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 SEPTEMBER 30, 2010
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ -------------
Commission file number 0-10248
-------
FONAR CORPORATION
------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 11-2464137
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110 Marcus Drive Melville, New York 11747
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 694-2929
--------------
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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of
this chapter) during the preceding 12 months (or for shorter period that the
registrant was required to submit and post such files. 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___
Smaller reporting company _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 October 31, 2010
----------------------------------------- -------------------------------
Common Stock, par value $.0001 5,137,115
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 - September 30, 2010
(Unaudited) and June 30, 2010
Condensed Consolidated Statements of Operations for
the Three Months Ended September 30, 2010 and
September 30, 2009 (Unaudited)
Condensed Consolidated Statements of Comprehensive
Income (Loss) for the Three Months Ended
September 30, 2010 and September 30, 2009 (Unaudited)
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended September 30, 2010 and
September 30, 2009 (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 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. (Removed and Reserved)
Item 5. Other Information
Item 6. Exhibits
Signatures
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
ASSETS September 30, June 30,
2010 2010
(UNAUDITED)
Current Assets: ---------- ----------
Cash and cash equivalents $ 1,253 $ 1,299
Marketable securities 32 28
Accounts receivable - net 4,652 4,821
Accounts receivable - related parties - net 178 -
Medical receivables - net 12 25
Management fee receivable - net 2,593 2,569
Management fee receivable - related medical
practices - net 1,982 1,922
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,225 277
Inventories 2,535 2,826
Advances and notes to related
medical practices - net 42 83
Notes receivable - net 236 272
Prepaid expenses and other current assets 516 553
---------- ----------
Total Current Assets 15,256 14,675
---------- ----------
Property and equipment - net 1,981 2,109
Other intangible assets - net 4,190 4,291
Other assets 561 554
---------- ----------
Total Assets $ 21,988 $ 21,629
========== ==========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
September 30, June 30,
LIABILITIES AND STOCKHOLDERS' DEFICIENCY 2010 2010
(UNAUDITED)
Current Liabilities: ---------- ----------
Current portion of long-term debt and capital leases $ 590 $ 579
Current portion of long-term debt - related party 90 88
Accounts payable 2,855 3,192
Other current liabilities 9,512 8,065
Unearned revenue on service contracts 5,070 5,220
Unearned revenue on service contracts - related parties 165 -
Customer advances 5,366 4,813
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,292 2,743
---------- ----------
Total Current Liabilities 24,940 24,700
Long-Term Liabilities:
Accounts payable 62 63
Due to related medical practices 228 528
Long-term debt and capital leases,
less current portion 1,422 1,567
Long-term debt less current portion - related party 49 72
Other liabilities 484 475
---------- ----------
Total Long-Term Liabilities 2,245 2,705
---------- ----------
Total Liabilities 27,185 27,405
---------- ----------
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED, except share data)
September 30, June 30,
LIABILITIES AND STOCKHOLDERS' DEFICIENCY 2010 2010
(continued) (UNAUDITED)
---------- ----------
STOCKHOLDERS' DEFICIENCY:
Class A non-voting preferred stock $.0001 par value;
453,000 and 1,600,000 shares authorized at
September 30, 2010 and June 30, 2010, respectively;
313,451 issued and outstanding at September 30, 2010
and June 30, 2010 - -
Preferred stock $.001 par value; 567,000 and 2,000,000
shares authorized at September 30, 2010 and June 30, 2010,
respectively; issued and outstanding - none - -
Common Stock $.0001 par value; 8,500,000 and 30,000,000
shares authorized at September 30, 2010 and June 30, 2010,
respectively; 5,112,458 and 4,985,850 issued at
September 30, 2010 and June 30, 2010, respectively;
5,100,815 and 4,974,207 outstanding at September 30, 2010
and June 30, 2010, respectively 1 1
Class B Common Stock $ .0001 par value; 227,000 and
800,000 shares authorized at September 30, 2010 and
June 30, 2010, respectively; (10 votes per share), 158 issued
and outstanding at September 30, 2010 and June 30, 2010 - -
Class C Common Stock $.0001 par value; 567,000 and 2,000,000
shares authorized at September 30, 2010 and June 30, 2010,
respectively; (25 votes per share), 382,513 issued
and outstanding at September 30, 2010 and June 30, 2010 - -
Paid-in capital in excess of par value 172,568 172,379
Accumulated other comprehensive loss (15) (19)
Accumulated deficit (176,886) (177,271)
Notes receivable from employee stockholders (190) (191)
Treasury stock, at cost - 11,643 shares of common stock
at September 30, 2010 and June 30, 2010 (675) (675)
---------- ----------
Total Stockholders' Deficiency (5,197) (5,776)
---------- ----------
Total Liabilities and Stockholders' Deficiency $ 21,988 $ 21,629
========== ==========
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
SEPTEMBER 30,
-------------------------
2010 2009
REVENUES ---------- ----------
Product sales - net $ 2,660 $ 1,563
Service and repair fees - net 2,689 2,757
Service and repair fees - related parties - net 55 55
Management and other fees - net 2,088 1,736
Management and other fees - related medical
practices - net 1,193 795
License fees and royalties - 585
---------- ----------
Total Revenues - Net 8,685 7,491
---------- ----------
COSTS AND EXPENSES
Costs related to product sales 2,506 1,657
Costs related to service and repair fees 665 941
Costs related to service and repair
fees - related parties 14 19
Costs related to management and other fees 1,313 1,268
Costs related to management and other
fees - related medical practices 739 761
Research and development 454 854
Selling, general and administrative 2,383 3,233
Provision for bad debts 176 180
---------- ----------
Total Costs and Expenses 8,250 8,913
---------- ----------
Income (Loss) From Operations 435 (1,422)
Interest Expense (94) (79)
Interest Expense - Related Parties (4) (14)
Investment Income 38 87
Interest Income - Related Party 1 4
Other Income 9 33
Loss on Note Receivable - (350)
---------- ----------
NET INCOME (LOSS) $ 385 $ (1,741)
========== ==========
Net Income (Loss) Available to Common Stockholders $ 363 $ (1,741)
========== ==========
Basic Net Income (Loss) Per Common Share $ 0.07 $ (0.35)
========== ==========
Diluted Net Income (Loss) Per Common Share $ 0.07 $ (0.35)
========== ==========
Basic and Diluted Income Per Share - Common C $ 0.02 N/A
========== ==========
Weighted Average Basic Shares Outstanding 5,012,245 4,907,942
========== ==========
Weighted Average Diluted Shares Outstanding 5,139,749 4,907,942
========== ==========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(000'S OMITTED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2010 2009
---------- ----------
Net income (loss) $ 385 $ (1,741)
Other comprehensive income (loss), net of tax:
Unrealized gains on marketable securities,
net of tax 4 4
---------- ----------
