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, 2008
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-10248
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FONAR CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 11-2464137
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110 Marcus Drive Melville, New York 11747
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 694-2929
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES _X_ NO ___
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. 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, 2008
----------------------------------------- -------------------------------
Common Stock, par value $.0001 4,904,275
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, 2008
(Unaudited) and June 30, 2008
Condensed Consolidated Statements of Operations for
the Three Months Ended September 30, 2008 and
September 30, 2007 (Unaudited)
Condensed Consolidated Statements of Comprehensive
Loss for the Three Months Ended
September 30, 2008 and September 30, 2007 (Unaudited)
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended September 30, 2008 and
September 30, 2007 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
Signatures
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
ASSETS September 30, June 30,
2008 2008
(UNAUDITED)
Current Assets: ----------- -----------
Cash and cash equivalents $ 4,391 $ 1,326
Marketable securities 24 1,068
Accounts receivable - net 4,331 4,689
Accounts receivable - related parties -net 845 469
Medical receivables - net 1,111 1,228
Management fee receivable - net 3,893 5,040
Management fee receivable - related
medical practices - net 1,348 1,372
Costs and estimated earnings in excess
of billings on uncompleted contracts - 6
Inventories 3,202 3,256
Current portion of advances and notes to related
medical practices 188 214
Current portion of notes receivable less discount
for below market interest 490 2,508
Prepaid expenses and other current assets 755 811
----------- -----------
Total Current Assets 20,578 21,987
----------- -----------
Property and equipment - net 3,667 3,933
Advances and notes to related medical practices - net 222 263
Notes receivable less discount for below market interest 2,171 2,297
Other intangible assets - net 4,849 4,810
Other assets 1,912 1,936
----------- -----------
Total Assets $ 33,399 $ 35,226
=========== ===========
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 2008 2008
(UNAUDITED)
Current Liabilities: ----------- -----------
Current portion of long-term debt and
capital leases $ 212 $ 373
Accounts payable 4,238 4,020
Other current liabilities 8,038 8,316
Unearned revenue on service contracts 4,019 4,732
Unearned revenue on service
contracts - related parties 725 462
Customer advances 11,784 12,804
Customer advance - related party 1,472 1,472
Billings in excess of costs and estimated
earnings on uncompleted contracts 6,118 5,773
----------- -----------
Total Current Liabilities 36,606 37,952
Long-Term Liabilities:
Due to related medical practices 93 98
Long-term debt and capital leases,
less current portion 813 757
Other liabilities 461 497
----------- -----------
Total Long-Term Liabilities 1,367 1,352
----------- -----------
Total Liabilities 37,973 39,304
----------- -----------
Minority interest 64 167
----------- -----------
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 2008 2008
(continued) (UNAUDITED)
----------- -----------
STOCKHOLDERS' DEFICIENCY:
Class A non-voting preferred stock $.0001 par value;
1,600,000 authorized, 313,451 issued and outstanding
at September 30, 2008 and June 30, 2008 - -
Common Stock $.0001 par value; 30,000,000 shares
authorized at September 30, 2008 and June 30, 2008,
4,915,918 issued at September 30, 2008 and June 30, 2008
4,904,275 outstanding at September 30, 2008
and June 30, 2008 1 1
Class B Common Stock $.0001 par value; 800,000
shares authorized, (10 votes per share), 158 issued
and outstanding at September 30, 2008 and June 30, 2008 - -
Class C Common Stock $.0001 par value; 2,000,000 shares
authorized, (25 votes per share), 382,513 issued
and outstanding at September 30, 2008 and June 30, 2008 - -
Paid-in capital in excess of par value 172,276 172,276
Accumulated other comprehensive loss ( 17) ( 73)
Accumulated deficit (175,830) (175,380)
Notes receivable from employee stockholders ( 393) ( 394)
Treasury stock, at cost - 11,643 shares of common stock
at September 30, 2008 and June 30, 2008 ( 675) ( 675)
----------- -----------
Total Stockholders' Deficiency ( 4,638) ( 4,245)
----------- -----------
Total Liabilities and Stockholders' Deficiency $ 33,399 $ 35,226
=========== ===========
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,
------------------------
2008 2007
REVENUES ----------- -----------
Product sales - net $ 1,413 $ 2,589
Service and repair fees - net 2,331 2,465
Service and repair fees - related parties - net 269 254
Management and other fees - net 2,047 1,885
Management and other fees - related medical
practices - net 724 1,476
----------- -----------
Total Revenues - Net 6,784 8,669
----------- -----------
COSTS AND EXPENSES
Costs related to product sales 1,442 2,811
Costs related to service and repair fees 925 1,190
Costs related to service and repair
fees - related parties 107 123
Costs related to management and other fees 1,203 1,089
Costs related to management and other
fees - related medical practices 656 947
Research and development 880 1,163
Selling, general and administrative 3,265 5,287
Provision for bad debts 154 165
----------- -----------
Total Costs and Expenses 8,632 12,775
----------- -----------
Loss From Operations ( 1,848) ( 4,106)
Interest Expense ( 79) ( 102)
Investment Income 33 180
Interest Income - Related Parties 6 9
Other Income 1 6
Minority Interest in Income of Partnerships ( 11) ( 162)
Gain on Sale of Investment - 571
Gain on Sale of Consolidated Subsidiary 1,448 3,395
----------- -----------
NET LOSS $ ( 450) $( 209)
=========== ===========
Basic and Diluted Loss Per Common Share $(.09) $(0.04)
=========== ===========
Weighted Average Number of Common
Shares Outstanding 4,904,275 4,884,207
=========== ===========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
(000'S OMITTED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
2008 2007
----------- -----------
Net loss $ ( 450) $ ( 209)
Other comprehensive income (loss) net of tax:
Unrealized gains (losses) on securities,
net of tax 55 ( 2)
----------- -----------
Total comprehensive loss $ ( 395) $ ( 211)
=========== ===========
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,
------------------------
2008 2007
----------- -----------
Cash Flows from Operating Activities
Net loss $ ( 450) $ ( 209)
Adjustments to reconcile net loss to
net used in operating activities:
Minority interest in income of partnerships 11 162
Depreciation and amortization 435 558
Gain on sale of consolidated subsidiary (1,448) (3,395)
Gain on sale of investment - ( 571)
Provision for bad debts 154 165
Stock issued for costs and expenses - 135
(Increase) decrease in operating assets, net:
Accounts, management fee and medical receivable(s) 198 (1,363)
Notes receivable 144 130
Costs and estimated earnings in excess of
billings on uncompleted contracts 6 ( 31)
Inventories 54 ( 310)
Prepaid expenses and other current assets 56 ( 255)
Other assets ( 9) ( 20)
Advances and notes to related medical practices 68 19
Increase (decrease) in operating liabilities, net:
Accounts payable 234 ( 625)
Other current liabilities ( 728) ( 373)
Customer advances ( 1,020) 1,080
Billings in excess of costs and estimated
earnings on uncompleted contracts 345 1,425
Other liabilities ( 36) ( 20)
Due to related medical practices ( 5) -
----------- -----------
Net used in operating activities ( 1,991) ( 3,498)
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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,
------------------------
2008 2007
----------- -----------
Cash Flows from Investing Activities:
Sales of marketable securities 1,099 50
Purchases of marketable securities - ( 765)
Purchases of property and equipment ( 1) ( 51)
Costs of capitalized software development ( 149) ( 187)
Cost of patents ( 60) ( 88)
Proceeds from note receivable 2,000 -
Proceeds from sale of investment - 571
Proceeds from sale of consolidated subsidiary 2,293 4,142
----------- -----------
Net cash provided by investing activities 5,182 3,672
----------- -----------
Cash Flows from Financing Activities:
Distributions to holders of minority interest ( 23) ( 95)
Repayment of borrowings and capital
lease obligations ( 104) ( 56)
Repayment of notes receivable from employee
stockholders 1 2
----------- -----------
Net cash used in financing activities ( 126) ( 149)
----------- -----------
Net Increase in Cash and Cash Equivalents 3,065 25
Cash and Cash Equivalents - Beginning of Period 1,326 1,470
----------- -----------
Cash and Cash Equivalents - End of Period $ 4,391 $ 1,495
=========== ===========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(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, 2008 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30, 2009. 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 7, 2008 for the fiscal year ended June 30, 2008.
