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 MARCH 31, 2010
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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 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 _X_ NO ___
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 April 30, 2010
----------------------------------------- -----------------------------
Common Stock, par value $.0001 4,974,207
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 - March 31, 2010
(Unaudited) and June 30, 2009
Condensed Consolidated Statements of Operations for
the Three Months Ended March 31, 2010 and
March 31, 2009 (Unaudited)
Condensed Consolidated Statements of Operations for
the Nine Months Ended March 31, 2010 and
March 31, 2009 (Unaudited)
Condensed Consolidated Statements of Comprehensive
(Loss) Income for the Three Months Ended
March 31, 2010 and March 31, 2009 (Unaudited)
Condensed Consolidated Statements of Comprehensive
(Loss) Income for the Nine Months Ended
March 31, 2010 and March 31, 2009 (Unaudited)
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended March 31, 2010 and
March 31, 2009 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 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 March 31, June 30,
2010 2009
(UNAUDITED)
Current Assets: --------- ---------
Cash and cash equivalents $ 570 $ 1,226
Marketable securities 32 23
Accounts receivable - net 5,731 5,392
Accounts receivable - related parties - net 59 -
Medical receivables - net 127 374
Management fee receivable - net 2,952 3,274
Management fee receivable - related medical
practices - net 1,814 2,196
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,012 1,476
Inventories 2,931 3,172
Current portion of advances and notes to related
medical practices 130 165
Current portion of notes receivable 86 518
Prepaid expenses and other current assets 266 472
--------- ---------
Total Current Assets 15,710 18,288
--------- ---------
Property and equipment - net 2,299 2,892
Advances and notes to related medical practices - net - 89
Notes receivable - net 119 1,779
Other intangible assets - net 4,707 4,920
Other assets 392 391
--------- ---------
Total Assets $ 23,227 $ 28,359
========= =========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
March 31, June 30,
LIABILITIES AND STOCKHOLDERS' DEFICIENCY 2010 2009
(UNAUDITED)
Current Liabilities: ----------- ---------
Current portion of long-term debt and
capital leases $ 418 $ 277
Current portion of long-term debt - related party 86 80
Accounts payable 3,340 3,519
Other current liabilities 7,695 8,460
Unearned revenue on service contracts 5,761 5,526
Unearned revenue on service contracts - related parties 55 -
Customer advances 6,089 9,238
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,047 2,026
--------- ---------
Total Current Liabilities 26,491 29,126
Long-Term Liabilities:
Accounts payable 124 184
Due to related medical practices 632 643
Long-term debt and capital leases,
less current portion 1,219 759
Long-term debt less current portion - related party 95 160
Other liabilities 467 428
--------- ---------
Total Long-Term Liabilities 2,537 2,174
--------- ---------
Total Liabilities 29,028 31,300
--------- ---------
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED, except share data)
March 31, June 30,
LIABILITIES AND STOCKHOLDERS' DEFICIENCY 2010 2009
(continued) (UNAUDITED)
--------- ---------
STOCKHOLDERS' DEFICIENCY:
Class A non-voting preferred stock $.0001 par value;
1,600,000 authorized, 313,451 issued and outstanding
at March 31, 2010 and June 30, 2009 - -
Preferred stock $.001 par value; 2,000,000 shares
Authorized, issued and outstanding - none - -
Common Stock $.0001 par value; 30,000,000 shares
authorized, 4,985,850 and 4,917,918 issued at
March 31, 2010 and June 30, 2009, respectively;
4,974,207 and 4,906,275 outstanding at March 31, 2010
and June 30, 2009, respectively 1 1
Class B Common Stock $ .0001 par value; 800,000
shares authorized, (10 votes per share), 158 issued
and outstanding at March 31, 2010 and June 30, 2009 - -
Class C Common Stock $.0001 par value; 2,000,000 shares
authorized, (25 votes per share), 382,513 issued
and outstanding at March 31, 2010 and June 30, 2009 - -
Paid-in capital in excess of par value 172,379 172,280
Accumulated other comprehensive loss ( 13) ( 21)
Accumulated deficit (177,300) (174,259)
Notes receivable from employee stockholders ( 193) ( 267)
Treasury stock, at cost - 11,643 shares of common stock
at March 31, 2010 and June 30, 2009 ( 675) ( 675)
--------- ---------
Total Stockholders' Deficiency ( 5,801) ( 2,941)
--------- ---------
Total Liabilities and Stockholders' Deficiency $ 23,227 $ 28,359
========= =========
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
MARCH 31,
-------------------
2010 2009
REVENUES --------- ---------
Product sales - net $ 1,955 $ 6,156
Service and repair fees - net 2,778 2,567
Service and repair fees - related parties - net 55 55
Management and other fees - net 1,738 1,736
Management and other fees - related medical
practices - net 988 742
--------- ---------
Total Revenues - Net 7,514 11,256
--------- ---------
COSTS AND EXPENSES
Costs related to product sales 1,353 3,325
Costs related to service and repair fees 566 969
Costs related to service and repair
fees - related parties 11 21
Costs related to management and other fees 1,338 1,039
Costs related to management and other
fees - related medical practices 703 686
Research and development 528 872
Selling, general and administrative 2,708 3,219
Provision for bad debts 282 363
--------- ---------
Total Costs and Expenses 7,489 10,494
--------- ---------
Income From Operations 25 762
Interest Expense ( 66) ( 75)
Interest Expense - Related Parties ( 21) -
Investment Income 51 91
Interest Income - Related Party 2 5
Other Income (Expense) 1 ( 17)
Provision for Income Taxes - ( 36)
--------- ---------
NET (LOSS) INCOME $ ( 8) $ 730
========= =========
Net (Loss) Income Available to Common Stockholders $ ( 8) $ 686
========= =========
Basic Net (Loss) Income Per Common Share $ ( 0.00) $ 0.14
========= =========
Diluted Net (Loss) Income Per Common Share $ ( 0.00) $ 0.13
========= =========
Basic and Diluted Income Per Share - Common C N/A 0.04
========= =========
Weighted Average Basic Shares Outstanding 4,929,752 4,904,275
========= =========
Weighted Average Diluted Shares Outstanding 4,929,752 5,031,779
========= =========
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 NINE MONTHS ENDED
MARCH 31,
--------------------
2010 2009
REVENUES --------- ---------
Product sales - net $ 6,479 $ 11,975
Service and repair fees - net 8,163 7,737
Service and repair fees - related parties - net 165 165
Management and other fees - net 5,212 5,518
Management and other fees - related medical
practices - net 2,613 2,181
License fees and royalties 585 1,755
--------- ---------
Total Revenues - Net 23,217 29,331
--------- ---------
COSTS AND EXPENSES
Costs related to product sales 5,289 7,590
Costs related to service and repair fees 2,485 3,008
Costs related to service and repair
fees - related parties 50 64
Costs related to management and other fees 3,989 3,316
Costs related to management and other
fees - related medical practices 2,208 2,040
Research and development 2,159 2,681
Selling, general and administrative 9,042 9,955
Provision for bad debts 659 1,063
--------- ---------
Total Costs and Expenses 25,881 29,717
--------- ---------
Loss From Operations ( 2,664) ( 386)
Interest Expense ( 235) ( 193)
Interest Expense - Related Parties ( 40) -
Investment Income 203 236
Interest Income - Related Party 9 17
Other Income (Expense) 35 ( 15)
Minority Interest in Income of Partnerships - ( 11)
Gain on Sale of Consolidated Subsidiary - 1,448
Loss on Note Receivable ( 350) -
Provision for Income Taxes - ( 36)
--------- ---------
NET (LOSS) INCOME $( 3,042) $ 1,060
========= =========
Net (Loss) Income Available to Common Stockholders $( 3,042) $ 997
========= =========
Basic Net (Loss) Income Per Common Share $ (0.62) $ 0.20
========= =========
Diluted Net (Loss) Income Per Common Share $ (0.62) $ 0.19
========= =========
Basic and Diluted Income per share - Common C N/A $ 0.05
========= =========
Weighted Average Basic Common Shares Outstanding 4,917,990 4,904,275
========= =========
Weighted Average Diluted Common Shares Outstanding 4,917,990 5,031,779
========= =========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
(000'S OMITTED)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------
2010 2009
--------- ---------
Net (loss) income $ ( 8) $ 730
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on marketable securities,
net of tax 2 ( 1)
--------- ---------
Total comprehensive (loss) income $ ( 6) $ 729
========= =========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
(000'S OMITTED)
FOR THE NINE MONTHS ENDED
MARCH 31,
--------------------
2010 2009
--------- ---------
Net (loss) income $ (3,042) $ 1,060
Other comprehensive income, net of tax:
Unrealized gains on marketable securities,
net of tax 8 48
--------- ---------
Total comprehensive (loss) income $ (3,034) $ 1,108
========= =========
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 NINE MONTHS ENDED
MARCH 31,
--------------------
2010 2009
--------- ---------
Cash Flows from Operating Activities:
Net (loss) income $( 3,042) $ 1,060
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Minority interest in income of partnerships - 11
Depreciation and amortization 1,094 1,297
Provision for bad debts 659 1,063
Abandoned patents written off 182 -
Discount on note receivable 350 -
Gain on sale of consolidated subsidiary - ( 1,448)
Compensatory element of stock issuances 99 -