Total comprehensive income (loss) $ 389 $ (1,737)
========== ==========
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 THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2010 2009
---------- ----------
Cash Flows from Operating Activities:
Net income (loss) $ 385 $ (1,741)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 279 366
Provision for bad debts 176 180
Stock issued for costs and expenses 76 -
Discount on note receivable - 350
Compensatory element of stock issuances 112 18
(Increase) decrease in operating assets, net:
Accounts, management fee and medical receivable(s) (221) 82
Notes receivable - 126
Costs and estimated earnings in excess of
billings on uncompleted contracts (947) 264
Inventories 291 (280)
Prepaid expenses and other current assets 37 128
Other assets (7) -
Advances and notes to related medical practices 41 43
Increase (decrease) in operating liabilities, net:
Accounts payable (338) 269
Other current liabilities 1,463 31
Customer advances 552 26
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,451) 509
Other liabilities 10 16
Due to related medical practices (300) 15
---------- ----------
Net cash provided by operating activities 158 402
---------- ----------
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 THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2010 2009
---------- ----------
Cash Flows from Investing Activities:
Purchases of property and equipment - (7)
Costs of capitalized software development (24) (105)
Cost of patents (27) (88)
---------- ----------
Net cash used in investing activities (51) (200)
---------- ----------
Cash Flows from Financing Activities:
Repayment of borrowings and capital
lease obligations (155) (57)
Repayment of notes receivable from employee
stockholders 2 1
---------- ----------
Net cash used in financing activities (153) (56)
---------- ----------
Net (Decrease) Increase in Cash and Cash Equivalents (46) 146
Cash and Cash Equivalents - Beginning of Period 1,299 1,226
---------- ----------
Cash and Cash Equivalents - End of Period $ 1,253 $ 1,372
========== ==========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(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 months ended September 30, 2010, are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30, 2011. 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 13, 2010 for the fiscal year ended June 30, 2010.
Liquidity and Going Concern
---------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("US GAAP") and assume that the Company will continue
as a going concern.
At September 30, 2010, the Company had a working capital deficit of
approximately $9.7 million and a stockholders' deficiency of approximately $5.2
million. For the three months ended September 30, 2010, the Company generated a
net income of approximately $385,000, which included non-cash charges of
approximately $643,000.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The accompanying unaudited condensed consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Management's plans include focusing its efforts on increased marketing
campaigns, which will strengthen the demand for the Company's products and
services. Management anticipates that its capital resources will improve if
Fonar's MRI scanner products gain wider market recognition and acceptance
resulting in increased product sales. The Company's subsidiary, Health
Management Corporation ("HMCA") will focus its efforts to market the scanning
services of its customers (related and non-related professional corporations or
"PCs") and to expand the number of PCs for which it performs management
services. Current economic credit conditions have contributed to a slowing
business environment. Given such liquidity and credit constraints in the
markets, the business has and may continue to suffer, should the credit markets
not improve in the near future. The direct impact of these conditions is not
fully known. However, there can be no assurance that the Company would be able
to secure additional funds if needed and that if such funds were available,
whether the terms or conditions would be acceptable to the Company. In such
case, the further reduction in operating expenses as well as possible sale of
other operating subsidiaries might need to be substantial in order for the
Company to generate positive cash flow to sustain the operations of the Company.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The unaudited condensed consolidated financial statements include the accounts
of FONAR Corporation, its majority and wholly-owned subsidiaries and
partnerships (collectively the "Company"). All significant intercompany accounts
and transactions have been eliminated in consolidation.
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 ASC
topic 260-10, "Participating Securities and the Two-Class method", 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 the
three months ended September 30, 2009, because the participating securities do
not have a contractual obligation to share in the losses of the Company. For the
three months ended September 30, 2010, the Company used the Two-Class method for
calculating basic earnings per share and applied the if converted method in
calculating diluted earnings per share.
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 or conversion of the
participating convertible securities that were excluded from the diluted EPS
calculation was approximately 224,000 because they were antidilutive as a result
of net losses for the three months ended September 30, 2009. For the three
months ended September 30, 2010, the number of common shares potentially
issuable upon the exercise of certain options of 68,000 have not been included
in the computation of diluted EPS since the effect would be antidilutive.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share (Continued)
-------------------------
Three months ended Three months ended
September 30, 2010 September 30, 2009
------------------------- ------------------
(000's omitted, except per share data)
Class C
Common Common
Total Stock Stock
Basic ------- ------- -------
-----
Numerator:
Net income (loss) available
to common stockholders $ 363 $ 356 $ 7 $(1,741)
======= ======= ======= ========
Denominator:
Weighted average shares
outstanding 5,012 383 4,908
======= ======= ========
Basic income (loss) per common share $ 0.07 $ 0.02 $ (0.35)
======= ======= ========
Diluted
-------
Denominator:
Weighted average shares
outstanding 5,012 5,012 383 4,908
Stock options - - - -
Convertible Class C Stock 128 128 - -
------- ------- ------- --------
Total Denominator for diluted
earnings per share 5,140 5,140 383 4,908
======= ======= ======= ========
Diluted income (loss) per
common share $ 0.07 $ 0.02 $ (0.35)
======= ======= ========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
--------------------------------
In June 2009, the FASB issued ASC 860 (formerly SFAS No. 166), "Accounting for
Transfers of Financial Assets - an amendment of FASB Statement No. 140, ASC 860
requires additional disclosures concerning a transferor's continuing involvement
with transferred financial assets. ASC 860 eliminates the concept of a
"qualifying special-purpose entity" and changes the requirements for
derecognizing financial assets. ASC 860 is effective for fiscal years beginning
after November 15, 2009. The Company adopted ASC topic 860 on July 1, 2010. The
adoption did not have a material impact on its condensed consolidated financial
statements.