Liquidity and Capital Resources
-------------------------------
In September 2008, the Company sold its 92.3% interest (to a related party) in
an entity that provided management services to a scanning center in Bensonhurst,
New York and received net cash proceeds of approximately $2.3 million.
In August 2008, the Company signed a modification agreement with regards to the
asset purchase agreement with Health Plus. The Company received a $2,000,000
payment on the note issued by Health Plus.
At September 30, 2008, the Company had a working capital deficit of
approximately $16.0 million and a stockholders' deficiency of approximately $4.6
million. For the three months ended September 30, 2008, the Company incurred a
net loss of approximately $450,000, which included non-cash charges of
approximately $589,000. The Company has funded its cash flow deficit for the
three months ended September 30, 2008 through cash provided by the sale of
marketable securities and other assets. In addition, during June 2008, the
Company implemented a restructuring program, including a reduction of its
workforce, across the board salary reductions, elimination of manufacturing
facilities and restructuring of its diagnostic imaging management service
business. Management estimates that the annualized savings related to these
cost-cutting measures approximates $5,000,000.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION & LIQUIDITY & CAPITAL RESOURCES (Continued)
Liquidity and Capital Resources (Continued)
-------------------------------------------
Although sales levels remained weak in fiscal 2008, the Company continues to
focus its efforts on increased advertising and marketing campaigns, and
distribution programs 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. If the Company is not successful with its marketing
efforts to increase sales and weak demand continues, the Company will experience
a shortfall in cash and it will be necessary to further reduce operating
expenses or obtain funds through equity or debt financing in sufficient amounts
to avoid the need to curtail operations subsequent to September 30, 2009.
Current economic credit conditions have contributed to a slowing business
environment. Given such liquidity and credit constraints in the markets, the
business may 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed consolidated financial statements include the accounts of FONAR
Corporation, its majority and wholly-owned subsidiaries and partnerships
(collectively the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Earnings (Loss) Per Share
Basic earnings (loss) per share ("EPS") is computed based on weighted average
shares outstanding and excludes any potential dilution. In accordance with EITF
03-6, "Participating Securities and the Two-Class method under FASB Statement
No. 128" ("EITF 03-6"), the Company's participating convertible securities,
which include Class B common stock and Class C common stock, are not included in
the computation of basic EPS for the three months ended September 30, 2008 and
2007, because the participating securities do not have a contractual obligation
to share in the losses of the Company.
Diluted EPS reflects the potential dilution from the exercise or conversion of
all dilutive securities into common stock based on the average market price of
common shares outstanding during the period. The number of common shares
potentially issuable upon the exercise of certain options and warrants or
conversion of the participating convertible securities that were excluded from
the diluted EPS calculation was approximately 267,000 and 279,000 because they
were antidilutive as a result of net losses for the three month periods ended
September 30, 2008 and 2007, respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
--------------------------------
In September 2006, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements," ("SFAS 157"). This statement provides a single definition of fair
value, a framework for measuring fair value, and expanded disclosures concerning
fair value. Previously, different definitions of fair value were contained in
various accounting pronouncements creating inconsistencies in measurement and
disclosures. SFAS 157 applies under those previously issued pronouncements that
prescribe fair value as the relevant measure of value, except SFAS No. 123
(revised 2004), "Share-Based Payment", and related interpretations and
pronouncements that require or permit measurement similar to fair value but are
not intended to measure fair value. The Company adopted SFAS 157 on July 1,
2008, as required for its financial assets and financial liabilities. However,
the FASB deferred the effective date of SFAS 157 for one year as it relates to
fair value measurement requirements for nonfinancial assets and nonfinancial
liabilities that are not recognized or disclosed at fair value on a recurring
basis. The adoption of SFAS 157 for the Company's financial assets and financial
liabilities did not have a material impact on its condensed consolidated
financial statements. The Company is evaluating the effect the implementation of
SFAS 157 for its nonfinancial assets and nonfinancial liabilities will have on
the Company's condensed consolidated financial statements.
Effective January 1, 2007, the Company adopted the provisions of FASB
Interpretation No. 48, "Accounting of Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
corporate tax return. For those benefits to be recognized, a tax position must
be more-likely-than-not to be sustained upon examination by taxing authorities.
Differences between tax positions taken or expected to be taken in a tax return
and the benefit recognized and measured pursuant to the interpretation are
referred to as "unrecognized benefits". A liability is recognized (or amount of
net operating loss carry forward or amount of tax refundable is reduced) for an
unrecognized tax benefit because it represents an enterprise's potential future
obligation to the taxing authority for a tax position that was not recognized as
a result of applying the provisions of FIN 48. In accordance with FIN 48,
interest costs related to unrecognized tax benefits are required to be
calculated (if applicable) and would be classified as "Interest expense, net".
Penalties if incurred would be recognized as a component of "General and
administrative" expenses. The Company files corporate income tax returns in the
United States (federal) and in various state and local jurisdictions. In most
instances, the Company is no longer subject to federal, state and local income
tax examinations by tax authorities for years prior to 2004. The adoption of the
provisions of FIN 48 did not have a material impact on the Company's
consolidated financial position and results of operations. As of September 30,
2008, no liability for unrecognized tax benefits was required to be recorded.
