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, 2011
------------------
[ ] 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
-------------------------------- ------------------------------------
(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, 2011
-------------------------------- -------------------------------
Common Stock, par value $.0001 5,722,728
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 PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 2011
(Unaudited) and June 30, 2011
Condensed Consolidated Statements of Income for
the Three Months Ended September 30, 2011 and
September 30, 2010 (Unaudited)
Condensed Consolidated Statements of Comprehensive
Income for the Three Months Ended
September 30, 2011 and September 30, 2010 (Unaudited)
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended September 30, 2011 and
September 30, 2010 (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,
2011 2011
(UNAUDITED)
Current Assets: ----------- --------
Cash and cash equivalents $ 9,512 $ 9,251
Marketable securities 28 33
Accounts receivable - net 4,701 5,264
Accounts receivable - related party 90 -
Management and other fees receivable - net 3,496 3,309
Management and other fees receivable - related
medical practices - net 1,714 1,669
Costs and estimated earnings in excess of
billings on uncompleted contracts 557 169
Inventories 3,817 2,400
Current portion of notes receivable - net 114 114
Prepaid expenses and other current assets 425 352
------- -------
Total Current Assets 24,454 22,561
------- -------
Property and equipment - net 3,499 3,769
Notes receivable 344 359
Other intangible assets - net 4,219 4,318
Other assets 587 574
-------- --------
Total Assets $33,103 $31,581
======== ========
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' EQUITY 2011 2011
(UNAUDITED)
Current Liabilities: ----------- --------
Current portion of long-term debt and capital leases $ 1,818 $ 2,026
Accounts payable 2,074 2,187
Other current liabilities 9,264 8,236
Unearned revenue on service contracts 5,379 5,762
Unearned revenue on service contracts - related party 82 -
Customer advances 3,638 4,846
Billings in excess of costs and estimated
earnings on uncompleted contracts 817 4
Income tax payable 75 75
------ ------
Total Current Liabilities 23,147 23,136
Long-Term Liabilities:
Accounts payable 148 102
Due to related medical practices 230 228
Long-term debt and capital leases,
less current portion 1,628 1,746
Other liabilities 498 502
------ ------
Total Long-Term Liabilities 2,504 2,578
------ ------
Total Liabilities 25,651 25,714
------ ------
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' EQUITY 2011 2011
(continued) (UNAUDITED)
---------- --------
STOCKHOLDERS' EQUITY:
Class A non-voting preferred stock $.0001 par value;
453,000 shares authorized at
September 30, 2011 and June 30, 2011,
313,451 issued and outstanding
at September 30, 2011 and June 30, 2011 - -
Preferred stock $.001 par value; 567,000
shares authorized at September 30, 2011
and June 30, 2011,
issued and outstanding - none - -
Common Stock $.0001 par value; 8,500,000 shares
authorized at September 30, 2011 and June 30, 2011,
5,689,171 and 5,636,571 issued at
September 30, 2011 and June 30, 2011, respectively;
5,677,528 and 5,624,928 outstanding at September 30, 2011
and June 30, 2011, respectively 1 1
Class B Common Stock (10 votes per share)
$ .0001 par value; 227,000 shares
authorized at September 30, 2011 and
June 30, 2011; 158 issued and
outstanding at September 30, 2011 and June 30, 2011 - -
Class C Common Stock (25 votes per share)
$.0001 par value; 567,000 shares
authorized at September 30, 2011 and June 30, 2011,
382,513 issued and outstanding
at September 30, 2011 and June 30, 2011 - -
Paid-in capital in excess of par value 173,580 173,476
Accumulated other comprehensive loss (22) (16)
Accumulated deficit (172,597) (174,110)
Notes receivable from employee stockholders (113) (115)
Treasury stock, at cost - 11,643 shares of common stock
at September 30, 2011 and June 30, 2011 (675) (675)
Non controlling interests 7,278 7,306
-------- --------
Total Stockholders' Equity 7,452 5,867
-------- --------
Total Liabilities and Stockholders' Equity $33,103 $31,581
======== ========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(000's OMITTED, except per share data)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
------------------
2011 2010
REVENUES -------- --------
Product sales - net $ 1,776 $ 2,660
Service and repair fees - net 2,905 2,689
Service and repair fees - related parties - net 27 55
Management and other fees - net 3,329 2,088
Management and other fees - related medical
practices - net 1,571 1,193
-------- --------
Total Revenues - Net 9,608 8,685
-------- --------
COSTS AND EXPENSES
Costs related to product sales 1,475 2,506
Costs related to service and repair fees 813 665
Costs related to service and repair
fees - related parties 8 14
Costs related to management and other fees 2,185 1,313
Costs related to management and other
fees - related medical practices 819 739
Research and development 329 454
Selling, general and administrative 2,043 2,383
Provision for bad debts 175 176
-------- --------
Total Costs and Expenses 7,847 8,250
-------- --------
Income From Operations 1,761 435
Interest Expense (107) (94)
Interest Expense - Related Parties - (4)
Investment Income 62 38
Interest Income - Related Party - 1