In June 2009, the FASB issued ASC 810 (formerly SFAS No. 167), "Amendments to
FASB Interpretation ("FIN") No. 46(R)," which changes how a reporting entity
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
determination of whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entity's purpose and design
and the reporting entity's ability to direct the activities of the other entity
that most significantly impact the other entity's economic performance. ASC 810
will require a reporting entity to provide additional disclosures about its
involvement with variable interest entities and any significant changes in risk
exposure due to that involvement. A reporting entity will be required to
disclose how its involvement with a variable interest entity affects the
reporting entity's financial statements. ASC 810 is effective for fiscal years
beginning after November 15, 2009, and interim periods within those fiscal
years. The adoption of ASC 810 did not have a material impact on the Company's
condensed consolidated financial statements.
In September 2009, the FASB reached final consensus on a new revenue recognition
standard, ASC topic 815 (formerly EIFT Issue No. 08-1), "Revenue Arrangements
with Multiple Deliverables". ASC topic 815 addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit of
accounting, and how the arrangement consideration should be allocated among the
separate units of accounting. This Issue is effective for fiscal years beginning
after June 15, 2010 and may be applied retrospectively or prospectively for new
or materially modified arrangements. In addition, early adoption is permitted.
The adoption of ASC 815 did not have a material impact on the Company's
condensed consolidated financial statements.
In September 2009, the EITF reached final consensus on a new revenue recognition
standard, ASC topic 350 (formerly EITF 09-3), "Applicability of AICPA Statement
of Position 97-2 to Certain Arrangements That Contain Software Elements". ASC
topic 350 amends the scope of AICPA Statement of Position 97-2, Software Revenue
Recognition to exclude tangible products that include software and non-software
components that function together to deliver the product's essential
functionality. This Issue shall be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010. Earlier application is permitted as of the beginning of a
company's fiscal year provided the company has not previously issued financial
statements for any period within that year. An entity shall not elect early
application of this Issue unless it also elects early application of Issue 08-1.
The adoption of ASC 350 did not have a material impact the Company's condensed
consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------
In January 2010, the FASB issued Accounting Standards Update No. 2010-6,
Improving Disclosures about Fair Value Measurements. The Update provides
amendments to FASB ASC 820-10 that require entities to disclose separately the
amounts of significant transfers in and out of Level 1 and Level 2 fair value
measurements and describe the reasons for the transfers. In addition the Update
requires entities to present separately information about purchases, sales,
issuances, and settlements in the reconciliation for fair value measurements
using significant unobservable inputs (Level 3). The disclosures related to
Level 1 and Level 2 fair value measurements are effective for the Company in
2010 and the disclosures related to Level 3 fair value measurements are
effective for the Company in 2011. The Update requires new disclosures only, and
will have no impact on the Company's condensed consolidated financial position,
results of operations, or cash flow.
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 income (losses) for any periods presented.
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 September 30, 2010 and June 30,
2010 was $12,225 and $25,225, respectively. As of September 30, 2010 and June
30, 2010, the allowance for doubtful accounts totaled $1,622,000 on these
receivables.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(UNAUDITED)
NOTE 3 - MEDICAL RECEIVABLES, ACCOUNTS RECEIVABLE AND MANAGEMENT FEE RECEIVABLE
(Continued)
Accounts Receivable and Management Fee Receivable
-------------------------------------------------
Receivables, net is comprised of the following at September 30, 2010:
(000's Omitted)
Gross Allowance for
Receivable doubtful accounts Net
---------- ----------------- ----------
Receivables from equipment
sales and service contracts $ 6,956 $ 2,304 $ 4,652
========== ================= ==========
Receivables from equipment
sales and service contracts-
related parties $ 178 $ - $ 178
========== ================= ==========
Management fee receivables $ 8,526 $ 5,933 $ 2,593
========== ================= ==========
Management fee receivables from
related medical practices ("PC's") $ 3,112 $ 1,130 $ 1,982
========== ================= ==========
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.
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 47% and 49% of
the PC's net revenues for the three months ended September 30, 2010 and 2009,
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.
Net revenues from management and other fees charged to the related PCs accounted
for approximately 13.7% and 10.6% of the consolidated net revenues for the three
months ended September 30, 2010 and 2009, respectively.
