's consolidated balance sheets and the related income
attributable to the minority interests is reflected as an expense in arriving at
net loss. SFAS 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. SFAS 160 requires
retroactive adoption of the presentation and disclosure requirements for
existing minority interests. All other requirements of SFAS 160 shall be applied
prospectively.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation. The reclassifcations did not have any effect on reported
consolidated net losses for any periods presented.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
(UNAUDITED)
NOTE 3 - MEDICAL RECEIVABLES, ACCOUNTS RECEIVABLE AND MANAGEMENT FEE RECEIVABLE
Medical Receivables
The Company was assigned medical receivables valued at $11,775,000, in
connection with the satisfaction of the management fees and termination fees
related to a Termination and Replacement Agreement dated May 23, 2005. The
balance of the net medical receivables as of December 31, 2007 was $1,779,000.
Accounts Receivable and Management Fee Receivable
Receivables, net is comprised of the following at December 31, 2007:
(000's Omitted)
Gross Allowance for
Receivable doubtful accounts Net
---------- ----------------- ---------------
Receivables from equipment
sales and service contracts $6,538 $1,303 $5,235
========== ================= ===============
Receivables from equipment
sales and service contracts-
related parties $1,181 $ 619 $ 562
========== ================= ===============
Management fee receivables $7,648 $2,260 $5,388
========== ================= ===============
Management fee receivables
from related medical
practices ("PC's") $3,418 $2,093 $1,325
========== ================= ===============
The Company's customers are concentrated in the healthcare industry.
The Company's receivables from the related and non-related professional
corporations (PC's) substantially consists 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.
In the case of contracts with the MRI facilities, fees were charged by the
Company during fiscal 2007 based on the number of procedures performed. In the
case of the physical therapy and rehabilitation practices the Company's
previously managed, flat fees were charged on a monthly basis. Fees are subject
to adjustment on an annual basis, but must be based on mutual agreement. The per
procedure charges to the MRI facilities during fiscal 2007 ranged from $275 to
$500 per MRI scan.
As of June 22, 2007, an unrelated third party purchased the stock of the
professional corporations owning the eight New York sites managed by the
Company, previously owned by Dr. Raymond V. Damadian, the President, Chairman of
the Board and principal stockholder of Fonar. In connection with the sale, new
management agreements were substituted for the existing management agreements,
providing, however, for the same management services. The fees in fiscal 2008,
however, are currently flat monthly fees in the aggregate amount of $682,500 per
month.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
(UNAUDITED)
NOTE 3 - MEDICAL RECEIVABLES, ACCOUNTS RECEIVABLE AND MANAGEMENT FEE RECEIVABLE
(Continued)
Accounts Receivable and Management Fee Receivable (Continued)
Dr. Damadian still owns the four MRI facilities in Georgia and Florida managed
by the Company. No MRI facilities or other medical facilities are owned by the
Company.
Collection by the Company of its management fee receivables may be impaired by
the uncollectibility of the PC's medical fees from 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 43% and 41% of
the PC's net revenues for both the six months ended December 31, 2007 and 2006,
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 and contractual allowances. 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.
Certain no-fault insurers have raised issues concerning whether the Company's
clients, the "P.C.'s," are in compliance with certain laws, including, but not
limited to, laws governing their corporate structure and/or licensing, their
entitlement or standing to seek and/or obtain no-fault benefits, and/or laws
prohibiting the corporate practice of medicine, fee-splitting and/or physician
self referrals. To the extent any claims are asserted against the P.C.'s, the
settlement of such claims could result in the P.C.'s waiving their rights to
collect certain of their insurance claims. Management believes that the Company
and the P.C.'s are not in violation of any of the above mentioned laws. Since
the resolution or settlement of these claims with the insurance companies could
have a material impact on the collection of management fees by the Company from
its P.C.'s, the Company has provided reserves for uncollectable fees related to
this matter.
On February 8, 2006, the Deficit Reduction Act of 2005 (DRA) was signed into law
by President George W. Bush. The DRA would result in caps on Medicare and
Medicaid payment rates for most imaging services, including MRI and CT,
furnished in physicians' offices and other non-hospital based settings. Under
the cap, payments for these imaging services could not exceed the hospital
outpatient payment rates for those services. This change applied to services
furnished by the P.C.'s on or after January 1, 2007. Although the professional
corporations managed by the Company bill for scans on a "global" basis, which
means a single fee per scan, the limitation is applicable only to the technical
component of the services, which is the payment or portion of the payment
attributable to the non-professional services. If the fee for the technical
component of the service (without including geographic adjustments) exceeds the
hospital outpatient payment amount for the service (also without including
geographic adjustments), under the Physician Fee Schedule, then the payment
would be limited to the Physician Fee Schedule rate.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
(UNAUDITED)
NOTE 3 - MEDICAL RECEIVABLES, ACCOUNTS RECEIVABLE AND MANAGEMENT FEE RECEIVABLE
(Continued)
Accounts Receivable and Management Fee Receivable (Continued)
Currently, a statute in the State of Florida required all drivers, licensed in
the State of Florida, to carry a $10,000 no-fault insurance policy covering
personal injury protection benefits. This statute expired in October 2007 but
will be in effect again in a slightly revised form on January 1, 2008.
Management does not believe that the expiration of this statute will have a
material impact on the Company's condensed consolidated financial position or
results of consolidated operations in the future.
While the Company has prepared certain estimates of the impact of the above
discussed changes and possible changes, it is not possible to fully quantify
their impact on its business. There can be no assurance that the impact of these
changes will not be greater than estimated or that any future health care
legislation or reimbursement changes will not adversely affect the Company's
business.
