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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended DECEMBER 31, 2011

 

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to _____________

 

Commission file number 0-10248

 

FONAR CORPORATION

____________________________________________

(Exact name of registrant as specified in its charter)

 

DELAWARE   11-2464137
(State or other jurisdiction of   (I.R.S. Employer
Incorporation or organization)   Identification No.)
     
110 Marcus Drive  Melville, New York   11747
(Address of principal executive offices)   (Zip Code)

 

Registrant's telephone number, including area code: (631) 694-2929

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES _X_ NO ___

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files. YES _X_ NO ___

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.(Check one): Large accelerated filer___ Accelerated filer___ Non-accelerated filer___ Smaller reporting company _X_

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ___ NO _X_

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the latest practicable date.

 

Class  Outstanding at January 31, 2012
Common Stock, par value $.0001   5,835,428 
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 - December 31, 2011
(Unaudited) and June 30, 2011
   3 
Condensed Consolidated Statements of Income for the Three Months Ended December 31, 2011 and December 31, 2010 (Unaudited)   6 
Condensed Consolidated Statements of Income for the Six Months Ended December 31, 2011 and December 31, 2010 (Unaudited)   7 
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended December 31, 2011 and December 31, 2010 (Unaudited)   8 
Condensed Consolidated Statements of Comprehensive Income for the Six Months Ended December 31, 2011 and December 31, 2010 (Unaudited)   9 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2011 and December 31, 2010 (Unaudited)   10 
Notes to Condensed Consolidated Financial Statements (Unaudited)   11 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations   21 
Item 3. Quantitative and Qualitative Disclosures About Market Risk   31 
Item 4. Controls and Procedures   31 
PART II - OTHER INFORMATION   32 
Item 1. Legal Proceedings   32 
Item 1A. Risk Factors   32 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   32 
Item 3. Defaults Upon Senior Securities   32 
Item 4. (Removed and Reserved)   32 
Item 5. Other Information   32 
Item 6. Exhibits   32 
Signatures   32 

 

 

 

 

 

 

 

 

Page 2

 
 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(000's OMITTED)

 

ASSETS

 

   December 31,  June 30,
   2011  2011
Current Assets:  (UNAUDITED)   
Cash and cash equivalents  $9,911   $9,251 
           
Marketable securities   30    33 
           
Accounts receivable – net   4,823    5,264 
           
Accounts receivable - related party   60    —   
           
Management and other fees receivable - net   3,635    3,309 
           
Management and other fees receivable – related medical practices – net   1,307    1,669 
           
Costs and estimated earnings in excess of billings on uncompleted contracts   1,152    169 
           
Inventories   3,806    2,400 
           
Current portion of notes receivable - net   115    114 
           
Prepaid expenses and other current assets   270    352 
           
Total Current Assets   25,109    22,561 
           
Property and equipment – net   3,374    3,769 
           
Notes receivable   315    359 
           
Other intangible assets – net   4,120    4,318 
           
Other assets   535    574 
           
Total Assets  $33,453   $31,581 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

Page 3

 
 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(000's OMITTED)

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

   December 31,  June 30,
   2011  2011
   (UNAUDITED)   
Current Liabilities:          
Current portion of long-term debt and capital
Leases
  $1,636   $2,026 
 Accounts payable   1,959    2,187 
 Other current liabilities   8,956    8,236 
 Unearned revenue on service contracts   5,275    5,762 
Unearned revenue on service contracts - related Parties   55    —    
 Customer advances   3,303    4,846 
Billings in excess of costs and estimated earnings on uncompleted contracts   736    4 
 Income tax payable   —       75 
     Total Current Liabilities   21,920    23,136 
Long-Term Liabilities:          
 Accounts payable   141    102 
 Due to related medical practices   229    228 
Long-term debt and capital leases, less current Portion   1,490    1,746 
 Other liabilities   494    502 
     Total Long-Term Liabilities   2,354    2,578 
     Total Liabilities   24,274    25,714 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

Page 4

 
 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(000's OMITTED)

 

LIABILITIES AND STOCKHOLDERS' EQUITY (Continued)

 

 

   December 31,  June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY  2011  2011
(continued)  (UNAUDITED)   
STOCKHOLDERS' EQUITY:          
Class A non-voting preferred stock $.0001 par value; 453,000 shares authorized at December 31, 2011 and June 30, 2011, 313,451 issued and outstanding at December 31, 2011 and June 30, 2011   —      —   
Preferred stock $.001 par value; 567,000 shares authorized at December 31, 2011 and June 30, 2011, issued and outstanding – none   —      —   
Common Stock $.0001 par value; 8,500,000 shares authorized at December 31, 2011 and June 30, 2011, 5,774,371 and 5,636,571 issued at December 31, 2011 and June 30, 2011, respectively; 5,762,728 and 5,624,928 outstanding at December 31, 2011 and June 30, 2011, respectively   1    1 
Class B Common Stock (10 votes per share) $ .0001 par value; 227,000 shares authorized at December 31, 2011 and June 30, 2011, 158 issued and outstanding at December 31, 2011 and June 30, 2011   —      —   
Class C Common Stock (25 votes per share) $.0001 par value; 567,000 shares authorized at December 31, 2011 and June 30, 2011, 382,513 issued and outstanding at December 31, 2011 and June 30, 2011   —      —   
Paid-in capital in excess of par value   173,729    173,476 
Accumulated other comprehensive loss   (20)   (16)
Accumulated deficit   (171,061)   (174,110)
Notes receivable from employee stockholders   (74)   (115)
Treasury stock, at cost - 11,643 shares of common stock at December 31, 2011 and June 30, 2011   (675)   (675)
Non controlling interests   7,279    7,306 
Total Stockholders' Equity   9,179    5,867 
Total Liabilities and Stockholders' Equity  $33,453   $31,581 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

Page 5

 
 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(000's OMITTED, except per share data)

 

 

   FOR THE THREE MONTHS ENDED
   DECEMBER 31,
REVENUES  2011  2010
 Product sales – net  $1,615   $1,789 
 Service and repair fees – net   2,807    2,653 
  Service and repair fees – related parties - net   27    55 
 Management and other fees – net   3,308    2,380 
Management and other fees – related medical
practices – net
   1,571    1,142 
     Total Revenues – Net   9,328    8,019 
           
COSTS AND EXPENSES          
 Costs related to product sales   1,171    1,368 
 Costs related to service and repair fees   868    700 
Costs related to service and repair fees –
related parties
   9    15 
 Costs related to management and other fees   1,887    1,707 
Costs related to management and other fees –
related medical practices
   901    633 
 Research and development   293    153 
 Selling, general and administrative   1,995    1,745 
 Provision for bad debts   310    255 
     Total Costs and Expenses   7,434    6,576 
           
Income From Operations   1,894    1,443 
           
Interest Expense   (124)   (137)
Investment Income   64    58 
Other Expense   (1)   (1)
Provision for Income Taxes   (21)   —    
           