Effective June 30, 2009, Tallahassee Magnetic Resonance Imaging, PA, Stand Up
MRI of Boca Raton, PA and Stand Up MRI & Diagnostic Center, PA (all related
medical practices) entered in a guaranty for all management fees which were
indebted to the Company. Each entity will jointly and severally guarantee to the
Company all payments due to the Company which have arisen under each individual
management agreement.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(UNAUDITED)
NOTE 4 - INVENTORIES
Inventories included in the accompanying condensed consolidated balance sheet
consist of the following:
(000's omitted)
September 30, June 30,
2010 2010
------------- ----------
Purchased parts, components
and supplies $ 1,474 $ 1,775
Work-in-process 1,061 1,051
------- -------
$ 2,535 $ 2,826
======= =======
NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
1) Information relating to uncompleted contracts as of September 30, 2010
is as follows:
(000's omitted)
Costs incurred on uncompleted
contracts $ 7,208
Estimated earnings 3,201
--------
10,409
Less: Billings to date 10,476
--------
$ (67)
========
Included in the accompanying condensed consolidated balance sheet at September
30, 2010 under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 1,225
Less: Billings in excess of costs and estimated
earnings on uncompleted contracts 1,292
--------
$ (67)
========
2) Customer advances consist of the following as of September 30, 2010:
Related
Total Party Other
-------- -------- --------
Total Advances $ 15,842 $ - $ 15,842
Less: Advances
on contracts under construction 10,476 - 10,476
-------- -------- --------
$ 5,366 $ - $ 5,366
======== ======== ========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(UNAUDITED)
NOTE 6 - STOCKHOLDERS DEFICIENCY
On July 22, 2010, the Company amended its certificate of incorporation
decreasing the number of authorized shares of Common Stock from 30,000,000 to
8,500,000, Class B Common Stock from 800,000 to 227,000, Class C Common Stock
from 2,000,000 to 567,000, Class A Non-voting Preferred Stock from 1,600,000 to
453,000 and Preferred Stock from 2,000,000 to 567,000.
Common Stock
------------
During the three months ended September 30, 2010:
a) The Company issued 75,410 shares of common stock to employees and
consultants as compensation valued at $112,039 under a stock bonus plan.
b) The Company issued 51,198 shares of common stock for costs and expenses of
$76,021.
NOTE 7 - OTHER CURRENT LIABILITIES
Other current liabilities in the accompanying condensed consolidated balance
sheet consist of the following:
(000's omitted)
September 30, June 30,
2010 2010
------------- ----------
Accrued salaries, commissions
and payroll taxes $ 953 $ 638
Accrued interest 1,037 992
Litigation accruals 193 193
Sales tax payable 2,609 2,597
Legal and other professional fees 812 737
Accounting fees 359 475
Insurance premiums 81 46
Penalty - Sales tax 842 817
Penalty - 401k plan (see Note 11) 250 250
Purchase scanners (related party $700
and $0 as of September 30, 2010
and June 30, 2010, respectively) 1,090 390
Rent 419 356
Other 867 574
---------- ---------
$ 9,512 $ 8,065
========== =========
NOTE 8 - SEGMENT AND RELATED INFORMATION
The Company operates in two industry segments - manufacturing and the servicing
of medical equipment and management of diagnostic imaging centers.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies as disclosed in the Company's 10-K as
of June 30, 2010. 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:
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(UNAUDITED)
NOTE 8 - SEGMENT AND RELATED INFORMATION (Continued)
(000's omitted)
Management
of Diagnostic
Medical Imaging
Equipment Centers Totals
--------- ------------- --------
For the three months ended September 30, 2010:
Net revenues from external customers $ 5,404 $ 3,281 $ 8,685
Inter-segment net revenues $ 232 $ - $ 232
Income from operations $ 17 $ 418 $ 435
Depreciation and amortization $ 194 $ 85 $ 279
Capital expenditures $ 51 $ - $ 51
For the three months ended September 30, 2009:
Net revenues from external customers $ 4,961 $ 2,530 $ 7,491
Inter-segment net revenues $ 232 $ - $ 232
Loss from operations $ (903) $ (519) $(1,422)
Depreciation and amortization $ 229 $ 137 $ 366
Capital expenditures $ 195 $ 5 $ 200
NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION
During the three months ended September 30, 2010 and September 30, 2009, the
Company paid $51,000 and $34,000 for interest, respectively.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Litigation
----------
There were no material changes in litigation from that reported in our Form 10-K
for the fiscal year ended June 30, 2010. In the Golden Triangle Company v. Fonar
Corporation et al case (U.S. District Court for the Eastern District of New York
CV10-2932), the plaintiff has requested and been granted until November 29, 2010
to file an amended complaint. In the Matt Malek Madison v. Fonar case (U.S.
District Court, Northern District of California), the Company filed a notice of
appeal on October 28, 2010. In the Anchorage Neurological Associates, Inc. v.
Fonar case, the plaintiff granted the Company an extension of time to answer
until November 18, 2010. In these and the other three cases where the plaintiff
is seeking a refund of a deposit paid for scanners, the Company believes that is
has valid defenses to the claims and is contesting them.
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.
Other Matters
-------------
The Company is also delinquent in filing sales tax returns for certain states,
for which the Company has transacted business. As of September 30, 2010, the
Company has recorded tax obligations of approximately $2,241,000 plus interest
and penalties of approximately $1,757,000. The Company is in the process of
determining the regulatory requirements in order to become compliant.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(UNAUDITED)
NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)
Other Matters (Continued)
-------------
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.
NASDAQ Continued Listing
------------------------
On October 14, 2010, the Company received notification from NASDAQ that it had
failed to maintain a minimum of $2,500,000 in stockholders' equity. The Company
reported in its Form 10-K for the period ended June 30, 2010, stockholders
deficiency of approximately of $5,776,000 and as of October 13, 2010 the Company
also did not meet the alternative of market value of listed securities or net
income from continuing operations. The Company has until November 29, 2010 to
submit a plan to regain compliance. If the Company's plan is accepted, the
Company can be granted an extension up to 180 calendar days from October 14,
2010 to be in compliance. If the plan is not accepted, the Company can request
to appeal the decision to a hearing panel. If the Company if not successful at
the hearing, the Company will be delisted from NASDAQ.
NOTE 11 - INCOME TAXES
Effective January 1, 2007, the Company adopted the provisions of ASC topic 740
(formerly FASB Interpretation No. 48/FASB Statement No. 109, "Accounting for
Uncertainty in Income Taxes"). ASC topic 740 prescribes a recognition threshold
and a measurement attribute for the financial statement recognition and
measurement of tax positions taken or expected to be taken in a corporate tax
return. For those benefits to be recognized, a tax position must be more-
likely-than-not to be sustained upon examination by taxing authorities.
