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, 2007
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-10248
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FONAR CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 11-2464137
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110 Marcus Drive Melville, New York 11747
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 694-2929
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (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, 2007
- ----------------------------------------- -----------------------------
Common Stock, par value $.0001 4,865,186
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, 2007
(Unaudited) and June 30, 2006
Condensed Consolidated Statements of Operations for
the Three Months Ended March 31, 2007 and
March 31, 2006 (Unaudited)
Condensed Consolidated Statements of Operations for
the Nine Months Ended March 31, 2007 and
March 31, 2006 (Unaudited)
Condensed Consolidated Statements of Comprehensive
Loss for the Three Months Ended
March 31, 2007 and March 31, 2006 (Unaudited)
Condensed Consolidated Statements of Comprehensive
Loss for the Nine Months Ended
March 31, 2007 and March 31, 2006 (Unaudited)
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended March 31, 2007 and
March 31, 2006 (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 and Reports on Form 8-K
Signatures
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
ASSETS March 31, June 30,
2007 2006
(UNAUDITED)
Current Assets: --------- -------
Cash and cash equivalents $ 2,812 $ 4,557
Marketable securities 2,971 4,938
Accounts receivable - net 4,769 3,359
Accounts receivable - related parties - net 389 499
Medical receivables 3,431 6,053
Management fee receivable - related medical
practices - net 7,327 7,323
Costs and estimated earnings in excess
of billings on uncompleted contracts 209 2,958
Inventories 6,149 7,077
Investment in sales-type lease - 279
Current portion of advances and notes to related
medical practices 213 90
Current portion of note receivable less discount
for below market interest 569 459
Prepaid expenses and other current assets 1,322 1,280
------ ------
Total Current Assets 30,161 38,872
------ ------
Property and equipment - net 5,563 6,667
Advances and notes to related medical practices - net 518 676
Notes receivable less discount for below market interest 5,290 5,719
Other intangible assets - net 5,282 4,930
Other assets 1,665 366
-------- --------
Total Assets $ 48,479 $ 57,230
======== ========
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' EQUITY 2007 2006
(UNAUDITED)
Current Liabilities: ---------- --------
Current portion of long-term debt and
capital leases $ 239 $ 234
Accounts payable 3,892 4,886
Other current liabilities 6,499 6,102
Unearned revenue on service contracts 5,202 4,238
Unearned revenue on service contracts - related parties 454 544
Customer advances 11,268 5,464
Customer advances - related party 42 42
Income taxes payable - 8
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,642 2,979
Billings in excess of costs and estimated
earnings on uncompleted contracts - related party - 137
------ ------
Total Current Liabilities 29,238 24,634
Long-Term Liabilities:
Due to related medical practices 93 93
Long-term debt and capital leases,
less current portion 1,012 1,172
Other liabilities 170 215
------ ------
Total Long-Term Liabilities 1,275 1,480
------ ------
Total Liabilities 30,513 26,114
------ ------
Minority interest 571 697
------ ------
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' EQUITY 2007 2006
(continued) (UNAUDITED)
------------ --------
STOCKHOLDERS' EQUITY
Class A non-voting preferred stock $.0001 par value;
1,600,000 authorized, 313,451 issued and outstanding
At March 31, 2007 and June 30, 2006 - -
Common Stock $.0001 par value; 30,000,000 shares
authorized at March 31, 2007 and June 30, 2006,
4,872,829 issued at March 31, 2007 and
4,599,804 at June 30, 2006; 4,861,186 outstanding at
March 31, 2007 and 4,588,161 at June 30, 2006 - -
Class B Common Stock $ .0001 par value; 800,000
shares authorized, (10 votes per share), 158 issued
and outstanding at March 31, 2007 and June 30, 2006 - -
Class C Common Stock $.0001 par value; 2,000,000 shares
authorized, (25 votes per share), 382,513 issued
and outstanding at March 31, 2007 and June 30, 2006 - -
Paid-in capital in excess of par value 171,999 168,425
Accumulated other comprehensive loss ( 94) ( 246)
Accumulated deficit (153,309) (136,333)
Notes receivable from employee stockholders ( 526) ( 752)
Treasury stock, at cost - 11,643 shares of common stock
at March 31, 2007 and June 30, 2006 ( 675) ( 675)
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Total Stockholders' Equity 17,395 30,419
------- -------
Total Liabilities and Stockholders' Equity $ 48,479 $ 57,230
======= =======
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,
-------------------
2007 2006
REVENUES -------- --------
Product sales - net $ 3,220 $ 1,285
Product sales - related parties - net 1 397
Service and repair fees - net 2,314 2,079
Service and repair fees - related parties - net 243 250
Management and other fees - related medical
practices - net 3,004 3,092
-------- --------
Total Revenues - Net 8,782 7,103
-------- --------
COSTS AND EXPENSES
Costs related to product sales 3,128 1,670
Costs related to product sales - related parties 1 585
Costs related to service and repair fees 1,203 1,291
Costs related to service and repair
fees - related parties 126 153
Costs related to management and other
fees - related medical practices 2,236 2,051
Research and development 1,509 1,683
Selling, general and administrative,
inclusive of compensatory element of stock
issuances of $ 0 and $ 268 for the three months
ended March 31, 2007 and 2006, respectively 5,794 6,253
Provision for bad debts 100 775
-------- --------
Total Costs and Expenses 14,097 14,461
-------- --------
Loss From Operations ( 5,315) ( 7,358)
Interest Expense ( 60) ( 50)
Investment Income 178 207
Interest Income - Related Parties 10 3
Other Income 26 44
Minority Interest in Income of Partnerships ( 240) ( 203)
------ -------
NET LOSS $( 5,401) $( 7,357)
======= =======
Basic and Diluted Loss Per Common Share $ (1.11) $ (1.65)
======== ========
Weighted Average Number of Shares Outstanding 4,860,418 4,460,878
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,
-------------------
2007 2006
REVENUES -------- --------
Product sales - net $ 7,619 $ 7,125
Product sales - related parties - net 143 2,914
Service and repair fees - net 6,806 5,617
Service and repair fees - related parties - net 722 740
Management and other fees - net - 648
Management and other fees - related medical
practices - net 8,947 9,526
License fees and royalties - 1,227
-------- --------
Total Revenues - Net 24,237 27,797
-------- --------
COSTS AND EXPENSES
Costs related to product sales 7,939 7,378
Costs related to product sales - related parties 147 2,655
Costs related to service and repair fees 3,503 3,722
Costs related to service and repair
fees - related parties 371 490
Costs related to management and other fees - 528
Costs related to management and other
fees - related medical practices 6,459 6,724
Research and development 4,320 5,248
Selling, general and administrative,
inclusive of compensatory element of stock
issuances of $ 121 and $ 1,337 for the nine months
ended March 31, 2007 and 2006, respectively 18,017 19,526
Provision for bad debts 286 825
Amortization of management agreements - 37
Termination costs paid with common stock - 1,600
-------- --------
Total Costs and Expenses 41,042 48,733
-------- --------
Loss From Operations (16,805) (20,936)
Interest Expense ( 203) ( 214)
Investment Income 606 617
Interest Income - Related Parties 32 9
Other Income 104 262
Minority Interest in Income of Partnerships ( 710) ( 769)
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NET LOSS $(16,976) $(21,031)
======= ========
Basic and Diluted Loss Per Common Share $ (3.52) $ (4.80)
======== ========
Weighted Average Number of Shares Outstanding 4,817,860 4,384,245
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
(000'S OMITTED)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------
2007 2006
--------- ---------
Net loss $(5,401) $(7,357)
Other comprehensive income, net of tax:
Unrealized gains on securities,
net of tax 40 50
--------- ---------
Total comprehensive loss $(5,361) $(7,307)
========= =========
FOR THE NINE MONTHS ENDED
MARCH 31,
--------------------
2007 2006
--------- ---------
Net loss $(16,976) $(21,031)
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities,
net of tax 152 ( 97)
--------- ---------
Total comprehensive loss $(16,824) $(21,128)
========= =========
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,
--------------------
2007 2006
--------- ---------
Cash Flows from Operating Activities:
Net loss $(16,976) $(21,031)
Adjustments to reconcile net loss to
net cash used in operating activities:
Minority interest in income of partnerships 710 769
Depreciation and amortization 1,987 2,430
Provision for bad debts 286 825
Compensatory element of stock issuances 121 1,337
Stock issued for costs and expenses 1,839 3,001
Termination costs paid with common stock - 1,600
Amortization of unearned compensation - 291
Gain on sale of equipment - ( 3)
Loss from sale of physical medicine
management business - 144
(Increase) decrease in operating assets, net:
Accounts, management fee and medical receivable(s) 1,032 ( 630)
Notes receivable 319 ( 3)