Net revenues from management and other fees charged to the related P.C.'s
accounted for approximately 9.9% and 38.5% of the consolidated net revenues for
the six months ended December 31, 2007 and 2006, respectively. Product sales and
service repair fees from related parties amounted to approximately 2.7% and 4.0%
of consolidated net revenues for the six months ended December 31, 2007 and 2006
respectively.
HMCA entered into a management agreement in September 2007 with Integrity
Healthcare Management Inc ("Integrity"). Under the terms of the agreement,
Integrity will provide the billings and collections for HMCA's facilities as
well as assist in the management of the facilities. The existing management
agreements between the facilities and HMCA will remain in place. Integrity will
receive as compensation an annual fee equal to one-half of the increase in the
consolidated cash flow of HMCA and the facilities over the period from July 1,
2006 through June 30, 2007. The term of the agreement is one year with an
automatic year to year renewal, but may be terminated by either party without
cause at the end of any year. As of December 31, 2007, no management fees were
earned by Integrity. Integrity is a subsidiary of Health Diagnostics, LLC. The
Chief Operating Officer of Health Diagnostics, LLC, Timothy Damadian, is a son
of the President and Chief Executive Officer of Fonar, Dr. Raymond Damadian. In
July 2007, Integrity and related parties sold a business (consisting of
management companies and diagnostic centers) to Health Diagnostics, LLC and
Timothy Damadian subsequently accepted a three year employment position
(non-equity) with Health Diagnostics, LLC. At the time, Health Diagnostics, LLC
purchased the above business, Fonar sold its entire 20% interest in a Bronx
diagnostic business and its entire 50% interest in a Florida management company
to Healthcare Diagnostic, LLC (see Note 8). From time to time Health
Diagnostics, LLC may purchase MRI systems from Fonar. As of December 31, 2007,
Health Diagnostics, LLC had placed an order with Fonar to purchase six
Upright(TM) MRI systems and gave a deposit of $450,000.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
(UNAUDITED)
NOTE 3 - MEDICAL RECEIVABLES, ACCOUNTS RECEIVABLE AND MANAGEMENT FEE RECEIVABLE
(Continued)
Unaudited Financial Information of Unconsolidated Managed Medical Practices
Audited financial information related to the unconsolidated related and
unrelated P.C.'s managed by the Company is not available. Substantially all of
these medical practices' books and records are maintained on a cash basis, they
depreciate their equipment on an accelerated tax basis and have a December 31
year end.
Summarized statement of operations data for the three months ended December 31,
2007 and 2006 related to the unconsolidated medical practices managed by the
Company is as follows:
(000's omitted) (Income Tax-Cash Basis)
For the three months
ended December 31,
--------------------
2007 2006
-------- --------
Patient Revenue - Net $ 3,983 $ 5,025
======== ========
(Loss) Income from Operations $ (151) $ 335
======== ========
Net (Loss) Income $ (281) $ 107
======== ========
Summarized statement of operations data for the six months ended December 31,
2007 and 2006 related to the unconsolidated medical practices managed by the
company is as follows:
(000's omitted) (Income Tax-Cash Basis)
For the six months
ended December 31,
--------------------
2007 2006
-------- --------
Patient Revenue - Net $ 8,352 $ 9,787
======== ========
(Loss) Income from Operations $ (478) $ 518
======== ========
Net (Loss) Income $ (754) $ 48
======== ========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
(UNAUDITED)
NOTE 4 - INVENTORIES
Inventories included in the accompanying condensed consolidated balance sheet
consist of the following:
(000's omitted)
December 31, June 30,
2007 2007
------------ --------
Purchased parts, components
and supplies $ 2,413 $ 3,285
Work-in-process 1,793 1,181
------------ --------
$ 4,206 $ 4,466
============ ========
NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
1) Information relating to uncompleted contracts as of December 31, 2007 is as
follows:
(000's omitted)
Costs incurred on uncompleted
contracts $ 4,805
Estimated earnings 1,853
--------
6,658
Less: Billings to date 11,525
--------
$(4,867)
========
Included in the accompanying condensed consolidated balance sheet at December
31, 2007 under the following captions:
Costs and estimated earnings in excess of
Billings on uncompleted contracts $ -
Less: billings in excess of costs and estimated
Earnings on uncompleted contracts 4,867
--------
$(4,867)
========
2) Customer advances consist of the following as of December 31, 2007:
Related
Total Party Other
-------- -------- --------
Total Advances $23,224 $ 492 $22,732
Less: Advances
on contracts under construction 11,525 -- 11,525
-------- -------- --------
$11,699 $ 492 $11,207
======== ======== ========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
(UNAUDITED)
NOTE 6 -STOCKHOLDERS' EQUITY
Common Stock
During the three months ended December 31, 2007:
a) The Company issued 10,000 shares of common stock for costs and
expenses of $69,718.
b) The Company issued 54 shares of common stock to employees as
compensation valued at $317 under stock bonus plan.
During the six months ended December 31, 2007:
a) The Company issued 30,000 shares of common stock for costs and
expenses of $204,457.
b) The Company issued 54 shares of common stock to employees as
compensation valued at $317 under stock bonus plan.
NOTE 7 - OTHER CURRENT LIABILITIES
Other current liabilities in the accompanying condensed consolidated balance
sheet consist of the following:
(000's omitted)
December 31, June 30,
2007 2007
------------ --------
Royalties $ 595 $ 635
Accrued salaries, commissions
and payroll taxes 1,123 1,106
Accrued interest 707 573
Litigation accruals 193 193
Sales tax payable 3,297 3,037
Professional fees 801 989
Insurance premiums 458 197
Penalty 401k plan 250 250
Other 549 775
------------ --------
$ 7,973 $ 7,755
============ ========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
(UNAUDITED)
NOTE 8 - SALE OF INVESTMENT AND CONSOLIDATED SUBSIDIARY
Sale of Investment
On July 31, 2007, the Company sold its 20% equity interest in an unconsolidated
entity (management company for a diagnostic center) to an unrelated third party
(see note 3). The selling price was $629,000. The Company realized a gain on the
sale of the equity interest of $571,000.