Net Income   1,812    1,363 
Net Income - Non Controlling Interests   276    —   
Net Income - Controlling Interests  $1,536   $1,363 
Net Income Available to Common Stockholders  $1,432   $1,262 
Net Income Available to Class A Non-Voting
Preferred Stockholders
  $78   $75 
Net Income Available to Class C Common
Stockholders
  $26   $26 
Basic Net Income Per Common Share  $0.25   $0.25 
Diluted Net Income Per Common Share  $0.24   $0.24 
Basic and Diluted Income Per Share-Common C  $0.07   $0.07 
Weighted Average Basis Shares Outstanding   5,728,528    5,149,499 
Weighted Average Diluted Shares Outstanding   5,856,032    5,277,003 

 

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

Page 6

 
 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(000's OMITTED, except per share data)

 

 

   FOR THE SIX MONTHS ENDED
   DECEMBER 31,
   2011  2010
REVENUES          
 Product sales – net  $3,391   $4,448 
 Service and repair fees – net   5,712    5,342 
Service and repair fees – related parties - net   55    110 
 Management and other fees – net   6,637    4,469 
Management and other fees – related medical
practices – net
   3,141    2,335 
     Total Revenues – Net   18,936    16,704 
           
COSTS AND EXPENSES          
 Costs related to product sales   2,646    3,873 
 Costs related to service and repair fees   1,682    1,366 
Costs related to service and repair fees –
related parties
   16    28 
 Costs related to management and other fees   4,072    3,021 
Costs related to management and other fees –
related medical practices
   1,720    1,372 
 Research and development   622    607 
 Selling, general and administrative   4,037    4,128 
 Provision for bad debts   485    431 
     Total Costs and Expenses   15,280    14,826 
           
Income From Operations   3,656    1,878 
           
Interest Expense   (231)   (231)
Interest Expense – Related Party   —      (4)
Investment Income   126    96 
Interest Income - Related Party   —      1 
Other Income   55    8 
Provision for Income Taxes   (21)   —   
Net Income   3,585    1,748 
Net Income - Non Controlling Interests   535    —   
Net Income - Controlling Interests  $3,050   $1,748 
Net Income Available to Common Stockholders  $2,842   $1,618 
Net Income Available to Class A Non-voting
Preferred Stockholders
  $155   $97 
Net Income Available to Class C Common
Stockholders
  $53   $33 
Basic Net Income Per Common Share  $0.50   $0.32 
Diluted Net Income Per Common Share  $0.49   $0.31 
Basic and Diluted Income Per Share-Common C  $0.14   $0.09 
Weighted Average Basic Shares Outstanding   5,698,645    5,080,872 
Weighted Average Diluted Shares Outstanding   5,826,149    5,208,376 

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

Page 7

 
 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(000'S OMITTED)

 

 

   FOR THE THREE MONTHS ENDED
   DECEMBER 31,
   2011  2010
Net income  $1,812   $1,363 
Other comprehensive income, net of tax:
Unrealized gains on marketable securities,
net of tax
   1    1 
Total comprehensive income  $1,813   $1,364 
Comprehensive income-non controlling interests   276    —    
Comprehensive income-controlling interests  $1,537   $1,364 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

Page 8

 
 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(000'S OMITTED)

 

 

 

   FOR THE SIX MONTHS ENDED
   DECEMBER 31,
   2011  2010
Net income  $3,585   $1,748 
Other comprehensive income, net of tax:
Unrealized gains on marketable securities,
net of tax
   (4)   5 
 Total comprehensive income  $3,581   $1,753 
Comprehensive income-non controlling interests   535    —    
Comprehensive income-controlling interests  $3,046   $1,753 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

Page 9

 
 

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(000'S OMITTED)

 

 

  FOR THE SIX MONTHS ENDED DECEMBER 31,
  2011  2010
Cash Flows from Operating Activities:         
 Net income $3,585   $1,748 
Adjustments to reconcile net income to
net cash provided by operating activities:
        
   Depreciation and amortization  1,049    872 
   Provision for bad debts  485    431 
   Stock issued for costs and expenses  220    247 
   Compensatory element of stock issuances  34    118 
(Increase) decrease in operating assets, net:         
    Accounts, management fee and medical receivable(s)  (68)   (469)
   Notes receivable  42    (291)
Costs and estimated earnings in excess of billings on uncompleted contracts  (983)   5 
   Inventories  (1,406)   70 
   Prepaid expenses and other current assets  82    259 
   Other assets  38    (119)
   Advances and notes to related medical practices  —       83 
Increase (decrease) in operating liabilities, net:         
   Accounts payable  (189)   (694)
   Other current liabilities  (312)   1,328 
   Customer advances  (943)   (364)
Billings in excess of costs and estimated
earnings on uncompleted contracts
 732    (1,611)
   Other liabilities  (8)   19 
   Due to related medical practices  1    (296)
   Income tax payable  (75)   —   
Net cash provided by operating activities  2,284    1,336 
          
Cash Flows from Investing Activities:         
 Sales of marketable securities  (1)   (1)
 Purchases of property and equipment  (380)   —    
 Costs of capitalized software development  —      (66)
Cost of patents  (75)   (82)
Net cash used in investing activities  (456)   (149)
          
Cash Flows from Financing Activities:         
 Repayment of borrowings and capital lease obligations  (646)   (597)
 Distributions to non controlling interests  (563)   —    
Repayment of notes receivable from employee
Stockholders
 41    72 
Net cash used in financing activities  (1,168)   (525)
Net Increase in Cash and Cash Equivalents  660    662 
Cash and Cash Equivalents – Beginning of Period  9,251    1,299 
Cash and Cash Equivalents - End of Period $9,911   $1,961 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

Page 10

 
 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011

(UNAUDITED)

 

 

NOTE 1 - BASIS OF PRESENTATION & LIQUIDITY & CAPITAL RESOURCES

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended December 31, 2011, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2012. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K filed on September 30, 2011 for the fiscal year ended June 30, 2011.

 

Liquidity and Going Concern

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and assume that the Company will continue as a going concern.

 

Although the Company has experienced seven consecutive fiscal quarters of profitability, we previously had a history of operating losses and negative cash flows from operating activities. We had a stockholders’ deficiency as recently as the fourth fiscal quarter of fiscal 2011, until we completed a private placement of $6 million on May 2, 2011. In the event that we are unable to sustain our current profitability or are otherwise unable to secure external financing, we may not be able to meet our obligations as they come due, raising substantial doubts as to our ability to continue as a going concern. Our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles, contemplate that we will continue as a going concern and do not contain any adjustments that might result if we were unable to continue as a going concern. Changes in our operational plans, our existing and anticipated working capital needs, the acceleration or modification of our business plans, lower than anticipated revenues, increased expenses, potential acquisitions or other events will all affect our ability to continue as a going concern.

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The unaudited condensed consolidated financial statements include the accounts of FONAR Corporation, its majority and wholly-owned subsidiaries and partnerships (collectively the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.