The Company recognized a deferred tax asset of approximately $76 million as of
September 30, 2008, primarily related to net operating loss carryforwards of
approximately $167 million, available to offset future taxable income through
2028.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements (Continued)
--------------------------------------------
On February 15, 2007, the FASB issued SFAS No. 159, entitled ``The Fair Value
Option for Financial Assets and Financial Liabilities,'' ("SFAS 159"). The
guidance in SFAS 159 ``allows'' reporting entities to ``choose'' to measure many
financial instruments and certain other items at fair value. The objective
underlying the development of this literature is to improve financial reporting
by providing reporting entities with the opportunity to reduce volatility in
reported earnings that results from measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions, using
the guidance in SFAS No. 133, as amended, entitled ``Accounting for Derivative
Instruments and Hedging Activities.'' The provisions of SFAS No. 159 are
applicable to all reporting entities and are effective as of the beginning of
the first fiscal year that begins subsequent to November 15, 2007. The Company
adopted SFAS 159 effective July 1, 2008. Upon adoption, the Company did not
elect the fair value option for any items within the scope of SFAS 159 and,
therefore, the adoption of SFAS 159 did not have an impact on the Company's
condensed consolidated financial statements.
In March 2007, the FASB ratified the Emerging Issues Task Force ("EITF")
consensus on EITF Issue No. 06-10. "Accounting for Collateral Assignment Split
Dollar Life Insurance". This EITF indicates that an employer should recognize a
liability for postretirement benefits related to collateral assignment split-
dollar life insurance arrangements. In addition, the EITF provides guidance for
the recognition of an asset related to a collateral assignment split-dollar life
insurance arrangement. The EITF is effective for fiscal years beginning after
December 15, 2007. The Company will adopt the EITF as required and management
does not expect it to have any impact on the Company's results of operations,
financial condition and liquidity.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS
141R"), which replaces SFAS No. 141, "Business Combinations". SFAS 141R
establishes principles and requirements for determining how an enterprise
recognizes and measures the fair value of certain assets and liabilities
acquired in a business combination, including noncontrolling interests,
contingent consideration, and certain acquired contingencies. SFAS 141R also
requires acquisition-related transaction expenses and restructuring costs be
expensed as incurred rather than capitalized as a component of the business
combination. SFAS 141R will be applicable prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. SFAS 141R would have
an impact on accounting for any businesses acquired after the effective date of
this pronouncement.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements (Continued)
-------------------------------------------
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary (previously referred to as minority interests). SFAS
160 also requires that a retained noncontrolling interest upon the
deconsolidation of a subsidiary be initially measured at its fair value. Upon
adoption of SFAS 160, the Company will be required to report its noncontrolling
interests as a separate component of stockholders' equity. The Company will also
be required to present net income allocable to the noncontrolling interest and
net income attributable to the stockholders of the Company separately in its
consolidated statements of income. Currently, minority interests are reported as
a liability in the Company's consolidated balance sheets and the related income
attributable to the minority interests is reflected as an expense in arriving at
net loss. SFAS 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. SFAS 160 requires
retroactive adoption of the presentation and disclosure requirements for
existing minority interests. All other requirements of SFAS 160 shall be applied
prospectively.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No 133" ("SFAS
No. 161"). SFAS No. 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under SFAS No.
133 and its related interpretations, and (c) how derivative instruments and
related hedged item affect an entity's financial position, financial performance
and cash flows. The guidance in SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. This Statement encourages, but does
not require, comparative disclosures for earlier periods at initial adoption.
The Company does not believe that the implementation of SFAS No. 161 will have
any impact on the Company's consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles". SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. It is effective 60 days following the SEC's approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, "The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles". The adoption of this statement in not expected to have a material
effect on the Company's consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements (Continued)
--------------------------------------------
In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, "Determining
the Fair Value of a Financial Asset in a Market That Is Not Active" ("FSP
157-3"), which clarifies the application of SFAS 157 when the market for a
financial asset is inactive. Specifically, FSP 157-3 clarifies how (1)
management's internal assumptions should be considered in measuring fair value
when observable data are not present, (2) observable market information from an
inactive market should be taken into account, and (3) the use of broker quotes
or pricing services should be considered in assessing the relevance of
observable and unobservable data to measure fair value. The guidance in FSP
157-3 is effective immediately and did not have a material impact on the
Company's condensed consolidated financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation. The reclassifcations did not have any effect on reported
consolidated net losses for any periods presented.
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, 2008 was $1,111,000.
As of September 30, 2008 and June 30, 2008, the Company recorded an allowance
for doubtful accounts of $789,500 and $769,000, respectively, on these
receivables.
Accounts Receivable and Management Fee Receivable
Receivables, net is comprised of the following at September 30, 2008:
(000's Omitted)
Gross Allowance for
Receivable doubtful accounts Net
---------- ----------------- ----------
Receivables from equipment sales
and service contracts $ 5,663 $ 1,332 $ 4,331
========== ================= ==========
Receivables from equipment sales
and service contracts - related
parties $ 1,464 $ 619 $ 845
========== ================= ==========
Management fee receivables $ 7,961 $ 4,068 $ 3,893
========== ================= ==========
Management fee receivables from
related medical practices ("PC's") $ 3,726 $ 2,378 $ 1,348
========== ================= ==========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
NOTE 3 - MEDICAL RECEIVABLES, ACCOUNTS RECEIVABLE AND MANAGEMENT FEE RECEIVABLE
(CONTINUED)
Medical Receivables (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.
As of June 22, 2007, an unrelated third party purchased the stock of the
professional corporations owning the eight New York sites managed by the
Company, previously owned by Dr. Raymond V. Damadian, the President, Chairman of
the Board and principal stockholder of Fonar. In connection with the sale, new
management agreements were substituted for the existing management agreements,
providing, however, for the same management services. The fees starting in
fiscal 2008, however, are currently fixed monthly fees in amounts ranging from
$45,000 to $125,000 per month. Dr. Damadian still owns the four MRI facilities
in Georgia and Florida managed by the Company. No MRI facilities or other
medical facilities are owned by the Company.