The gain was calculated as follows:
Selling Price: $ 629
Less: Closing costs ( 58)
Selling Price - Net cash paid 571
Cost Basis -
-------
Gain on sale of investment $ 571
=======
Sale of Consolidated Subsidiary
On July 31, 2007, the Company sold its 50% interest (to an unrelated third
party) (see note 3) in an entity that provided management services to a
diagnostic center in Orlando, FL. The Company continues to manage other
diagnostic centers in the Florida region.
The unrelated third party purchased all assets and assumed all liabilities of
the diagnostic center which included cash, the management fee receivable,
furniture and fixtures and other miscellaneous assets. The purchase price for
the 50% interest was $4,500,000 and after closing costs the amount received was
$4,256,000.
The following is the calculation of the gain on sale of the 50% interest in a
consolidated subsidiary:
Selling Price: $ 4,500
Less: Closing costs ( 243)
---------
Selling Price - Net cash paid: 4,257
Assets sold:
Cash $ 114
Management fee
receivable 1,166
Property and
equipment - net 23
Other assets 15
Minority interest (456)
---------
Subtotal 862
---------
Gain on sale of consolidated subsidiary $3,395
=========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
(UNAUDITED)
NOTE 9 - SEGMENT AND RELATED INFORMATION
The Company operates in two industry segments - manufacturing and the servicing
of medical equipment and management of diagnostic imaging centers.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies as disclosed in the Company's 10-K as
of June 30, 2007. All inter-segment sales are market-based. The Company
evaluates performance based on income or loss from operations.
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
(000's omitted)
Management
of
Diagnostic
Medical Imaging
Equipment Centers Totals
--------- ---------- ---------
For the three months ended December 31, 2007:
Net revenues from external customers $ 7,886 $ 2,794 $ 10,680
Inter-segment net revenues $ 219 $ - $ 219
Loss from operations $ (3,249) $ ( 627) $ (3,876)
Depreciation and amortization $ 349 $ 237 $ 586
Capital expenditures $ 165 $ 23 $ 188
For the three months ended December 31, 2006:
Net revenues from external customers $ 4,533 $ 3,139 $ 7,672
Inter-segment net revenues $ 330 $ - $ 330
Loss from operations $ (5,035) $ (364) $ (5,399)
Depreciation and amortization $ 390 $ 275 $ 665
Compensatory element of stock issuances $ 23 $ - $ 23
Capital expenditures $ 249 $ 24 $ 273
(000's omitted)
Management
of
Diagnostic
Medical Imaging
Equipment Centers Totals
--------- ---------- ---------
For the six months ended December 31, 2007:
Net revenues from external customers $ 13,194 $ 6,156 $ 19,350
Inter-segment net revenues $ 454 $ - $ 454
Loss from operations $( 7,434) $ (548) $( 7,982)
Depreciation and amortization $ 679 $ 465 $ 1,144
Capital expenditures $ 440 $ 74 $ 514
Identifiable assets $ 22,699 $ 18,526 $ 41,225
For the six months ended December 31, 2006:
Net revenues from external customers $ 9,512 $ 5,943 $ 15,455
Inter-segment net revenues $ 513 $ - $ 513
Loss from operations $(10,612) $ (878) $(11,490)
Depreciation and amortization $ 773 $ 548 $ 1,321
Compensatory element of stock issuances $ 116 $ 5 $ 121
Capital expenditures $ 683 $ 56 $ 739
Identifiable assets - June 30, 2007 $ 21,098 $ 20,112 $ 41,210
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
(UNAUDITED)
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
During the six months ended December 31, 2007 and December 31, 2006, the Company
paid $106,000 and $144,000 for interest, respectively.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Litigation
The Company is subject to legal proceedings and claims arising from the ordinary
course of its business, including personal injury, customer contract and
employment claims. In the opinion of management, the aggregate liability, if
any, with respect to such actions, will not have a material adverse effect on
the consolidated financial position or results of operations of the Company.
Certain no-fault insurers have raised issues concerning whether the Company's
clients the "P.C.'s" are in compliance with certain laws, including, but not
limited to, laws governing their corporate structure and/or licensing, their
entitlement or standing to seek and/or obtain no-fault benefits, and/or laws
prohibiting the corporate practice of medicine, fee-splitting and/or physician
self referrals. To the extent any claims are asserted against the P.C.'s, the
settlement of such claims could result in the P.C.'s waiving their rights to
collect certain of their insurance claims. Management believes that the Company
and the P.C.'s are not in violation of any of the above mentioned laws. Since
the resolution or settlement of these claims with the insurance companies could
have a material impact on the collection of management fees by the Company from
its P.C.'s, the Company has provided reserves for uncollectable fees related to
this matter.
Other Matters
In March 2007, the Company and New York State taxing authorities conducted a
conference to discuss a sales tax matter to determine if certain sales
transactions are subject to sales tax withholdings. At the present time, such
discussions are ongoing and the Company cannot yet determine the outcome.
Management is of the belief the resolution of this matter will not materially
impact the consolidated financial statements. The Company has recorded a
provision of $250,000 to cover any potential tax liability including interest.
Such amount is the Company's best estimate of the tax liability. Management is
unable to determine the outcome of this uncertainty.
The Company is also delinquent in filing sales tax returns for certain states,
for which the Company has transacted business. As of December 31, 2007, the
Company has recorded tax obligations of approximately $1,940,000 plus interest
and penalties of approximately $1,250,000. The Company is in the process of
determining the regulatory requirements in order to become compliant.