 

 

 

 

Page 11

 
 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011

(UNAUDITED)

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Earnings Per Share

 

Basic earnings per share (“EPS”) is computed based on weighted average shares outstanding and excludes any potential dilution. In accordance with ASC topic 260-10, “Participating Securities and the Two-Class method”, the Company used the Two-Class method for calculating basic earnings per share and applied the if converted method in calculating diluted earnings per share for the three and six months ended December 31, 2011 and December 31, 2010.

 

Diluted EPS reflects the potential dilution from the exercise or conversion of all dilutive securities into common stock based on the average market price of common shares outstanding during the period. For the three and six months ended December 31, 2011 and December 31, 2010, the number of common shares potentially issuable upon the exercise of certain options of 16,205 and 68,000; respectively, have not been included in the computation of diluted EPS since the effect would be antidilutive.

 

   Three months ended December 31, 2011  Three months ended December 31, 2010
   (000's omitted, except per share data)
Basic   Total    Common Stock    Class C Common Stock    Total    Common Stock    Class C Common Stock 
Numerator:                              
Net income Available
to common stockholders
  $1,536   $1,432   $26   $1,363   $1,262   $26 
Denominator:                              
Weighted average shares
  outstanding
   5,729    5,729    383    5,149    5,149    383 
Basic income per common
  share
  $0.27   $0.25   $0.07   $0.26   $0.25   $0.07 
                               
Diluted                              
Denominator:                              
Weighted average shares
  outstanding
        5,729    383         5,149    383 
Stock options        —      —           —      —   
Convertible Class C Stock        128    —           128    —   
Total Denominator for diluted
  earnings per share
        5,857    383         5,277    383 
Diluted income per
  common share
       $0.24   $0.07        $0.24   $0.07 
                               

 

 

 

Page 12

 
 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011

(UNAUDITED)

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Earnings Per Share (Continued)

 

 

 

   Six months ended December 31, 2011  Six months ended December 31, 2010
   (000's omitted, except per share data)
Basic   Total    Common Stock    Class C Common Stock    Total    Common Stock    Class C Common Stock 
Numerator:                              
Net income available to
  common stockholders
  $3,050   $2,842   $53   $1,748   $1,618   $33 
Denominator:                              
Weighted average shares
  outstanding
   5,699    5,699    383    5,081    5,081    383 
Basic income per common
  share
  $0.54   $0.50   $0.14   $0.34   $0.32   $0.09 
                               
Diluted                              
Denominator:                              
Weighted average shares
  outstanding
        5,699    383         5,081    383 
Stock options        —       —            —       —    
Convertible Class C
  Stock
        128    —            128    —    
Total Denominator for
  diluted earnings per
  share
        5,857    383         5,209    383 
Diluted income per
  common share
       $0.49   $0.14        $0.31   $0.09 

 

 

  

Recent Accounting Pronouncements

 

In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-08, Intangibles-Goodwill and Other (Topic 350):Testing Goodwill for Impairment, to simplify how entities test goodwill for impairment. ASU 2011-08 allows entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If a greater than 50 percent likelihood exists that the fair value is less than the carrying amount then a two-step goodwill impairment test as described in Topic 350 must be performed. The guidance provided by this update becomes effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this standard is not expected to have a material impact on the Company’s condensed consolidated financial position and results of operations.

 

 

Page 13

 
 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011

(UNAUDITED)

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recent Accounting Pronouncements Continued

 

In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05. ASU 2011-12 defers the requirement that companies present reclassification adjustments for each component of Accumulated Other Comprehensive Income in both net income and Other Comprehensive Income on the face of the financial statements. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. The guidance provided by this update becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this standard is not expected to have a material impact on the Company’s condensed consolidated position and results of operations.

 

FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of June 30, 2011 that will become effective in subsequent periods; however, management does not believe that any of those updates would have significantly affected our financial accounting measures or disclosures had they been in effect during 2011 or 2010, and it does not believe that any of those pronouncements will have a significant impact on our condensed consolidated financial statements at the time they become effective.

 

Reclassifications

 

Certain prior year amounts have been reclassified to conform to the current year presentation. The reclassifcations did not have any effect on reported consolidated net income for any periods presented.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Page 14

 
 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011

(UNAUDITED)

 

 

NOTE 3 – ACCOUNTS, MANAGEMENT & OTHER FEES RECEIVABLE

 

 

Receivables, net is comprised of the following at December 31, 2011:

 

(000’s Omitted)

   Gross
Receivable
  Allowance for
doubtful accounts
  Net
Receivables from equipment sales and
  service contracts
  $6,610   $1,787   $4,823 
Receivables from equipment sales and
  service contracts – related party
  $60    —     $60 
Management and other fees
Receivables
  $10,593   $6,958   $3,635 
Management and other fees
Receivables from related medical
Practices ("PC’s")
  $1,710   $403   $1,307 

 

The Company's customers are concentrated in the healthcare industry.

 

The Company's receivables from the related and non-related professional corporations (PC's) substantially consists of fees outstanding under management agreements. Payment of the outstanding fees is dependent on collection by the PC's of fees from third party medical reimbursement organizations, principally insurance companies and health management organizations.

 

Payment of the management fee receivables from the PC’s may be impaired by the inability of the PC’s to collect in a timely manner their medical fees from the third party payors, particularly insurance carriers covering automobile no-fault and workers compensation claims due to longer payment cycles and rigorous informational requirements and certain other disallowed claims. Approximately 58% and 32% of the PC's net revenues for the six months ended December 31, 2011 and 2010, respectively, were derived from no-fault and personal injury protection claims. The Company considers the aging of its accounts receivable in determining the amount of allowance for doubtful accounts. The Company generally takes all legally available steps to collect its receivables. Credit losses associated with the receivables are provided for in the condensed consolidated financial statements and have historically been within management's expectations.

 

Page 15

 
 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011

(UNAUDITED)

 

 

NOTE 3 – ACCOUNTS, MANAGEMENT & OTHER FEES RECEIVABLE (Continued)

 

Net revenues from management and other fees charged to the related PCs accounted for approximately 16.6% and 14.0% of the consolidated net revenues for the six months ended December 31, 2011 and 2010, respectively.

 

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)

 

   December 31,
2011
  June 30,
2011
Purchased parts, components
  and supplies
  $2,898   $1,818 
Work-in-process   908    582 
   $3,806   $2,400 

 

 

NOTE 5 - COSTS & ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

 

1) Information relating to uncompleted contracts as of December 31, 2011 is as

follows:

(000's omitted)

 

Costs incurred on uncompleted contracts  $3,107 
Estimated earnings   1,592 
    4,699 
Less: Billings to date   4,283 
   $416 

 

Included in the accompanying condensed consolidated balance sheet at December 31, 2011 under the following captions:

 

   Costs and estimated earnings in excess of billings on
      uncompleted contracts
  $1,152 
      
Less: Billings in excess of costs and estimated earnings
      on uncompleted contracts
   736 
   $416 

 

 

 

Page 16

 
 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011

(UNAUDITED)

 

 

NOTE 5 - COSTS & ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS (Continued)

 

2) Customer advances consist of the following as of December 31, 2011:

 

   Total  Related Party  Other
Total Advances  $7,586   $—     $7,586 
Less: Advances               
     on contracts under construction   4,283    —      4,283 
   $3,303   $—     $3,303 

 

 

NOTE 6 – STOCKHOLDERS EQUITY

 

Common Stock

 

During the six months ended December 31, 2011:

 

a) The Company issued 20,000 shares of common stock to employees and consultants as compensation valued at $33,800 under a stock bonus plan.