Differences between tax positions taken or expected to be taken in a tax return
and the benefit recognized and measured pursuant to the interpretation are
referred to as "unrecognized benefits". A liability is recognized (or amount of
net operating loss carryforward or amount of tax refundable is reduced) for an
unrecognized tax benefit because it represents an enterprise's potential future
obligation to the taxing authority for a tax position that was not recognized as
a result of applying the provisions of ASC topic 740.
In accordance with ASC topic 740, interest costs related to unrecognized tax
benefits are required to be calculated (if applicable) and would be classified
as "Interest expense, net". Penalties if incurred would be recognized as a
component of "Selling, general and administrative" expenses.
The Company files corporate income tax returns in the United States (federal)
and in various state and local jurisdictions. In most instances, the Company is
no longer subject to federal, state and local income tax examinations by tax
authorities for years prior to 2005.
The adoption of the provisions of ASC topic 740 did not have a material impact
on the Company's consolidated financial position and results of operations. Upon
the adoption and as of September 30, 2010, no liability for unrecognized tax
benefits was required to be recorded. The Company does not expect its
unrecognized tax benefit position to change during the next 12 months.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(UNAUDITED)
NOTE 11 - INCOME TAXES (Continued)
The Company recognized a deferred tax asset of $812,814 and a deferred tax
liability of $812,814 as of September 30, 2010, primarily relating to net
operating loss carryforwards of approximately $165,987,000 available to offset
future taxable income through 2029. The net operating losses begin to expire in
2012 for federal tax purposes and in 2012 for state income tax purposes.
The ultimate realization of deferred tax assets is dependent on the generation
of future taxable income during the periods in which those temporary differences
become deductible. 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.
NOTE 12 - SUBSEQUENT EVENTS
During the period from October 1, 2010 through October 31, 2010, the Company
issued 36,300 shares of common stock to employees and consultants as
compensation valued at $45,933 under the 2010 Stock Bonus Plan.
FONAR CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
For the three month period ended September 30, 2010, we reported a net
income of $385,000 on revenues of $8.7 million as compared to net loss of $1.7
million on revenues of $7.5 million for the three month period ended September
30, 2009. We recognized an operating income of $435,000 for the three month
period ended September 30, 2010 compared to an operating loss of $1.4 million
for the three month period ended September 30, 2009. The principal reason for
the net income in the first three months of fiscal 2011 as compared to the net
loss for the first three months of fiscal 2010 was that during the first quarter
of fiscal 2011, there was an increase in revenues for both product sales and
management and other fees. Another reason is that we had further cost cutting
programs which we implemented in January 2010.
Overall, our revenues increased 15.9% from $7.5 million for the first three
months of fiscal 2010 to $8.7 million for the first three months of fiscal 2011.
Although revenues from service and repair fees decreased 2.4%, from $2.8 million
for the first three months of fiscal 2010 to $2.7 million for the first three
months of fiscal 2011, product sales increased 70.2%, from $1.6 million for the
first three months of 2010 to $2.7 million for the first three months of fiscal
2011, and management fees increased by 29.6% from $2.5 million for the first
three months of fiscal 2010 to $3.3 million for the first three months of fiscal
2011. Revenues from license fees and royalties decreased 100% from $585,000 to
$0, because the license agreement under which they were generated expired.
Due to the increase in our revenues we recognized an operating income for
the three months ended September 30, 2010 of $435,000 as compared to an
operating loss of $1.4 for the three months ended September 30, 2009 The
increase in the operating income was principally due to the increase in revenues
of 15.9%, while costs and expenses in the aggregate declined from $8.9 million
in the first three months of fiscal 2010 to $8.3 million in the first three
months of fiscal 2011.
In order to reduce our operating losses and demands on our cash and other
liquid reserves, we continued to pursue our program of cost cutting. During
January 2010 we made further reductions in the size of our workforce and
significant reductions in compensation paid to our continuing employees. These
measures supplemented our previous reductions in the size of our workforce,
compensation and benefits, as well as across the board reduction of expenses.
These cost reductions are intended to enable us to withstand periods of lower
volumes of MRI scanner sales, by keeping expenditures at levels which, if
necessary, can be supported by service revenues and HMCA revenues.
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. Additionally, health care policy changes, including the
Patient Protection and Affordable Care Act and the Health Care and Education
Affordability Reconciliation Act of 2010 may have a material adverse effect on
our operations or financial results. 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.
Trends in the first quarter of fiscal 2011 include an increase in product
sales revenues and an increase in management fees, as well a decrease in our
total costs and expenses, in particular in our selling, general and
administrative costs, which declined by 26.3% from $3.2 million for the first
three months of fiscal 2010 to $2.4 million for the first three months of fiscal
2011. We will continue to focus on our marketing efforts to improve sales
performance and increase patient volume at the MRI facilities managed by HMCA in
fiscal 2011. In addition, we will monitor our cost cutting program and will
continue to reduce costs as necessary.
For the three month period ended September 30, 2010, as compared to the
three month period ended September 30, 2009 overall revenues from MRI product
sales increased 70.2% ($2.7 million compared to $1.6 million), primarily as a
result of the completion of existing contracts and reduced costs for parts.
Service revenues for the three month period ended September 30, 2010 as
compared to the three month period ended September 30, 2009 decreased 2.4% ($2.7
million compared to $2.8 million). Unrelated party service and repair fees
decreased 2.5% ($2.7 million compared to $2.8 million) and related party service
and repair fees remained constant at $55,000. We anticipate that there will be
increases in service revenues as warranties on installed scanners expire over
time.
There were approximately $1.1 million in foreign revenues for the first
three months of fiscal 2011 as compared to approximately $1.4 million in foreign
revenues for the first three months of fiscal 2010, representing a decrease in
foreign revenues of 21.4%. We do not regard this as a material trend, but as
part of a normal variation resulting from low volumes of foreign sales.