Costs and estimated earnings in excess of
billings on uncompleted contracts 2,748 6,062
Inventories 928 2,182
Principal payments received on sales type lease 279 128
Prepaid expenses and other current assets ( 41) 475
Other assets ( 65) 26
Advances and notes to related medical practices 35 ( 27)
Increase (decrease) in operating liabilities, net:
Accounts payable ( 995) ( 3,655)
Other current liabilities 1,271 662
Customer advances 5,804 1,843
Billings in excess of costs and estimated
earnings on uncompleted contracts ( 1,474) 739
Other liabilities ( 45) ( 38)
Due to related medical practices - ( 28)
Income taxes payable ( 8) ( 11)
--------- ---------
Net cash used in operating activities ( 2,245) ( 2,912)
--------- ---------
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,
--------------------
2007 2006
--------- ---------
Cash Flows from Investing Activities:
Purchases of marketable securities - ( 300)
Sales of marketable securities 2,119 3,210
Purchases of property and equipment ( 332) ( 1,592)
Costs of capitalized software development ( 497) ( 557)
Cost of patents and copyrights ( 406) ( 371)
Proceeds from sale of equipment - 97
--------- ---------
Net cash provided by investing activities 884 487
--------- ---------
Cash Flows from Financing Activities:
Distributions to holders of minority interests ( 836) ( 604)
Proceeds from long-term debt - 478
Repayment of borrowings and capital
lease obligations ( 155) ( 255)
Net proceeds from exercise of stock options
and warrants 50 662
Net proceeds from sale of stock 373 -
Repayment of notes receivable from employee
stockholders 184 216
--------- ---------
Net cash (used in) provided by financing activities ( 384) 497
--------- ---------
Net Decrease in Cash and Cash Equivalents (1,745) ( 1,928)
Cash and Cash Equivalents - Beginning of Period 4,557 5,517
--------- ---------
Cash and Cash Equivalents - End of Period $ 2,812 $ 3,589
========= =========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(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
nine months ended March 31, 2007 are not necessarily indicative of the results
that may be expected for the fiscal year ending June 30, 2007. 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
20, 2006 for the fiscal year ended June 30, 2006.
Liquidity and Capital Resources
The Company's principal source of liquidity has been derived from revenues, as
well as cash provided by previous debt and equity financing. Management is
expecting this to continue. At March 31, 2007, the Company had working capital
of $923,000. For the nine months ended March 31, 2007, the Company incurred a
net loss of $17.0 million which included non-cash charges of $4.2 million.
Sales levels remain weaker than expected and the Company continues to focus its
efforts on increased advertising and marketing campaigns, and distribution
programs to strengthen the demand for Fonar's products. Management anticipates
that Fonar's capital resources will improve as Fonar's MRI scanner products gain
wider market recognition and acceptance resulting in increased product sales. If
the Company is not successful with its current marketing efforts to increase
sales, then the Company will experience a shortfall in cash necessary to sustain
operations at their current levels. Should weak demand continue, the Company has
determined it will be necessary to reduce overhead expenses or seek other
sources of funds through the issuance of equity or debt financing in order to
maintain sufficient funds available to operate through March 31, 2008. The
reduction in overhead expenses might need to be substantial in order for the
Company to streamline operations to an efficient level.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed consolidated financial statements include the accounts of FONAR
Corporation, its majority and wholly-owned subsidiaries and partnerships
(collectively the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Reverse Stock Split
On April 17, 2007, the Company effected a one-for-twenty-five reverse split of
its issued and outstanding common stock, Treasury Shares of the Common Stock,
the Class B Common Stock, the Class C Common Stock and the Class A Non-Voting
Preferred Stock and Preferred Stock. The accompanying condensed consolidated
financial statements, notes and other references to share and per share data
have been retroactively restated to reflect the reverse stock splits for all
periods presented.
At the same time reduce the number of shares of stock which the Company has the
authority to issue 36,400,000 shares from 182,000,000 shares. The Classes and
the aggregate number of shares of stock of every class which the Company shall
have the authority to issue are as follows:
Common Stock 30,000,000
Class B Common Stock 800,000
Class C Common Stock 2,000,000
Preferred Stock 2,000,000
Class A Non-Voting
Preferred Stock 1,600,000
----------
36,400,000
==========
Earnings (Loss) Per Share
Basic earnings (loss) per share ("EPS") is computed based on weighted average
shares outstanding and excludes any potential dilution. In accordance with EITF
03-6, "Participating Securities and the Two-Class method under FASB Statement
No. 128" ("EITF 03-6"), the Company's participating convertible securities,
which include Class B common stock and Class C common stock, are not included in
the computation of basic EPS for nine months ended March 31, 2007 and 2006,
because the participating securities do not have a contractual obligation to
share in the losses of the Company.
Diluted EPS reflects the potential dilution from the exercise or conversion of
all dilutive securities into common stock based on the average market price of
common shares outstanding during the period. The number of common shares
potentially issuable upon the exercise of certain options and warrants or
conversion of the participating convertible securities that were excluded from
the diluted EPS calculation was approximately 279,000 and 281,000 because they
are antidilutive as a result of a net loss for the nine months ended March 31,
2007 and 2006, respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Options and Warrants and Similar Equity Instruments
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" SFAS 123R. SFAS 123R requires the compensation cost relating to
stock-based payment transactions be recognized in financial statements. That
cost will be measured based on the fair value of the equity or liability
instruments issued on the grant date of such instruments, and will be recognized
over the period during which an individual is required to provide service in
exchange for the award (typically the vesting period). SFAS 123R covers a wide
range of stock-based compensation arrangements including stock options,
restricted stock plans, performance-based awards, stock appreciation rights, and
employee stock purchase plans. SFAS 123R replaces SFAS 123 and supersedes APB
Opinion 25.
On July 1, 2005, the Company adopted SFAS 123R using the modified prospective
method, in which compensation cost is recognized beginning with the effective
date (a) based on the requirements of SFAS 123R for all share-based payments
granted after the effective date and (b) based on the fair value as measured
under SFAS 123 for all awards granted to employees prior to the effective date
of SFAS 123R that remain unvested on the effective date.
Accordingly, the adoption of SFAS 123R's fair value method did not have a
significant impact on our result of operations. SFAS 123R requires the benefits
of tax deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under
current literature. It is unlikely that the Company will have near term benefits
from tax deductions. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after adoption. The Company cannot
estimate what those amounts will be in the future because of various factors,
including but not limited to the timing of employee exercises and whether the
Company will be in a taxable position. At this time, there would be no tax
impact related to the prior periods since the Company has a net loss.
Recent Accounting Pronouncements
In February 2006, the FASB issued SFAS NO. 155, Accounting for Certain Hybrid
Financial Instruments-An Amendment of FASB No. 133 and 140. The purpose of SFAS
statement No. 155 is to simplify the accounting for certain hybrid financial
instruments by permitting fair value re-measurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation. SFAS No. 155 also eliminates the restriction on passive derivative
instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is
effective for all financial instruments acquired or issued after the beginning
of any entity's first fiscal year beginning after September 15, 2006. We believe
that the adoption of this standard on July 1, 2007 will not have a material
effect on our condensed consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets, an Amendment of SFAS No. 140. SFAS No. 156 requires separate
recognition of a servicing asset and a servicing liability each time an entity
undertakes and obligation to service a financial asset by entering into a
servicing contract. This statement also requires that servicing assets and
liabilities be initially recorded at fair value and subsequently adjusted to the
fair value at the end of each reporting period. This statement is effective in
fiscal years beginning after September 15, 2006. We believe that the adoption of
this standard on July 1, 2007 will not have a material effect on our condensed
consolidated financial statements.