 

b) The Company issued 117,800 shares of common stock for costs and expenses of $219,882.

 

 

NOTE 7 – OTHER CURRENT LIABILITIES

 

Other current liabilities in the accompanying condensed consolidated balance sheet consist of the following:

 

(000’s omitted)

 

December 31,  June 30,
   2011  2011
Accrued salaries, commissions
and payroll taxes
  $567   $839 
Accrued interest   176    157 
Litigation accruals   493    193 
Sales tax payable   2,748    2,732 
Legal and other professional fees   623    694 
Accounting fees   251    435 
Insurance premiums   92    22 
Interest and penalty - sales tax   2,017    1,923 
Penalty  - 401k plan  (see Note 10)   250    250 
Purchase scanners   1,148    105 
Rent   283    461 
Other   308    425 
   $8,956   $8,236 

 

 

 

 

 

Page 17

 
 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011

(UNAUDITED)

 

NOTE 8 - SEGMENT AND RELATED INFORMATION

 

The Company operates in two industry segments - manufacturing and the servicing of medical equipment and management of diagnostic imaging centers.

 

The accounting policies of the segments are the same as those described in the summary of significant accounting policies as disclosed in the Company’s 10-K as of June 30, 2011. All inter-segment sales are market-based. The Company evaluates performance based on income or loss from operations.

 

Summarized financial information concerning the Company's reportable segments is shown in the following table:

(000's omitted)

   Medical Equipment  Management of Diagnostic Imaging Centers  Totals
For the three months ended December 31, 2011               
Net revenues from external customers  $4,449   $4,879   $9,328 
Inter-segment net revenues  $203   $—     $203 
Income from operations  $791   $1,103   $1,894 
Depreciation and amortization  $170   $354   $524 
Capital expenditures  $36   $264   $300 
                
For the three months ended December 31, 2010               
Net revenues from external customers  $4,496   $3,523   $8,019 
Inter-segment net revenues  $225   $—     $225 
Income from operations  $943   $500   $1,443 
Depreciation and amortization  $218   $375   $593 
Capital expenditures  $97   $—     $97 
                
For the six months ended December 31, 2011               
Net revenues from external customers  $9,158   $9,778   $18,936 
Inter-segment net revenues  $405   $—     $405 
Income from operations  $1,542   $2,114   $3,656 
Depreciation and amortization  $345   $704   $1,049 
Capital expenditures  $75   $380   $455 
                
For the six months ended December 31, 2010               
Net revenues from external customers  $9,900   $6,804   $16,704 
Inter-segment net revenues  $457   $—     $457 
Income from operations  $960   $918   $1,878 
Depreciation and amortization  $412   $460   $872 
Capital expenditures  $148   $—     $148 

 

Page 18

 
 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011

(UNAUDITED)

 

 

NOTE 9 – SUPPLEMENTAL CASH FLOW INFORMATION

 

During the six months ended December 31, 2011 and December 31, 2010, the Company paid $76,000 and $146,000 for interest, respectively.

 

NOTE 10 – COMMITMENTS AND CONTINGENCIES

 

Litigation

 

The Company is subject to legal proceedings and claims arising from the ordinary course of its business, including personal injury, customer contract and employment claims. In the opinion of management, the aggregate liability, if any, with respect to such actions, will not have a material adverse effect on the consolidated financial position or results of operations of the Company.

 

There were no material changes in litigation from that reported in our Form 10-K for the fiscal year ended June 30, 2011. In the Golden Triangle Company v. Fonar Corporation et al case (U.S. District Court for the Eastern District of New York CV10-2932), the Company made a motion to dismiss the plaintiff’s amended complaint, which was granted, leaving only the cause of action for breach of contract. The claims against the individual officers and employees were also dismissed. The Company filed its answer to the complaint, together with a counterclaim alleging the plaintiff, by attempting to overcharge the end customer, has damaged the Company’s reputation and ability to sell in Kuwait. The plaintiff, in turn has answered our counterclaim. In the Matt Malek Madison v. Fonar case (U.S. District Court, Northern District of California), Fonar appealed the judgment against it, but the U.S. Court of Appeals for 9th Circuit affirmed the judgment of the District Court on January 31, 2012, awarding the plaintiff the $300,000 deposit with prejudgment interest from July 1, 2006. The $300,000 plus interest of $72,000 has been accrued as of December 31, 2011. Notwithstanding the foregoing, we are planning to ask the Court of Appeals to reconsider its decision in an en banc (larger panel of judges) proceeding.

 

Other Matters

 

The Company is also delinquent in filing sales tax returns for certain states, for which the Company has transacted business. As of December 31, 2011, the Company has recorded tax obligations of approximately $2,426,000 plus interest and penalties of approximately $2,017,000. The Company is in the process of determining the regulatory requirements in order to become compliant.

 

The Company has determined they may not be in compliance with the Department of Labor and Internal Revenue Service regulations concerning the requirements to file Form 5500 to report activity of its 401(k) Employee Benefit Plan. The filings do not require the Company to pay tax, however they may be subject to penalty for non-compliance. The Company has recorded provisions for any potential penalties totaling $250,000. The amount was the Company’s best estimate of potential penalties. Management is unable to determine the outcome of this uncertainty. The Company has engaged outside counsel to handle such matters to determine the necessary requirements to ensure compliance. On August 31, 2011, the Company submitted with the Internal Revenue Service a request for a compliance statement and a determination letter for our 401K plan. On December 9, 2011, the Internal Revenue Service issued a favorable determination letter on our 401K plan. The Company is still working with outside counsel to complete and file forms with the US Department of Labor.

Page 19

 
 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011

(UNAUDITED)

 

 

NOTE 11 - INCOME TAXES

 

Effective January 1, 2007, the Company adopted the provisions of ASC topic 740 (formerly FASB Interpretation No. 48/FASB Statement No. 109, “Accounting for Uncertainty in Income Taxes”). ASC topic 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a corporate tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits”. A liability is recognized (or amount of net operating loss carryforward or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC topic 740.

 

In accordance with ASC topic 740, interest costs related to unrecognized tax benefits are required to be calculated (if applicable) and would be classified as “Interest expense, net”. Penalties if incurred would be recognized as a component of “Selling, general and administrative” expenses.

 

The Company files corporate income tax returns in the United States (federal) and in various state and local jurisdictions. In most instances, the Company is no longer subject to federal, state and local income tax examinations by tax authorities for years prior to 2006.