Overall, for the first three months of fiscal 2011, revenues for the
medical equipment segment increased by 9.0% to $5.4 million from $5.0 million
for the first three months of fiscal 2010. The revenues generated by HMCA
increased, by 29.6%, to $3.3 million for the first three months of fiscal 2011
as compared to $2.5 million for the first three months of fiscal 2010.
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 51.2% from $1.7 million in the
first quarter of fiscal 2010 to $2.5 million in the first quarter of 2011,
resulting from an increase in the manufacturing activity producing an increase
in product sales revenues.
Costs related to providing service for the first quarter decreased by 29.3%
from $960,000 in the first quarter of fiscal 2010 to $679,000 in fiscal 2011,
notwithstanding a decrease in service revenues of only 2.4%, from $2.8 million
in the first quarter of fiscal 2010 to $2.7 million in the first quarter of
fiscal 2011. 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, New York, on a daily basis and to detect and repair any
irregularities before more serious problems result.
Overall, the operating results for our medical equipment segment improved
to an operating income of $18,000 for the first three months of fiscal 2011 as
compared to an operating loss of $902,000 for the first three months of fiscal
2010.
HMCA revenues increased in the first quarter of fiscal 2011 by 29.6% to
$3.3 million from $2.5 million for the first quarter of fiscal 2010, primarily
due to increased revenues from our New York locations. We now manage ten sites,
nine of which are equipped with FONAR UPRIGHT(R) MRI scanners. HMCA experienced
an operating income of $418,000 for the first three months of fiscal 2011
compared to operating loss of $519,000 for the first three months of fiscal
2010. The greater operating income was due primarily to an increase in the
management and other fees which increased due to renegotiating the annual
contracts.
HMCA cost of revenues for the first three months of fiscal 2010 as compared
to the first three months of fiscal 2011 increased by 1.1% from $2.0 million to
$2.1 million. The increase in HMCA's cost of revenues was primarily the result
of the increased expenditures we have been making to improve HMCA revenues by
our marketing efforts, which focus on the unique capability of our Upright(R)
MRI Scanners to scan patients in different positions.
In 2009, the Obama administration announced its intentions for healthcare
reform in the United States. The plan contemplates providing healthcare coverage
for some 40 million uninsured Americans. The plan calls for, among other things,
more vigilant control of healthcare utilization, including diagnostic imaging
services. In November of 2009, the U.S. House of Representatives passed a
healthcare reform bill. In December of 2009, the Senate passed a different
healthcare reform bill.
On March 23, 2010, President Obama signed into law healthcare reform
legislation in the form of PPACA. The implementation of this law will likely
have a profound impact on the healthcare industry. Most of the provisions of
PPACA will be phased in over the next four years and can be conceptualized as a
broad framework not only to provide health insurance coverage to millions of
Americans, but to fundamentally change the delivery of care by bringing together
elements of health information technology, evidence-based medicine, chronic
disease management, medical "homes," care collaboration and shared financial
risk in a way that will accelerate industry adoption and change. There are also
many provisions addressing cost containment, reductions of Medicare and other
payments and heightened compliance requirements and additional penalties, which
will create further challenges for providers. We are unable to predict the full
impact of PPACA at this time due to the law's complexity and current lack of
implementing regulations or interpretive guidance. Further complicating any
effort to predict the effect of health care reform is the possibility that the
PPACA will be repealed or amended. Moving forward, we believe that the federal
government will likely have a greater involvement in the healthcare industry
than in prior years.
While the Company has prepared certain estimates of the impact of the above
discussed changes and proposed 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.
The increase in our consolidated net revenues of 15.9% from $7.5 million in
the first quarter of fiscal 2010 to $8.7 million in the first quarter of fiscal
2011 was coupled by a decrease of 7.4% in total costs and expenses from $8.9
million in the first quarter of fiscal 2010 compared to $8.3 million in the
first quarter of fiscal 2011. As a result, our loss from operations changed from
$1.4 million in the first quarter of fiscal 2010 to operating income of $435,000
in the first quarter of fiscal 2011.
Selling, general and administrative expenses decreased by 26.3% to $2.4
million in the first three months of fiscal 2011 from $3.2 million in the first
three months of fiscal 2010. The compensatory element of stock issuances, which
is included in selling, general and administrative expenses, was $112,039 for
the first three months of fiscal 2011 as compared to $18,000 for the first three
months of fiscal 2010.
Research and development expenses decreased by 46.8% to $454,000 for the
first three months of fiscal 2011 as compared to $854,000 for the first three
months of fiscal 2010.
Interest expense in the first three months of fiscal 2011 increased to
$98,000 compared to $93,000 for the first three months of fiscal 2010.
Inventories decreased by 10.3% to $2.5 million at September 30, 2010 as
compared to $2.8 million at June 30, 2010 representing the use of raw materials
and components in our inventory to fill orders.
Management fee and medical receivables increased by 1.6% to $4.6 million at
September 30, 2010 from $4.5 million at June 30, 2010, primarily due to
renegotiated management fee contracts with an unrelated party.
The overall trends reflected in the results of operations for the first
three months of fiscal 2011 are an increase in revenues from product sales, as
compared to the first three months of fiscal 2010 ($2.7 million for the first
three months of fiscal 2011 as compared to $1.6 million for the first three
months of fiscal 2010), and an increase in MRI equipment segment revenues both
absolutely ($5.4 million as compared to $5.0 million) and as compared to HMCA
($5.4 million or 62.2% from the MRI equipment segment as compared to $3.3
million or 37.8% from HMCA, for the first three months of fiscal 2011, as
compared to $5.0 million or 66.2% from the MRI equipment segment and $2.5
million or 33.8%, from HMCA, for the first three months of fiscal 2010).