Other Income 56 9
-------- --------
Net Income 1,772 385
Net Income - Non Controlling Interests (259) -
-------- --------
Net Income - Controlling Interests $ 1,513 $ 385
======== ========
Net Income Available to Common Stockholders $ 1,409 $ 363
======== ========
Net Income Available to Class A Non-Voting
Preferred Stockholders $ 78 $ 22
======== ========
Net Income Available to Class C Common Stockholders $ 27 $ 7
======== ========
Basic Net Income Per Common Share Available
to Common Stockholders $ 0.25 $ 0.07
======== ========
Diluted Net Income Per Common Share Available
to Common Stockholders $ 0.24 $ 0.07
======== ========
Basic and Diluted Income Per Share - Common C $ 0.07 $ 0.02
======== ========
Weighted Average Basic Shares Outstanding 5,668,762 5,012,245
========= =========
Weighted Average Diluted Shares Outstanding 5,796,266 5,139,749
========= =========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(000'S OMITTED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
------------------
2011 2010
-------- --------
Net income $ 1,772 $ 385
Other comprehensive (loss) income, net of tax:
Unrealized (losses) gains on marketable securities,
net of tax (5) 4
-------- --------
Total comprehensive income $ 1,767 $ 389
======== ========
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,
------------------
2011 2010
-------- --------
Cash Flows from Operating Activities:
Net income $ 1,772 $ 385
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 525 279
Provision for bad debts 175 176
Stock issued for costs and expenses 104 76
Compensatory element of stock issuances - 112
(Increase) decrease in operating assets, net:
Accounts, management fee and medical receivable(s) 66 (221)
Notes receivable 14 -
Costs and estimated earnings in excess of
billings on uncompleted contracts (387) (947)
Inventories (1,417) 291
Prepaid expenses and other current assets (73) 37
Other assets (14) (7)
Advances and notes to related medical practices - 41
Increase (decrease) in operating liabilities, net:
Accounts payable (67) (338)
Other current liabilities 727 1,463
Customer advances (1,208) 552
Billings in excess of costs and estimated
earnings on uncompleted contracts 813 (1,451)
Other liabilities (4) 10
Due to related medical practices 2 (300)
-------- --------
Net cash provided by operating activities 1,028 158
-------- --------
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,
------------------
2011 2010
-------- --------
Cash Flows from Investing Activities:
Purchases of property and equipment (116) -
Costs of capitalized software development - (24)
Cost of patents (39) (27)
-------- --------
Net cash used in investing activities (155) (51)
-------- --------
Cash Flows from Financing Activities:
Repayment of borrowings and capital
lease obligations (326) (155)
Distributions to non controlling interests (288) -
Repayment of notes receivable from employee
stockholders 2 2
-------- --------
Net cash used in financing activities (612) (153)
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 261 (46)
Cash and Cash Equivalents - Beginning of Period 9,251 1,299
-------- --------
Cash and Cash Equivalents - End of Period $ 9,512 $ 1,253
======== ========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(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, 2011, are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30, 2012. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K filed on
September 30, 2011 for the fiscal year ended June 30, 2011.
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.
Management's plans include focusing its efforts on increased marketing
campaigns, which management believes 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, Imperial Management Services LLC ("Imperial") has focused 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. The Company is planning to raise
additional capital through obtaining financing in the capital market. 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 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, 2011
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION & LIQUIDITY & CAPITAL RESOURCES (Continued)
Liquidity and Going Concern (Continued)
---------------------------
Although the Company has experienced six consecutive fiscal quarters of
profitability, we previously had a history of operating losses and negative cash
flows from operating activities. We had a stockholders deficiency as recently as
the fourth fiscal quarter of fiscal 2011, until we completed a private placement
of $6 million on May 2, 2011. In the event that we are unable to sustain our
current profitability or are otherwise unable to secure external financing, we
may not be able to meet our obligations as they come due, raising substantial
doubts as to our ability to continue as a going concern. Our condensed
consolidated financial statements, which have been prepared in accordance with
generally accepted accounting principles, contemplate that we will continue as a
going concern and do not contain any adjustments that might result if we were
unable to continue as a going concern. Changes in our operational plans, our
existing and anticipated working capital needs, the acceleration or modification
of our business plans, lower than anticipated revenues, increased expenses,
potential acquisitions or other events will all affect our ability to continue
as a going concern.