 

The adoption of the provisions of ASC topic 740 did not have a material impact on the Company’s consolidated financial position and results of operations. Upon the adoption and as of December 31, 2011, no liability for unrecognized tax benefits was required to be recorded. The Company does not expect its unrecognized tax benefit position to change during the next 12 months.

 

The Company recognized a deferred tax asset, net of valuation allowance of $605,460 and a deferred tax liability of $605,460 as of December 31, 2011, primarily relating to net operating loss carryforwards of approximately $164,939,000 available to offset future taxable income through 2029. The net operating losses begin to expire in 2012 for federal and 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.

 

 

Page 20

 
 

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011

(UNAUDITED)

 

 

NOTE 12 – SUBSEQUENT EVENTS

 

During the period from January 1, 2012 through January 31, 2012, the Company issued 72,700 shares of common stock for costs and expenses of $129,181 under the 2010 Stock Bonus Plan.

 

 

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

For the six month period ended December 31, 2011, we reported a net income of $3.6 million on revenues of $18.9 million as compared to net income of $1.7 million on revenues of $16.7 million for the six month period ended December 31, 2010. We recognized an operating income of $3.7 million for the six month period ended December 31, 2011 compared to an operating income of $1.9 million for the six month period ended December 31, 2010. The principal reason for our increased net income in the first six months of fiscal 2012 as compared to our net income for the first six months of fiscal 2011, was a significant increase in revenues for management fees coupled with a smaller increase in costs and expenses.

 

For the three month period ended December 31, 2011, we reported net income of $1.8 million on revenues of $9.3 million as compared to net income of $1.4 million on revenues of $8.0 million for the three month period ended December 31, 2010.

 

Overall, our revenues increased 13.4% from $16.7 million for the first six months of fiscal 2011 to $18.9 million for the first six months of fiscal 2012. Although revenues from service and repair fees increased 5.8% from $5.5 million the first six months of fiscal 2011 to $5.8 million the first six months of fiscal 2012, and product sales decreased 23.8%, from $4.4 million for the first six months of 2010 to $3.4 million for the first six months of fiscal 2012, management fees increased by 43.7% from $6.8 million for the first six months of fiscal 2011 to $9.8 million for the first six months of fiscal 2012.

 

Due to the increase in our revenues along with a smaller increase in our costs and expenses, we recognized an operating income for the six months ended December 31, 2011 of $3.7 million as compared to an operating income of $1.9 for the six months ended December 31, 2010. The increase in the operating income was principally due to the smaller increase in costs and expenses of 3.1% from $14.8 million in the first six months of fiscal 2011 to $15.3 million in the first six months of fiscal 2012, revenues increased 13.4%, from $16.7 million in the first six months of fiscal 2011 to $18.9 million in the first six months of fiscal 2012.

 

During Fiscal 2012, we continued to recognize benefits from the cost cutting measures we adopted in January, 2010, when we made reductions in the size of our workforce and significant reductions in compensation paid to our continuing employees. These measures supplemented our previous reductions in the size of our workforce, compensation and benefits, as well as across the board reduction of expenses. These cost reductions are intended to enable us to withstand periods of lower volumes of MRI scanner sales, by keeping expenditures at levels which, if necessary, can be supported by service revenues and diagnostic facility management revenues.

 

 

Page 21

 
 

FONAR CORPORATION AND SUBSIDIARIES

 

These controls, combined with our intensive efforts to increase our management fees and the addition of a new billing and collection contract in particular in fiscal 2011, are responsible for our profitability during the six months ended December 31, 2011.

 

Forward Looking Statements

 

Certain statements made in this Quarterly Report on Form 10-Q are "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995) regarding the plans and objectives of Management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Our plans and objectives are based, in part, on assumptions involving the expansion of business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Additionally, health care policy changes, including the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act of 2010 may have a material adverse effect on our operations or financial results. Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statement included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.

 

Results of Operations

 

We operate in two industry segments: the manufacture and servicing of medical (MRI) equipment, our traditional business which is conducted directly by Fonar, and diagnostic facilities management services, which is conducted through Fonar’s wholly-owned subsidiary, Health Management Corporation of America, which we also refer to as HMCA.

 

In May 2011, HMCA contributed all of its assets, liabilities and business to Imperial which is controlled but not wholly-owned by HMCA. Imperial is continuing the business of HMCA utilizing the same facilities, equipment and personnel as HMCA. This transaction did not result in a change of control or policy, but was solely a means to raise capital. To avoid confusion in making comparisons and to show the continuity of the business, our physician management and diagnostic services segment is sometimes referred to as “HMCA-IMPERIAL” for both periods before and after May 2, 2011.

 

Trends in the first half of fiscal 2012 include an increase in management and other fee revenues, which more than offset the decline in product sales revenues. Also costs related to product sales decreased 31.7% from $3.9 million for the first six months of fiscal 2011 to $2.6 million for the first six months of fiscal 2012 which corresponds to the decrease in product sales. We will continue to focus on our marketing efforts to improve sales performance and increase patient volume at the MRI facilities managed by HMCA-IMPERIAL in fiscal 2012. In addition, we will monitor our cost control program and will continue to reduce costs as necessary.

 

Page 22

 
 

FONAR CORPORATION AND SUBSIDIARIES

 

For the three month period ended December 31, 2011, as compared to the three month period ended December 31, 2010 overall revenues from MRI product sales decreased 9.7% ($1.6 million compared to $1.8 million), and for the six month period ended December 31, 2011, as compared to the six month period ended December 31, 2010 overall revenues from MRI product sales decreased 23.8% ($3.4 million compared to $4.4 million). Continuing tight credit and world-wide economic uncertainty have depressed the market for our MRI products, which in the overwhelming majority of cases are purchased on credit.

 

Service revenues for the three month period ended December 31, 2011 as compared to the three month period ended December 31, 2010 increased 4.7% ($2.8 million compared to $2.7 million). Unrelated party service and repair fees increased 5.8% ($2.8 million compared to $2.7 million) and related party service and repair fees decreased from $55,000 for the three month period ended December 31, 2010 as compared to $27,000 for the three month period ended December 31, 2011. We anticipate that there will be increases in service revenues as warranties on installed scanners expire over time.

 

Service revenues for the six month period ended December 31, 2011 as compared to the six month period ended December 31, 2011 increased 5.8% ($5.8 million compared to $5.5 million). Unrelated party service and repair fees increased 6.9% ($5.7 million compared to $5.3 million) and related party service and repair fees decreased from $110,000 for the six months ended December 31, 2010 as compared to $55,000 for the six months ended December 31, 2011.

 

There were approximately $1.2 million in foreign revenues for the first six months of fiscal 2012 as compared to approximately $1.6 million in foreign revenues for the first six months of fiscal 2011, representing a decrease in foreign revenues of 24%. We do not regard this as a material trend, but as part of a normal variation resulting from low volumes of foreign sales.