(Increase) decrease in operating assets, net:
Accounts, management fee and medical receivable(s) ( 105) ( 1,093)
Notes receivable 160 385
Costs and estimated earnings in excess of
billings on uncompleted contracts 464 ( 522)
Inventories 241 ( 537)
Prepaid expenses and other current assets 206 402
Other assets ( 1) ( 17)
Advances and notes to related medical practices 124 151
Increase (decrease) in operating liabilities, net:
Accounts payable ( 239) ( 284)
Other current liabilities 212 192
Customer advances ( 3,149) ( 5,551)
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,021 ( 641)
Other liabilities 41 ( 178)
Due to related medical practices ( 11) ( 2)
--------- ---------
Net cash used in operating activities ( 1,694) ( 5,712)
--------- ---------
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 NINE MONTHS ENDED
MARCH 31,
--------------------
2010 2009
--------- ---------
Cash Flows from Investing Activities:
Sales of marketable securities - 1,098
Purchases of property and equipment ( 18) ( 20)
Costs of capitalized software development ( 281) ( 392)
Cost of patents ( 171) ( 192)
Proceeds from note receivable 1,581 2,000
Proceeds from cash surrender value of life insurance - 1,345
Proceeds from sale of consolidated subsidiary - 2,293
--------- ---------
Net cash provided by investing activities 1,111 6,132
--------- ---------
Cash Flows from Financing Activities:
Distributions to holders of minority interests - ( 23)
Repayment of borrowings and capital
lease obligations ( 147) ( 243)
Repayment of notes receivable from employee
stockholders 74 125
--------- ---------
Net cash used in financing activities ( 73) ( 141)
--------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents ( 656) 279
Cash and Cash Equivalents - Beginning of Period 1,226 1,326
--------- ---------
Cash and Cash Equivalents - End of Period $ 570 $ 1,605
========= =========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION & LIQUIDITY & CAPITAL RESOURCES
Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and nine months ended March 31, 2010, are not necessarily indicative of
the results that may be expected for the fiscal year ending June 30, 2010. 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 5, 2009 and as amended on Form 10-K/A on November 10, 2009 for the
fiscal year ended June 30, 2009.
Liquidity and Going Concern
---------------------------
At March 31, 2010, the Company had a working capital deficit of approximately
$10.8 million and a stockholders' deficiency of approximately $5.8 million. For
the nine months ended March 31, 2010, the Company incurred a net loss of
approximately $3.0 million, which included non-cash charges of approximately
$2.4 million. The Company has funded its cash flow deficit for the nine months
ended March 31, 2010 through cash provided by operations and 1.6 million of
proceeds from the collection of principal on a note receivable.
The Company continues to focus its efforts on increased marketing campaigns to
strengthen the demand for its products and services. Management anticipates that
its capital resources will improve if Fonar's MRI scanner products gain wider
market recognition and acceptance resulting in increased product sales. The
Company's subsidiary, Health Management Corporation ("HMCA") will focus its
efforts to market the scanning services of its customers (related and non-
related professional corporations or "PCs") and to expand the number of PCs for
which it performs management services. Current economic credit conditions have
contributed to a slowing business environment. Given such liquidity and credit
constraints in the markets, the business has and may continue to suffer, should
the credit markets not improve in the near future. The direct impact of these
conditions is not fully known. However, there can be no assurance that the
Company would be able to secure additional funds if needed and that if such
funds were available, whether the terms or conditions would be acceptable to the
Company. In such case, the further reduction in operating expenses as well as
possible sale of other operating subsidiaries might need to be substantial in
order for the Company to generate positive cash flow to sustain the operations
of the Company.
In January 2010, the Company was required to implement a substantial cost
reduction, which consisted in a reduction in personnel and significant
reductions in the remaining employee's compensation and other costs.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION & LIQUIDITY & CAPITAL RESOURCES (Continued)
Liquidity and Going Concern (Continued)
---------------------------
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. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying unaudited condensed
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The unaudited condensed consolidated financial statements include the accounts
of FONAR Corporation, its majority and wholly-owned subsidiaries and
partnerships (collectively the "Company"). All significant intercompany accounts
and transactions have been eliminated in consolidation.
Earnings (Loss) Per Share
-------------------------
Basic earnings (loss) per share ("EPS") is computed based on weighted average
shares outstanding and excludes any potential dilution. In accordance with ASC
topic 260-10, "Participating Securities and the Two-Class method", the Company's
participating convertible securities, which include Class B common stock and
Class C common stock, are not included in the computation of basic EPS for the
nine months and three months ended March 31, 2010, because the participating
securities do not have a contractual obligation to share in the losses of the
Company. For the nine months and three months ended March 31, 2009, the Company
used the Two-Class method for calculating basic earnings per share and applied
the if converted method in calculating diluted earnings per share.
Diluted EPS reflects the potential dilution from the exercise or conversion of
all dilutive securities into common stock based on the average market price of
common shares outstanding during the period. The number of common shares
potentially issuable upon the exercise of certain options and warrants or
conversion of the participating convertible securities that were excluded from
the diluted EPS calculation was approximately 224,000 because they were
antidilutive as a result of net losses for the three and nine months ended March
31, 2010. For the three and nine months ended March 31, 2009, the number of
common shares potentially issuable upon the exercise of certain options of
138,000 have not been included in the computation of diluted EPS since the
effect would be antidilutive.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share (Continued)
-------------------------
Three months ended Three months ended
March 31, 2010 March 31, 2009
------------------ --------------------------
(000's omitted, except per share data)
Class C
Common Common
Total Stock Stock
Basic ------- ------- --------
-----
Numerator:
Net (loss) income available
to common stockholders $( 8) $ 686 $ 672 $ 14
======= ======= ======= =======
Denominator:
Weighted average shares
outstanding 4,930 4,904 383
======= ======= =======
Basic (loss) income per common share $(0.00) $ 0.14 $ 0.04
======= ======= =======
Diluted
-------
Denominator:
Weighted average shares
outstanding 4,930 4,904 4,904 383
Stock options - - - -
Warrants - - - -
Convertible Class C Stock 128 128 -
------- ------- ------- -------
Total Denominator for diluted
earnings per share 4,930 5,032 5,032 383
======= ======= ======= =======
Diluted (loss) income per
common share $(0.00) $0.13 $0.04
======= ======= =======
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share (Continued)
-------------------------
Nine months ended Nine months ended
March 31, 2010 March 31, 2009
------------------ --------------------------
(000's omitted, except per share data)
Class C
Common Common
Total Stock Stock
Basic ------- ------- --------
-----
Numerator:
Net (loss) income available
to common stockholders $(3,042) $ 997 $ 977 $ 20
======= ======= ======= =======
Denominator:
Weighted average shares
outstanding 4,918 4,904 383
======= ======= =======
Basic (loss) income per common share $(0.62) $ 0.20 $ 0.05
======= ======= =======
Diluted
-------
Denominator:
Weighted average shares
outstanding 4,918 4,904 4,904 383
Stock options - - - -
Warrants - - - -
Convertible Class C Stock 128 128 -
------- ------- ------- -------
Total Denominator for diluted
earnings per share 4,918 5,032 5,032 383
======= ======= ======= =======
Diluted (loss) income per
common share $(0.62) $0.19 $0.05
======= ======= =======
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
--------------------------------
In September 2006, the Financial Accounting Standard Board ("FASB") issued
Accounting Standards Codification ("ASC") topic 820 (formerly Statement of
Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements").
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. ASC topic 820 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 ASC topic 820 on July 1,
2008, as required for its financial assets and financial liabilities. However,
the FASB deferred the effective date of ASC topic 820 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 the provisions of ASC topic 820 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 ASC topic 820 for its nonfinancial assets and
nonfinancial liabilities will have on the Company's condensed consolidated
financial statements.
On February 15, 2007, the FASB issued ASC topic 820 (formerly SFAS No. 159),
entitled "The Fair Value Option for Financial Assets and Financial Liabilities".