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
used the Two-Class method for calculating basic earnings per share and applied
the if converted method in calculating diluted earnings per share for the three
months ended September 30, 2011 and September 30, 2010.
Diluted EPS reflects the potential dilution from the exercise or conversion of
all dilutive securities into common stock based on the average market price of
common shares outstanding during the period. For the three months ended
September 30, 2011 and September 30, 2010, the number of common shares
potentially issuable upon the exercise of certain options of 20,000 and 68,000;
respectively, 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, 2011
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share (Continued)
-------------------------
Three months ended Three months ended
September 30, 2011 September 30, 2010
---------------------- ----------------------
(000's omitted, except per share data)
Class C Class C
Common Common Common Common
Total Stock Stock Total Stock Stock
Basic ------ ------ ------ ------ ------ ------
-----
Numerator:
Net income available to
common stockholders $1,409 $1,409 $ 27 $ 363 $ 356 $ 7
====== ====== ====== ====== ====== ======
Denominator:
Weighted average shares
outstanding 5,669 5,669 383 5,012 5,012 383
====== ====== ====== ====== ====== ======
Basic income per common share $0.27 $0.25 $0.07 $ 0.07 $ 0.07 $ 0.02
====== ====== ====== ====== ====== ======
Diluted
-------
Denominator:
Weighted average shares
outstanding 5,669 383 5,012 383
Stock options - - - -
Convertible Class C Stock 128 - 128 -
------ ------ ------ ------
Total Denominator for diluted
earnings per share 5,797 383 5,140 383
====== ====== ====== ======
Diluted income per
common share $ 0.24 $ 0.07 $ 0.07 $ 0.02
====== ====== ====== ======
Recent Accounting Pronouncements
--------------------------------
In June 2011, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update (ASU) No. 2011-05, Comprehensive Income (Topic 220):
Presentation of Comprehensive Income. This guidance improves the comparability,
consistency and transparency of financial reporting and increases the prominence
of items reported in other comprehensive income. The guidance provided by this
update becomes effective for annual periods beginning on or after December 15,
2011. The adoption of this standard is not expected to have a material impact on
the Company's condensed consolidated financial position and results of
operations.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------
FASB, the Emerging Issues Task Force and the SEC have issued certain other
accounting standards, updates, and regulations as of June 30, 2011 that will
become effective in subsequent periods; however, management does not believe
that any of those updates would have significantly affected our financial
accounting measures or disclosures had they been in effect during 2011 or 2010,
and it does not believe that any of those pronouncements will have a significant
impact on our consolidated financial statements at the time they become
effective.
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the current
year presentation. The reclassifcations did not have any effect on reported
consolidated net income (losses) for any periods presented.
NOTE 3 - ACCOUNTS RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE
Accounts Receivable and Management and Other Fees Receivable
------------------------------------------------------------
Receivables, net is comprised of the following at September 30, 2011:
(000's Omitted)
Gross Allowance for
Receivable doubtful accounts Net
---------- ----------------- ----------
Receivables from equipment
sales and service contracts $ 6,479 $ 1,778 $ 4,701
========== ================= ==========
Receivables from equipment
sales and service contracts-
related party $ 90 $ - $ 90
========== ================= ==========
Management and other fees
receivables $ 10,179 $ 6,683 $ 3,496
========== ================= ==========
Management and other fees
receivables from related
medical practices ("PC's") $ 2,117 $ 403 $ 1,714
========== ================= ==========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
NOTE 3 - ACCOUNTS RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE
(Continued)
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.
Payment of the management fee receivables from the PC's may be impaired by the
inability of the PC's to collect in a timely manner their medical fees from the
third party payors, particularly insurance carriers covering automobile no-
fault and workers compensation claims due to longer payment cycles and rigorous
informational requirements and certain other disallowed claims. Approximately
55% and 47% of the PCs' net revenues for the three months ended September 30,
2011 and 2010, respectively, were derived from no-fault and personal injury
protection claims. The Company considers the aging of its accounts receivable in
determining the amount of allowance for doubtful accounts. The Company
generally takes all legally available steps to collect its receivables. Credit
losses associated with the receivables are provided for in the condensed
consolidated financial statements and have historically been within
management's expectations.