 

Overall, for the first six months of fiscal 2012, revenues for the medical equipment segment decreased by 7.5% to $9.2 million from $9.9 million for the first six months of fiscal 2011. The revenues generated by HMCA-IMPERIAL increased by 43.7%, to $9.8 million for the first six months of fiscal 2012 as compared to $6.8 million for the first six months of fiscal 2011. This trend reflects an increase in the percentage of our revenues derived from our diagnostic facilities management segment relative to our medical equipment segment (51.6% for the first six months of fiscal 2012 relative to 40.7% for the first six months of fiscal 2011). The increase in HMCA-IMPERIAL revenues was the result of increased marketing efforts for the scanning centers.

 

We recognize MRI scanner sales revenues on the “percentage of completion” basis, which means the revenues are recognized as the scanner is manufactured. Revenues recognized in a particular quarter do not necessarily reflect new orders or progress payments made by customers in that quarter. We build the scanner as the customer meets certain benchmarks in its site preparation in order to minimize the time lag between incurring costs of manufacturing and our receipt of the cash progress payments from the customer which are due upon delivery. Consequently, there can be a disparity between the revenues recognized in a fiscal period and the number of product sales. Generally, the recognized revenue 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 14.4% from $1.4 million in the second quarter of fiscal 2011 to $1.2 million in the second quarter of 2012, resulting from a decrease in the manufacturing activity. Costs related to product sales also decreased by 31.7% from $3.9 million in the first six months of fiscal 2011 to $2.6 million in the first six months of fiscal 2012.

Page 23

 
 

FONAR CORPORATION AND SUBSIDIARIES

 

Costs related to providing service for the second quarter increased by 22.7% from $715,000 in the second quarter of fiscal 2011 to $877,000 in fiscal 2012, notwithstanding an increase in service revenues of 4.6%, from $2.7 million in the second quarter of fiscal 2011 to $2.8 million in the second quarter of fiscal 2012. Certain of the costs of providing service (employee salaries and overhead, for example) are not directly tied to revenue. Notwithstanding the foregoing, we believe that an important factor in controlling our service costs 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 for the first six months increased by 21.8% from $1.4 million in the six months of fiscal 2011 to $1.7 million in fiscal 2012, notwithstanding that service revenues increased 5.8% from $5.5 million in the first six months of fiscal 2011 to $5.8 million in the first six months of fiscal 2012.

 

Overall, the operating results for our medical equipment segment declined to an operating income of $791,000 for the second quarter of fiscal 2012 as compared to an operating income of $943,000 for the second quarter of 2011, but improved to an operating income of $1.5 million for the first six months of fiscal 2012 as compared to an operating income of $960,000 for the first six months of fiscal 2011.

 

HMCA-IMPERIAL revenues increased in the second quarter of fiscal 2012 by 38.5% to $4.9 million from $3.5 million for the second quarter of fiscal 2011, primarily due to increased revenues from our New York locations. Part of this increase in revenues was due to HMCA’s acquisition of Fair Haven Services, Inc. (“Fairhaven”) from Dr. Raymond V. Damadian, the President, Chairman of the Board and principal stockholder of the Company for $10 effective as of October 1, 2010. Fairhaven is the Company which leases the MRI scanners to the New York sites managed by HMCA-IMPERIAL. Also contributing to the increase in revenue is the increase in management and other fees which was due to renegotiating our annual management contracts with the professional corporations we manage, along with the acquisition of a new billing and collection contract with Health Diagnostics LLC.

 

HMCA-IMPERIAL revenues for the first six months of fiscal 2012 increased by 43.7% from $6.8 million in the first six months of fiscal 2011 to $9.8 million in the first six months of fiscal 2012. We now manage ten sites all of which are equipped with FONAR UPRIGHT® MRI scanners. HMCA-IMPERIAL experienced an operating income of $2.1 million for the first six months of fiscal 2012 compared to operating income of $918,000 for the first six months of fiscal 2011. The greater operating income was due primarily to an increase in management and other fees and the acquisition of a new billing and collection contract.

 

HMCA-IMPERIAL cost of revenues for the first six months of fiscal 2011 as compared to the first six months of fiscal 2012 increased by 31.8% from $4.4 million to $5.8 million. The increase in HMCA’s cost of revenues was primarily the result of the increased expenditures we have been making to improve HMCA revenues by our marketing efforts, which focus on the unique capability of our Upright® MRI Scanners to scan patients in different positions.

 

 

 

 

 

 

Page 24

 
 

FONAR CORPORATION AND SUBSIDIARIES

 

The increase in our consolidated net revenues of 16.3% from $8.0 million in the second quarter of fiscal 2011 to $9.3 million in the second quarter of fiscal 2012 was coupled with an increase of 13.0% in total costs and expenses from $6.6 million in the second quarter of fiscal 2011 compared to $7.4 million in the second quarter of fiscal 2012. As a result, our income from operations of $1.4 million in the second quarter of fiscal 2011 increased to $1.9 million in the second quarter of fiscal 2012.

 

For the first six months of fiscal 2012 our consolidated revenues increased by 13.4% to $18.9 million from $16.7 million for the first six months of fiscal 2011 while the total costs and expenses increased by 3.1% to $15.3 million for the first six months of fiscal 2012 from $14.8 million for the first six months of fiscal 2011. Our operating income of $1.9 million in the first six months of fiscal 2011 increased to $3.7 million in the first six months of fiscal 2012.

 

Selling, general and administrative expenses decreased by 2.2% to $4.0 million in the first six months of fiscal 2012 from $4.1 million in the first six months of fiscal 2011. The compensatory element of stock issuances, which is included in selling, general and administrative expenses, was $33,800 for the first six months of fiscal 2012 as compared to $12,000 for the first six months of fiscal 2011.

 

Research and development expenses increased by 2.5% to $622,000 for the first six months of fiscal 2012 as compared to $607,000 for the first six months of fiscal 2011.

 

Interest expense in the first six months of fiscal 2012 and 2011 remained constant at $231,000.

 

Inventories increased by 58.6% to $3.8 million at December 31, 2011 as compared to $2.4 million at June 30, 2011 representing the purchase of raw materials and components in our inventory to fill orders.

 

Management fee and medical receivables decreased by .7% to $4.9 million at December 31, 2011 from $5.0 million at June 30, 2011, primarily due to renegotiated management fee contracts with an unrelated party and increased collections of outstanding receivables.

 

The overall trends reflected in the results of operations for the first six months of fiscal 2012 are an increase in revenues from management and other fees, as compared to the first six months of fiscal 2011 ($9.8 million for the first six months of fiscal 2012 as compared to $6.8 million for the first six months of fiscal 2011), and an decrease in MRI equipment segment revenues both absolutely ($9.2 million as compared to $9.9 million) and as compared to HMCA-IMPERIAL. Revenues were $9.2 million or 48.3% from the MRI equipment segment as compared to $9.8 million or 51.7% from HMCA-IMPERIAL, for the first six months of fiscal 2012, as compared to $9.9 million or 59.3% from the MRI equipment segment and $6.8 million or 40.7%, from HMCA-IMPERIAL, for the first six months of fiscal 2011. Unrelated party sales constituted 100% of our medical equipment product sales for both the first six months of fiscal 2012 and of fiscal 2011.