The guidance in ASC topic 820 "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 ASC topic 820 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 ASC topic 820 effective July 1, 2008. Upon adoption, the Company did not
elect the fair value option for any items within the scope of ASC topic 820 and,
therefore, the adoption of ASC topic 820 did not have an impact on the Company's
condensed consolidated financial statements.
In March 2007, the FASB ratified ASC topic 715 (formerly the Emerging Issues
Task Force ("EITF") consensus on Issue No. 06-10). "Accounting for Collateral
Assignment Split Dollar Life Insurance". This ASC topic 715 indicates that an
employer should recognize a liability for postretirement benefits related to
collateral assignment split-dollar life insurance arrangements. In addition, the
ASC topic 715 provides guidance for the recognition of an asset related to a
collateral assignment split-dollar life insurance arrangement. The ASC topic 715
is effective for fiscal years beginning after December 15, 2007. The Company has
adopted the ASC topic 715 as required and it did not have an impact on the
Company's results of operations, financial condition and liquidity.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------
In December 2007, the FASB issued ASC topic 805 (formerly SFAS No. 141R),
"Business Combinations", which replaces SFAS No. 141, "Business Combinations".
ASC topic 805 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. ASC
topic 805 also requires acquisition-related transaction expenses and
restructuring costs be expensed as incurred rather than capitalized as a
component of the business combination. ASC topic 805 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. ASC topic 805 would have an impact on accounting for any
businesses acquired after the effective date of this pronouncement. The Company
believes that the adoption of ASC topic 805 could have an impact on the
accounting for any future acquisitions, if one were to occur.
In December 2007, the FASB issued ASC topic 810 (formerly SFAS No. 160),
"Noncontrolling Interests in Consolidated Financial Statements - An Amendment of
ARB No. 51". ASC topic 810 establishes accounting and reporting standards for
the noncontrolling interest in a subsidiary (previously referred to as minority
interests). ASC topic 810 also requires that a retained noncontrolling interest
upon the deconsolidation of a subsidiary be initially measured at its fair
value. Upon adoption of ASC topic 810, 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. ASC topic 810 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. ASC topic 810 requires retroactive adoption of the
presentation and disclosure requirements for existing minority interests. All
other requirements of ASC topic 810 shall be applied prospectively. The Company
adopted ASC topic 810 for our fiscal year beginning July 1, 2009, and the
adoption did not have any material impact on the Company's financial position,
results of operations or cash flows
In October 2008, the FASB issued ASC topic 820 (formerly FASB Staff Position No.
FAS 157-3), "Determining the Fair Value of a Financial Asset in a Market That Is
Not Active", which clarifies the application of ASC topic 820 when the market
for a financial asset is inactive. Specifically, ASC topic 820 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 ASC
topic 820 is effective immediately and did not have a material impact on the
Company's condensed consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------
In June 2008, the FASB issued ASC topic 815 (formerly Emerging Issue Task Force
07-5), "Determining Whether an Instrument (or an Embedded Feature) is Indexed to
an Entity's Own Stock". ASC topic 815 provides framework for determining whether
an instrument is indexed to an entity's own stock. ASC topic 815 is effective
for fiscal years beginning after December 15, 2008. The adoption of ASC topic
815 did not have a material impact on its consolidated financial position and
results of operations.
In April 2009, the FASB issued ASC topic 270 (formerly FAS 107-1 and APB 28-1),
Interim Disclosures about Fair Value of Financial Instruments. SFAS 107-1 amends
FASB No. 107, Disclosures about Fair Value of Financial Instruments, to require
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual financial statements.
SFAS also amends APB Opinion No. 28, Interim Financial Reporting, to require
those disclosures in summarized financial information at interim reporting
periods. ASC topic 270 is effective for interim reporting periods ending after
June 15, 2009. The adoption of this standard did not have a material impact on
the Company's consolidated financial position, results of operations and cash
flows. The carrying value of our cash and cash equivalents approximates fair
value because these instruments have original maturities of three months or
less.
The Company adopted a new accounting standard included in ASC 855, "Subsequent
Events", which requires an entity to recognize in the financial statements the
effects of all subsequent events that provide additional evidence about
conditions that existed at the date of the balance sheet. For non-recognized
subsequent events that must be disclosed to keep the financial statements from
being misleading, an entity will be required to disclose the nature of the event
as well as an estimate of its financial effect, or a statement that such an
estimate cannot be made.
In June 2009, the FASB issued ASC 105 (formerly SFAS No. 168), "The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles". ASC 105 will become the single source of authoritative
nongovernmental U.S. generally accepted accounting principles ("GAAP"),
superseding existing FASB, American Institute of Certified Public Accountants
("AICPA"), EITF, and related accounting literature. ASC 105 reorganizes the
thousand of GAAP pronouncements into roughly 90 accounting topics and displays
them using a consistent structure. Also included is relevant Securities and
Exchange Commission guidance organized using the same topical structure in
separate sections. ASC 105 will be effective for financial statements issued for
reporting periods that end after September 15, 2009. As the codification was not
intended to change or alter existing U.S. GAAP, it does not have any impact on
our consolidated financial position, results of operations and cash flows.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------
In April 2008, the FASB issued ASC topic 350 (formerly FSP FAS 142-3),
"Determination of the Useful Life of Intangible Assets". ASC topic 350 amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of an intangible asset under SFAS
No. 142, "Goodwill and Other Intangibles" (SFAS 142). ASC topic 350 aims to
improve the consistency between the useful life of an intangible asset as
determined under SFAS 142 and the period of expected cash flows used to measure
the fair value of the asset under SFAS No. 141, "Business Combinations", and
other applicable accounting literature. ASC topic 350 will be effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. The adoption of this
pronouncement did not have a material impact on the Company's condensed
consolidated financial statements.
In June 2009, the FASB issued ASC 860 (formerly SFAS No. 166), "Accounting for
Transfers of Financial Assets - an amendment of FASB Statement No. 140, ASC 860
requires additional disclosures concerning a transferor's continuing involvement
with transferred financial assets. ASC 860 eliminates the concept of a
"qualifying special-purpose entity" and changes the requirements for
derecognizing financial assets. ASC 860 is effective for fiscal years beginning
after November 15, 2009. The Company is currently evaluating the impact that the
adoption of ASC 860 will have on its condensed consolidated financial
statements.
In June 2009, the FASB issued ASC 810 (formerly SFAS No. 167), "Amendments to
FASB Interpretation ("FIN") No. 46(R)," which changes how a reporting entity
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
determination of whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entity's purpose and design
and the reporting entity's ability to direct the activities of the other entity
that most significantly impact the other entity's economic performance. ASC 810
will require a reporting entity to provide additional disclosures about its
involvement with variable interest entities and any significant changes in risk
exposure due to that involvement. A reporting entity will be required to
disclose how its involvement with a variable interest entity affects the
reporting entity's financial statements. ASC 810 is effective for fiscal years
beginning after November 15, 2009, and interim periods within those fiscal
years. Management is currently evaluating the requirements of ASC 810 and has
not yet determined the impact on the Company's condensed consolidated financial
statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------
In September 2009, the FASB reached final consensus on a new revenue recognition
standard, ASC topic 815 (formerly EIFT Issue No. 08-1), "Revenue Arrangements
with Multiple Deliverables". ASC topic 815 addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit of
accounting, and how the arrangement consideration should be allocated among the
separate units of accounting. This Issue is effective for fiscal years beginning
after June 15, 2010 and may be applied retrospectively or prospectively for new
or materially modified arrangements. In addition, early adoption is permitted.
The Company is currently evaluating the potential impact of ASC topic 815 on its
condensed consolidated financial statements.
In September 2009, the EITF reached final consensus on a new revenue recognition
standard, ASC topic 350 (formerly EITF 09-3), "Applicability of AICPA Statement
of Position 97-2 to Certain Arrangements That Contain Software Elements". ASC
topic 350 amends the scope of AICPA Statement of Position 97-2, Software Revenue
Recognition to exclude tangible products that include software and non-software
components that function together to deliver the product's essential
functionality. This Issue shall be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010. Earlier application is permitted as of the beginning of a
company's fiscal year provided the company has not previously issued financial
statements for any period within that year. An entity shall not elect early
application of this Issue unless it also elects early application of Issue 08-1.
The Company is currently evaluating the potential impact of ASC topic 350 on its
condensed consolidated financial statements.