In June, 2006, the FASB issued Interpretation No. 48, "Accounting of Uncertainty
in Income Taxes-an interpretation of FASB Statement No. 109". This
Interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return, and provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. This Interpretation is effective for fiscal years
beginning after December 31, 2006. The Company is assessing the impact of this
Interpretation on its condensed consolidated financial statements, but does not
expect it to have a material effect.
In September, 2006, the FASB issued SFAS No. 157, "Fair Value Measurements",
which defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. This standard applies under
other accounting pronouncements that require or permit fair value measurements,
but does not require any new fair value measurements. SFAS No. 157 will become
effective for us in 2009. We are currently assessing the impact of SFAS No. 157;
however, we do not believe the adoption of this standard will have a material
effect on our condensed consolidated financial statements.
In September, 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans", which requires us to
recognize the funded status of our defined benefit plans in the consolidated
balance sheets and changes in the funded status in comprehensive income. This
standard also requires us to recognize the gains/losses, prior year service
costs and transition assets/obligations as a component of other comprehensive
income upon adoption, and provide additional annual disclosure. SFAS No. 158
does not affect the computation of benefit expense recognized in our
consolidated statements of operations. The recognition and disclosure provisions
are effective in 2007. In addition, SFAS No. 158 requires us to measure plan
assets and benefit obligations as of the year-end balance sheet date effective
in 2009. We are required to apply the provisions of this standard prospectively.
We are currently assessing the impact of SFAS No. 158 on our condensed
consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
In September, 2006, the SEC staff issued Staff Accounting Bulletin ("SAB") No.
108, "Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements". This guidance indicates
that the materiality of a misstatement must be evaluated using both the rollover
and iron curtain approaches. The iron curtain approach quantifies a misstatement
based on the amount of the error originating in the current year income
statement. SAB No. 108 is effective for our 2007 annual consolidated financial
statements. We are currently assessing the impact of SAB No. 108; however, we do
not believe the adoption of this standard will have a material effect on our
condensed consolidated financial statements.
In February, 2007, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (FAS 159). FAS 159 provides Companies
with an option to report selected financial assets and liabilities at fair
value. FAS 159's objective is to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring related
assets and liabilities differently. FAS 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between Companies
that choose different measurement attributes for similar types of assets and
liabilities. FAS 159 requires Companies to provide additional information that
will help investors and other users of financial statements to more easily
understand the effect of the Company's choice to use fair value on its earnings.
It also requires entities to display the fair value of those assets and
liabilities for which the Company has chosen to use fair value on the face of
the balance sheet. FAS 159 is effective as of the beginning of an entity's first
fiscal year beginning after November 15, 2007. Early adoption is permitted as of
the beginning of the previous fiscal year provided that the entity makes that
choice in the first 120 days of that fiscal year and also elects to apply the
provisions of Statement 157. The Company did not early adopt FAS 159.
In March 2007, the Financial Accounting Standards Board (FASB) ratified the
Emerging Issues Task Force (EITF) consensus on EITF Issue No. 06-10, "Accounting
for Collateral Assignment Split Dollar Life Insurance." This EITF indicates that
an employer should recognize a liability for postretirement benefits related to
collateral assignment split-dollar life insurance arrangements. In addition, the
EITF provides guidance for the recognition of an asset related to a collateral
assignment split-dollar life insurance arrangement. The EITF is effective for
fiscal years beginning after December 15, 2007. The Company will adopt the EITF
as required and management does not expect it to have any impact on the
Company's results of operations, financial condition and liquidity.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
In June 2006, the EITF reached a consensus on Issue No. 06-3 ("EITF 06-3"), "
Disclosure Requirements for Taxes Assessed by a Governmental Authority on
Revenue-Producing Transactions ." The consensus allows companies to choose
between two acceptable alternatives based on their accounting policies for
transactions in which the company collects taxes on behalf of a governmental
authority, such as sales taxes. Under the gross method, taxes collected are
accounted for as a component of sales revenue with an offsetting expense.
Conversely, the net method allows a reduction to sales revenue. If such taxes
are reported gross and are significant, companies should disclose the amount of
those taxes. The guidance should be applied to financial reports through
retrospective application for all periods presented, if amounts are significant,
for interim and annual reporting beginning after December 15, 2006 with early
adoption is permitted. We do not expect the adoption of EITF 06-3 to have a
material effect on our condensed consolidated financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation. The reclassifcations did not have any effect on reported
consolidated net losses for any periods presented.
NOTE 3 - MEDICAL RECEIVABLES, ACCOUNTS RECEIVABLE AND MANAGEMENT FEE RECEIVABLE
Medical Receivables
The Company was assigned medical receivables valued at $11,775,000, in
connection with the satisfaction of the management fees and termination fees
related to a Termination and Replacement Agreement dated May 23, 2005. The
balance of the medical receivables as of March 31, 2007 was $3,431,000.
Accounts Receivable and Management Fee Receivable
Receivables, net is comprised of the following at March 31, 2007:
(000's Omitted)
Gross Allowance for
Receivable doubtful accounts Net
---------- ----------------- -----------
Receivables from equipment
sales and service contracts $ 5,499 $ 730 $ 4,769
========== ================= ===========
Receivables from equipment
sales and service contracts-
related parties $ 1,035 $ 646 $ 389
========== ================= ===========
Management fee receivables
from related medical
practices ("PC's") $ 10,530 $ 3,203 $ 7,327
========== ================= ===========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
NOTE 3 - MEDICAL RECEIVABLES, ACCOUNTS RECEIVABLE AND MANAGEMENT FEE RECEIVABLE
(Continued)
Accounts Receivable and Management Fee Receivable (Continued)
The Company's customers are concentrated in the healthcare industry.
The Company's receivables from the related PC's consist substantially of fees
outstanding under management agreements, service contracts and lease agreements.
Payment of the outstanding fees is based on collection by the PC's of fees from
third party medical reimbursement organizations, principally insurance companies
and health management organizations.
Collection by the Company of its accounts receivable 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 39% and 48% of the PC's net revenues for
both the nine months ended March 31, 2007 and 2006, 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.
Certain no-fault insurers have raised issues concerning whether the Company's
clients the "P.C.'s" are in compliance with certain laws, including, but not
limited to, laws governing their corporate structure and/or licensing, their
entitlement or standing to seek and/or obtain no-fault benefits, and/or laws
prohibiting the corporate practice of medicine, fee-splitting and/or physician
self referrals. To the extent any claims are asserted against the P.C.'s, the
settlement of such claims could result in the P.C.'s waiving their rights to
collect certain of their insurance claims. Management believes that the company
and the P.C.'s are not in violation of any of the above mentioned laws. Since
the resolution or settlement of these claims with the insurance companies could
have a material impact on the collection of management fees by the Company from
its P.C.'s, the Company has provided reserves for uncollectable fees related to
this matter.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
NOTE 3 - MEDICAL RECEIVABLES, ACCOUNTS RECEIVABLE AND MANAGEMENT FEE RECEIVABLE
(Continued)
Accounts Receivable and Management Fee Receivable (Continued)
On February 8, 2006, the Deficit Reduction Act of 2005 ("DRA") was signed into
law by President George W. Bush. The DRA would result in caps on Medicare and
Medicaid payment rates for most imaging services, including MRI and CT,
furnished in physicians' offices and other non-hospital based settings. Under
the cap, payments for these imaging services could not exceed the hospital
outpatient payment rates for those services. This change is to apply to services
furnished by the P.C.'s on or after January 1, 2007. Although the professional
corporations managed by HCMA bill for scans on a "global" basis, which means a
single fee per scan, the limitation is applicable only to the technical
component of the services, which is the payment or portion of the payment
attributable to the non-professional services. If the fee for the technical
component of the service (without including geographic adjustments) exceeds the
hospital outpatient payment amount for the service (also without including
geographic adjustments), under the Physician Fee Schedule, then the payment
would be limited to the Physician Fee Schedule rate. Based on the Company's scan
volumes for 2006, the Company estimates that the implementation of the
reimbursement reduction contained in the DRA may have the impact of reducing the
Company's management fee revenues by approximately $800,000 annually.