Collection by the Company of its management fee receivables may be impaired by
the uncollectibility of the PC's medical fees from third party payors,
particularly insurance carriers covering automobile no-fault and workers
compensation claims due to longer payment cycles and rigorous informational
requirements and certain other disallowed claims. Approximately 49% and 40% of
the PC's net revenues for both the three months ended September 30, 2008 and
2007, 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 P.C.'s
accounted for approximately 10.7% and 17.0% of the consolidated net revenues for
the three months ended September 30, 2008 and 2007, respectively. Product sales
and service repair fees from related parties amounted to approximately 4.0% and
2.9% of consolidated net revenues for the three months ended September 30, 2008
and 2007 respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
NOTE 3 - MEDICAL RECEIVABLES, ACCOUNTS RECEIVABLE AND MANAGEMENT FEE RECEIVABLE
(CONTINUED)
Medical Receivables (Continued)
HMCA entered into a management agreement in September 2007 with Integrity
Healthcare Management Inc ("Integrity"). Under the terms of the agreement,
Integrity provided the billings and collections for HMCA's facilities as well as
assist in the management of the facilities. Integrity was to receive as
compensation an annual fee equal to one-half of the increase in the consolidated
cash flow of HMCA and the facilities over the period from July 1, 2006 through
June 30, 2007. The original term of the agreement was one year with an automatic
year to year renewal, but may be terminated by either party without cause at the
end of any year. During June 2008, HMCA terminated the agreement and no
management fees were earned by Integrity. Integrity is a subsidiary of Health
Diagnostics, LLC. The director of Health Diagnostics, LLC, Timothy Damadian, is
a son of the President and Chief Executive Officer of Fonar, Dr. Raymond
Damadian. Commencing with June 2008, however, the Company hired Health
Diagnostics, LLC, the parent company of Integrity, to perform all billing and
collection procedures on its behalf. The Company has agreed to pay 6% of all
adjusted deposits for these services. Amounts charged to HMCA during the quarter
ended September 30, 2008 under this agreement totaled $308,586.
Unaudited Financial Information of Unconsolidated Managed Medical Practices
Audited financial information related to the unconsolidated related and
unrelated P.C.'s managed by the Company is not available. Substantially all of
these medical practices' books and records are maintained on a cash basis, they
depreciate their equipment on an accelerated tax basis and have a December 31
year end.
Summarized statement of operations data for the three months ended September 30,
2008 and 2007 related to the unconsolidated medical practices managed by the
Company is as follows:
(000's omitted) (Income Tax-Cash Basis)
For the three months ended September 30,
2008 2007
-------- --------
Patient Revenue - Net $4,181 $4,369
======== ========
Income (Loss) from Operations $ 16 $( 327)
======== ========
Net Loss $( 7) $( 472)
======== ========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
NOTE 4 - INVENTORIES
Inventories included in the accompanying condensed consolidated balance sheet
consist of the following:
(000's omitted)
September 30, June 30,
2008 2008
------------- ---------
Purchased parts, components and supplies $ 1,884 $ 1,847
Work-in-process 1,318 1,409
------- -------
$ 3,202 $ 3,256
======= =======
NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
1) Information relating to uncompleted contracts as of September 30, 2008 is
as follows:
(000's omitted)
Costs incurred on uncompleted contracts $ 3,677
Estimated earnings 1,483
--------
5,160
Less: Billings to date 11,278
--------
$(6,118)
========
Included in the accompanying condensed consolidated balance sheet at September
30, 2008 under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ -
Less: Billings in excess of costs and
estimated earnings on uncompleted contracts 6,118
--------
$(6,118)
========
2) Customer advances consist of the following as of September 30, 2008:
Related
Total Party Other
-------- -------- --------
Total Advances $ 24,534 $ 1,472 $ 23,062
Less: Advances
on contracts under construction 11,278 - 11,278
-------- -------- --------
$ 13,256 $ 1,472 $ 11,784
======== ======== ========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
NOTE 6 - OTHER CURRENT LIABILITIES
Other current liabilities in the accompanying condensed consolidated balance
sheet consist of the following:
(000's omitted)
September 30, June 30,
2008 2008
------------- ----------
Royalties $ 623 $ 623
Accrued salaries, commissions
and payroll taxes 1,114 901
Accrued interest 829 876
Litigation accruals 193 193
Sales tax payable 2,577 2,544
Legal and other professional fees 521 634
Accounting fees 262 503
Insurance premiums 389 410
Penalty - Sales tax 632 632
Penalty - 401k plan (see Note 11) 250 250
Other 648 750
------------- ----------
$ 8,038 $ 8,316
============= ==========
NOTE 7 - SALE OF CONSOLIDATED SUBSIDIARY AND INVESTMENT
Sale of Consolidated Subsidiary
On September 30, 2008, the Company sold its 92.3% interest (to a related party)
in an entity that provided management services to a diagnostic center in
Bensonhurst, NY. The Company continues to manage other diagnostic centers in the
New York region.
The related third party purchased all assets and assumed all liabilities of the
diagnostic center which included cash, the management fee receivable, furniture
and fixtures and other miscellaneous assets. The purchase price for the 92.3%
interest was $2,307,500 all of which was paid in cash at the time of closing.
The following is the calculation of the gain on sale of the 92.3% interest in a
consolidated subsidiary:
(000's omitted)
Selling Price - Net cash paid: $ 2,307
Assets and liabilities sold:
Cash $ 14
Management fee receivable - net 917
Property and equipment - net 1
Other assets 34
Accounts payable ( 16)
Minority interest ( 91)
Subtotal 859
Gain on sale of consolidated subsidiary $ 1,448
=======
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
NOTE 7 - SALE OF CONSOLIDATED SUBSIDIARY AND SALE OF INVESTMENT (CONTINUED)
Sale of Consolidated Subsidiary (Continued)
On July 31, 2007, the Company sold its 50% interest (to an unrelated third
party) in an entity that provided management services to a diagnostic center in
Orlando, FL. The Company continues to manage other diagnostic centers in the
Florida region.
The unrelated third party purchased all assets and assumed all liabilities of
the diagnostic center which included cash, the management fee receivable,
furniture and fixtures and other miscellaneous assets. The purchase price for
the 50% interest was $4,500,000 and after closing costs the amount received was
$4,257,000.
The following is the calculation of the gain on sale of the 50% interest in a
consolidated subsidiary:
(000's omitted)
Selling Price: $4,500
Less: Closing costs ( 243)
Selling Price - Net cash paid: 4,257
Assets sold:
Cash $ 114
Management fee receivable 1,166
Property and equipment - net 23
Other assets 15
Minority interest (456)
Subtotal 862
Gain on sale of consolidated subsidiary $3,395
========
Sale of Investment
On July 31, 2007, the Company sold its 20% equity interest in an unconsolidated
entity (management company for a diagnostic center) to an unrelated third party.
The selling price was $629,195. The Company realized a gain on the sale of the
equity interest of $571,161.
The gain was calculated as follows:
(000's omitted)
Selling Price: $ 629
Less: Closing costs ( 58)
Selling Price - Net cash paid 571
Cost Basis -
Gain on sale of investment $571
======
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(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, 2008. 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, 2008:
Net revenues from external customers $ 4,013 $ 2,771 $ 6,784
Inter-segment net revenues $ 272 $ - $ 272
(Loss) Income from operations $ (1,860) $ 12 $(1,848)
Depreciation and amortization $ 267 $ 168 $ 435
Capital expenditures $ 210 $ - $ 210
Identifiable assets $ 18,245 $ 15,154 $33,399
For the three months ended September 30, 2007:
Net revenues from external customers $ 5,308 $ 3,361 $ 8,669
Inter-segment net revenues $ 235 $ - $ 235
(Loss) Income from operations $ (4,185) $ 79 $(4,106)
Depreciation and amortization $ 330 $ 228 $ 558
Capital expenditures $ 275 $ 51 $ 326
Identifiable assets - June 30, 2008 $ 19,203 $ 16,022 $35,226
NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION
During the three months ended September 30, 2008 and September 30, 2007, the
Company paid $127,000 and $62,000 for interest, respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
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.