Net revenues from management and other fees charged to the related PCs accounted
for approximately 16.4% and 13.7% of the consolidated net revenues for the three
months ended September 30, 2011 and 2010, 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.
NOTE 4 - INVENTORIES
Inventories included in the accompanying condensed consolidated balance sheet
consist of the following:
(000's omitted)
September 30, June 30,
2011 2011
------------ ---------
Purchased parts, components
and supplies $ 3,059 $ 1,818
Work-in-process 758 582
------- -------
$ 3,817 $ 2,400
======= =======
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
1) Information relating to uncompleted contracts as of September 30,
2011 is as follows:
(000's omitted)
Costs incurred on uncompleted
contracts $ 2,262
Estimated earnings 949
--------
3,211
Less: Billings to date 3,471
--------
$ (260)
========
Included in the accompanying condensed consolidated balance sheet at September
30, 2011 under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 557
Less: Billings in excess of costs and estimated
earnings on uncompleted contracts 817
--------
$(260)
========
2) Customer advances consist of the following as of September 30, 2011:
Related
Total Party Other
-------- -------- -------
Total Advances $ 7,109 $ -- $ 7,109
Less: Advances
on contracts under construction 3,471 -- 3,471
-------- -------- --------
$ 3,638 $ -- $ 3,638
======== ======== =======
NOTE 6 - STOCKHOLDERS EQUITY
Common Stock
------------
During the three months ended September 30, 2011:
a) The Company issued 52,600 shares of common stock for costs and expenses of
$104,276.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
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,
2011 2011
--------- ---------
Accrued salaries, commissions
and payroll taxes $ 643 $ 839
Accrued interest 156 157
Litigation accruals 193 193
Sales tax payable 2,733 2,732
Legal and other professional fees 663 694
Accounting fees 427 435
Insurance premiums 61 22
Interest and penalty - sales tax 1,968 1,923
Penalty - 401k plan (see Note 10) 250 250
Purchase scanners 1,380 105
Rent 445 461
Other 345 425
--------- ---------
$ 9,264 $ 8,236
========= =========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
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, 2011. 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 September 30, 2011:
Net revenues from external customers $ 4,708 $ 4,900 $ 9,608
Inter-segment net revenues $ 202 $ - $ 202
Income from operations $ 751 $ 1,010 $ 1,761
Depreciation and amortization $ 175 $ 350 $ 525
Capital expenditures $ 39 $ 116 $ 155
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
NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION
During the three months ended September 30, 2011 and September 30, 2010, the
Company paid $64,000 and $51,000 for interest, respectively.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Litigation
----------
The Company is subject to legal proceedings and claims arising from the ordinary
course of its business, including personal injury, customer contract and
employment claims. In the opinion of management, the aggregate liability, if
any, with respect to such actions, will not have a material adverse effect on
the consolidated financial position or results of operations of the Company.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
----------
There were no material changes in litigation from that reported in our Form 10-
K for the fiscal year ended June 30, 2011. 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 Company made a motion to dismiss the plaintiff's
amended complaint, which was granted, leaving only the cause of action for
breach of contract. The claims against the individual officers and employees
were also dismissed. The Company filed its answer to the complaint, together
with a counterclaim alleging the plaintiff, by attempting to overcharge the end
customer, has damaged the Company's reputation and ability to sell in Kuwait. In
the Matt Malek Madison v. Fonar case (U.S. District Court, Northern District of
California), Fonar is appealing the judgment.
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, 2011, the
Company has recorded tax obligations of approximately $2,397,000 plus interest
and penalties of approximately $1,968,000. 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. The amount was 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. On August
31, 2011, the Company submitted with the Internal Revenue Service a request for
a compliance statement and a determination letter for our 401K plan.
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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
NOTE 11 - INCOME TAXES (Continued)
In accordance with ASC topic 740, interest costs related to unrecognized tax
benefits are required to be calculated (if applicable) and would be classified
as "Interest expense, net". Penalties if incurred would be recognized as a
component of "Selling, general and administrative" expenses.