The Company has determined they may not be in compliance with the Department of
Labor and Internal Revenue Service regulations concerning the requirements to
file Form 5500 to report activity of its 401(k) Employee Benefit Plan. The
filings do not require the Company to pay tax, however they may be subject to
penalty for non-compliance. The Company has recorded provisions for any
potential penalties totaling $250,000. Such amount is the Company's best
estimate of potential penalties. Management is unable to determine the outcome
of this uncertainty. The Company has engaged outside counsel to handle such
matters to determine the necessary requirements to ensure compliance. Such
non-compliance could impact the eligibility of the plan.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
(UNAUDITED)
NOTE 12 - LICENSE FEES AND ROYALTIES
In July 2000, the Company entered into a non-exclusive sales representative
agreement with an unrelated third party. The agreement requires the third party
to sell at least two Fonar MRI scanners or if it does not, pay an amount equal
to the Company's gross margin on the unsold MRI scanner (s). As the third party
did not sell any scanners in the past contract year, the Company received the
gross margin payment on two scanners of approximately $1.2 million in November
2007. The receipt is shown in the Company's condensed consolidated statements of
operations as revenue, license fees and royalties for the three and six months
ended December 31, 2007.
FONAR CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
For the six month period ended December 31, 2007, we reported a net loss of
$4.0 million on revenues of $19.4 million as compared to net loss of $11.6
million on revenues of $15.5 million for the six month period ended December 31,
2006.
For the three month period ended December 31, 2007, we reported a net loss
of $3.8 million on revenues of $10.7 million as compared to a net loss of $5.5
million on revenues of $7.7 million for the three month period ended December
31, 2006.
We note improvement in both our net loss and revenues for the six months
ended December 31, 2007 as compared to the six months ended December 31, 2006.
Net losses improved by 65%, ($4.0 million as compared to $11.6 million), on a
revenue increase of 25.2% ($19.4 million as compared to $15.5 million).
Operating losses have decreased by 30.5% ($8.0 million for the first six
months of fiscal 2008 as compared to $11.5 million for the first six months of
fiscal 2007). The larger portion of the decrease in the net loss was due to
gains realized on the sale in July 2007 of our 50% interest in a consolidated
entity and our 20% interest in unconsolidated entity to an unrelated third
party. We received proceeds of approximately $4.8 million and recognized gains
of approximately $4.0 million in the aggregate. Both entities were engaged in
the business of managing MRI facilities.
We believe the improvements in our operating results have resulted in part
from reduced apprehension on the part of FONAR UPRIGHT(R), Multi-Position(TM)
MRI ("FONAR UPRIGHT(R) MRI") customers regarding the anticipated negative impact
of the Deficit Reduction Act (DRA) on scanner income and the magnitude of the
impact. We believe direct experience by FONAR UPRIGHT(R) MRI customers with the
DRA's revenue impact since it became effective January 1, 2007 has been largely
offset by the growth in demand for FONAR UPRIGHT(R) MRI scans because of the
unique benefits of the FONAR UPRIGHT(R) MRI. This has encouraged them in their
plans and encouraged other physicians to proceed with their plans to purchase
FONAR UPRIGHT(R) MRI scanners.
Overall, there was a reduction of our selling, general and administrative
costs of 8.1%, from $12.2 million in the first half of fiscal 2007 to $11.2
million in the first half of fiscal 2008.
In addition, we plan to continue to expand our sales force, both in terms
of hiring more sales personnel and establishing a network of domestic
distributors, as well as improving our network of foreign distributors.
We also are monitoring the performance of our existing users in order to
establish teams to assist underperforming customers improve their scan volume.
In addition, we have held seminars to assist customers in their marketing
efforts and are in the process of developing a web site to assist our customers
in their marketing efforts.
Importantly, we are beginning to penetrate the hospital market. The FONAR
UPRIGHT(R) MRI scanner is the only scanner which enables weight-bearing scans of
the spine, which is critical in making a correct diagnosis of spine diseases
such as low back pain and therefore the key to performing the correct surgery of
the spine.
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, our traditional business which is conducted directly by
Fonar, and diagnostic facilities management services, which is conducted through
Fonar's wholly-owned subsidiary, Health Management Corporation of America, which
we also refer to as HMCA. During July 2007 HMCA sold its 50% interest in a
consolidated entity for approximately $4.3 million and its 20% interest in an
unconsolidated entity for approximately $571,000 to an unrelated third party.
Trends in the second quarter of fiscal 2008 include an increase in product
sales revenues, service and repair fees, and license and royalties revenue. We
will continue to focus on increased marketing efforts, including advertising,
and adding additional sales personnel and distributors, where appropriate, to
improve sales performance in fiscal 2008. During fiscal 2007, the Company also
hired an additional advertising and marketing executive, who had previously been
associated with the agency that provided advertising services to us. In
addition, we will continue our efforts to reduce costs through our procurement
policies and streamlining our operations.
For the three month period ended December 31, 2007, as compared to the
three month period ended December 31, 2006, overall revenues from MRI product
sales increased 92.1% ($4.0 million compared to $2.1 million).
For the six month period ended December 31, 2007, as compared to the six
month period ended December 31, 2006, overall revenues from MRI product sales
increased 45.1% ($6.6 million compared to $4.5 million). Unrelated party scanner
sales ($6.6 million compared to $4.4 million) increased at a rate of 49.8%.
There were no related party scanner sales for the six month period ended
December 31, 2007 compared to $142,000 for the six month period ended December
31, 2006.
Service revenues for the three month period ended December 31, 2007, as
compared to the three month period ended December 31, 2006 increased by 11.3%
($2.7 million compared to $2.4 million) because of additional customers entering
into service agreements with Fonar for their scanners following the expiration
of the warranty period on their equipment. Unrelated party service and repair
fees increased by 11.4% ($2.5 million compared to $2.2 million) and related
party service and repair fees increased by 10.1% ($262,000 compared to
$238,000). We anticipate that there will continue to be increases in service
revenues as warranties on installed scanners expire over time.