 

 

 

 

 

 

 

 

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On March 23, 2010, President Obama signed into law healthcare reform legislation in the form of the Patient Protection and Affordable Care Act (PPACA). The implementation of this law could have a profound impact on the healthcare industry. Most of the provisions of PPACA will be phased in over the next four years. In 2011, however, the House of Representatives voted to repeal PPACA; the Senate, however, narrowly defeated the bill to repeal the Act. Over half the States have brought or joined lawsuits challenging the Act as unconstitutional. The Supreme Court is scheduled to decide the issue during its current term (within the year). To date, the PPACA has not had any material effect on our business, and it is not possible in the current legal and political environment to determine the impact of any healthcare reform which ultimately may be implemented.

 

We are committed to improving the operating results we experienced in the first six months in fiscal 2012. Nevertheless, factors beyond our control, such as the timing and rate of market growth which depend on economic conditions, including the availability of credit, payor reimbursement rates and policies, and unexpected expenditures or the timing of such expenditures, make it impossible to forecast future operating results. We believe we are pursuing the correct policies which should prove successful in improving the Company’s operating results.

 

Our FONAR UPRIGHT® MRI, and Fonar-360™ MRI scanners, together with our works-in-progress, are intended to significantly improve our competitive position.

 

Our FONAR UPRIGHT® MRI scanner, which operates at 6000 gauss (.6 Tesla) field strength, allows patients to be scanned while standing, sitting, reclining and in multiple flexion and extension positions. It is common in visualizing the spine that abnormalities are visualized in some positions and not others. This enables surgical corrections that heretofore would be unaddressable for lack of visualizing the symptom causing the pathology. A floor-recessed elevator brings the patient to the height appropriate for the targeted image region. A custom-built adjustable bed will allow patients to sit or lie on their backs, sides or stomachs at any angle. Full-range-of-motion studies of the joints in virtually any direction are possible and another promising feature for sports injuries.

 

Fonar recently announced a major diagnostic breakthrough in multiple sclerosis achieved with advanced UPRIGHT® MRI. In a newly published paper, medical researchers at FONAR report a diagnostic breakthrough in multiple sclerosis (MS), based on observations made possible by the Company’s unique FONAR UPRIGHT® Multi-Position™ MRI scanner. The findings reveal that the cause of multiple sclerosis may be biomechanical and related to earlier trauma to the neck, which can result in obstruction of the flow of cerebrospinal fluid (CSF), which is produced and stored in the central anatomic structures of the brain known as the ventricles. Since the ventricles produce a large volume of CSF each day (500 cc), the obstruction can result in a build up of pressure within the ventricles, resulting in leakage of the CSF into the surrounding brain tissue. This leakage could be responsible for generating the brain lesions of multiple sclerosis. The paper, titled “The Possible Role of Cranio-Cervical Trauma and Abnormal CSF Hydrodynamics in the Genesis of Multiple Sclerosis," has just been published and appears in the latest issue of the journal Physiological Chemistry and Physics and Medical NMR (Sept. 20, 2011, 41: 1-17).

 

 

 

 

 

 

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Recently, this capability of the FONAR UPRIGHT® 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® 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® 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® 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® Multi-Position™ 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™ FONAR UPRIGHT® 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® and examined in a full range of flexion and extension positions made possible by FONAR’s new UPRIGHT® 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™ Multi-Position™ 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).

 

 

 

 

 

 

 

 

 

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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® Multi-Position™ MRI thereby enabling the extent of spinal canal stenosis that existed in patients to be measured. Spinal canal stenosis gives rise to the symptom complex intermittent neurogenic claudication manifest as debilitating pain in the back and lower extremities, weakness and difficulties in ambulation and leg paresthesias. Spinal canal stenosis is a spinal compression syndrome separate and distinct from the more common nerve compression syndrome of the spinal nerves as they exit the vertebral column through the bony neural foramen.

 

Most recently a combined study of 1,200 neck pain patients published in “Brain Injury” (July 2010: 24(7-8): 988-944) by 8 university medical centers reported that cerebellar tonsil ectopia (CTE) 1mm or greater was found and visualized 2.5 times (250%) more frequently when patients who had sustained MVA whiplash injuries were scanned upright rather than lying down (recumbent).

 

The FONAR UPRIGHT® 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™ 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™ 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™ is presently marketed as a diagnostic scanner and is sometimes referred to as the Open Sky™ MRI. In its Open Sky™ version, the Fonar 360™ 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™ 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®, is 0.6 Tesla.

 

In the future, we expect the Fonar 360™ to function as an interventional MRI. The enlarged room sized magnet and 360º access to the patient afforded by the Fonar 360™ 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.

 

 

 

 

 

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The first Fonar 360™ 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™ 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® MRI and the Fonar 360™ 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® MRI magnet and its transverse magnetic field enables the use of two detector rf coils operating in quadrature which increases the FONAR UPRIGHT® MRI signal to noise ratio by 40%, providing a signal to noise ratio equal to a .84T recumbent only MRI scanner.

 

Liquidity and Capital Resources

 

Cash, cash equivalents and marketable securities increased by 7.1% from $9.3 million at June 30, 2011 to $9.9 million at December 31, 2011. Marketable securities approximated $30,000 as of December 31, 2011, as compared to $33,000 at June 30, 2011.

 

Cash provided by operating activities for the first six months of fiscal 2012 was $2.3 million. Cash provided by operating activities was attributable to net income of $3.6 million, an increase in billing in excess of costs and estimated earnings on uncompleted contracts of $732,000 offset by a decrease of customer advances of $1.5 million, an increase in inventories of $1.4 million, a decrease in costs and estimated earnings on uncompleted contracts of $983,000 along with a decrease in accounts payable of $189,000.

 

Cash used in investing activities for the first six months of fiscal 2012 was $456,000. The principal uses of cash used in investing activities during the first six months of fiscal 2012 consisted mainly of capitalized software and patent costs of $75,000, and the purchase of property and equipment of $380,000.

 

Cash used in financing activities for the first six months of fiscal 2012 was $1.2 million. The uses of cash in financing activities during the first six months of fiscal 2012 were the repayment of principal on long-term debt and capital lease obligations, offset by repayment of notes receivable from employee stockholders of $41,000.

 

Total liabilities decreased by 5.6% to $24.3 million at December 31, 2011 from $25.7 million at June 30, 2011. We experienced an increase in other current liabilities from $8.2 million at June 30, 2011 to $8.7 million at December 31, 2011 offset by a decrease in long-term debt and capital leases from $1.7 million at June 30, 2011 to $1.5 million at December 31, 2012, a decrease in accounts payable from $2.2 million at June 30, 2011 to $2.0 million at December 31, 2012, and a decrease in customer advances from $4.8 million at June 30, 2011 to $3.6 million at December 31, 2011. Unearned revenue on service contracts decreased to $5.3 million at December 31, 2011 as compared to $5.8 million at June 30, 2011.