The Company files corporate income tax returns in the United States (federal)
and in various state and local jurisdictions. In most instances, the Company is
no longer subject to federal, state and local income tax examinations by tax
authorities for years prior to 2006.
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, 2011, 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.
The Company recognized a net deferred tax asset of $605,460 and a deferred tax
liability of $605,460 as of September 30, 2011, primarily relating to net
operating loss carryforwards of approximately $163,661,000 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, 2011 through October 31, 2011, the Company
issued 45,200 shares of common stock for costs and expenses of $76,840 under the
2010 Stock Bonus Plan.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
For the three month period ended September 30, 2011, we reported a net
income of $1.8 million on revenues of $9.6 million as compared to net income of
$385,000 on revenues of $8.7 million for the three month period ended September
30, 2010. We recognized an operating income of $1.8 million for the three month
period ended September 30, 2011 compared to an operating income of $435,000 for
the three month period ended September 30, 2010. The principal reasons for the
increase in net income in the first three months of fiscal 2012 as compared to
our net income for the first three months of fiscal 2011 were that during fiscal
2012, there was an increase in revenues for management and other fees and
service and repair fees along with a decrease in costs and expenses,
particularly in cost related to product sales and selling, general and
administrative expenses.
Overall, our revenues increased 10.6% from $8.7 million for the first three
months of fiscal 2011 to $9.6 million for the first three months of fiscal 2012.
Although revenues from service and repair fees increase by 6.9% from $2.7
million from the first three months of fiscal 2011 to $2.9 million for the first
three months of fiscal 2012, product sales decreased $33.2%, from $2.7 million
for the first three months of 2011 to $1.8 million for the first three months of
fiscal 2012. Also, management fees increased by 49.3% from $3.3 million for the
first three months of fiscal 2011 to $4.9 million for the first three months of
fiscal 2012.
Due to the increase in our revenues and the decrease in our costs and
expenses, we recognized an operating income for the three months ended September
30, 2011 of $1.8 million as compared to an operating income of $435,000 for the
three months ended September 30, 2010. The increase in the operating income was
principally due to the decrease in costs and expenses of 4.9%, from $8.3 million
in the first three months of fiscal 2011 to $7.8 million in the first three
months of fiscal 2012, and an increase of revenues of 10.6%, from $8.7 million
in the first three months of fiscal 2011 to $9.6 million in the first three
months of fiscal 2012.
During fiscal 2012, we continued to recognize benefits from the cost
cutting measures we adopted in January 2010, when we made 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
diagnostic facility management revenues.
These cost controls, combined with out intensive efforts to increase our
management fees and the addition of a new billing and collection contract in
particular in fiscal 2011, are responsible for our profitability during the
first three months of September 30, 2011.
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 by
Fonar's wholly-owned subsidiary, Health Management Corporation of America
("HMCA") and HMCA's subsidiary, Imperial Management Services LLC, which
together, we also refer to as HMCA-IMPERIAL.
In May 2011, HMCA contributed all of its assets, liabilities and business
to Imperial which is controlled but not wholly-owned by HMCA. Imperial is
continuing the business of HMCA utilizing the same facilities, equipment and
personnel as HMCA. This transaction did not result in a change of control or
policy, but was solely a means to raise capital. To avoid confusion in making
comparisons and to show the continuity of the business, our physician management
and diagnostic services segment is sometimes referred to as "HMCA- IMPERIAL" for
both periods before and after May 2, 2011.
Trends in the first quarter of fiscal 2012 include an increase in
management and service fee revenues, which more than offset the decline in
product sales revenues. In addition, we experienced a decrease in our total
costs and expenses, in particular in our selling, general and administrative
costs, which declined by 14.3% from $2.4 million for the first three months of
fiscal 2011 to $2.0 million for the first three months of fiscal 2012. Also
costs related to product sales decreased 41.1% from $2.5 million for the first
three months of fiscal 2011 to $1.5 million for the first three months of fiscal
2012 which corresponds to the decrease in product sales. We will continue to
focus on our marketing efforts to improve sales performance and increase patient
volume at the MRI facilities managed by HMCA-IMPERIAL in fiscal 2012. 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, 2011, as compared to the
three month period ended September 30, 2010 overall revenues from MRI product
sales decreased 33.2% ($1.8 million compared to $2.7 million).
Service revenues for the three month period ended September 20, 2011 as
compared to the three month period ended September 30, 2010 increased 6.9% (2.9
million compared to $2.7 million). Unrelated party service and repair fees also
increased from $2.7 million to $2.9 million and related party service and
repair fees decreased from $55,000 to $27,000.