Currently, a statute in the State of Florida requires all drivers, licensed in
the State of Florida, to carry a $10,000 no-fault insurance policy covering
personal injury protection benefits. This statute is due to expire in October
2007 unless extended by legislative actions. Management does not believe that
the expiration of this statute will have a material impact on the Company's
condensed consolidated financial position or results of consolidated operations
in the future.
While the Company has prepared certain estimates of the impact of the above
discussed changes and possible 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.
Net revenues from management and other fees charged to the related P.C's
accounted for approximately 36.9% and 34.3% of the condensed consolidated net
revenues for the nine months ended March 31, 2007 and 2006, respectively.
Product sales and service repair fees from related parties amounted to
approximately 3.6% and 13.1% of condensed consolidated net revenues for the nine
months ended March 31, 2007 and 2006, respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
NOTE 3 - MEDICAL RECEIVABLES, ACCOUNTS RECEIVABLE AND MANAGEMENT FEE RECEIVABLE
(Continued)
Unaudited Financial Information of Unconsolidated Managed Medical Practices
Summarized income statement data for the three months ended March 31, 2007 and
2006 related to the unconsolidated medical practices managed by the Company is
as follows:
(000's omitted) (Income Tax-Cash Basis)
For the three months ended March 31,
2007 2006
------ ------
Patient Revenue - Net $4,799 $4,189
====== ======
Income from Operations $ 228 $ 13
====== ======
Net Income (Loss) $ 7 $ (183)
====== ======
Summarized income statement data for the nine months ended March 31, 2007 and
2006 related to the unconsolidated medical practices managed by the Company is
as follows:
(000's omitted) (Income Tax-Cash Basis)
For the nine months ended March 31,
2007 2006
------- -------
Patient Revenue - Net $14,586 $12,587
======= =======
Income from Operations $ 747 $ 123
======= =======
Net Income (Loss) $ 55 $ (497)
======= =======
NOTE 4 - INVENTORIES
Inventories included in the accompanying condensed consolidated balance sheet at
March 31, 2007 consist of:
(000's omitted)
Purchased parts, components
and supplies $ 3,491
Work-in-process 2,658
-------
$ 6,149
=======
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
1) Information relating to uncompleted contracts as of March 31, 2007 is as
follows:
(000's omitted)
Costs incurred on
uncompleted Contracts $ 4,957
Estimated earnings 1,725
---------
6,682
Less: Billings to date 8,115
---------
$(1,433)
=========
Included in the accompanying condensed consolidated balance sheet at March 31,
2007 under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 209
Less: billings in excess of costs and estimated
earnings on uncompleted contracts 1,642
--------
$(1,433)
========
2) Customer advances consist of the following as of March 31, 2007:
Related
Total Party Other
-------- -------- -------
Total Advances $ 19,425 $ 42 $ 19,383
Less: Advances
on contracts under construction 8,115 -- 8,115
-------- -------- --------
$ 11,310 $ 42 $ 11,268
======== ======== =======
NOTE 6 -STOCKHOLDERS' EQUITY
Common Stock
During the three months ended March 31, 2007:
a) The Company issued 5,813 shares of common stock for costs and expenses of
39, 821.
b) The Company cancelled 1,200 shares of Common Stock for option notes
receivable of 42,300.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
NOTE 6 -STOCKHOLDERS' EQUITY (Continued)
Common Stock (Continued)
During the nine months ended March 31, 2007:
a) The Company issued 5,030 shares of common stock to employees as
compensation valued at $41,699 under stock bonus plan.
b) The Company issued 7,000 shares of common stock to consultants and others
valued at $78,200.
c) The Company issued 214,915 shares of common stock for costs and expenses of
$1,839,010.
d) The Company issued 3,680 shares of common stock upon the exercise of stock
options resulting in proceeds of $49,680.
e) The Company issued 43,600 shares of common stock resulting in proceeds of
$372,760.
f) The Company cancelled 1,200 shares of Common Stock for option notes
receivable of 42,300.
The Company pays premiums for life insurance on its Chief Executive Officer. The
insurance policies were owned by a life insurance trust. The cash surrender
value of the life insurance policies, in the approximate amount of $1.2 million,
was contributed to capital during the first quarter of 2007 pursuant to a split
dollar agreement.
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,
2007 2006
-------------- -------------
Royalties $ 615 $ 716
Accrued salaries, commissions si
and payroll taxes 1,353 1,146
Accrued interest 535 535
Litigation judgements 193 193
Sales tax payable 2,192 2,181
Other 1,611 1,331
-------------- -------------
$ 6,499 $ 6,102
============== =============
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
NOTE 8 -SALE OF PHYSICAL MEDICINE MANAGEMENT BUSINESS
On July 28, 2005 Fonar, HMCA and Dynamic entered into an Asset Purchase
Agreement with Health Plus Management Services, L.L.C. ("Health Plus"), pursuant
to which HMCA and its subsidiary Dynamic sold to Health Plus the portion of
their business which was engaged in the business of managing physical therapy
and rehabilitation facilities, together with the assets used in the conduct of
such business.
The assets sold consisted principally of the management agreements with the
physical therapy and rehabilitation facility management business, the physical
therapy equipment, a portion of the accounts receivable and furniture and
fixtures the Company provided to the physical therapy and rehabilitation
facilities.
The purchase price under the Asset Purchase Agreement was $6.6 million, payable
pursuant to a promissory note (the "note") in 120 monthly installments
commencing on August 28, 2005. The first twelve installments are interest only
and the remaining 108 payments will consist of equal installments of principal
and interest in the amount of $76,014 each. The note is secured by a first lien
on all of the assets of Health Plus, including its accounts receivable. The Note
is subject to prepayment provisions to the extent Health Plus resells all or
part of the assets and business or utilizes the assets sold as collateral in any
debt financing. The note provides for interest at 5% per annum. The fair value
assigned to the note was $6,078,068 reflecting a discount of $521,932 for the
below market interest rate. The Company recorded a loss of $143,598 on this
transaction during the year ended June 30, 2006.
The two principals of Health Plus were employed by HMCA and Dynamic up to the
time of the closing of the business. In consideration for the termination of
their employment agreement, these two individuals each became entitled to
receive $800,000. In addition, each became entitled to receive $200,000 for
collection services to be provided on behalf of HMCA and Dynamic with respect to
a portion of the accounts receivable of certain physical therapy and
rehabilitation facilities which arose during the period when HMCA was engaged in
the management of those facilities. The $1,000,000 payable to each of these
individuals was satisfied in shares of Fonar common stock in 2006.
For accounting purposes in accordance with accounting principles generally
accepted in the United States of America, the Company determined that the
classification of the disposed business described above as discontinued
operations would not be appropriate. Accordingly, the operating results of the
disposed business have been included in continuing operations in the
accompanying condensed consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
NOTE 9 - SALE OF SUBSIDIARY
On January 31, 2006, the Company sold 100% of the stock of Tallahassee Magnetic
Resonance Imaging, P.A. to Raymond V. Damadian for a diminimus amount since the
liabilities exceed the assets. No gain or loss was recognized on this sale.
Revenue recognized from this entity totaled $590,883 for the nine months ended
March 31, 2006.
NOTE 10 - SEGMENT AND RELATED INFORMATION
The Company operates in two industry segments - manufacturing and the servicing
of medical equipment and management of physician practices, including diagnostic
imaging services.