Service revenues for the six month period ended December 31, 2007, as
compared to the six month period ended December 31, 2006 increased 9.5% ($5.4
million compared to $5.0 million). Unrelated party service and repair fees
increased by 9.7% ($4.9 million compared to $4.5 million).
There were approximately $428,000 in foreign revenues for the first six
months of fiscal 2008 as compared to approximately $480,000 in foreign revenues
for the first six months of fiscal 2007, representing a decrease in foreign
revenues of 10.8%. The Company is making a concerted effort to increase foreign
sales, most recently through its foreign distributors and attendance at trade
shows.
For the second quarter of fiscal 2008, revenues for the medical equipment
segment increased by 74.0% to $7.9 million from $4.5 million for the second
quarter of fiscal 2007. The revenues generated by HMCA decreased, by 8.2% to
$2.8 million for the second quarter of fiscal 2008 as compared to $3.1 million
for the second quarter of fiscal 2007.
Overall, for the first half of fiscal 2008, revenues for the medical
equipment segment increased by 38.7% to $13.2 million from $9.5 million for the
first half of fiscal 2007. The revenues generated by HMCA increased, by 3.6% to
$6.2 million for the first half of fiscal 2008 as compared to $5.9 million for
the first half of fiscal 2007.
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 its site preparation 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 recognized
revenue results from revenues from a scanner sale are recognized in a fiscal
quarter or quarters following the quarter in which the sale was made.
Costs related to product sales increased by 48.4% from $2.4 million in the
second quarter of fiscal 2007 to $3.5 million in the second quarter of 2008,
reflecting the corresponding increase in product sales revenues. Costs related
to providing service increased by 14.2% from $1.2 million in the second quarter
of fiscal 2007 to $1.3 million in the second quarter of fiscal 2008,
corresponding with the increase in service and repair revenues.
Costs related to product sales increased by 27.7% from $5.0 million in the
first six months of fiscal 2007 to $6.3 million in the first six months of 2008,
reflecting the corresponding increase in product sales revenues. Costs related
to providing service increased by 4.2% from $2.5 million in the six month of
fiscal 2007 to $2.6 million in the first six months of fiscal 2008, reflecting
the increase in service and repair revenues.
Service and repair revenues increased at a higher rate than the costs
related to providing service and repairs. Service contract prices are fixed for
the term of the contract, which are usually for a term of one year. We believe
that an important factor in keeping service costs down is our ability to monitor
the performance of customers' scanners from our facilities in Melville on a
daily basis and to detect and repair any irregularities before more serious
problems result. We also believe the low cost of providing service reflects the
high quality of our products.
Overall, our operating loss for our medical equipment segment was $7.4
million for the first six months of fiscal 2008 as compared to operating loss of
$10.6 million for the first six months of fiscal 2007.
HMCA revenues decreased in the second quarter of fiscal 2008, by 11.0% to
$2.8 million from $3.1 million for the second quarter of fiscal 2007, primarily
because of the sale of its 50% interest of a previously consolidated entity in
July 2007. For the first six months of fiscal 2008, HMCA revenues increased by
3.6% to $6.2 million from $5.9 million for the first six months of fiscal 2007
due to fee structure change to the eight New York facilities we manage. We now
manage ten sites equipped with FONAR UPRIGHT(R) MRI scanners. HMCA experienced
an operating loss of $548,000 for the first six months of fiscal 2008 compared
to operating loss of $878,000 for the first six months of fiscal 2007.
HMCA cost of revenues decreased to $2.0 million for the second quarter of
fiscal 2008 as compared to $2.2 million for the second quarter of fiscal 2007.
HMCA cost of revenues for the first six months of fiscal 2008 decreased to $4.0
million as compared to $4.2 million for the first six months of fiscal 2007.
As of June 22, 2007, Dr. Robert Diamond purchased the stock of the
professional corporations owning the eight New York sites managed by HMCA,
previously owned by Dr. Raymond V. Damadian, the President, Chairman of the
Board, Chief Executive Officer and principal stockholder of Fonar. In connection
with the sale, new management agreements were substituted for the existing
management agreements, providing, however, for the same management services. The
fees in fiscal 2008, however, are currently flat monthly fees in the aggregate
amount of $682,500 per month.
For the purpose of improving the performance of HMCA and the facilities,
HMCA entered into an agreement in September, 2007 with Integrity Healthcare
Management, Inc. ("Integrity"), which is a wholly-owned subsidiary of Health
Diagnostics, LLC. The Chief Operating Officer of Health Diagnostics, LLC,
Timothy Damadian is a son of Dr. Damadian. Under the terms of the agreement,
Integrity will supervise and direct HMCA and the management of the facilities.
The existing management agreements between the facilities and HMCA will remain
in place. Integrity will receive as compensation an annual fee equal to one-half
of the increase in the consolidated cash flow of HMCA and the facilities over
the period from July 1, 2006 through June 30, 2007. The term of the agreement is
on an automatically renewable year to year basis, but may be terminated by
either party without cause at the end of any year. From time to time Health
Diagnostics, LLC, may also purchase MRI scanners from Fonar. As of December 31,
2007, Healthcare Diagnostics, LLC had placed orders with Fonar to purchase six
FONAR UPRIGHT(R) MRI scanners.