Unrelated party sales constituted 100% of our medical equipment product sales
for both the first three months of fiscal 2011 and of fiscal 2010.
We are committed to improving the operating results we experienced in the
first three months in fiscal 2011. Nevertheless, factors beyond our control,
such as the timing and rate of market growth which depend on economic
conditions, including the availability of credit, 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, this capability of the FONAR UPRIGHT(R) technology has
demonstrated its key value on patients with the Arnold-Chiari syndrome, which is
believed to affect 200,000 to 500,000 Americans. In this syndrome, brain stem
compression and subsequent severe neurological symptoms occur in these patients,
when because of weakness in the support tissues within the skull, the brain stem
descends and is compressed at the base of the skull in the foramen magnum, which
is the circular bony opening at the base of the skull where the spinal cord
exits the skull. Conventional lie-down MRI scanners cannot make an adequate
evaluation of the pathology since the patient's pathology is most visible and
the symptoms most acute when the patient is scanned in the upright
weight-bearing position.
The UPRIGHT(R) MRI has also demonstrated its value for patients suffering
from scoliosis. Scoliosis patients have been typically subjected to routine
x-ray exams for years and must be imaged upright for an adequate evaluation of
their scoliosis. Because the patient must be standing for the exam, an x-ray
machine has been the only modality that could provide that service. The
UPRIGHT(R) MRI is the only MRI scanner which allows the patient to stand during
the MRI exam. Fonar has developed a new RF receiver and scanning protocol that
for the first time allows scoliosis patients to obtain diagnostic pictures of
their spines without the risks of x-rays. A recent study by the National Cancer
Institute (2000) of 5,466 women with scoliosis reported a 70% increase in breast
cancer resulting from 24.7 chest x-rays these patients received on the average
in the course of their scoliosis treatment. The UPRIGHT(R) MRI examination of
scoliosis enables the needed imaging evaluation of the degree of spine scoliosis
without exposing the patient to the risk of breast cancer from x- radiation.
Currently scoliosis affects more than 3,000,000 American women.
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 MRIs.
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
spondylolistheses (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
herniations, the finding may reveal a significant cause of failed back
surgeries. The UCLA study further showed the "miss-rate" of vertebral
instabilities by static only MRI was even higher, 38.7%, at the L3-4 vertebral
segment. Additionally the UCLA study showed that MRI examinations of the
cervical spine that did not perform extension images of the neck "missed" disc
bulges 23.75% of the time (163 patients).
The UCLA study further reported that they were able to quantitatively
measure the dimensions of the central spinal canal with the "highest accuracy"
using the FONAR UPRIGHT(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 360o 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 first Fonar 360(TM) MRI scanner, installed at the Oxford-Nuffield
Orthopedic Center in Oxford, United Kingdom, is now carrying a full diagnostic
imaging caseload. In addition, however, development of the works in progress
Fonar 360(TM) MRI image guided interventional technology is actively
progressing. Fonar software engineers have completed and installed their 2nd
generation tracking software at Oxford-Nuffield which is designed to enable the
surgeons to insert needles into the patient and accurately advance them, under
direct visual image guidance, to the target tissue, such as a tumor, so that
therapeutic agents can be injected.
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 magnet 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
NASDAQ Listing
On October 14, 2010, the Company received a deficiency letter from the
NASDAQ Staff that we do not comply with the minimum $2,500,000 in the
stockholders' equity criteria of the Capital Market. The deficiency letter
followed the filing of the Company's Form 10-K for the fiscal year ended June
30, 2010, in which we reported a stockholders' deficiency of approximately
$5,776,000. The Company also did not meet the alternative minimum listing
criteria of market value of listed securities of $35 million or net income from
continuing operations of $500,000. The Company has until November 29, 2010 to
submit a plan to regain compliance. If the Company's plan is accepted, then the
Company can be granted an extension up to 180 calendar days from October 14,
2010 to be in compliance. If the plan is not accepted, the Company can request
to appeal the decision to a Hearing Panel. If the Company is not successful at
the hearing, then the Company will be delisted from NASDAQ.
Cash, cash equivalents and marketable securities remained constant at $1.3
million at June 30, 2010 and September 30, 2010. Marketable securities
approximated $32,000 as of September 30, 2010, as compared to $28,000 at June
30, 2010.
Cash provided by operating activities for the first three months of fiscal
2011 was $158,000. Cash provided by operating activities was attributable to net
income of $385,000, a decrease in inventories of $291,000, an increase in other
current liabilities of $1.5 million, and an increase of customer advances of
$552,000 offset by an increase in costs and estimated earning in excess of
billings on uncompleted contracts of $947,000, a decrease in billings in excess
of costs and estimated earnings on uncompleted contracts of $1.5 million along
with a decrease in accounts payable of $338,000.
Cash used in investing activities for the first three months of fiscal 2011
was $51,000. The principal source of cash used in investing activities during
the first three months of fiscal 2011 consisted mainly of capitalized software
and patent costs of $51,000.
Cash used in financing activities for the first three months of fiscal 2011
was $153,000. The principal uses of cash in financing activities during the
first three months of fiscal 2011 consisted of repayment of principal on
long-term debt and capital lease obligations of $155,000, offset by repayment of
notes receivable from employee stockholders of $2,000.
Total liabilities decreased by 0.8% to $27.2 million at September 30, 2010
from $27.4 million at June 30, 2010. We experienced an increase in other current
liabilities from $8.1 million at June 30, 2010 to $9.5 million at September 30,
2010 offset by a decrease in long-term debt and capital leases from $1.6 million
at June 30, 2010 to $1.5 million at September 30, 2010 and a decrease in
accounts payable from $3.3 million at June 30, 2010 to $2.9 million at September
30, 2010, along with a decrease in billings in excess of costs and estimated
earnings on uncompleted contracts from $2.7 million at June 30, 2010 to $1.3
million at September 30, 2010, and an increase in customer advances from $4.8
million at June 30, 2010 to $5.4 million at September 30, 2010. Unearned revenue
on service contracts remained constant at $5.2 million at June 30, 2010 and
September 30, 2010.