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, 2006. 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)
Physician
Management
and
Diagnostic
Medical Imaging
Equipment Services Totals
---------- ---------- ----------
For the three months ended March 31, 2007:
Net revenues from external customers $ 5,778 $ 3,004 $ 8,782
Inter-segment net revenues $ 269 $ - $ 269
Foreign Revenue $ 1,756 $ - $ 1,756
Loss from operations $ (4,718) $ (597) $ (5,315)
Depreciation and amortization $ 391 $ 275 $ 666
Compensatory element of stock issuances $ - $ - $ -
Capital expenditures $ 415 $ 81 $ 496
For the three months ended March 31, 2006:
Net revenues from external customers $ 4,011 $ 3,092 $ 7,103
Inter-segment net revenues $ 152 $ - $ 152
Foreign Revenue $ 1,200 $ - $ 1,200
Loss from operations $ (6,290) $ (1,068) $ (7,358)
Depreciation and amortization $ 498 $ 273 $ 771
Compensatory element of stock issuances $ 254 $ 14 $ 268
Capital expenditures $ 413 $ 529 $ 942
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
NOTE 10 - SEGMENT AND RELATED INFORMATION (Continued)
(000's omitted)
Physician
Management
and
Diagnostic
Medical Imaging
Equipment Services Totals
---------- ---------- ----------
For the nine months ended March 31, 2007:
Net revenues from external customers $ 15,290 $ 8,947 $ 24,237
Inter-segment net revenues $ 782 $ - $ 782
Foreign Revenue $ 2,236 $ - $ 2,236
Loss from operations $(15,330) $ (1,475) $(16,805)
Depreciation and amortization $ 1,164 $ 823 $ 1,987
Compensatory element of stock issuances $ 116 $ 5 $ 121
Capital expenditures $ 1,098 $ 137 $ 1,235
Identifiable assets $ 26,030 $ 22,449 $ 48,479
For the nine months ended March 31, 2006:
Net revenues from external customers $ 17,623 $ 10,174 $ 27,797
Inter-segment net revenues $ 429 $ - $ 429
Foreign Revenue $ 2,700 $ - $ 2,700
Income from operations $(16,846) $ (4,090) $(20,936)
Depreciation and amortization $ 1,497 $ 933 $ 2,430
Compensatory element of stock issuances $ 1,010 $ 327 $ 1,337
Termination Costs paid with Common Stock $ - $ 1,600 $ 1,600
Capital expenditures $ 1,090 $ 1,430 $ 2,520
Identifiable assets - June 30, 2006 $ 31,264 $ 25,965 $ 57,229
NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION
During the nine months ended March 31, 2007 and March 31, 2006, the Company paid
$203,000 and $214,000 for interest, respectively.
Non-Cash Transaction.
During the nine months ended March 31, 2007:
a) The Company recorded the cash surrender value of the split dollar life
insurance policies of $1,234,000 to additional paid in capital.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
NOTE 12 - SUBSEQUENT EVENTS
Company's Common Stock Meets NASDAQ's Continuing Listing Requirements
The Company received written notification from The Nasdaq Stock Market on
December 22, 2005 that the bid price of its common stock for the last 30
consecutive trading days had closed below the minimum $1.00 per share required
for continued listing under Nasdaq Marketplace Rule 4310(c)(4) (the "Rule").
Pursuant to Nasdaq Marketplace Rule 4310(c)(8)(D), the Company has been provided
an initial period of 180 calendar days, or until June 20, 2006, to regain
compliance. The notice states that the Company has achieved compliance with the
Rule if at any time before June 20, 2006 the bid price of the Company's common
stock closes at $1.00 per share or more for a minimum of 10 consecutive business
days. The Company had been granted an extension to achieve compliance until
December 18, 2006.
On December 19, 2006, the Company received a Nasdaq Staff Determination
indicating that the Company still fails to comply with the minimum bid price
requirement for continued listing and therefore is subject to delisting from the
Nasdaq Capital Market. The Company has requested a hearing before a Nasdaq
Listing Qualifications Panel to review the staff determination and presented
their plan for a reverse stock split at a ratio of 1:25 (one new share for every
25 shares) of its outstanding common stock and all other classes of its
outstanding stock.
As a result of the hearing held before the NASDAQ Listing Qualifications Panel
("Panel") on February 15, 2007, FONAR's request for continued listing on The
NASDAQ Stock Market was granted, subject to the condition that on or before May
1, 2007, the Company must have evidenced a closing bid price of $1.00 or more
for a minimum of ten consecutive trading days, which condition has been
satisfied. The Panel's decision was based on its determination that the reverse
split to be presented at the Annual Meeting on April 16, 2007, when implemented,
would be likely to cure the bid price deficiency and allow the Company to
maintain compliance for the longer term. Accordingly, the company has effected a
reverse stock split as of April 17, 2007.
Common Stock
During the period from April 1, 2007 through April 30, 2007:
a) The Company issued 4,000 shares of common stock for costs and expenses of
$22,868.
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, 2007, we reported a net loss of
$17.0 million on revenues of $24.2 million as compared to net loss of $21.0
million on revenues of $27.8 million for the nine month period ended March 31,
2006.
For the three month period ended March 31, 2007 we reported a net loss of
$5.4 million on revenues of $8.8 million as compared to net loss of $7.4 million
on revenues of $7.1 million for the three month period ended March 31, 2006.
The Company notes improvement in both its net loss and revenue for the
quarter ending March 31, 2007 as compared to the quarter ended March 31, 2006.
Net losses improved by 26.6%, ($5.4 million) as compared to ($7.4 million), on a
revenue increase of 23.6%, to $8.8 million from $7.1 million. Particularly
noteworthy was that the revenues for the quarter ending March 31, 2007 accounted
for 36.2% of the revenues of the nine month period ending March 31, 2007.
There was recent increased sales activity which management believes is
attributable to a general increase in utilization of MRI, the increase in demand
for Upright(TM) scans and the reduction of uncertainty of the impact of the
Deficit Reduction Act ("DRA"). A recent survey of Fonar Upright(TM) customers
shows that the DRA has not had a substantial impact on revenues and has been
more than offset by an increase in utilization of MRI and the increased demand
for Upright(TM) imaging technology.
In addition, we are planning to expand our sales force, both in terms of
hiring more sales personnel and establishing a network of domestic distributors
(we already use distributors for foreign sales) under the direction of our
internal sales force.
We also are monitoring the performance of our existing users in order to
establish teams to assist underperforming customers improve their scan volume.
In addition, we have held seminars to assist customers in their marketing
efforts and are in the process of developing a web site to assist our customers
in their marketing efforts.
The number of units sold was 8 during the first nine months of fiscal 2007
as compared to 13 for the first nine months of fiscal 2006.
Importantly, we are beginning to penetrate the hospital market. For the
2006 fiscal year, two Fonar Upright(TM) MRI scanners were sold to hospitals, one
of which is a member of a chain of hospitals. In the first nine months of fiscal
2007, we sold one Fonar Upright(TM) MRI scanner to a hospital. The Fonar
Upright(TM) MRI scanner is the only scanner which enables weight-bearing scans
of the spine, which is critical in making a correct diagnosis of spine diseases
such as low back pain and therefore the key to performing the correct surgery of
the spine.
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 actual results, performance or
achievements of the Company 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. The Company's 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 the control of the Company. Although the
Company believes that its 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 the Company or any
other person that the objectives and plans of the Company will be achieved.
Results of Operations
The Company operates in two industry segments: the manufacture and
servicing of medical (MRI) equipment, the Company's 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. During July 2005 HMCA
sold the portion of its business engaged in the management of physical therapy
and rehabilitation facilities.
Trends in the third quarter of fiscal 2007 include an increase in product
sales revenues. Sales orders for Upright(TM) MRI scanners, decreased from 13 in
the first nine months of fiscal 2006 to 8 in the first nine month of 2007.
Although unrelated party sales revenues increased from $12.7 million in the
first nine months of fiscal 2006 to $14.4 million in the first nine months of
fiscal 2007, unrelated party scanner sales revenues increased from $7.1 million
in fiscal 2006 to $7.6 million in fiscal 2007. (The inconsistency between sales
orders and sales revenues is a result of our recognition of revenues on the
"percentage of completion" basis, which means revenues are recognized as the
scanner is manufactured). Related party scanner sales revenues decreased in
fiscal 2007, from $2.9 million for the nine months ended March 31, 2006 to
$143,000 for the nine months ended March 31, 2007. The Company will continue to
focus on increased marketing efforts, including advertising, marketing and
adding additional sales personnel and distributors, to improve sales performance
in the remaining fiscal 2007. During the fiscal 2007, the Company also hired an
additional advertising and marketing executive, who had previously been
associated with our independent advertising agency.