Other Matters
In March 2007, the Company and New York State taxing authorities conducted a
conference to discuss a sales tax matter to determine if certain sales
transactions are subject to sales tax withholdings. At the present time, such
discussions are ongoing and the Company cannot yet determine the outcome.
Management is of the belief the resolution of this matter will not materially
impact the consolidated financial statements. The Company has recorded a
provision of $250,000 to cover any potential tax liability including interest.
Such amount is the Company's best estimate of the tax liability. Management is
unable to determine the outcome of this uncertainty.
The Company is also delinquent in filing sales tax returns for certain states,
for which the Company has transacted business. As of September 30, 2008, the
Company has recorded tax obligations of approximately $1,940,000 plus interest
and penalties of approximately $1,320,000. The Company is in the process of
determining the regulatory requirements in order to become compliant.
The Company has determined they may not be in compliance with the Department of
Labor and Internal Revenue Service regulations concerning the requirements to
file Form 5500 to report activity of its 401(k) Employee Benefit Plan. The
filings do not require the Company to pay tax, however they may be subject to
penalty for non-compliance. The Company has recorded provisions for any
potential penalties totaling $250,000. Such amount is the Company's best
estimate of potential penalties. Management is unable to determine the outcome
of this uncertainty. The Company has engaged outside counsel to handle such
matters to determine the necessary requirements to ensure compliance. Such
non-compliance could impact the eligibility of the plan.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)
NASDAQ Notice of Non-compliance
-------------------------------
On July 8, 2008, the Company received a letter from The NASDAQ Stock Market LLC
indicating the Company was not in compliance with Marketplace Rules 4350(e) and
4350(g) due to the fact that it had not yet solicited proxies and held its
annual meeting for the fiscal year ended June 30, 2007. As a result, the notice
indicated that the Company's securities would be subject to delisting from The
NASDAQ Capital Market unless the Company requested a hearing before a NASDAQ
Listing Qualifications Panel. On July 15, 2008, the Company requested a hearing
with the NASDAQ Listing Qualifications Panel. The request was granted. The
hearing was held on August 28, 2008. At the hearing the Company's ability to
comply with NASDAQ's stockholders' equity requirement was raised and discussed.
Subsequent to the hearing and after the filing of the Form 10-K for fiscal 2008,
which showed a stockholder's deficiency, NASDAQ requested additional information
concerning the Company's plan to regain compliance with the stockholder's equity
requirement. An additional submission was made in writing on November 3, 2008.
Although no decision has yet been rendered, the Company has solicited proxies
and is scheduled to hold a joint two-year annual meeting on November 17, 2008.
The Company's stockholder's deficiency was $4.2 million as of June 30, 2008 and
$4.6 million as of September 30, 2008. The Company is in the process of seeking
equity financing in an amount which would be at least sufficient to meet
NASDAQ's stockholder's equity requirement. In the Company's submission
responding to NASDAQ's request for additional information relating to the
Company's plan to require compliance with NASDAQ's stockholders' equity
requirement, the Company requested an exception through January 15, 2009 to
evidence compliance with the minimum stockholders' equity requirement for
continued listing on the NASDAQ Capital Market. No decision has yet been
rendered.
NOTE 11 - NOTES RECEIVABLE
On August 8, 2008, the Company signed a modification agreement with regards to
the Asset Purchase Agreement with Health Plus. Under the modification agreement
Health Plus made a $2,000,000 principal payment on the promissory note in
exchange for a discount on the original note of $1,000,000.
The original promissory note ("Note") was modified to $2,378,130 payable in 60
consecutive months in equal installments of principal and interest of $47,090.
The Note is secured by a first lien on all of the assets of Health Plus,
including its accounts receivable and is subject to prepayment provisions to the
extent Health Plus resells all or part of the assets and business or utilizes
the assets sold as collateral in any debt financing. The note provides for
interest at 7% per annum. The Company recorded a change to earnings representing
the net discount on this note of $658,351 on this transaction during the quarter
ended June 30, 2008.
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, 2008, we reported a net loss
of $450,000 on revenues of $6.8 million as compared to net loss of $209,000 on
revenues of $8.7 million for the three month period ended September 30, 2007.
Our revenues declined 22% from the first quarter of fiscal 2008 compared to
the first quarter of fiscal 2009. The Company believes the reason for the
reduction in revenues is in large measure the result of current economic
circumstances where credit is difficult to obtain and customers may be concerned
about the impact on their business of a possible recession.
Notwithstanding a decrease in our revenues and an increase of our net loss,
our operating loss for the three months ended September 30, 2008 improved as
compared to the three months ended September 30, 2007 ($1.8 million for the
first three months of fiscal 2009 as compared to $4.1 million for the first
three months of fiscal 2008). The decrease in the operating loss was principally
due to a decrease in selling, general and administrative expenses. In order to
reduce our net losses and demands on our cash and other liquid reserves, we
instituted an aggressive program of cost cutting at the end of fiscal 2008 and
the beginning of fiscal 2009. Overall, there was a reduction of our selling,
general and administrative costs of 38.2%, from $5.3 million in the first three
months of fiscal 2008 to $3.3 million in the first three months of fiscal 2009,
resulting directly from our aggressive program of cutting costs.
In addition to the success of our cost cutting programs in improving our
operating performance, we also realized a gain on a sale in September 2008 of
our 92.3% interest in a consolidated entity. We received proceeds of
approximately $2.3 million and recognized a gain of approximately $1.4 million,
which also improved our liquidity. The entity was engaged in the business of
managing a MRI facility. The principal reason our net loss for the first quarter
of fiscal 2009 ($450,000) was more than the net loss for the first quarter of
fiscal 2008 ($209,000), notwithstanding the improvement in our operations, was
because of we recognized gains on the sale of an investment ($571,000) and the
sale of a consolidated subsidiary ($3.4 million) in the first quarter of fiscal
2008, which exceeded the improvement in our operations ($2.3 million) and the
gain on the sale of a consolidated subsidiary ($1.4 million) in the first
quarter of fiscal 2009.
We anticipate improvements in our operating results in part from reduced
apprehension on the part of FONAR UPRIGHT(R), Multi-Position(TM) MRI ("FONAR
UPRIGHT(R) MRI") customers regarding the anticipated negative impact of the
Deficit Reduction Act (DRA) on scanner income and the magnitude of the impact.