In January 2010, the FASB issued Accounting Standards Update No. 2010-6,
Improving Disclosures about Fair Value Measurements. The Update provides
amendments to FASB ASC 820-10 that require entities to disclose separately the
amounts of significant transfers in and out of Level 1 and Level 2 fair value
measurements and describe the reasons for the transfers. In addition the Update
requires entities to present separately information about purchases, sales,
issuances, and settlements in the reconciliation for fair value measurements
using significant unobservable inputs (Level 3). The disclosures related to
Level 1 and Level 2 fair value measurements are effective for the Company in
2010 and the disclosures related to Level 3 fair value measurements are
effective for the Company in 2011. The Update requires new disclosures only, and
will have no impact on the Company's condensed consolidated financial position,
results of operations, or cash flow.
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the current year
presentation. The reclassifcations did not have any effect on reported
consolidated net losses for any periods presented.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(UNAUDITED)
NOTE 3 - MEDICAL RECEIVABLES, ACCOUNTS RECEIVABLE AND MANAGEMENT FEE RECEIVABLE
Medical Receivables
-------------------
The Company was assigned medical receivables valued at $11,775,000, in
connection with the satisfaction of the management fees and termination fees
related to a Termination and Replacement Agreement dated May 23, 2005. The
balance of the net medical receivables as of March 31, 2010 and June 30, 2009
was $127,000 and $374,000, respectively. As of March 31, 2010 and June 30, 2009,
the allowance for doubtful accounts totaled $1,537,500 and $1,343,500,
respectively, on these receivables.
Accounts Receivable and Management Fee Receivable
-------------------------------------------------
Receivables, net is comprised of the following at March 31, 2010:
(000's Omitted)
Gross Allowance for
Receivable doubtful accounts Net
---------- ----------------- ----------
Receivables from equipment
sales and service contracts $ 8,076 $ 2,345 $ 5,731
========== ================= ==========
Receivables from equipment
sales and service contracts-
related parties $ 59 $ - $ 59
========== ================= ==========
Management fee receivables $ 8,385 $ 5,433 $ 2,952
========== ================= ==========
Management fee receivables from
related medical practices ("PC's") $ 2,944 $ 1,130 $ 1,814
========== ================= ==========
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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(UNAUDITED)
NOTE 3 - MEDICAL RECEIVABLES, ACCOUNTS RECEIVABLE AND MANAGEMENT FEE RECEIVABLE
(Continued)
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 44% and 48% of
the PC's net revenues for the nine months ended March 31, 2010 and 2009,
respectively, were derived from no-fault and personal injury protection claims.
The Company considers the aging of its accounts receivable in determining the
amount of allowance for doubtful accounts and contractual allowances. The
Company generally takes all legally available steps to collect its receivables.
Credit losses associated with the receivables are provided for in the condensed
consolidated financial statements and have historically been within management's
expectations.
Net revenues from management and other fees charged to the related PCs accounted
for approximately 11.3% and 7.4% of the consolidated net revenues for the nine
months ended March 31, 2010 and 2009, respectively.
Effective June 30, 2009, Tallahassee Magnetic Resonance Imaging, PA, Stand Up
MRI of Boca Raton, PA and Stand Up MRI & Diagnostic Center, PA (all related
medical practices) entered in a guaranty for all management fees which were
indebted to the Company. Each entity will jointly and severally guarantee to the
Company all payments due to the Company which have arisen under each individual
management agreement.
NOTE 4 - INVENTORIES
Inventories included in the accompanying condensed consolidated balance sheet
consist of the following:
(000's omitted)
March 31, June 30,
2010 2009
------------ ---------
Purchased parts, components
and supplies $ 1,785 $ 2,065
Work-in-process 1,146 1,107
------- -------
$ 2,931 $ 3,172
======= =======
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(UNAUDITED)
NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
1) Information relating to uncompleted contracts as of March 31, 2010
is as follows:
(000's omitted)
Costs incurred on uncompleted
Contracts $ 8,763
Estimated earnings 5,357
--------
14,120
Less: Billings to date 16,155
--------
$(2,035)
========
Included in the accompanying condensed consolidated balance sheet at March 31,
2010 under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 1,012
Less: Billings in excess of costs and estimated
earnings on uncompleted contracts 3,047
--------
$(2,035)
========
2) Customer advances consist of the following as of March 31, 2010:
Related
Total Party Other
-------- -------- -------
Total Advances $ 22,244 $ -- $ 22,244
Less: Advances
on contracts under construction 16,155 -- 16,155
-------- -------- --------
$ 6,089 $ -- $ 6,089
======== ======== =======
NOTE 6 - STOCKHOLDERS DEFICIENCY
Common Stock
During the nine months ended March 31, 2010:
a) The Company issued 67,932 shares of common stock to employees as
compensation valued at $99,270 under a stock bonus plan.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(UNAUDITED)
NOTE 7 - OTHER CURRENT LIABILITIES
Other current liabilities in the accompanying condensed consolidated balance
sheet consist of the following:
(000's omitted)
March 31, June 30,
2010 2009
--------- ---------
Royalties (see Note 8) $ - $ 623
Accrued salaries, commissions
and payroll taxes 686 882
Accrued interest 945 901
Litigation accruals 193 193
Sales tax payable 2,564 2,434
Legal and other professional fees 689 675
Accounting fees 385 480
Insurance premiums 73 30
Penalty - Sales tax 682 682
Penalty - 401k plan (see Note 11) 250 250
Purchase scanners 365 440
Other 863 870
--------- ---------
$ 7,695 $ 8,460
========= =========
NOTE 8 - ROYALTY SETTLEMENT
The Company had a license agreement, which required the Company to pay a royalty
on the Company's future sales of certain MRI imaging apparatus. The licensor
claimed that the Company breached its contract and was owed certain amounts
under this agreement. During September 2009, the Company entered into an
understanding regarding this matter with the licensor. On February 12, 2010, the
Company signed a settlement agreement and release with this licensor in which
the Company will pay principal and interest of $711,448. The Company has agreed
to pay this amount plus 5% interest over a term beginning February 2010 to
September 2014. The first payment in February 2010 was in the amount of $15,000
and then beginning in March 2010 the monthly payment amount is $12,150 with a
final payment of $5,091 payable September 2014.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(UNAUDITED)
NOTE 9 - SALE OF CONSOLIDATED SUBSIDIARY
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
========
NOTE 10 - 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, 2009. All inter-segment sales are market-based. The Company
evaluates performance based on income or loss from operations.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(UNAUDITED)
NOTE 10 - SEGMENT AND RELATED INFORMATION (Continued)
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 March 31, 2010:
Net revenues from external customers $ 4,788 $ 2,726 $ 7,514
Inter-segment net revenues $ 232 $ - $ 232
Income (Loss) from operations $ 400 $ ( 375) $ 25
Depreciation and amortization $ 224 $ 138 $ 362
Capital expenditures $ 89 $ 8 $ 97
For the three months ended March 31, 2009:
Net revenues from external customers $ 8,778 $ 2,478 $11,256
Inter-segment net revenues $ 245 $ - $ 245
Income (Loss) from operations $ 816 $ ( 54) $ 762
Depreciation and amortization $ 262 $ 168 $ 430
Capital expenditures $ 190 $ 12 $ 202
(000's omitted)
Management
of Diagnostic
Medical Imaging
Equipment Centers Totals
--------- ------------- ---------
For the nine months ended March 31, 2010:
Net revenues from external customers $ 15,392 $ 7,825 $ 23,217
Inter-segment net revenues $ 697 $ - $ 697
Loss from operations $ (1,258) $ (1,406) $ (2,664)
Depreciation and amortization $ 682 $ 412 $ 1,094
Capital expenditures $ 454 $ 16 $ 470
Identifiable assets $ 16,078 $ 7,149 $ 23,227
For the nine months ended March 31, 2009:
Net revenues from external customers $ 21,632 $ 7,699 $ 29,331
Inter-segment net revenues $ 762 $ - $ 762
Income (Loss) from operations $ 207 $ (593) $ 386)
Depreciation and amortization $ 793 $ 504 $ 1,297
Capital expenditures $ 588 $ 16 $ 604
Identifiable assets - June 30, 2009 $ 17,302 $ 11,057 $ 28,359
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(UNAUDITED)
NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION
During the nine months ended March 31, 2010 and March 31, 2009, the Company paid
$131,000 and $278,000 for interest, respectively.
NOTE 12 - 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.
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued)
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. In fiscal 2007, the Company
recorded a provision of $250,000 to cover any potential tax liability including
interest. This matter was settled in May of 2009 with no payment required by the
Company. The Company reversed the accrual for this matter in the quarter ended
June 30, 2009.