For the three month period ended March 31, 2007, as compared to the three
month period ended March 31, 2006, overall revenues from MRI product sales
increased 91% ($3.2 million compared to $1.7 million). Unrelated party scanner
sales ($3.2 million compared to $1.3 million) increased at a rate of 151% and
related party scanner sales ($1,000 compared to $397,000) decreased 99.7%.
Service revenues, increased by 11.3% ($2.3 million compared to $2.1 million)
because of additional customers entering into service agreements with Fonar for
their scanners following the expiration of the warranty period on their
equipment. Overall, for the third quarter of fiscal 2007, revenues for the
medical equipment segment increased by 44.1% to $5.8 million from $4.0 million
for the third quarter of fiscal 2006. The revenues generated by HMCA decreased,
by 2.8% to $3.0 million for the third quarter of fiscal 2007 as compared to $3.1
million for the third quarter of fiscal 2006.
For the nine month period ended March 31, 2007, as compared to the nine
month period ended March 31, 2006, overall revenues from MRI product sales
decreased 22.7% ($7.8 million compared to $10.0 million) as a result of a
decline in related party sales revenues. Unrelated party scanner sales revenues
($7.6 million compared to $7.1 million) increased at a rate of 6.9%, but related
party scanner sales ($143 thousand compared to $2.9 million) decreased 95.1%.
Service revenues increased by 18.4% ($7.5 million compared to $6.4 million)
because of additional customers entering into service agreements with Fonar for
their scanners following the expiration of the warranty period on their
equipment. Overall, for the first nine months of fiscal 2007, revenues for the
medical equipment segment decreased by 13.2% to $15.3 million from $17.6 million
for the first nine months of fiscal 2006. The revenues generated by HMCA also
decreased, by 12.1% to $8.9 million for the first nine months of fiscal 2007 as
compared to $10.2 million for the first nine months of fiscal 2006. The decrease
in revenues recognized by HMCA resulted primarily from the sale of HMCA's
business of managing physical therapy and rehabilitation centers during July
2005.
There were approximately $2.2 million in foreign revenues for the first
nine months of fiscal 2007 as compared to approximately $2.7 million in foreign
revenues for the first nine months of fiscal 2006, representing a decrease in
foreign revenues of 18.5%. The Company is making a concerted effort to increase
foreign sales, most recently through its European distributor and attending a
foreign trade show.
Nevertheless, notwithstanding the decrease in our total net revenues of
12.8% from $27.8 million in the first nine months of fiscal 2006 to $24.2
million in the first nine months of fiscal 2007, these decreases were
accompanied by a decrease of 15.8% in total costs and expenses from $48.7
million in the first nine months of fiscal 2006 compared to $41.0 million in the
first nine months of fiscal 2007. As a result, our operating loss decreased from
$20.9 million in the first nine months of fiscal 2006 to $16.8 million in the
first nine months of fiscal 2007.
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 being recognized in a fiscal
quarter or quarters following the quarter in which the sale was made.
We believe the decrease in product sales revenues reflect the large
variation in sales revenue that is typical of the sale of high unit cost capital
equipment, which variation is characteristic of Fonar's 28 year experience
selling MRI scanning systems. We also believe that the Deficit Reduction Act may
also have contributed to the decrease in product sales revenues.
Service and repair revenues increased by 9.8%, from $2.3 million for the
third quarter of fiscal 2006 to $2.6 million for the third quarter of fiscal
2007.
Service and repair revenues increased by 18.4% from $6.4 million for the
first nine months of fiscal 2006 to $7.5 million for the first nine months of
fiscal 2007.
The increases in service and repair revenues are occurring because after
the warranty on the MRI scanner expires, the owner will ordinarily enter into a
service contract with us to assure continued coverage. We anticipate that for
this reason there will continue to be increases in service revenues as
warranties on installed scanners expire over time.
Costs related to product sales increased by 38.8% from $2.3 million in the
third quarter of fiscal 2006 to $3.1 million in the third quarter of 2007,
reflecting the corresponding increase in product sales revenues. Costs related
to providing service decreased by 8.0% from $1.4 million in the third quarter of
fiscal 2006 to $1.3 million in the third quarter of 2007, notwithstanding the
increase in service revenues.
Costs related to product sales decreased by 19.4% from $10.0 million in the
first nine months of fiscal 2006 to $8.1 million in the first nine months of
2007, reflecting the corresponding decrease in product sales revenues. Costs
related to providing service decreased by 8.0% from $4.2 million in the first
nine months of fiscal 2006 to $3.9 million in the first nine months of 2007,
notwithstanding the increase in service revenues.
In brief, costs are incurred concurrently with revenues in accordance with
the percentage of completion method.
Service and repair revenues increased at a materially higher rate than the
costs related to providing service and repairs. In fact, such costs decreased by
8.0% from $4.2 million for the first nine months of fiscal 2006 to $3.9 million
for the first nine months of fiscal 2007. Service contract prices are fixed for
the term of the contract, which are usually for a term of one year. We believe
that an important factor in keeping service costs down is our ability to monitor
the performance of customers' scanners from our facilities in Melville on a
daily basis and to detect and repair any irregularities before more serious
problems result. We also believe the low cost of providing service reflects the
high quality of our products.
Overall, our operating loss for our medical equipment segment was $15.3
million for the first nine months of fiscal 2007 as compared to operating loss
of $16.8 million for the first nine months of fiscal 2006.
HMCA revenues decreased slightly in the third quarter of fiscal 2007, by
2.8% to $3.0 million from $3.1 million for the third quarter of fiscal 2006. For
the first nine months of fiscal 2007, HMCA revenues decreased by 12.1% to $8.9
million from $10.2 million for the first nine months of fiscal 2006. HMCA is
seeking to increase revenues from the MRI facilities by continuing its program
of replacing older scanners at the sites we manage with Upright(TM) MRI
scanners. We now manage ten sites, as compared to nine sites at March 31, 2006,
equipped with Upright(TM) MRI scanners. HMCA experienced an operating loss of
1.5 million for the first nine months of fiscal 2007 compared to operating loss
of $4.1 million for the first nine months of fiscal 2006. The greater loss in
the first nine months of fiscal 2006 was principally the result of a payment of
$1.6 million for the termination of two employment agreements in connection with
the sale by HMCA of its physical therapy and rehabilitation facility management
business and the loss of revenues resulting from the sale of that business
during the first quarter of fiscal 2006.
HMCA cost of revenues for the third quarter of fiscal 2007 increased to
$2.2 million as compared to $2.1 million for the third quarter of fiscal 2006.
HMCA cost of revenues for the first nine months of fiscal 2007 decreased to $6.5
million as compared to $7.3 million for the first nine months of fiscal 2006.
Rental costs were reduced in fiscal 2007 while repairs and amortization costs
where higher in fiscal 2006.
On February 8, 2006, the Deficit Reduction Act of 2005 ("DRA") was signed
into law by President George W. Bush. The DRA, which went into effect in the
beginning of calendar 2007, places caps on Medicare and Medicaid payment rates
for most imaging services, including MRI and CT, furnished in physicians'
offices and other non-hospital based settings. Under the cap, payments for these
imaging services can not exceed the hospital outpatient payment rates for those
services. This change applies to services furnished by the professional
corporations managed by HMCA on or after January 1, 2007. Although the
professional corporations managed by HCMA bill for scans on a "global" basis,
which means a single fee per scan, the limitation is applicable only to the
technical component of the services, which is the payment or portion of the
payment attributable to the non-professional services. If the fee for the
technical component of the service (without including geographic adjustments)
exceeds the hospital outpatient payment amount for the service (also without
including geographic adjustments), under the Physician Fee Schedule, then the
payment would be limited to the Physician Fee Schedule rate. Based on our scan
volume for 2006, our estimate of the implementation of the reimbursement
reduction contained in the DRA may have the impact of reducing our management
fee revenues by approximately $800,000 annually. We believe that the Upright(TM)
MRI is uniquely designed to facilitate increased volumes to compensate any
reductions due to the DRA. The Upright(TM) MRI with multiple positions is
dynamic MRI as compared with the static conventional recumbent-only single
position MRI.