We believe from experience by FONAR UPRIGHT(R) MRI customers and MRI facilities
managed by our subsidiary, Health Management Corporation of America ("HMCA"),
that the DRA's revenue impact has been largely offset by the growth in demand
for FONAR UPRIGHT(R) MRI scans.
We also are monitoring the performance of our existing users in order to
establish teams to assist underperforming customers improve their scan volume.
In addition, we have held seminars to assist customers and the MRI Facilities
managed by HMCA in their marketing efforts and are in the process of developing
a web site to assist our customers in their marketing efforts.
Importantly, we are beginning to penetrate the hospital market. The FONAR
UPRIGHT(R) MRI scanner is the only scanner which enables weight-bearing scans of
the spine, which is critical in making a correct diagnosis of spine diseases
such as low back pain and therefore the key to performing the correct surgery of
the spine.
In order to reduce our net losses and demands on our cash and other liquid
reserves, we instituted an aggressive program of cost cutting at the end of
fiscal 2008 and beginning of fiscal 2009. These measures include consolidating
HMCA's office space with Fonar's office space, 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 low volumes of MRI scanner sales, such as we have experienced in fiscal 2007
and 2008, 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. 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 2009 include a decrease in product
sales revenues, service and repair fees, and management fees, as well as a
decrease in our total costs and expenses, in particular in our selling, general
and administrative expenses. We will continue to focus on our marketing efforts,
including advertising, and adding additional distributors and sales personnel,
where appropriate, to improve sales performance in fiscal 2009. In addition, we
will continue to monitor our cost cutting program and will continue to reduce
costs as necessary.
For the three month period ended September 30, 2008, as compared to the
three month period ended September 30, 2007, overall revenues from MRI product
sales decreased 45.4% ($1.4 million compared to $2.6 million). Unrelated party
scanner sales ($1.4 million compared to $2.6 million) decreased at a rate of
45.4%. There were no related party scanner sales for the three month periods
ended September 30, 2008 and 2007.
Service revenues for the three month period ended September 30, 2008, as
compared to the three month period ended September 30, 2007 decreased by 4.4%
($2.6 million compared to $2.7 million). Unrelated party service and repair fees
decreased by 5.4% ($2.3 million compared to $2.5 million) and related party
service and repair fees increased by 5.9% ($269,000 compared to $254,000). We
anticipate that there will be increases in service revenues as warranties on
installed scanners expire over time.
There were approximately $189,000 in foreign revenues for the first three
months of fiscal 2009 as compared to approximately $198,000 in foreign revenues
for the first three months of fiscal 2008, representing a decrease in foreign
revenues of 4.5%. The Company is making a concerted effort to increase foreign
sales, most recently through its foreign distributors.
Overall, for the first quarter of fiscal 2009, revenues for the medical
equipment segment decreased by 24.4% to $4.0 million from $5.3 million for the
first quarter of fiscal 2008. The revenues generated by HMCA decreased, by 17.6%
to $2.8 million for the first quarter of fiscal 2009 as compared to $3.4 million
for the first quarter of fiscal 2008.
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 decreased by 48.7% from $2.8 million in the
first quarter of fiscal 2008 to $1.4 million in the first quarter of 2009,
reflecting the corresponding decrease in product sales revenues. Costs related
to providing service decreased by 21.4% from $1.3 million in the first quarter
of fiscal 2008 to $1.0 million and fiscal 2009.
Service and repair revenues decreased at a lower rate than the costs
related to providing service and repairs. Service contract prices are fixed for
the term of the contract, which are usually for a period of one year. We believe
that an important factor in keeping service costs down is our ability to monitor
the performance of customers' scanners from our facilities in Melville, New
York, on a daily basis and to detect and repair any irregularities before more
serious problems result. We also believe the low cost of providing service
reflects the high quality of our products.
Overall, our operating loss for our medical equipment segment was $1.9
million for the first three months of fiscal 2009 as compared to an operating
loss of $4.2 million for the first three months of fiscal 2008 resulting from an
a decrease in cost related to product sales, research and development and, most
significantly, selling, general and administrative expenses.
HMCA revenues decreased in the first quarter of fiscal 2009, by 17.6% to
$2.8 million from $3.4 million for the first quarter of fiscal 2008, primarily
because of the sale of its 50% interest of a previously consolidated entity in
July 2007. We now manage ten sites, nine of which are equipped with FONAR
UPRIGHT(R) MRI scanners. HMCA experienced an operating income of $12,000 for the
first three months of fiscal 2009 compared to operating income of $79,000 for
the first three months of fiscal 2008.
HMCA cost of revenues decreased to $1.9 million for the first quarter of
fiscal 2009 as compared to $2.0 million for the first quarter of fiscal 2008.
As of June 22, 2007, an unrelated third party purchased the stock of the
professional corporations owning the eight New York sites managed by HMCA,
previously owned by Dr. Raymond V. Damadian, the President, Chairman of the
Board, Chief Executive Officer and principal stockholder of Fonar. In connection
with the sale, new management agreements were substituted for the existing
management agreements, providing, however, for the same management services. The
fees in fiscal 2009 are currently flat monthly fees in the aggregate amount of
$682,500 per month. Dr. Damadian still owns the four MRI facilities in Georgia
and Florida managed by the Company. No MRI facilities or other medical
facilities are owned by the Company.
For the purpose of improving the performance of HMCA and the facilities,
HMCA entered into an agreement in September, 2007 with Integrity Healthcare
Management, Inc. ("Integrity"), which is a wholly-owned subsidiary of Health
Diagnostics, LLC. Under the terms of the agreement, Integrity supervised and
directed HMCA and the management of the facilities including the performance of
billing and collections services. The existing management agreements between the
facilities and HMCA remained in place. Integrity was entitled to compensation of
an annual fee equal to one-half of the increase in the consolidated cash flow of
HMCA and the facilities over the period from July 1, 2006 through June 30, 2007.
This agreement was terminated as of the end of June 2008.
Nevertheless, commencing upon the termination of this agreement, we hired
Health Diagnostics, LLC, the parent company of Integrity, to perform all billing
and collection procedures for HMCA's clients on HMCA's behalf. HMCA has agreed
to pay 6% of all adjusted deposits for these services.
On February 8, 2006, the Deficit Reduction Act of 2005 ("DRA") was signed
into law by President George W. Bush. The DRA, which went into effect in the
beginning of calendar 2007, places caps on Medicare and Medicaid payment rates
for most imaging services, including MRI and CT, furnished in physicians'
offices and other non-hospital based settings. Under the cap, payments for these
imaging services cannot exceed the hospital outpatient payment rates for those
services. This change applies to services furnished by the professional
corporations managed by HMCA on or after January 1, 2007. Although the
professional corporations managed by HCMA bill for scans on a "global" basis,
which means a single fee per scan, the limitation is applicable only to the
technical component of the services, which is the payment or portion of the
payment attributable to the non-professional services. If the fee for the
technical component of the service (without including geographic adjustments)
exceeds the hospital outpatient payment amount for the service (also without
including geographic adjustments), under the Physician Fee Schedule, then the
payment would be limited to the Physician Fee Schedule rate.