The Company is also delinquent in filing sales tax returns for certain states,
for which the Company has transacted business. As of March 31, 2010, the Company
has recorded tax obligations of approximately $2,111,000 plus interest and
penalties of approximately $1,508,000. 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
MARCH 31, 2010
(UNAUDITED)
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued)
Other Matters (Continued)
------------------------
The Company's management fees are dependent on collection by the PCs of fees
from reimbursements from Medicare, Medicaid, private insurance, no fault and
workers' compensation carriers, self-pay and other third-party payors. The
health care industry is experiencing the effects of the federal and state
governments' trend toward cost containment, as government and other third-party
payors seek to impose lower reimbursement and utilization rates and negotiate
reduced payment schedules with providers. The cost containment measures,
consolidated with the increasing influence of managed-care payors and
competition for patients, have resulted in reduced rates of reimbursement for
services provided by the Company from time to time. The Company's future
revenues and results of operations may be adversely impacted by future
reductions in reimbursement rates.
In March 2010, President Obama signed into law the Patient Protection and
Affordable Care Act and the Health Care and Education Affordability Act of 2010.
This health reform legislation requires employers to provide employees with
insurance coverage that meets minimum eligibility and coverage requirements or
face penalties. The legislation also includes provisions that will impact the
number of individuals with insurance coverage, the types of coverage and level
of health benefits that will required and the amount of payment providers
performing health care service will receive. The legislation imposes
implementation effective dates beginning in 2010 and extending through 2020.
Many of the changes require additional guidance from government agencies or
federal regulations. Therefore, it is difficult to determine at this time what
impact the health reform legislation will have on the Company or its customers.
The proposed changes in the Medicare and Medicaid programs, could reduce our
sales and have a material adverse effect on our business, financial condition
and results of operations. In addition, the health reform legislation provides
for an excise tax on United States sales of Class I, Class II and Class III
medical devices (which include our scanners) beginning in 2013, which could also
have a material adverse effect on the Company.
The use of radiology benefit managers, or RBMs, has increased in recent years.
It is common practice for health insurance carriers to contract with RBMs to
manage utilization of diagnostic imaging procedures for their insureds. In many
cases, this leads to lower utilization of imaging procedures based on a
determination of medical necessity. The efficacy of RBMs is still a highly
controversial topic. The Company cannot predict whether the current
administration's healthcare plan and the use of RBMs will negatively impact its
business, but it is possible that the Company's financial position and results
of operations could be negatively affected by increased utilization of RBMs.
While the Company has prepared certain estimates of the impact of the above
discussed changes and proposed changes, it is not possible to fully quantify
their impact on its business. There can be no assurance that the impact of these
changes will not be greater than estimated or that any future health care
legislation or reimbursement changes will not adversely affect the Company's
business.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(UNAUDITED)
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued)
NASDAQ Continued Listing
------------------------
The Company's stockholder's deficiency was $10.8 million as of March 31, 2010
and $2.9 million as of June 30, 2009. As a result of the Company's failure to
meet the minimum stockholders equity requirement of $2.5 million, NASDAQ issued
a notice of non-compliance but granted the Company an extension to October 5,
2009 to evidence compliance with the minimum stockholders' equity requirement or
minimum net income requirement for continued listing on the NASDAQ Capital
Market. Following the filing of the Company's Form 10-K for the year ended June
30, 2009, the Company had still not met the minimum stockholders' net equity
requirement, but had achieved compliance with the alternative minimum net income
requirement of $500,000, showing a net income of $1.1 million.
NOTE 13 - LICENSE FEES AND ROYALTIES
In July 2000, the Company entered into a non-exclusive sales representative
agreement with an unrelated third party. The agreement requires the third party
to sell at least two Fonar MRI scanners or if it does not, pay an amount equal
to the Company's gross margin on the unsold MRI scanners. The Company received
the gross margin payment on one scanner of $585,493 in November 2008 and applied
a previously received deposit for two other gross margin payments for a total of
$1,755,493 which was included in revenue for the year ended June 30, 2009. The
Company received the last gross margin payment of $585,493 in July 2009, which
has been included in revenue for the nine months ended March 31, 2010. As of
April 2009, this agreement has expired.
NOTE 14 - NOTES RECEIVABLE
On October 27, 2009, the Company entered into an agreement with Mountain Crest
Ventures LLC to assign the promissory note from Health Plus for the Asset
Purchase Agreement. The Company received $1,580,862, which represented the
remaining principal balance less a discount of $350,000. Mountain Crest Ventures
LLC retains all rights under the original promissory note to collect all
remaining payments due. The Company recorded the $350,000 loss in the financial
statements for the nine months ended March 31, 2010.
NOTE 15 - 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
MARCH 31, 2010
(UNAUDITED)
NOTE 15 - 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 2004.
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 March 31, 2010, no liability for unrecognized tax
benefits was required to be recorded. The Company does not expect its
unrecognized tax benefit position to change during the next 12 months.
The Company recognized a deferred tax asset of $836,542 and a deferred tax
liability of $836,542 as of March 31, 2010, primarily relating to net operating
loss carryforwards of approximately $169,682,000 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.
FONAR CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
For the nine month period ended March 31, 2010, we reported a net loss of $3.0
million on revenues of $23.2 million as compared to net income of $1.1 million
on revenues of $29.3 million for the nine month period ended March 31, 2009. We
recognized an operating loss of $2.7 million for the nine month period ended
March 31, 2010 compared to an operating loss of $386,000 for the nine month
period ended March 31, 2009. The principal reason for the smaller net loss in
the first nine months of fiscal 2009 as compared to the first nine months of
fiscal 2010 was that during the first quarter of fiscal 2009, we recognized a
gain of $1.4 million on the sale of a consolidated entity. Another reason is
that we had $1.8 million in license fees and royalties in the first nine months
of fiscal 2009 as compared to $585,000 in license fees and royalties in the
first nine months of fiscal 2010. The license fees were paid pursuant to an
agreement which expired during April 2009.
For the three month period ended March 31, 2010, we reported net loss of $8,000
on revenues of $7.5 million as compared to net income of $730,000 on revenues of
$11.3 million for the three month period ended March 31, 2009.
Overall, our revenues decreased 20.8% from $29.3 million for the first nine
months of fiscal 2009 to $23.2 million for the first nine months of fiscal 2010.
Revenues from service and repair fees increased 5.4%, from $7.9 million for the
first nine months of fiscal 2009 to $8.3 million for the first nine months of
fiscal 2010, but product sales declined 45.9%, from $12.0 million for the first
nine months of 2009 to $6.5 million for the first nine months of fiscal 2010.
Due to the decrease in our revenues our operating loss for the nine months ended
March 31, 2010 increased as compared to the nine months ended March 31, 2009 (a
$2.7 million operating loss for the first nine months of fiscal 2010 as compared
to a $386,000 operating loss for the first nine months of fiscal 2009). The
increase in the operating loss was principally due to the decrease in revenues
of 20.8%, while costs and expenses in the aggregate declined only 12.9%, from
$29.7 million in the first nine months of fiscal 2009 to $25.9 million in the
first nine months of fiscal 2010.
In order to reduce our operating losses and demands on our cash and other liquid
reserves, we continued to pursue our program of cost cutting during January 2010
through further reductions in the size of our workforce and significant
reductions in compensation paid to our continuing employees. These measures
supplemented our previous reductions in the size of our workforce, compensation
and benefits, as well as across the board reduction of expenses. These cost
reductions are intended to enable us to withstand periods of lower volumes of
MRI scanner sales, such as we have experienced in fiscal 2009 and 2010, by
keeping expenditures at levels which, if necessary, can be supported by service
revenues and HMCA revenues.
Forward Looking Statements
Certain statements made in this Quarterly Report on Form 10-Q are "forward-
looking statements" (within the meaning of the Private Securities Litigation
Reform Act of 1995) regarding the plans and objectives of Management for future
operations. Such statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, performance or achievements to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. The forward-looking
statements included herein are based on current expectations that involve
numerous risks and uncertainties. Our plans and objectives are based, in part,
on assumptions involving the expansion of business. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond our control. Additionally, health care policy changes, including the
Patient Protection and Affordable Care Act and the Health Care and Education
Affordability Reconciliation Act of 2010 may have a material adverse effect on
our operations or financial results. Although we believe that our assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
forward-looking statements included in this Report will prove to be accurate. In
light of the significant uncertainties inherent in the forward-looking statement
included herein, the inclusion of such information should not be regarded as a
representation by us or any other person that our objectives and plans will be
achieved.
Results of Operations
We operate in two industry segments: the manufacture and servicing of medical
(MRI) equipment, our traditional business which is conducted directly by Fonar,
and diagnostic facilities management services, which is conducted through
Fonar's wholly-owned subsidiary, Health Management Corporation of America, which
we also refer to as HMCA.