As of September 30, 2010, the total of $9.5 million in other current
liabilities included accrued salaries and payroll taxes of $953,000, accrued
interest of $1.0 million and sales taxes of $2.6 million.
Our working capital deficit decreased to $9.7 million at September 30, 2010
from $10.0 million at June 30, 2010. This resulted from an increase in current
assets ($14.7 million at June 30, 2010 as compared to $15.3 million at September
30, 2010) particularly an increase in the current portion of costs and estimated
earnings in excess of billings on uncompleted contracts of $948,000 ($277,000 at
June 30, 2010 as compared to $1.2 million at September 30, 2010), and a decrease
in inventories of $291,000 ($2.8 million at June 30, 2010 as compared to $2.5
million at September 30, 2010) offset by a greater increase in current
liabilities ($24.7 million at June 30, 2010 as compared to $24.9 million at
September 30, 2010) resulting primarily from a decrease of approximately
$337,000 in the current portion of accounts payable ($3.2 million at June 30,
2010 as compared to $2.9 million at September 30, 2010) and an increase of $1.4
million in other current liabilities ($8.1 million at June 30, 2010 as compared
to $9.5 million at September 30, 2010) .
Fonar has not committed to making any significant capital expenditures in
the 2011 fiscal year.
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 and upgrades
at competitive prices. Also critical to our business plan are improvement and
expansion of the MRI facilities managed by our subsidiary HMCA.
The Company continues to focus its efforts on increased marketing campaigns
to strengthen the demand for its products and services. Management anticipates
that its capital resources will improve if Fonar's MRI scanner products gain
wider market recognition and acceptance resulting in increased product sales and
demand for Upright(R) scanning at the facilities HMCA manages. Current economic
credit conditions have contributed to a slowing business environment. Given such
liquidity and credit constraints in the markets, the business has and may
continue to suffer, should the credit markets not improve in the near future.
The direct impact of these conditions is not fully known. However, there can be
no assurance that the Company would be able to secure additional funds if needed
and that if such funds were available, whether the terms or conditions would be
acceptable to the Company. In such case, the further reduction in operating
expenses as well as possible sale of other operating subsidiaries might need to
be substantial in order for the Company to generate positive cash flow to
sustain the operations of the Company.
At September 30, 2010, the Company had a working capital deficiency of
approximately $9.7 million and a stockholders' deficiency of approximately $5.2
million. For the three months ended September 30, 2010, the Company incurred a
net income of approximately $385,000, which included non-cash charges of
approximately $643,000. The Company has funded its cash flow deficit for the
three months ended September 30, 2010 through cash provided by operations.
Management anticipates that Fonar's capital resources will improve if (1)
Fonar's MRI scanner products gain wider market recognition and acceptance
resulting in increased product sales, (2) service and maintenance revenues
increase as the warranties on scanners expire and (3) HMCA revenues can be
increased through the Company's vigorous marketing efforts. In addition,
Management is exploring the possibility of equity and/or loan financing to
improve liquidity. If we are not successful with our marketing efforts to
increase revenues and are unable to raise debt or equity capital, we will
experience a shortfall in cash, and it will be necessary to further reduce
operating expenses to attempt to avoid the need to curtail our operations.
Current economic, credit and political conditions have contributed to a slowing
business environment for our company. The precise impact of these conditions can
not be fully predicted. There can be no assurance that we would be able to
secure additional funds if needed.
The accompanying financial statements have been prepared in accordance with
accounting principals generally accepted in the United States of America and
assume that the Company will continue as a going concern. Although the Company's
results of operations and net income have improved in the first quarter of
fiscal 2011 compared to the first quarter of fiscal 2010, we still had negative
working capital and a stockholders' deficiency at September 30, 2010. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company maintains its funds in liquid accounts. None of our investments
are in fixed rate instruments.
All of our revenue, expense and capital purchasing activities are
transacted in United States dollars.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rule 13(a)-15(e)) are
controls and other procedures that are designed to ensure that information
required to be disclosed by a public company in the reports that it files or
submits under the Exchange Act, is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by a public company
in the reports that it files or submits under the Exchange Act is accumulated
and communicated to the company's management, including its principal executive
and principal financial officers, or persons performing similar functions, as
appropriate to allow for timely decisions regarding required disclosure.
Disclosure controls and procedures include many aspects of internal control over
financial reporting.
In connection with the preparation of this Quarterly Report on Form 10-Q
for the quarter ended September 30, 2010, management, with the participation of
our Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15
under the Exchange Act and have determined that such controls and procedures
were effective as of September 30, 2010.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls or in other factors that
could significantly affect these controls, during the quarter ended September
30, 2010, 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
from that reported in our Form 10-K for the fiscal year ended June 30, 2010. In
the Golden Triangle Company v. Fonar Corporation et al case (U.S. District Court
for the Eastern District of New York CV10-2932), the plaintiff has requested and
been granted until November 29, 2010 to file an amended complaint. In the Matt
Malek Madison v. Fonar case (U.S. District Court, Northern District of
California, Fonar filed a notice of appeal on October 28, 2010. In the Anchorage
Neurological Associates, Inc. v. Fonar case, the plaintiff granted Fonar an
extension of time to answer until November 18, 2010. In these and the other
three cases where the plaintiff is seeking a refund of a deposits paid for
scanners, Fonar believes that it has valid defenses to the claims and is
contesting them.
Item 1A - Risk Factors: Not required. We are a smaller reporting company.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds: None
Item 3 - Defaults Upon Senior Securities: None
Item 4 - (Removed and Reserved)
Item 5 - Other Information: None
Item 6 - Exhibits and Reports on Form 8-K: 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: November 19, 2010