There were approximately $279,000 in foreign revenues for the first three
months of fiscal 2012 as compared to approximately $1.1 million in foreign
revenues for the first three months of fiscal 2011, representing a decrease in
foreign revenues of 74.6%. 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 2012, revenues for the
medical equipment segment decreased by 12.9% to $4.7 million from $5.4 million
for the first three months of fiscal 2011. The revenues generated by HMCA-
IMPERIAL increased by 49.3%, to $4.9 million for the first three months of
fiscal 2012 as compared to $3.3 million for the first three months of fiscal
2011. This trend reflects an increase in the percentage of our revenues derived
from our diagnostic facilities management segment (51% for the first three
months of fiscal 2012 as compared to 38% for the first three months of fiscal
2011). The increase in HMCA-IMPERIAL revenues was the result of our increased
marketing efforts for the scanning centers.
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 from a scanner sale is recognized in a fiscal quarter or quarters
following the quarter in which the sale was made.
Costs related to product sales decreased from $2.5 million in the first
quarter of fiscal 2011 to $1.5 million in the first quarter of 2012 resulting
from a decrease in the manufacturing activity.
Costs related to providing service for the first quarter increased by 20.9%
from $679,000 in the first quarter of fiscal 2011 to $821,000 in fiscal 2012,
notwithstanding service revenues increased from $2.7 million in the first
quarter of fiscal 2011 to $2.9 million in the first quarter of fiscal 2012. 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 $751,000 for the first quarter of fiscal 2012 as
compared to an operating income of $18,000 for the first quarter of 2011.
HMCA-IMPERIAL revenues increased in the first quarter of fiscal 2012 by
49.3% to $4.9 million from $3.3 million for the first quarter of fiscal 2011,
primarily due to increased revenues from our New York locations. Part of this
increase in revenues was due to HMCA's acquisition of Fair Haven Services, Inc.
("Fairhaven") from Dr. Raymond V. Damadian, the President, Chairman of the Board
and principal stockholder of the Company as of October 1, 2010. Fairhaven is the
Company which leases the MRI scanners to the New York sites managed by
HMCA-IMPERIAL. Also contributing to the increase in revenue is the increase in
management and other fees which was due to renegotiating the annual contracts
along with the acquisition of a new billing and collection contract with Health
Diagnostics LLC.
We now manage ten sites all of which are equipped with FONAR UPRIGHT(R) MRI
scanners. HMCA-IMPERIAL experienced an operating income of $1.0 million for the
first three months of fiscal 2012 compared to operating income of $418,000 for
the first three months of fiscal 2011. The greater operating income was due
primarily to an increase in the management and other fees which increased due to
renegotiating the annual contracts, and the acquisition of a new billing and
collection contract.
HMCA-IMPERIAL cost of revenues for the first three months of fiscal 2011 as
compared to the first three months of fiscal 2012 increased by 46.4% from $2.1
million to $3.0 million. The increase in HMCA-IMPERIAL'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 along with the acquisition of 50 % interest in an MRI center located
in the New York Metropolitan Area.
The increase in our consolidated net revenues of 10.6% from $8.7 million in
the first quarter of fiscal 2011 to $9.6 million in the first quarter of fiscal
2012 was coupled by a decrease of 4.9% in total costs and expenses from $8.3
million in the first quarter of fiscal 2011 compared to $7.8 million in the
first quarter of fiscal 2012. As a result, our income from operations of
$435,000 in the first quarter of fiscal 2011 increased to $1.8 million in the
first quarter of fiscal 2012.
Selling, general and administrative expenses decreased by 14.3% to $2.0
million in the first three months of fiscal 2012 from $2.4 million in the first
three months of fiscal 2011. The compensatory element of stock issuances, which
is included in selling, general and administrative expenses, was $0 for the
first three months of fiscal 2012 as compared to $112,039 for the first three
months of fiscal 2011.
Research and development expenses decreased by 27.5% to $329,000 for the
first three months of fiscal 2012 as compared to $454,000 for the first three
months of fiscal 2011.
Interest expense in the first three months of fiscal 2011 increased to
$107,000 compared to $98,000 for the first three months of fiscal 2011.
Inventories increased by 59% to $3.8 million at September 30, 2011 as
compared to $2.4 million at June 30, 2011 representing the purchase of raw
materials and components in our inventory to fill orders.