Trends in the third quarter of fiscal 2010 include a decrease in product sales
revenues and an increase in service and repair fees, an increase in management
fees, as well a decrease in our total costs and expenses, in particular in our
costs related to 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 in fiscal 2010. In addition, we will monitor our cost
cutting program and will continue to reduce costs as necessary.
For the three month period ended March 31, 2010, as compared to the three month
period ended March 31, 2009, overall revenues from MRI product sales decreased
68.2% ($2.0 million compared to $6.2 million).
For the nine month period ended March 31, 2010, as compared to the nine month
period ended March 31, 2009, overall revenues from MRI product sales decreased
45.9% ($6.5 million compared to $12.0 million).
Service revenues for the three month period ended March 31, 2010 as compared to
the three month period ended March 31, 2009 increased 8.0% ($2.8 million
compared to $2.6 million). Unrelated party service and repair fees increased
8.2% ($2.8 million compared to $2.6 million) and related party service and
repair fees remained constant at $55,000. We anticipate that there will be
increases in service revenues as warranties on installed scanners expire over
time.
Service revenues for the nine month period ended March 31, 2010, as compared to
the nine month period ended March 31, 2009 increased by 5.4% ($8.3 million
compared to $7.9 million). Unrelated party service and repair fees increased by
5.5% ($8.2 million compared to $7.7 million) and related party service and
repair fees remained constant at $165,000.
There were approximately $3.5 million in foreign revenues for the first nine
months of fiscal 2010 as compared to approximately $3.4 million in foreign
revenues for the first nine months of fiscal 2009, representing an increase in
foreign revenues of 2.9%.
Overall, for the first nine months of fiscal 2010, revenues for the medical
equipment segment decreased by 28.8% to $15.4 million from $21.6 million for the
first nine months of fiscal 2009. The revenues generated by HMCA increased, by
1.6%, to $7.8 million for the first nine months of fiscal 2010 as compared to
$7.7 million for the first nine months of fiscal 2009.
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 59.3% from $3.3 million in the third
quarter of fiscal 2009 to $1.4 million in the third quarter of 2010, reflecting
a decrease in product sales revenues and lower cost basis for parts and
components.
Costs related to product sales decreased by 30.3% from $7.6 million in the first
nine months of fiscal 2009 to $5.3 million in the first nine months of 2010,
reflecting the corresponding decrease in product sales revenues as well as our
lower cost basis for parts and components.
Costs related to providing service for the third quarter decreased by 41.7% from
$990,000 in the third quarter of fiscal 2009 to $577,000 in fiscal 2010,
notwithstanding an increase in service revenues of 8.0%, from $2.6 million in
the third quarter of fiscal 2009 to $2.8 million in the third quarter of fiscal
2010. 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.
Costs related to providing service decreased by 17.5% from $3.0 million in the
first nine months of fiscal 2009 to $2.5 million in fiscal 2010, while revenues
from service increased 5.4% from $7.9 million in fiscal 2009 to $8.3 million in
fiscal 2010.
Overall, the operating results for our medical equipment segment, HMCA,
reflected an operating loss of $1.3 million for the first nine months of fiscal
2010 as compared to an operating income of $207,000 for the first nine months of
fiscal 2009.
HMCA revenues increased in the third quarter of fiscal 2010 by 10.0% to $2.7
million from $2.5 million for the third quarter of fiscal 2009, primarily due to
increased revenues from our Florida locations. HMCA revenues for the first nine
months of fiscal 2010, increased slightly by 1.6% from $7.7 million in the first
nine months of fiscal 2009 to $7.8 million in the first nine months of fiscal
2010. We now manage ten sites, nine of which are equipped with FONAR UPRIGHT(R)
MRI scanners. HMCA experienced an operating loss of $1.4 million for the first
nine months of fiscal 2010 compared to operating loss of $593,000 for the first
nine months of fiscal 2009. The greater operating loss was due primarily to an
increase in the marketing personnel for the sites managed by HMCA and an
increase in selling, general and administrative expenses.
HMCA cost of revenues for the first nine months of fiscal 2009 as compared to
the first nine months of fiscal 2010 increased by 15.7% from $5.4 million to
$6.2 million. HMCA cost of revenues increased to $2.0 million for the third
quarter of fiscal 2010 as compared to $1.7 million for the third quarter of
fiscal 2009. The increase in HMCA's cost of revenues was primarily the result of
the increased expenditures we have been making to improve HMCA revenues by our
marketing efforts, which focus on the unique capability of our Upright(R) MRI
Scanners to scan patients in different positions.
In 2009, the Obama administration announced its intentions for healthcare reform
in the United States. The plan contemplates providing healthcare coverage for
some 40 million uninsured Americans. The plan calls for, among other things,
more vigilant control of healthcare utilization, including diagnostic imaging
services. In November of 2009, the U.S. House of Representatives passed a
healthcare reform bill. In December of 2009, the Senate passed a different
healthcare reform bill.
In March 2010, President Obama signed into law the Patient Protection and
Affordable Care Act and the Health Care and Education Affordability Act of 2010.
This health reform legislation requires employers to provide employees with
insurance coverage that meets minimum eligibility and coverage requirements or
face penalties. The legislation also includes provisions that will impact the
number of individuals with insurance coverage, the types of coverage and level
of health benefits that will be required and the amount of payment providers
performing health care services will receive. The legislation imposes
implementation effective dates beginning in 2010 and extending through 2020.
Many of the changes require additional guidance from government agencies or
federal regulations. Therefore, it is difficult to determine at this time what
impact the health reform legislation will have on the Company or its customers.
The proposed changes in the Medicare and Medicaid programs, could reduce our
sales and have a material adverse effect on our business, financial condition
and results of operations. In addition, the health reform legislation provides
for an excise tax on United States sales of Class I, Class II and Class III
medical devices (which include our scanners) beginning in 2013, which could also
have a material adverse effect on the Company.
The use of radiology benefit managers, or RBM's has increased in recent years.
It is common practice for health insurance carriers to contract with RBMs to
manage utilization of diagnostic imaging procedures for their insureds. In many
cases, this leads to lower utilization of imaging procedures based on a
determination of medical necessity. The efficacy of RBMs is still a highly
controversial topic. The Company cannot predict whether the current
administration's healthcare plan and the use of RBMs will negatively impact its
business, but it is possible that the Company's financial position and results
of operations could be negatively affected by increased utilization of RBMs.
While the Company has prepared certain estimates of the impact of the above
discussed changes and proposed changes, it is not possible to fully quantify
their impact on its business. There can be no assurance that the impact of these
changes will not be greater than estimated or that any future health care
legislation or reimbursement changes will not adversely affect the Company's
business.
The decrease in our consolidated net revenues of 33.2% from $11.3 million in the
third quarter of fiscal 2009 to $7.5 million in the third quarter of fiscal
2010, was offset in part by a decrease of 28.6% in total costs and expenses from
$10.5 million in the third quarter of fiscal 2009 compared to $7.5 million in
the third quarter of fiscal 2010. As a result, our income from operations
changed from $762,000 in the third quarter of fiscal 2009 to $25,000 in the
third quarter of fiscal 2010.
For the first nine months of fiscal 2010 the consolidated revenues decreased by
20.8% to $23.2 million from $29.3 million for the first nine months of fiscal
2009 while the total costs and expenses decreased by only 12.9% to $25.9 million
for the first nine months of fiscal 2010 from $29.7 million for the first nine
months of fiscal 2009. Our operating loss increased from $386,000 in the first
nine months of fiscal 2009 to $2.7 million in the first nine months of fiscal
2010.
Selling, general and administrative expenses decreased by 9.2% to $9.0 million
in the first nine months of fiscal 2010 from $10.0 million in the first nine
months of fiscal 2009. The compensatory element of stock issuances, which is
included in selling, general and administrative expenses, was $99,000 for the
first nine months of fiscal 2010 as compared to $0 for the first nine months of
fiscal 2009.
Research and development expenses decreased by 19.5% to $2.2 million for the
first nine months of fiscal 2010 as compared to $2.7 million for the first nine
months of fiscal 2009.
Interest expense in the first nine months of fiscal 2010 increased to $275,000
compared to $193,000 for the first nine months of fiscal 2009.
Inventories decreased by 7.6% to $2.9 million at March 31, 2010 as compared to
$3.2 million at June 30, 2009 representing the use of raw materials and
components in our inventory to fill orders.
Management fee and medical receivables decreased by 16.3% to $4.9 million at
March 31, 2010 from $5.8 million at June 30, 2009, primarily due to improved
collections on the Company's management fee and medical receivables.