On February 8, 2006, the Deficit Reduction Act of 2005 ("DRA") was signed
into law by President George W. Bush. The DRA, which went into effect in the
beginning of calendar 2007, places caps on Medicare and Medicaid payment rates
for most imaging services, including MRI and CT, furnished in physicians'
offices and other non-hospital based settings. Under the cap, payments for these
imaging services cannot exceed the hospital outpatient payment rates for those
services. This change applies to services furnished by the professional
corporations managed by HMCA on or after January 1, 2007. Although the
professional corporations managed by HCMA bill for scans on a "global" basis,
which means a single fee per scan, the limitation is applicable only to the
technical component of the services, which is the payment or portion of the
payment attributable to the non-professional services. If the fee for the
technical component of the service (without including geographic adjustments)
exceeds the hospital outpatient payment amount for the service (also without
including geographic adjustments), under the Physician Fee Schedule, then the
payment would be limited to the Physician Fee Schedule rate.
While we have prepared certain estimates of the impact of the above
discussed changes and possible changes, it is not possible to fully quantify
their impact on our business. There can be no assurance that the impact of these
changes will not be greater than estimated or that any future health care
legislation or reimbursement changes will not adversely affect our business.
The increase in our total net revenues of 39.2% from $7.7 million in the
second quarter of fiscal 2007 to $10.7 million in the second quarter of fiscal
2008, was accompanied by an increase of 11.3% in total costs and expenses from
$13.1 million in the second quarter of fiscal 2007 compared to $14.6 million in
the second quarter of fiscal 2008. As a result, our operating loss decreased
from $5.5 million in the second quarter of fiscal 2007 to $3.8 million in the
second quarter of fiscal 2008. For the first six months of fiscal 2008 the
consolidated revenues increased by 25.2% to $19.4 million from $15.5 million for
the first six months of fiscal 2007 while the total costs and expenses increased
by 1.4% to $27.3 million for the first six months of fiscal 2008 from $26.9
million for the first six months of fiscal 2007. Our operating loss decreased
from $11.5 million in the first six months of fiscal 2007 to $8.0 million in the
first six months of fiscal 2008.
Selling, general and administrative expenses decreased by 8.1% from $11.2
million in the first six months of fiscal 2008 from $12.2 million in the first
six months of fiscal 2007. The compensatory element of stock issuances, which is
now included in selling, general and administrative expenses, decreased from
$121,000 in the first six months of fiscal 2007 to $317 in the first six months
of fiscal 2008. This reflects a lesser use of Fonar's stock in lieu of cash to
pay employees, consultants and professionals for services.
Research and development expenses decreased by 11.6% to $2.5 million for
the first six months of fiscal 2008 as compared to $2.8 million for the first
six months of fiscal 2007.
Interest expense in the first six months of fiscal 2008 increased by 79.2%
to $258,000 from $144,000 for the first six months of fiscal 2007 because of the
additional accrual of sales tax interest.
Inventories decreased by 5.8% to $4.2 million at December 31, 2007 as
compared to $4.5 million at June 30, 2007 representing our use of raw materials
and components in our inventory to fill orders.
Management fee and medical receivables decreased by 8.0% to $8.5 million at
December 31, 2007 from $9.2 million at June 30, 2007, primarily due to
collections on the Company's medical receivables.
The overall trends reflected in the results of operations for the first six
months of fiscal 2008 are an increase in revenues from product sales, as
compared to the first six months of fiscal 2007 ($6.6 million for the first six
months of fiscal 2008 as compared to $4.5 million for the first six months of
fiscal 2007), and an increase in MRI equipment segment revenues relative to HMCA
revenues ($13.2 million or 68% from the MRI equipment segment as compared to
$6.2 million or 32% from HMCA, for the first six months of fiscal 2008, as
compared to $9.5 million or 62% from the MRI equipment segment and $5.9 million
or 38%, from HMCA, for the first six months of fiscal 2007). In addition, we
experienced an increase in unrelated party sales relative to related party sales
in our medical equipment product sales ($6.6 million or 100% to unrelated
parties for the first six months of fiscal 2008 as compared to $4.4 million, or
97% to unrelated parties and $142,000 or 3% to related parties for the first six
months of fiscal 2007).
We are committed to continuing the improvement in our operating results we
experienced in the first six months in fiscal 2008. Nevertheless, factors beyond
our control, such as the timing and rate of market growth which depend on
economic conditions, payor reimbursement rates and policies, and unexpected
expenditures or the timing of such expenditures, make it impossible to forecast
future operating results. We believe we are pursuing the correct policies which
should prove successful in improving the Company's operating results.
Our FONAR UPRIGHT(R) MRI, and Fonar-360(TM) MRI scanners, together with our
works-in-progress, are intended to significantly improve our competitive
position.
Our FONAR UPRIGHT(R) 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 be unaddressable for lack of
visualizing the symptom causing the pathology. A floor-recessed elevator brings
the patient to the height appropriate for the targeted image region. A
custom-built adjustable bed will allow patients to sit or lie on their backs,
sides or stomachs at any angle. Full-range-of-motion studies of the joints in
virtually any direction are possible and another promising feature for sports
injuries.
Recently a new important application has been discovered for the FONAR
UPRIGHT(R) MRI, namely the evaluation of spinal scoliosis in young women. In a
2000 publication of the National Cancer Institute women with scoliosis were
discovered to have a 70% increase in breast cancer which was presumed to arise
from the repeated chest x-rays needed to monitor treatment. FONAR UPRIGHT(R) MRI
is now available to provide a radiation-free alternative to meet this need. In
addition, the University of California, Los Angeles (UCLA) reported their
results of their study of 1,302 patients utilizing the FONAR UPRIGHT(R)
Multi-Position(TM) 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
Dynamic(TM) FONAR UPRIGHT(R) MRI to detect spine pathology, including
spondylolisthesis, disc herniations and disc degneration, as compared to
visualizations of the spine produced by traditional single position static
MRI's.