We believe that the effect of the DRA on our scanning center management
business has not been material because of our payor mix and that any negative
effect has been countered by an increase in the scan volume of the centers we
manage.
The decrease in our total net revenues of 21.7% from $8.7 million in the
first quarter of fiscal 2008 to $6.8 million in the first quarter of fiscal
2009, was accompanied by a decrease of 32.4% in total costs and expenses from
$12.8 million in the first quarter of fiscal 2008 compared to $8.6 million in
the first quarter of fiscal 2009. As a result, our operating loss improved from
($4,106,000) in the first quarter of fiscal 2008 to ($1,848,000) in the first
quarter of fiscal 2009 notwithstanding the greater net loss in the first fiscal
quarter of 2009 ($450,000) compared to ($209,000) in the first quarter of fiscal
2008.
Selling, general and administrative expenses decreased by 38.2% to $3.3
million in the first three months of fiscal 2009 from $5.3 million in the first
three months of fiscal 2008, largely as a result of our aggressive cost cutting
measures. There was no compensatory element of stock issuances, which is now
included in selling, general and administrative expenses, in the first three
months of fiscal 2009 or 2008.
Research and development expenses decreased by 24.3% to $880,000 for the
first three months of fiscal 2009 as compared to $1.2 million for the first
three months of fiscal 2008.
Interest expense in the first three months of fiscal 2009 decreased by
22.5% to $79,000 from $102,000 for the first three months of fiscal 2008 because
of the repayment of existing debt.
Inventories decreased by 1.7% to $3.2 million at September 30, 2008 as
compared to $3.3 million at June 30, 2008 representing our use of raw materials
and components in our inventory to fill orders.
Management fee and medical receivables decreased by 16.9% to $6.4 million
at September 30, 2008 from $7.6 million at June 30, 2008, primarily due to
collections on the Company's management fee receivables and the sale of a 92.3%
interest of a consolidated entity, which included the receivables of such
entity.
The overall trends reflected in the results of operations for the first
three months of fiscal 2009 are an decrease in revenues from product sales, as
compared to the first three months of fiscal 2008 ($1.4 million for the first
three months of fiscal 2009 as compared to $2.6 million for the first three
months of fiscal 2008), and a decrease in MRI equipment segment revenues
relative to HMCA revenues ($4.0 million or 59.2% from the MRI equipment segment
as compared to $2.8 million or 40.8% from HMCA, for the first three months of
fiscal 2009, as compared to $5.3 million or 61% from the MRI equipment segment
and $3.4 million or 39%, from HMCA, for the first three months of fiscal 2008).
In addition, we experienced a decrease in unrelated party sales relative to
related party sales in our medical equipment product sales ($1.4 million or 100%
to unrelated parties for the first three months of fiscal 2009 as compared to
$2.6 million, or 100% to unrelated parties).
We are committed to continuing the improvement in our operating results we
experienced in the first three months in fiscal 2009. 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.
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
spodylolistheses (vertebral instabilities) visualized by Dynamic(TM)
Multi-Position(TM) MRI were being missed by static single position MRI (510
patients). Since this vertebral segment is responsible for the majority of all
disc 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 360 access to the patient afforded by
the Fonar 360(TM) permits surgeons to walk into the magnet and perform surgical
interventions on the patient under direct MR image guidance. Most importantly
the exceptional quality of the MRI image and its capacity to exhibit tissue
detail on the image, can then be obtained real time during the procedure to
guide the interventionalist. Thus surgical instruments, needles, catheters,
endoscopes and the like could be introduced directly into the human body and
guided directly to a malignant lesion using the MRI image. The number of
inoperable lesions could be significantly reduced by the availability of this
new FONAR technology. Most importantly treatment can be carried directly to the
target tissue.
The 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 as compared to a single coil,
or multiple coils on only one axis and its transverse magnetic field enables the
use of two detector rf coils operating in quadrature which increases the FONAR
UPRIGHT(R) MRI signal to noise ratio by 40%, providing a signal to noise ratio
equal to a .84T recumbent only MRI scanner.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities increased from $2.4
million at June 30, 2008 to $4.4 million at September 30, 2008. Marketable
securities approximated $24,000 as of September 30, 2008, as compared to $1.1
million at June 30, 2008.
Cash used in operating activities for the first three months of fiscal 2009
was $2.0 million. Cash used in operating activities was attributable to a
decrease in customer advances of $1.0 million, a decrease in other current
liabilities of $728,000 and the net loss of $450,000, offset by a decrease in
accounts, management fee and medical receivables of $198,000.
Cash provided by investing activities for the first three months of fiscal
2009 was $5.2 million. The principal source of cash from investing activities
during the first three months of fiscal 2009 consisted of proceeds from the sale
of consolidated subsidiary of $2.3 million, proceeds of $2.0 million from the
prepayment of a portion of a note receivable and sale of marketable securities
of $1.1 million, offset by capitalized software and patent costs of $209,000.
Cash used in financing activities for the first three months of fiscal 2009
was $126,000. The principal uses of cash in financing activities during the
first three months of fiscal 2009 consisted of repayment of principal on
long-term debt and capital lease obligations of $104,000 and distributions to
holders of minority interests of $23,000.
The Company's contractual obligations and the periods in which they are
scheduled to become due are set forth in the following table:
(000's OMITTED)
Due in
less Due Due Due
Contractual Than 1 in 2-3 in 4-5 after 5
Obligation Total year years years years
-------------- ---------- ---------- ---------- ---------- ----------
Long-term debt $ 633 $ 104 $ - $ - $ 529
Capital lease
Obligations 392 108 247 37 -
Operating
leases 5,485 1,619 1,751 1,581 534
---------- ---------- ---------- ---------- ----------
Total cash
Obligations $ 6,510 $ 1,831 $ 1,998 $ 1,618 $ 1,063
========== ========== ========== ========== ==========
Total liabilities decreased by 3.4% to $38.0 million at September 30, 2008
from $39.3 million at June 30, 2008. We experienced a increase in long-term debt
and capital leases from $757,000 at June 30, 2008 to $813,000 at September 30,
2008 and an increase in accounts payable from $4.0 million at June 30, 2008 to
$4.2 million at September 30, 2008, along with an increase in billings in excess
of costs and estimated earnings on uncompleted contracts from $5.8 million at
June 30, 2008 to $6.1 million at September 30, 2008, and a decrease in customer
advances from $14.3 million at June 30, 2008 to $13.3 million at September 30,
2008. Unearned revenue on service contracts decreased from $5.2 million at June
30, 2008 to $4.7 million at September 30, 2008.