The overall trends reflected in the results of operations for the first nine
months of fiscal 2010 are an increase in revenues from service and repair fees,
as compared to the first nine months of fiscal 2009 ($8.3 million for the first
nine months of fiscal 2010 as compared to $7.9 million for the first nine months
of fiscal 2009), and a decrease in MRI equipment segment revenues both
absolutely ($15.4 million as compared to $21.6 million) and relative to HMCA
revenues ($15.4 million or 66.3% from the MRI equipment segment as compared to
$7.8 million or 33.7% from HMCA, for the first nine months of fiscal 2010, as
compared to $21.6 million or 73.8% from the MRI equipment segment and $7.7
million or 26.2%, from HMCA, for the first nine months of fiscal 2009).
Unrelated party sales constituted 100% of our medical equipment product sales
for both the first nine months of fiscal 2010 and of fiscal 2009.
We are committed to improving the operating results we experienced in the first
nine months in fiscal 2010. Nevertheless, factors beyond our control, such as
the timing and rate of market growth which depend on economic conditions,
including the availability of credit, payor reimbursement rates and policies,
and unexpected expenditures or the timing of such expenditures, make it
impossible to forecast future operating results. We believe we are pursuing the
correct policies which should prove successful in improving the Company's
operating results.
Our FONAR UPRIGHT(R) MRI, and Fonar-360(TM) MRI scanners, together with our
works-in-progress, are intended to significantly improve our competitive
position.
Our FONAR UPRIGHT(R) MRI scanner, which operates at 6000 gauss (.6 Tesla) field
strength, allows patients to be scanned while standing, sitting, reclining and
in multiple flexion and extension positions. It is common in visualizing the
spine that abnormalities are visualized in some positions and not others. This
enables surgical corrections that heretofore would be unaddressable for lack of
visualizing the symptom causing the pathology. A floor-recessed elevator brings
the patient to the height appropriate for the targeted image region. A
custom-built adjustable bed will allow patients to sit or lie on their backs,
sides or stomachs at any angle. Full-range-of- motion studies of the joints in
virtually any direction are possible and another promising feature for sports
injuries.
Recently, this capability of the FONAR UPRIGHT(R) technology has demonstrated
its key value on patients with the Arnold-Chiari syndrome, which is believed to
affect 200,000 to 500,000 Americans. In this syndrome, brain stem compression
and subsequent severe neurological symptoms occur in these patients, when
because of weakness in the support tissues within the skull, the brain stem
descends and is compressed at the base of the skull in the foramen magnum, which
is the circular bony opening at the base of the skull where the spinal cord
exits the skull. Conventional lie-down MRI scanners cannot make an adequate
evaluation of the pathology since the patient's pathology is most visible and
the symptoms most acute when the patient is scanned in the upright
weight-bearing position.
The UPRIGHT(R) MRI has also demonstrated its value for patients suffering from
scoliosis. Scoliosis patients have been typically subjected to routine x- ray
exams for years and must be imaged upright for an adequate evaluation of their
scoliosis. Because the patient must be standing for the exam, an x-ray machine
has been the only modality that could provide that service. The UPRIGHT(R) MRI
is the only MRI scanner which allows the patient to stand during the MRI exam.
Fonar has developed a new RF receiver and scanning protocol that for the first
time allows scoliosis patients to obtain diagnostic pictures of their spines
without the risks of x-rays. A recent study by the National 'Cancer Institute
(2000) of 5,466 women with scoliosis reported a 70% increase in breast cancer
resulting from 24.7 chest x-rays these patients received on the average in the
course of their scoliosis treatment. The UPRIGHT(R) MRI examination of scoliosis
enables the needed imaging evaluation of the degree of spine scoliosis without
exposing the patient to the risk of breast cancer from x-radiation. Currently
scoliosis affects more than 3,000,000 American women.
In addition, the University of California, Los Angeles (UCLA) reported their
results of their study of 1,302 patients utilizing the FONAR UPRIGHT(R)
Multi-Position(TM) MRI at the 22nd Annual Meeting of the North American Spine
Society on October 23, 2007. The UCLA study showed the superior ability of the
Dynamic(TM) FONAR UPRIGHT(R) MRI to detect spine pathology, including
spondylolisthesis, disc herniations and disc degneration, as compared to
visualizations of the spine produced by traditional single position static MRIs.
The UCLA study by MRI of 1,302 back pain patients when they were UPRIGHT(R) and
examined in a full range of flexion and extension positions made possible by
FONAR's new UPRIGHT(R) technology established that significant "misses" of
pathology were occurring with static single position MRI imaging. At L4-5, the
vertebral level responsible for 49.8% of lumbar disc herniations, 35.1% of the
spondylolistheses (vertebral instabilities) visualized by Dynamic(TM)
Multi-Position(TM) MRI were being missed by static single position MRI (510
patients). Since this vertebral segment is responsible for the majority of all
disc herniations, the finding may reveal a significant cause of failed back
surgeries. The UCLA study further showed the "miss-rate" of vertebral
instabilities by static only MRI was even higher, 38.7%, at the L3-4 vertebral
segment. Additionally the UCLA study showed that MRI examinations of the
cervical spine that did not perform extension images of the neck "missed" disc
bulges 23.75% of the time (163 patients).
The UCLA study further reported that they were able to quantitatively measure
the dimensions of the central spinal canal with the "highest accuracy" using the
FONAR UPRIGHT(R) Multi-Position(TM) MRI thereby enabling the extent of spinal
canal stenosis that existed in patients to be measured. Spinal canal stenosis
gives rise to the symptom complex intermittent neurogenic claudication manifest
as debilitating pain in the back and lower extremities, weakness and
difficulties in ambulation and leg paresthesias. Spinal canal stenosis is a
spinal compression syndrome separate and distinct from the more common nerve
compression syndrome of the spinal nerves as they exit the vertebral column
through the bony neural foramen.
The FONAR UPRIGHT(R) MRI can also be useful for MRI directed emergency
neuro-surgical procedures as the surgeon would have unhindered access to the
patient's head when the patient is supine with no restrictions in the vertical
direction. This easy-entry, mid-field-strength scanner could prove ideal for
trauma centers where a quick MRI-screening within the first critical hour of
treatment will greatly improve patients' chances for survival and optimize the
extent of recovery.
The Fonar 360(TM) is an enlarged room sized magnet in which the floor, ceiling
and walls of the scan room are part of the magnet frame. This is made possible
by Fonar's patented Iron-Frame(TM) technology which allows the Company's
engineers to control, contour and direct the magnet's lines of flux in the
patient gap where wanted and almost none outside of the steel of the magnet
where not wanted. Consequently, this scanner allows surgeons and other
interventional physicians to walk inside the magnet and achieve 360 degree
access to the patient to perform interventional procedures.
The Fonar 360(TM) is presently marketed as a diagnostic scanner and is sometimes
referred to as the Open Sky(TM) MRI. In its Open Sky(TM) version, the Fonar
360(TM) serves as an open patient friendly scanner which allows 360 degree
surgical access to the patient on the scanner bed. To optimize the
patient-friendly character of the Open Sky(TM) MRI, the walls, floor, ceiling
and magnet poles are decorated with landscape murals. The patient gap is twenty
inches and the magnetic field strength, like that of the FONAR UPRIGHT(R), is
0.6 Tesla.
In the future, we expect the Fonar 360(TM) to function as an interventional MRI.
The enlarged room sized magnet and 360o access to the patient afforded by the
Fonar 360(TM) permits surgeons to walk into the magnet and perform surgical
interventions on the patient under direct MR image guidance. Most importantly
the exceptional quality of the MRI image and its capacity to exhibit tissue
detail on the image, can then be obtained real time during the procedure to
guide the interventionalist. Thus surgical instruments, needles, catheters,
endoscopes and the like could be introduced directly into the human body and
guided directly to a malignant lesion using the MRI image. The number of
inoperable lesions could be significantly reduced by the availability of this
new FONAR technology. Most importantly treatment can be carried directly to the
target tissue.
The first Fonar 360(TM) MRI scanner, installed at the Oxford-Nuffield Orthopedic
Center in Oxford, United Kingdom, is now carrying a full diagnostic imaging
caseload. In addition, however, development of the works in progress Fonar
360(TM) MRI image guided interventional technology is actively progressing.
Fonar software engineers have completed and installed their 2nd generation
tracking software at Oxford-Nuffield which is designed to enable the surgeons to
insert needles into the patient and accurately advance them, under direct visual
image guidance, to the target tissue, such as a tumor, so that therapeutic
agents can be injected.