The UCLA study by MRI of 1,302 back pain patients when they were UPRIGHT(R)
and examined in a full range of flexion and extension positions made possible by
FONAR's new UPRIGHT(R) 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
spodylolistheses (vertebral instabilities) visualized by Dynamic(TM)
Multi-Position(TM) MRI were being missed by static single position MRI (510
patients). Since this vertebral segment is responsible for the majority of all
disc herniation, 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(R) Multi-Position(TM) 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(R) 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.
The Fonar 360(TM) is an enlarged room sized magnet in which the floor,
ceiling and walls of the scan room are part of the magnet frame. This is made
possible by Fonar's patented Iron-Frame(TM) technology which allows the
Company's engineers to control, contour and direct the magnet's lines of flux in
the patient gap where wanted and almost none outside of the steel of the magnet
where not wanted. Consequently, this scanner allows surgeons and other
interventional physicians to walk inside the magnet and achieve 360 degree
access to the patient to perform interventional procedures.
The Fonar 360(TM)is presently marketed as a diagnostic scanner and is
sometimes referred to as the Open Sky(TM) MRI. In its Open Sky(TM)version, the
Fonar 360(TM)serves as an open patient friendly scanner which allows 360 degree
surgical access to the patient on the scanner bed. To optimize the
patient-friendly character of the Open Sky(TM) MRI, the walls, floor, ceiling
and magnet poles are decorated with landscape murals. The patient gap is twenty
inches and the magnetic field strength, like that of the FONAR UPRIGHT(R), is
0.6 Tesla.
In the future, we expect the Fonar 360(TM) to function as an interventional
MRI. The enlarged room sized magnet and 360 access to the patient afforded by
the Fonar 360(TM) permits surgeons to walk into the magnet and perform surgical
interventions on the patient under direct MR image guidance. Most importantly
the exceptional quality of the MRI image and its capacity to exhibit tissue
detail on the image, can then be obtained real time during the procedure to
guide the interventionalist. Thus surgical instruments, needles, catheters,
endoscopes and the like could be introduced directly into the human body and
guided directly to a malignant lesion using the MRI image. The number of
inoperable lesions could be significantly reduced by the availability of this
new FONAR technology. Most importantly treatment can be carried directly to the
target tissue. The interventional features of the Fonar 360(TM) are expected to
be implemented by Oxford Nuffield Orthopedic Center in Oxford U.K. in the near
future. A full range of MRI compatible surgical instruments using ceramic
cutting tools and beryllium-copper materials are available commercially.
The Company expects marked demand for its most commanding MRI products, the
FONAR UPRIGHT(R) MRI and the Fonar 360(TM) because of their exceptional features
in patient diagnosis and treatment. These scanners additionally provide improved
image quality and higher imaging speed because of their higher field strength of
..6 Tesla. The geometry of the FONAR UPRIGHT(R) MRI as compared to a single coil,
or multiple coils on only one axis and its transverse magnetic field enables the
use of two detector rf coils operating in quadrature which increases the FONAR
UPRIGHT(R) MRI signal to noise ratio by 40%, providing a signal to noise ratio
equal to a .84T recumbent only MRI scanner.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities decreased from $3.4
million at June 30, 2007 to $3.2 million at December 31, 2007. Marketable
securities approximated $1.7 million as at December 31, 2007, as compared to
$2.0 million at June 30, 2007. At December 31, 2007, our investments in U.S.
Government obligations were $198,000, our investments in corporate and
government agency bonds were $1.4 million and our investments in certificates of
deposit and deposit notes were $100,000. These investments have had the intended
effect of maintaining a stable investment portfolio.
Cash used in operating activities for the first six months of fiscal 2008
was $4.3 million. Cash used in operating activities was attributable primarily
to the net loss of $4.0 million, an increase in accounts, management fee and
medical receivables of $2.8 million and the decrease in accounts payable of
$121,000, offset by an increase in customer advances of $1.6 million and an
increase in billing in excess of costs and estimated earnings on uncompleted
contracts of $1.4 million.
Cash provided by investing activities for the first six months of fiscal
2008 was $4.4 million. The principal source of cash from investing activities
during the first six months of fiscal 2008 consisted of proceeds from the sale
of an investment and consolidated subsidiary of $4.7 million, offset by
expenditures for property and equipment of $151,000 and capitalized software and
patent costs of $363,000.
Cash used in financing activities for the first six months of fiscal 2008
was $90,000. The principal uses of cash in financing activities during the first
six months of fiscal 2008 consisted of repayment of principal on long-term debt
and capital lease obligations of $111,000 and distributions to holders of
minority interests of $105,000.
The Company's contractual obligations and the periods in which they are
scheduled to become due are set forth in the following table:
(000's OMITTED)
Due in
less Due Due Due
Contractual Than 1 in 2-3 in 4-5 after 5
Obligation Total year years years years
-------------- ---------- ---------- --------- ---------- --------
Long-term debt $ 539 $ -- $ -- $ -- $ 539
Capital lease
Obligations 564 252 296 16 --
Operating
leases 6,478 2,315 2,017 1,271 875
---------- ---------- --------- --------- --------
Total cash
Obligations $ 7,581 $ 2,567 $ 2,313 $ 1,287 $1,414
========== ========== ========= ========= ========
Total liabilities increased by 12.9% to $35.9 million at December 31, 2007
from $31.8 million at June 30, 2007. We experienced a decrease in long-term debt
and capital leases from $956,000 at June 30, 2007 to $850,000 at December 31,
2007 and a decrease in accounts payable from $3.9 million at June 30, 2007 to
$3.8 million at December 31, 2007, offset by an increase in billings in excess
of costs and estimated earnings on uncompleted contracts from $3.4 million at
June 30, 2007 to $4.9 million at December 31, 2007, and an increase in customer
advances from $10.1 million at June 30, 2007 to $11.7 million at December 31,
2007. Unearned revenue on service contracts increased from $5.1 million at June
30, 2007 to $6.2 million at December 31, 2007,
As of December 31, 2007, the total of $8.0 million in other current
liabilities included primarily accrued salaries and payroll taxes of $1.1
million, accrued interest of $707,000, accrued royalties of $595,000 and excise
and sales taxes of $3.3 million.