Management fee receivables increased by 4.7% to $5.2 million at September
30, 2011 from $5.0 million and at June 30, 2011, primarily due to renegotiated
management fee contracts with an unrelated party a new billing and collection
contract and the purchase of the stock of Fair Haven Services and a 50% interest
in a site in New York.
The overall trends reflected in the results of operations for the first
three months of fiscal 2012 are an increase in revenues from management and
other fees, as compared to the first three months of fiscal 2011 ($4.9 million
for the first three months of fiscal 2012 as compared to $3.3 million for the
first three months of fiscal 2011), and an decrease in MRI equipment segment
revenues both absolutely ($4.7 million as compared to $5.4 million) and as
compared to HMCA. Revenues were $4.7 million or 49% from the MRI equipment
segment as compared to $4.9 million or 51% from HMCA, for the first three months
of fiscal 2012, as compared to $5.4 million or 62.2% from the MRI equipment
segment and $3.3 million or 37.8%, from HMCA, for the first three months of
fiscal 2011. Unrelated party sales constituted 100% of our medical equipment
product sales for both the first three months of fiscal 2012 and of fiscal 2011.
On March 23, 2010, President Obama signed into law healthcare reform
legislation in the form of the Patient Protection and Affordable Care Act
(PPACA). The implementation of this law could have a profound impact on the
healthcare industry. Most of the provisions of PPACA will be phased in over the
next four years. In 2011, however, the House of Representatives voted to repeal
PPACA; the Senate, however, narrowly defeated the bill to repeal the Act. Over
half the States have brought or joined lawsuits challenging the Act and two
federal district courts have declared the Act unconstitutional in whole or in
part. It is expected that the Supreme Court will decide the issue during its
current term (within the year). To date, PPACA has not had any material effect
on our business, and it is not possible in the current legal and political
environment to determine the impact of any health reform regulation which
ultimately may be adopted.
We are committed to improving the operating results we experienced in the
first three months in fiscal 2012. 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.
Fonar recently announced a major diagnostic breakthrough in multiple
sclerosis achieved with advanced UPRIGHT(R) MRI. In a newly published paper,
medical researchers at FONAR report a diagnostic breakthrough in multiple
sclerosis (MS), based on observations made possible by the Company's unique
FONAR UPRIGHT(R) Multi-Position(TM) MRI scanner. The findings reveal that the
cause of multiple sclerosis may be biomechanical and related to earlier trauma
to the neck, which can result in obstruction of the flow of cerebrospinal fluid
(CSF), which is produced and stored in the central anatomic structures of the
brain known as the ventricles. Since the ventricles produce a large volume of
CSF each day (500 cc), the obstruction can result in a build up of pressure
within the ventricles, resulting in leakage of the CSF into the surrounding
brain tissue. This leakage could be responsible for generating the brain lesions
of multiple sclerosis. The paper, titled "The Possible Role of Cranio-Cervical
Trauma and Abnormal CSF Hydrodynamics in the Genesis of Multiple Sclerosis," has
just been published and appears in the latest issue of the journal Physiological
Chemistry and Physics and Medical NMR (Sept. 20, 2011, 41: 1-17). 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.
Most recently a combined study of 1,200 neck pain patients published in
"Brain Injury" (July 2010: 24(7-8): 988-944) by 8 university medical centers
reported that cerebellar tonsil ectopia (CTE) 1mm or greater was found and
visualized 2.5 times (250%) more frequently when patients who had sustained MVA
whiplash injuries were scanned upright rather than lying down (recumbent).
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
Cash, cash equivalents and marketable securities increased by 2.8% from
$9.3 million at June 30, 2011 to $9.5 million at September 30, 2011. Marketable
securities approximated $28,000 as of September 30, 2011, as compared to $33,000
at June 30, 2011.
Cash provided by operating activities for the first three months of fiscal
2012 was $1.0 million. Cash provided by operating activities was attributable to
net income of $1.8 million, an increase in billings in excess of costs and
estimated earnings on uncompleted contracts of $813,000, an increase in other
current liabilities of $727,000, offset by a decrease of customer advances of
$1.2 million and an increase in inventories of $1.4 million.
Cash provided by investing activities for the first three months of fiscal
2012 was $155,000. The principal source of cash provided by investing activities
during the first three months of fiscal 2012 consisted mainly of capitalized
software and patent costs of $39,000 and purchase of property and equipment of
$116,000.