The Company expects marked demand for its most commanding MRI products, the
FONAR UPRIGHT(R) MRI and the Fonar 360(TM) because of their exceptional features
in patient diagnosis and treatment. These scanners additionally provide improved
image quality and higher imaging speed because of their higher field strength of
..6 Tesla. The geometry of the FONAR UPRIGHT(R) MRI as compared to a single coil,
or multiple coils on only one axis and its transverse magnetic field enables the
use of two detector rf coils operating in quadrature which increases the FONAR
UPRIGHT(R) MRI signal to noise ratio by 40%, providing a signal to noise ratio
equal to a .84T recumbent only MRI scanner.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities decreased from $1.2 million at
June 30, 2009 to $602,000 at March 31, 2010. Marketable securities approximated
$32,000 as of March 31, 2010, as compared to $23,000 at June 30, 2009.
Cash used in operating activities for the first nine months of fiscal 2010 was
$1.7 million. Cash used in operating activities was attributable to a decrease
of inventories of $241,000, an increase in billings in excess of costs and
estimated earnings on uncompleted contracts of $1.0 million and a decrease in
costs and estimated earnings in excess of billings on uncompleted contracts of
$464,000, an increase in other current liabilities of $212,000, offset by a
decrease in customer advances of $3.0 million and the net loss of $3.0 million.
Cash provided by investing activities for the first nine months of fiscal 2010
was $1.1 million. The principal source of cash from investing activities during
the first nine months of fiscal 2010 consisted mainly of proceeds from a note
receivable of $1.6 million offset by capitalized software and patent costs of
$452,000.
Cash used in financing activities for the first nine months of fiscal 2010 was
$73,000. The principal uses of cash in financing activities during the first
nine months of fiscal 2010 consisted of repayment of principal on long-term debt
and capital lease obligations of $147,000, offset by repayment of notes
receivable from employee stockholders of $74,000.
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 $ 1,586 $ 373 $ 361 $ 328 $ 524
Capital lease
Obligations 232 131 101 - -
Operating
Leases 10,253 1,954 3,945 3,025 1,329
Stipulation
Agreements 536 412 112 12 -
--------- --------- --------- -------- ---------
-
Total cash
Obligations $ 12,607 $ 2,870 $ 4,519 $ 3,365 $ 1,853
========= ========= ========= ======== =========
Total liabilities decreased by 7.3% to $29.0 million at March 31, 2010 from
$31.3 million at June 30, 2009. We experienced an increase in long-term debt and
capital leases from $759,000 at June 30, 2009 to $1.2 million at March 31, 2010
and a decrease in accounts payable from $3.7 million at June 30, 2009 to $3.5
million at March 31, 2010, along with an increase in billings in excess of costs
and estimated earnings on uncompleted contracts from $2.0 million at June 30,
2009 to $3.0 million at March 31, 2010, and a decrease in customer advances from
$9.2 million at June 30, 2009 to $6.1 million at March 31, 2010. Unearned
revenue on service contracts increased from $5.5 million at June 30, 2009 to
$5.8 million at March 31, 2010.
As of March 31, 2010, the total of $7.7 million in other current liabilities
included primarily accrued salaries and payroll taxes of $686,000, accrued
interest of $945,000 and sales taxes of $2.6 million.
Our working capital deficit remained constant at $10.8 million at March 31, 2010
and June 30, 2009. This resulted from a decrease in current assets ($18.3
million at June 30, 2009 as compared to $15.7 million at March 31, 2010)
particularly a decrease in the current portion of notes receivable of $432,000
($518,000 at June 30, 2009 as compared to $86,000 at March 31, 2010), and a
decrease in management fee receivable of $704,000 ($5.5 million at June 30, 2009
as compared to $4.8 million at March 31, 2010) along with a decrease in current
liabilities ($29.1 million at June 30, 2009 as compared to $26.5 million at
March 31, 2010) resulting primarily from a decrease of approximately $179,000 in
the current portion of accounts payable ($3.5 million at June 30, 2009 as
compared to $3.3 million at March 31, 2010) and a decrease of $3.1 million in
customer advances ($9.2 million at June 30, 2009 as compared to $6.1 million at
March 31, 2010).
Fonar has not committed to making any significant capital expenditures in the
2010 fiscal year.
Our business plan calls for a continuing emphasis on providing our customers
with enhanced equipment service and maintenance capabilities and delivering
state-of-the-art, innovative and high quality equipment and upgrades at
competitive prices. Also critical to our business plan are improvement and
expansion the MRI facilities managed by our subsidiary HMCA.
The Company continues to focus its efforts on increased marketing campaigns to
strengthen the demand for its products and services. Management anticipates that
its capital resources will improve if Fonar's MRI scanner products gain wider
market recognition and acceptance resulting in increased product sales and
demand for Upright scanning at the facilities HMCA manages. Current economic
credit conditions have contributed to a slowing business environment. Given such
liquidity and credit constraints in the markets, the business has and may
continue to suffer, should the credit markets not improve in the near future.
The direct impact of these conditions is not fully known. However, there can be
no assurance that the Company would be able to secure additional funds if needed
and that if such funds were available, whether the terms or conditions would be
acceptable to the Company. In such case, the further reduction in operating
expenses as well as possible sale of other operating subsidiaries might need to
be substantial in order for the Company to generate positive cash flow to
sustain the operations of the Company.
At March 31, 2010, the Company had a working capital deficiency of approximately
$10.8 million and a stockholders' deficiency of approximately $5.8 million. For
the nine months ended March 31, 2010, the Company incurred a net loss of
approximately $3.0 million, which included non-cash charges of approximately
$2.4 million. The Company has funded its cash flow deficit for the nine months
ended March 31, 2010 through cash used in operations.
On October 27, 2009, in order to improve our liquidity the Company entered into
an agreement with Mountain Crest Ventures LLC to assign the promissory note
issued by Health Plus Management Services, LLC in connection with a Asset
Purchase Agreement which closed in July, 2005. The Company received $1,580,862,
which represented the remaining principal balance less a discount of $350,000.
Mountain Crest Ventures LLC retains all rights under the original promissory
note to collect all remaining payments due. The Company recorded the $350,000
discount in the financial statements for the nine months ended March 31, 2010.
Management anticipates that Fonar's capital resources will improve if (1)
Fonar's MRI scanner products gain wider market recognition and acceptance
resulting in increased product sales, (2) service and maintenance revenues
increase as the warranties on scanners expire and (3) HMCA revenues can be
increased through the Company's vigorous marketing efforts. In addition,
Management is exploring the possibility of equity and/or loan financing to
improve liquidity. If we are not successful with our marketing efforts to
increase revenues and are unable to raise debt or equity capital, we will
experience a shortfall in cash, and it will be necessary to further reduce
operating expenses to attempt to avoid the need to curtail our operations.
Current economic credit conditions have contributed to a slowing business
environment. The precise impact of these conditions can not be fully predicted.
There can be no assurance that we would be able to secure additional funds if
needed.
The accompanying financial statements have been prepared in accordance with
accounting principals generally accepted in the United States of America and
assume that the Company will continue as a going concern. The Company still
suffers recurring losses from operations, continues to generate negative cash
flows from operating activities and had negative working capital at March 31,
2010. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company maintains its funds in liquid accounts. None of our investments are
in fixed rate instruments.
All of our revenue, expense and capital purchasing activities are transacted in
United States dollars.
Item 4T. Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rule 13(a)-15(e)) are controls
and other procedures that are designed to ensure that information required to be
disclosed by a public company in the reports that it files or submits under the
Exchange Act, is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a public company in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the company's management, including its principal executive and
principal financial officers, or persons performing similar functions, as
appropriate to allow for timely decisions regarding required disclosure.
Disclosure controls and procedures include many aspects of internal control over
financial reporting.
In connection with the preparation of this Quarterly Report on Form 10-Q for the
quarter ended March 31, 2010, management, with the participation of our Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of our disclosure controls and procedures pursuant to Rule 13a-15 under the
Exchange Act and have determined that such controls and procedures were
effective as of March 31, 2010.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls or in other factors that could
significantly affect these controls, during the quarter ended March 31, 2010,
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings: There were no material changes in litigation for the
first nine months of fiscal 2010.
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: Exhibits
Exhibit 31.1 Certification See Exhibits
Exhibit 32.1 Certification See Exhibits
Report on Form 8-K containing the Company's
Earnings Report for the first quarter of
fiscal 2010.
See Report on Form 8-K dated February 22,
2010,
Commission File No. 000-10248
FONAR CORPORATION AND SUBSIDIARIES
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: May 21, 2010