Currently, a statute in the State of Florida requires all drivers licensed
in the State of Florida to carry a $10,000 no-fault insurance policy covering
personal injury protection benefits. This statute is due to expire in October
2007 unless it is extended by legislative action. Management does not believe
that the expiration of this statute will have a material impact on our
consolidated financial position or results of consolidated operations.
While we have prepared certain estimates of the impact of the above
discussed changes and possible changes, it is not possible to fully quantify
their impact on our 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 our business.
Sale of Physical Therapy and Rehabilitation Facility Management Business
Notwithstanding our continuing efforts to increase revenues from the
management of MRI scanning facilities, HMCA's revenues declined because of the
sale of its business of managing physical therapy and rehabilitation practices.
The sale was completed in fiscal 2006 on July 28, 2005. This sale was made in
connection with HMCA's decision to focus on the management of diagnostic imaging
facilities.
The sale was made pursuant to an asset purchase agreement to Health Plus
Management Services, L.L.C., which we also refer to as Health Plus. There is no
material relationship between Health Plus and Fonar, HMCA, or any of their
respective subsidiaries, directors or officers, or associates of any such
person. The two principals of Health Plus were employed by HMCA up to the time
of the closing of the transaction. In consideration for the termination of their
employment agreements, these two individuals each became entitled to receive
$800,000. In addition, each became entitled to receive $200,000 for billing and
collection services to be provided on behalf of HMCA with respect to a portion
of the accounts receivable of certain physical therapy and rehabilitation
facilities which arose during the period when we were engaged in the management
of those facilities. The $1,000,000 payable to each of these individuals was
payable at our option in shares of Fonar common stock.
The purchase price under the asset purchase agreement was $6.6 million,
payable pursuant to a promissory note in 120 monthly installments commencing on
August 28, 2005. The first twelve installments are interest only and the
remaining 108 payments will consist of equal installments of principal and
interest in the amount of $76,014 each. The note is subject to prepayment
provisions to the extent Health Plus resells all or part of the assets and
business or utilizes the assets sold as collateral in any debt financing. A loss
from the sale of $143,598 has been recorded during the quarter ended September
30, 2005. The note provides for interest at 5% per annum. The $6.6 million note
was valued at $6,078,068 as a result of a discount for the below market interest
rate.
As our consolidated revenues increased by 23.6% to $8.8 million for the
third quarter of fiscal 2007 from $7.1 million for the third quarter of fiscal
2006, the total costs and expenses decreased by 2.5% to $14.1 million for the
third quarter of fiscal 2007 from $14.5 million for the third quarter of fiscal
2006. For the first nine months of fiscal 2007 the consolidated revenues
decreased by 12.8% to $24.2 million from $27.8 million for the first nine months
of fiscal 2006, the total costs and expenses decreased by 15.8% to $41.0 million
for the first nine months of fiscal 2007 from $48.7 million for the first nine
months of fiscal 2006.
Selling, general and administrative expenses decreased by 1.6% from $17.9
million in the first nine months of fiscal 2007 from $18.2 million in the first
nine months of fiscal 2006. The compensatory element of stock issuances
decreased by 90.9% from $1.3 million in the first nine months of fiscal 2006 to
$121,000 in the first nine months of fiscal 2007 which is now included in
selling general and administrative expenses. This primarily reflected a
dramatically lesser use of Fonar's stock in lieu of cash to pay employees,
consultants and professionals for services.
Research and development expenses decreased by 17.7 % to $4.3 million for
the first nine months of fiscal 2007 as compared to $5.2 million for the first
nine months of fiscal 2006.
Interest expense in the first nine months of fiscal 2007 decreased by 5.1%
to $203,000 from $214,000 for the first nine months of fiscal 2006.
Inventories decreased by 13.1% to $6.1 million at March 31, 2007 as
compared to $7.1 million at June 30, 2006 as the Company's product sales
revenues decreased and we decreased our purchase of raw materials and
components.
Costs and estimated earnings in excess of billings on uncompleted contracts
decreased by 92.9% to $209,000 at March 31, 2007 from $3.0 million at June 30,
2006. This decrease resulted from our receipt of installment payments upon
delivery to customers whose sites were prepared to receive deliveries.
Management fee and medical receivables and accounts receivable decreased by
7.6% to $15.9 million at March 31, 2007 from $17.2 million at June 30, 2006,
primarily due to collections on the Company's medical receivables offset by an
increase in accounts receivable from the medical segment.
Our operating loss and net loss were $16.8 million and $17.0 million,
respectively, for the first nine months of fiscal 2007 as compared to operating
and net losses of $20.9 million and $21.0 million, respectively, for the first
nine months of fiscal 2006.
The overall trends reflected in the results of operations for the first
nine months of fiscal 2007 are a decrease in revenues from product sales, as
compared to the first nine months of fiscal 2006 ($7.8 million for the first
nine months of fiscal 2007 as compared to $10.0 million for the first nine
months of fiscal 2006), and a decrease in MRI equipment segment revenues
relative to HMCA revenues ($15.3 million or 63.1% from the MRI equipment segment
as compared to $8.9 million or 36.9% from HMCA, for the first nine months of
fiscal 2007, as compared to $17.6 million or 63% from the MRI equipment segment
and $10.2 million or 37%, from HMCA, for the first nine months of fiscal 2006).
In addition, we experienced a decrease in unrelated party sales relative to
related party sales in our medical equipment product sales ($7.6 million or 98%
to unrelated parties and $143,000 or 2% to related parties for the first nine
months of fiscal 2007 as compared to $7.1 million, or 71% to unrelated parties
and $2.9 million or 29% to related parties for the first nine months of fiscal
2006).
We are committed to reversing the trends we have experienced in the first
nine months in fiscal 2007. Nevertheless, factors beyond our control, such as
the timing and rate of market growth which depend on economic conditions, 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.
The Company's Upright(TM) MRI, and Fonar-360(TM) MRI scanners, together
with the Company's works-in-progress, are intended to significantly improve the
Company's competitive position.
The Company's Upright(TM) MRI scanner, which operates at 6000 gauss (0.6
Tesla) field strength, allows patients to be scanned while standing or
reclining. As a result, for the first time, MRI is able to be used to show
abnormalities and injuries under full weight-bearing conditions, particularly
the spine and joints. 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 will be
possible, an especially promising feature for sports injuries.
The Upright(TM) MRI will also be useful for MRI directed 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 should be 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
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 FONAR's Upright(TM) MRI, is 0.6 Tesla.
In the future, we expect the Fonar 360(TM) to function as an interventional
MRI. The enlarged room sized magnet and 360 access to the patient afforded by
the Fonar 360(TM) would permit surgeons to walk into the magnet and perform
interventions on the patient inside the magnet. 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 to the
malignant lesion by means of the MRI image. The number of inoperable lesions
should be greatly reduced by the availability of this new capability. Most
importantly treatment can be carried directly to the target tissue. The
interventional features of the Fonar 360(TM) are expected to be implemented by
Oxford Nuffield Orthopedic Center in Oxford U.K. in the near future. A full
range of MRI compatible surgical instruments using ceramic cutting tools and
beryllium-copper materials are available commercially.
The Company expects marked demand for its most commanding MRI products, the
Upright(TM) MRI and the Fonar 360(TM), first for 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 Upright(TM) 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
Upright(TM) 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 $9.5
million at June 30, 2006 to $5.8 million at March 31, 2007. Principal uses of
cash during the first nine months of fiscal 2007 included capital expenditures
for property and equipment of $332,000, repayment of long-term debt and capital
lease obligations in the amount of $155,000, capitalized software development
costs of $497,000 and capitalized patent and copyright costs of $406,000, and a
decrease in accounts payable of $995,000.
Marketable securities approximated $3.0 million as at March 31, 2007, as
compared to $4.9 million at June 30, 2006. This reduction represents the
maturation of marketable securities which have not been reinvested and the
proceeds of which are available to fund operations if needed. At March 31, 2007,
our investments in U.S. Government obligations were $1.5 million, our
investments in corporate and government agency bonds were $1.4 million and our
investments in certificates of deposit and deposit notes were $100,000. The
investments made have had the intended effect of maintaining a stable investment
portfolio.