Cash used in financing activities for the first three months of fiscal 2012
was $612,000. The principal uses of cash in financing activities during the
first three months of fiscal 2012 consisted of repayment of principal on long-
term debt and capital lease obligations of $326,000 and distributions to non
controlling interests of $288,000.
Total liabilities remained constant at 25.7 million at September 30, 2011
and at June 30, 2011. We experienced an increase in other current liabilities
from $8.2 million at June 30, 2011 to $9.2 million at September 30, 2011 along
with an increase in billings in excess of costs and estimated earnings on
uncompleted contracts from $4,000 at June 30, 2011 to $817,000 at September 30,
2011, offset by a decrease in accounts payable from $2.3 million at June 30,
2011 to $2.2 million at September 30, 2011, along with a decrease in customer
advances from $4.8 million at June 30, 2011 to $3.6 million at September 30,
2011. Unearned revenue on service contracts decreased to $5.5 million at
September 30, 2011 as compared to $5.8 million at June 30, 2011.
As of September 30, 2011, the total of $9.3 million in other current
liabilities included accrued salaries and payroll taxes of $643,000, sales taxes
of $2.7 million, sales tax interest and penalties of $2.0 million and balances
due on our purchases of pre-owned Upright(R) MRI scanners for refurbishing and
resale.
Our working capital increased to $1.3 million a September 30, 2011 from
working capital deficit of $575,000 at June 30, 2011. This resulted from an
increase in current assets ($22.6 million at June 30, 2011 as compared to $24.5
million at September 30, 2011) particularly an increase in inventories of $1.4
million ($2.4 million at June 30, 2011 as compared to $3.8 million at September
30, 2011), and a decrease of accounts receivable of $563,000 ($5.3 million at
June 30, 2011 as compared to $4.7 million at September 30, 2011) along with
current liabilities remaining constant at $23.1 million at June 30, 2011 and
September 30, 2011.
Fonar has not committed to making any significant capital expenditures in
the 2012 fiscal year.
Critical to our business plan are improvement and expansion of the MRI
facilities managed by our subsidiary HMCA-IMPERIAL, and increasing the number of
scans performed at those facilities. In addition, 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.
The Company continues to focus its efforts on increased marketing campaigns
to strengthen the demand for its products and services. Management is seeking to
promote wider market recognition of Fonar's scanner products, and increase
demand for Upright(R) scanning at the facilities HMCA-IMPERIAL manages. Given
the liquidity and credit constraints in the markets, the sale of medical
equipment has and may continue to suffer. There can be no assurance that the
Company would be able to secure additional funds in the event such funds were
needed on terms and conditions acceptable to the Company. In such case, further
reduction in operating expenses might need to be implemented in order for the
Company to generate positive cash flow to sustain the operations of the Company.
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 continue to
increase through the Company's vigorous marketing efforts and the installation
of more HMCA managed Upright(R) MRI scanners. If we are not successful with our
marketing efforts 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.
Although the Company has experienced six consecutive fiscal quarters of
profitability, we previously had a history of operating losses and negative cash
flows from operating activities. We had a stockholders deficiency as recently as
the fourth fiscal quarter of fiscal 2011, until we completed a private placement
of $6 million on May 2, 2011. In the event that we are unable to sustain our
current profitability and working capital surplus, and are unable to secure
external financing, we may not be able to meet our obligations as they come due,
raising substantial doubts as to our ability to continue as a going concern. Our
consolidated financial statements, which have been prepared in accordance with
generally accepted accounting principles, contemplate that we will continue as a
going concern and do not contain any adjustments that might result if we were
unable to continue as a going concern. Changes in our operational plans, our
existing and anticipated working capital needs, the acceleration or modification
of our business plans, lower than anticipated revenues, increased expenses, or
other events may all affect our ability to continue as a going concern.
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 three months ended September 30, 2011, 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, 2011.
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, 2011, 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, 2011. 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 Company made a
motion to dismiss the plaintiff's amended complaint, which was granted,
leaving only the cause of action for breach of contract. The claims against
the individual officers and employees were also dismissed. Fonar filed its
answer to the complaint, together with a counterclaim alleging the
plaintiff, by attempting to overcharge the end customer, has damaged
Fonar's reputation and ability to sell in Kuwait. In the Matt Malek Madison
v. Fonar case (U.S. District Court, Northern District of California), Fonar
is appealing the judgment.
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 31.1 and 32.1
Reports on Form 8-K: None
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 14, 2011