 

As of December 31, 2011, the total of $8.7 million in other current liabilities included accrued salaries and payroll taxes of $567,000, accrued interest of $2.0 million and sales taxes of $2.7 million.

 

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Our working capital increased to $3.2 million at December 31, 2011 from a working capital deficit of $575,000 at June 30, 2011. This resulted from an increase in current assets ($22.6 million at June 30, 2011 as compared to $25.1 million at December 31, 2011), in particular an increase in inventories of $1.4 million ($2.4 million at June 30, 2011 as compared to $3.8 million at December 31, 2011), and a decrease of accounts receivable of $381,000 ($5.3 million at June 30, 2011 as compared to $4.8 million at December 31, 2011) along with a decrease in current liabilities from $23.1 million at June 30, 2011 to $21.9 million at December 31, 2011.

 

Fonar has not committed to making any significant capital expenditures in the remainder of the 2012 fiscal year.

 

Our business plan calls for a continuing emphasis on providing our customers with enhanced equipment service and maintenance capabilities and delivering state-of-the-art, innovative and high quality equipment and upgrades at competitive prices. Also critical to our business plan are improvement and expansion of the MRI facilities managed by our subsidiary HMCA-IMPERIAL.

 

Critical to our business plan are improvement and expansion of the MRI facilities managed by our subsidiary HMCA-IMPERIAL, and increasing the number of scans performed at those facilities. In addition, our business plan calls for a continuing emphasis on providing our customers with enhanced equipment service and maintenance capabilities and delivering state-of-the-art, innovative and high quality equipment and upgrades at competitive prices.

 

The Company continues to focus its efforts on increased marketing campaigns to strengthen the demand for its products and services. Management is seeking to promote wider market recognition of Fonar’s scanner products, and increase demand for Upright® scanning at the facilities HMCA-IMPERIAL manages. Given the liquidity and credit constraints in the markets, the sale of medical equipment has and may continue to suffer. There can be no assurance that the Company would be able to secure additional funds in the event such funds were needed on terms and conditions acceptable to the Company. In such case, further reduction in operating expenses might need to be implemented in order for the Company to generate positive cash flow to sustain the operations of the Company.

 

Management anticipates that Fonar’s capital resources will improve if (1) Fonar’s MRI scanner products gain wider market recognition and acceptance resulting in increased product sales, (2) service and maintenance revenues increase as the warranties on scanners expire and (3) HMCA revenues can be increased through the Company’s vigorous marketing efforts and the installation of more HMCA managed Upright® MRI scanners. If our marketing efforts to increase revenues fail, and we are unable to raise debt or equity capital, we will experience a shortfall in cash, and it will be necessary to further reduce operating expenses to attempt to avoid the need to curtail our operations. Current economic, credit and political conditions have contributed to a slowing business environment for our company. The precise impact of these conditions can not be fully predicted. There can be no assurance that we would be able to secure additional funds if needed.

 

 

 

 

 

 

 

 

 

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Although the Company has experienced seven consecutive fiscal quarters of profitability, we previously had a history of operating losses and negative cash flows from operating activities. We had a stockholders deficiency as recently as the fourth fiscal quarter of fiscal 2011, until we completed a private placement of $6 million on May 2, 2011. In the event that we are unable to sustain our current profitability and working capital surplus, and are unable to secure external financing, we may not be able to meet our obligations as they come due, raising substantial doubts as to our ability to continue as a going concern. Our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles, contemplate that we will continue as a going concern and do not contain any adjustments that might result if we were unable to continue as a going concern. Changes in our operational plans, our existing and anticipated working capital needs, the acceleration or modification of our business plans, lower than anticipated revenues, increased expenses, or other events may all affect our ability to continue as a going concern.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The Company maintains its funds in liquid accounts. None of our investments are in fixed rate instruments.

 

All of our revenue, expense and capital purchasing activities are transacted in United States dollars.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

Disclosure controls and procedures (as defined in Rule 13(a)-15(e)) are controls and other procedures that are designed to ensure that information required to be disclosed by a public company in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a public company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow for timely decisions regarding required disclosure. Disclosure controls and procedures include many aspects of internal control over financial reporting.

 

In connection with the preparation of this Quarterly Report on Form 10-Q for the six months ended December 31, 2011, management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act and have determined that such controls and procedures were effective as of December 31, 2011.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal controls or in other factors that could significantly affect these controls, during the quarter ended December 31, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

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PART II – OTHER INFORMATION

 

Item 1 – Legal Proceedings: There were no material changes in litigation from that reported in our Form 10-K for the fiscal year ended June 30, 2011 and the Form 10-Q for the fiscal quarter ended December 31, 2011. In the Golden Triangle Company v. Fonar Corporation et al case (U.S. District Court for the Eastern District of New York CV10-2932), the Company has made a motion to dismiss the plaintiff’s amended complaint, which was granted, leaving only the cause of action for breach of contract. The claims against the individual officers and employees were also dismissed. Fonar filed its answer to the complaint, together with a counterclaim alleging the plaintiff, by attempting to overcharge the end customer has damaged Fonar’s reputation and ability to sell in Kuwait. The plaintiff, in turn, has answered our counterclaim. In the Matt Malek Madison v. Fonar case (U.S. District Court, Northern District of California), Fonar appealed the judgment against it, but the U.S. Court of Appeals for 9th Circuit affirmed the judgment of the District Court on January 31, 2012, awarding the plaintiff the $300,000 deposit with prejudgment interest from July 1, 2006. The $300,000 plus interest of $72,000 has been accrued as of December 31, 2011. Notwithstanding the foregoing, we are planning to ask the Court of Appeals to reconsider its decision in an en banc (larger panel of judges) proceeding.

 

Item 1A – Risk Factors: Not required. We are a smaller reporting company.

 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds: None

 

Item 3 - Defaults Upon Senior Securities: None

 

Item 4 - (Removed and Reserved)

 

Item 5 - Other Information: None

 

Item 6 - Exhibits and Reports on Form 8-K:

a) Exhibit 31.1 Certification. See Exhibits

b) Exhibit 32.1 Certification. See Exhibits

c) Report on Form 8-K filed on November 15, 2011, Item 2.02: Results of

Operations and Financial Condition for Fiscal 2011

d) Report on Form 8-K filed on November 4, 2011, Item 8.01: Other events

e) Report on Form 8-K filed on October 6, 2011, Item 8.01: Other events

f) Report on Form 8-K filed on October 4, 2011, Item 2.02: Results of

Operations and Financial Condition for first quarter of Fiscal 2012

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

FONAR CORPORATION

(Registrant)

 

By: /s/ Raymond V. Damadian

Raymond V. Damadian

President & Chairman

Dated: February 14, 2012

 

 

 

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