Our working capital deficit was $10.8 million as of December 31, 2007, as
compared to a working capital deficit of $7.6 million as of June 30, 2007,
increasing by 43%. This resulted from an increase in current liabilities ($30.6
million at June 30, 2007 as compared to $34.8 million at December 31, 2007,
particularly an increase in customer advances of $1.6 million ($10.1 million at
June 30, 2007 as compared to $11.7 million at December 31, 2007), and an
increase of unearned revenue on service contracts of $1.1 million ($5.1 million
at June 30, 2007 as compared to $6.2 million at December 31, 2007),
notwithstanding an increase in current assets ($23.0 million at June 30, 2007
compared to $24.0 million at December 31, 2007) resulting primarily from an
increase in accounts receivable of $1.7 million ($3.5 million at June 30, 2007
compared to $5.2 million at December 31, 2007) offset by a decrease in cash and
cash equivalents and marketable securities of $221,000 ($3.4 million at June 30,
2007 as compared to $3.2 million at December 31, 2007) and a decrease in
inventories of approximately $260,000 ($4.5 million at June 30, 2007 as compared
to $4.2 million at December 31, 2007).
With respect to current liabilities, the current portion of long-term debt
decreased from $257,000 at June 30, 2007 to $252,000 at December 31, 2007, and
billings in excess of costs and estimated earnings on uncompleted contracts
increased from $3.5 million at June 30, 2007 to $4.9 million at December 31,
2007. Customer advances increased from $10.1 million at June 30, 2007 to $11.7
million at December 31, 2007 and accounts payable decreased from $3.9 million at
June 30, 2007 to $3.8 million at December 31, 2007.
Inventories decreased by approximately $260,000 ($4.5 million at June 30,
2007 as compared to $4.2 million at December 31, 2007) resulting from the use of
raw materials and components in our inventory to fill our backlog of orders.
Fonar has not committed to making additional capital expenditures in the
2008 fiscal year other than to continue research and development expenditures at
current levels.
Our business plan calls for a continuing emphasis on providing our
customers with enhanced equipment service and maintenance capabilities and
delivering state-of-the-art, innovative and high quality equipment upgrades at
competitive prices.
Our principal source of liquidity has been derived from revenues, as well
as cash provided by previous debt and equity financing. We currently expect this
to continue. Also, in July 2007, the Company sold its 50% interest in a
consolidated subsidiary and 20% interest in an unconsolidated entity to an
unrelated third party and received proceeds of approximately $4.8 million. At
December 31, 2007, we had a working capital deficit of $10.8 million. For the
six months ended December 31, 2007, we incurred a net loss of $4.0 million which
included non-cash charges of $1.9 million.
The Company is focusing on increased advertising and marketing campaigns
and distribution programs to increase the demand for Fonar's products.
Management anticipates that Fonar's capital resources will improve as Fonar's
MRI scanner products gain wider market recognition and acceptance resulting in
increased product sales. If we are not successful with our current marketing
efforts to increase sales, then we could experience a shortfall in the cash
necessary to sustain operations at their current levels.
Given our cash and marketable securities balance of $3.2 million at
December 31, 2007, as compared to $3.4 million at June 30, 2007 and our expected
cash requirements, we anticipate that our existing capital resources, funds
generated from operations and funds expected to be received from note
receivables, will be sufficient to satisfy our cash flow requirements through at
least December 31, 2008. The increase in cash and marketable securities resulted
from the investment of a portion of the proceeds from the sale of our 50%
interest in a consolidated entity and our 20% interest in an unconsolidated
entity. Based upon current results of operations, we believe we will either need
to increase sales, reduce expenses or seek other sources of funds through the
issuance of equity or debt financing in order to maintain sufficient funds
available to operate subsequent to December 31, 2008.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our investments are in fixed rate instruments. Below is a tabular
presentation of the maturity profile of the fixed rate instruments held by us at
December 31, 2007.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
WEIGHTED AVERAGE INTEREST RATE
Investments
Year of in Fixed Rate Weighted Average
Maturity Instruments Interest Rate
-------- ------------- ----------------
12/31/08 $ -- --
12/31/09 1,198,062 3.29%
12/31/10 500,000 2.51%
12/31/11 -- --
12/31/12 -- --
------------- ----------------
Total: $ 1,698,062
=============
Fair Value
at 12/31/07 $ 1,617,834
=============
All of our revenue, expense and capital purchasing activities are
transacted in United States dollars.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
The Company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures performed as of the end of the period covered by this
report, the principal executive and acting principal financial officer of the
Company concluded that disclosure controls and procedures were effective.
(b) Change in internal controls.
There have been no changes in our internal control over financial reporting
that occurred during the most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings: There were no material changes in litigation for the
first six months of fiscal 2008.
Item 1A - Risk Factors: There were no material changes in risk factors in the
first six months of fiscal 2008 from those disclosed in our most recent
Form 10-K.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds: None
Item 3 - Defaults Upon Senior Securities: None
Item 4 - Submission of Matters to a Vote of Security Holders: None
Item 5 - Other Information: None
Item 6 - Exhibits: Exhibit 31.1 Certification See Exhibits
Exhibit 32.1 Certification See Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FONAR CORPORATION
(Registrant)
By: /s/ Raymond V. Damadian
Raymond V. Damadian
President & Chairman
Dated: February 15, 2008