As of September 30, 2008, the total of $8.0 million in other current
liabilities included primarily accrued salaries and payroll taxes of $1.1
million, accrued interest of $829,000, accrued royalties of $623,000 and excise
and sales taxes of $2.6 million.
Our working capital deficit remained constant at $16.0 million as of
September 30, 2008 and June 30, 2008. This resulted from an increase in current
liabilities ($38.0 million at June 30, 2008 as compared to $36.6 million at
September 30, 2008, particularly a decrease in customer advances of $1.0 million
($14.3 million at June 30, 2008 as compared to $13.3 million at September 30,
2008), and a decrease of unearned revenue on service contracts of $500,000 ($5.2
million at June 30, 2008 as compared to $4.7 million at September 30, 2008),
notwithstanding a decrease in current assets ($22.0 million at June 30, 2008
compared to $20.6 million at September 30, 2008) resulting primarily from a
decrease in management fee receivable of $1.2 million ($6.4 million at June 30,
2008 compared to $5.2 million at September 30, 2008) along with an increase in
cash and cash equivalents and marketable securities of $2.0 million ($2.4
million at June 30, 2008 as compared to $4.4 million at September 30, 2008) and
a decrease in inventories of approximately $100,000 ($3.3 million at June 30,
2008 as compared to $3.2 million at September 30, 2008).
With respect to current liabilities, the current portion of long-term debt
decreased from $373,000 at June 30, 2008 to $212,000 at September 30, 2008, and
billings in excess of costs and estimated earnings on uncompleted contracts
increased from $5.8 million at June 30, 2008 to $6.1 million at September 30,
2008. Customer advances decreased from $14.3 million at June 30, 2008 to $13.3
million at September 30, 2008 and accounts payable increased from $4.0 million
at June 30, 2008 to $4.2 million at September 30, 2008.
Inventories decreased by approximately $100,000 ($3.3 million at June 30,
2008 as compared to $3.2 million at September 30, 2008) resulting from the use
of raw materials and components in our inventory to fill our backlog of orders.
Fonar has not committed to making additional capital expenditures in the
2009 fiscal year other than to continue research and development expenditures at
current levels.
Our business plan calls for a continuing emphasis on providing our
customers with enhanced equipment service and maintenance capabilities and
delivering state-of-the-art, innovative and high quality equipment upgrades at
competitive prices.
Our principal source of liquidity has been derived from revenues, as well
as by the sale of marketable securities and cash provided by previous debt and
equity financing. We currently expect this to continue. Also, in September 2008,
the Company sold its 92.3% interest in a consolidated subsidiary and to a
related third party and received proceeds of approximately $2.3 million. At
September 30, 2008, we had a working capital deficit of $16.0 million. For the
three months ended September 30, 2008, we incurred a net loss of $450,000 which
included non-cash charges of $589,000.
On July 8, 2008, the Company received a letter from The NASDAQ Stock Market
LLC indicating the Company was not in compliance with Marketplace Rules 4350(e)
and 4350(g) due to the fact that it had not yet solicited proxies and held its
annual meeting for the fiscal year ended June 30, 2007. As a result, the notice
indicated that the Company's securities would be subject to delisting from The
NASDAQ Capital Market unless the Company requested a hearing before a NASDAQ
Listing Qualifications Panel. On July 15, 2008, the Company requested a hearing
with the NASDAQ Listing Qualifications Panel. The request was granted. The
hearing was held on August 28, 2008. At the hearing the Company's ability to
comply with NASDAQ's stockholders' equity requirement was raised and discussed.
Subsequent to the hearing and after the filing of the Form 10-K for fiscal 2008,
which showed a stockholder's deficiency, NASDAQ requested additional information
concerning the Company's plan to regain compliance with the stockholder's equity
requirement. An additional submission was made in writing on November 3, 2008.
Although no decision has yet been rendered, the Company has solicited proxies
and is scheduled to hold a joint two-year annual meeting on November 17, 2008.
The Company's stockholder's deficiency was $4.2 million as of June 30, 2008
and $4.6 million as of September 30, 2008. The Company is in the process of
seeking equity financing in an amount which would be at least sufficient to meet
NASDAQ's stockholder's equity requirement. In the Company's submission
responding to NASDAQ's request for additional information relating to the
Company's plan to require compliance with NASDAQ's stockholders' equity
requirement, the Company requested an exception through January 15, 2009 to
evidence compliance with the minimum stockholders' equity requirement for
continued listing on the NASDAQ Capital Market. No decision has yet been
rendered.
The Company is focusing on increased advertising and marketing campaigns
and distribution programs to increase the demand for Fonar's products.
Management anticipates that Fonar's capital resources will improve as Fonar's
MRI scanner products gain wider market recognition and acceptance resulting in
increased product sales. If we are not successful with our current marketing
efforts to increase sales, then we could experience a shortfall in the cash
necessary to sustain operations at their current levels.
Although sales levels remained weak in fiscal 2008, we are continuing to
focus our efforts on increased advertising and marketing campaigns, and
distribution programs to strengthen the demand for our products and services.
Management anticipates that Fonar's capital resources will improve if Fonar's
MRI scanner products gain wider market recognition and acceptance resulting in
increased product sales. If we are not successful with our marketing efforts to
increase sales and weak demand continues, we will experience a shortfall in
cash, and it will be necessary to further reduce operating expenses or obtain
funds through equity or debt financing in sufficient amounts to avoid the need
to curtail our operations subsequent to September 30, 2009. Current economic
credit conditions have contributed to a slowing business environment. Given such
liquidity and credit constraints in the markets, the business may 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 we 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 us. In such
case, the reduction in operating expenses might need to be substantial in order
for us to generate positive cash flow to sustain our operations.
If we are unable to meet expenditures with revenues or financing then it
will be necessary to reduce expenses further, or seek other sources of funds
through the issuance of debt or equity financing in order to conduct operations
as now conducted subsequent to September 30, 2009.
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
(a) Evaluation of disclosure controls and procedures.
The Company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures performed as of the end of the period covered by this
report, the principal executive and acting principal financial officer of the
Company concluded that disclosure controls and procedures were effective.
(b) Change in internal controls.
There have been no changes in our internal control over financial reporting
that occurred during the most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:There were no material changes in litigation for the
first three months of fiscal 2009.
Item 1A - Risk Factors: There were no material changes in risk factors in the
first three months of fiscal 2009 from those disclosed in our most recent
Form 10-K.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds: None
Item 3 - Defaults Upon Senior Securities: None
Item 4 - Submission of Matters to a Vote of Security Holders: None
Item 5 - Other Information: None
Item 6 - Exhibits and Reports on Form 8-K: Exhibit 31.1 Certification See
Exhibits
Exhibit 32.1 Certification See Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FONAR CORPORATION
(Registrant)
By: /s/ Raymond V. Damadian
Raymond V. Damadian
President & Chairman
Dated: November 13, 2008