Cash used in operating activities for the first nine months of fiscal 2007
approximated 2.2 million. Cash used in operating activities was attributable
primarily to the net loss of $17.0 million and the decrease in accounts payable
of $995,000, which were offset by a decrease in costs and estimated earnings in
excess of billings on uncompleted contracts of $2.7 million, a decrease in
inventories of $928,000 and the issuance of stock for compensation, costs and
expenses in lieu of cash in the amount of $2.0 million.
Cash provided by investing activities for the first nine months of fiscal
2007 approximated $884,000. The principal source of cash from investing
activities during the first nine months of fiscal 2007 consisted of the sale of
marketable securities of $2.1 million, offset by expenditures for property and
equipment of approximately $332,000 and capitalized software and patent costs of
approximately $903,000.
Cash used in financing activities for the first nine months of fiscal 2007
approximated $384,000. The sources of cash from financing activities were net
proceeds from exercises of stock options and warrants of $50,000, repayment of
notes receivable from employee stockholders of $184,000, and net proceeds from
the sale of stock of $373,000. The principal uses of cash in financing
activities during the first nine months of fiscal 2007 consisted of repayment of
principal on long-term debt and capital lease obligations of approximately
$155,000 and distributions to holders of minority interests of $836,000.
The Company's 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
than 1 in 1-3 in 4-5 after 5
Obligation Total year years years years
- -------------- ----------- ---------- ---------- ---------- ----------
Long-term debt $ 548 $ -- $ -- $ -- $ 548
Capital lease
Obligation 703 239 376 88 --
Operating
Leases 7,737 2,431 3,034 1,039 1,233
----------- ---------- ---------- ---------- ----------
Total cash
Obligations $ 8,988 $ 2,670 $ 3,410 $ 1,127 $ 1,781
=========== ========== ========== ========== ==========
Total liabilities increased by 16.8% to $30.5 million at March 31, 2007
from $26.1 million at June 30, 2006.
We experienced a decrease in long-term debt from $1.2 million at June 30,
2006 to $1.0 million at March 31, 2006, an increase in unearned revenue on
service contracts from $4.8 million to $5.7 million at June 30, 2006 to March
31, 2007, a decrease in billings in excess of costs and estimated earnings on
uncompleted contracts from $3.1 million at June 30, 2006 to $1.6 million at
March 31, 2007, a decrease in accounts payable from $4.9 million at June 30,
2006 to $3.9 million at March 31, 2007, an increase in customer advances from
$5.5 million at June 30, 2006 to $11.3 at March 31, 2007.
As of March 31, 2007, the total of $6.5 million in other current
liabilities included primarily accrued salaries and payroll taxes of $1.4
million, accrued royalties of $615,000 and excise and sales taxes of $2.2
million.
Our working capital approximated $923,000 as of March 31, 2007, as compared
to working capital of $14.2 million as of June 30, 2006, decreasing by 93.5%.
This resulted principally from an increase in current liabilities ($24.6 million
at June 30, 2006 as compared to $29.2 million at (March 31, 2007), particularly
an increase in customer advances of $5.8 million ($5.5 million at June 30, 2006
as compared to $11.3 million at March 31, 2007), and a decrease in current
assets ($38.9 million at June 30, 2006 and $30.2 million at March 31, 2007)
including a decrease in cash and cash equivalents and marketable securities of
$3.8 million ($9.5 million at June 30, 2006 as compared to $5.7 million at March
31, 2007), a decrease of cost and estimated earnings in excess of billings on
uncompleted contracts of $2.7 million ($3.0 million at June 30, 2006 as compared
to $209,000 at March 31, 2007) along with a decrease in inventories of
approximately $1.0 million ($7.1 million at June 30, 2006 as compared to $6.1
million at March 31, 2007).
With respect to current liabilities, the current portion of long-term debt
increased from $234,000 at June 30, 2006 to $239,000 at March 31, 2007, and
billings in excess of costs and estimated earnings on uncompleted contracts
decreased from $3.1 million at June 30, 2006 to $1.6 million at March 31, 2007.
Customer advances increased from $5.5 million at June 30, 2006 to $11.3 million
at March 31, 2007 and accounts payable decreased from $4.9 million at June 30,
2006 to $3.9 million at March 31, 2007.
In order to conserve our capital resources, we have issued common stock
under our stock bonus and stock option plans to compensate employees and non-
employees for services rendered, but to a materially lesser extent than in
previous years. In the first nine months of fiscal 2007, the compensatory
element of stock issuances was $121,000 as compared to $1.3 million for the
first nine months of fiscal 2006. Utilization of equity in lieu of cash
compensation improved our liquidity since it increased cash available for other
expenditures. In addition, we used stock to pay $ 1.6 million for the
termination of two employment agreements terminated in connection with the sale
of HMCA's physical therapy and rehabilitation facility management business in
the first three months of fiscal 2006.
Fonar's capital resources are expected to improve as Fonar's MRI scanner
products gain wider market recognition and acceptance and produce increased
product sales. The Company is focusing on increased advertising and marketing to
increase demand for its products.
Inventories decreased by approximately $1.0 million ($7.1 million at June
30, 2006 as compared to $6.1 million at March 31, 2007) resulting from a
decrease in the purchasing of raw materials and components and in filling our
backlog of orders.
Fonar has not committed to making additional capital expenditures in the
2007 fiscal year other than its intention to continue research and development
expenditures at current levels.
Our business plan calls for a continuing emphasis on providing our
customers with enhanced equipment service and maintenance capabilities and
delivering state-of-the-art, innovative and high quality equipment upgrades at
competitive prices.
Our principal source of liquidity has been cash flows provided by
operations. We currently expect this to continue. At March 31, 2007, we had
working capital of $923,000. For the nine months ended March 31, 2007, we
incurred a net loss of $17.0 million which included non-cash charges of $4.2
million.
In order to conserve our capital resources we have and will continue to
issue, from time to time, common stock and stock options to compensate employees
and non-employees for services rendered. The Company is focusing on increased
advertising and marketing campaigns and distribution programs to increase the
demand for Fonar's products. Management anticipates that Fonar's capital
resources will improve as Fonar's MRI scanner products gain wider market
recognition and acceptance resulting in increased product sales. If we are not
successful with our current marketing efforts to increase sales, then we could
experience a shortfall in the cash necessary to sustain operations at their
current levels.
At March 31, 2007 cash and marketable securities balance was $5.8 million.
Based upon current results of operations, we either need to increase sales,
reduce expenses or seek other sources of funds through the issuance of equity or
debt financing in order to maintain sufficient funds available to operate
through to March 31, 2008.
The Company received written notification from The Nasdaq Stock Market on
December 22, 2005 that the bid price of its common stock for the prior 30
consecutive trading days had closed below the minimum $1.00 per share required
for continued listing under Nasdaq Marketplace Rule 4310(c)(4) (the "Rule").
Pursuant to Nasdaq Marketplace Rule 4310(c)(8)(D), the Company had been provided
an initial period of 180 calendar days, or until June 20, 2006, to regain
compliance but since Fonar was then in compliance with NASDAQ's other listing
requirements, an extension to December 18, 2006 was granted.
On December 19, 2006 the Company received a Nasdaq Staff Determination
indicating that the Company still fails to comply with the minimum bid price
requirement for continued listing set forth in the Rule and that its securities
are therefore, subject to delisting from the Nasdaq Capital Market. The Company
has requested a hearing before a Nasdaq Listing Qualifications Panel to review
the Staff Determination which was held on February 15, 2007. As a result of the
hearing held before the NASDAQ Listing Qualifications Panel ("Panel"), Fonar's
request for continued listing on the NASDAQ Stock Market was granted, subject to
the condition that on or before May 1, 2007, the Company must have evidenced a
closing bid price of $1.00 or more for a minimum of ten consecutive trading
days, which condition has been satisfied. The Panel's decision was based on its
determination that the reverse split to be presented at the Annual Meeting on
April 16, 2007, when implemented, would be likely to cure the bid price
deficiency and allow the Company to maintain compliance for the longer term.
Accordingly, the Company has effected a reverse stock split as of April 17,
2007.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our investments are in fixed rate instruments. Below is a tabular
presentation of the maturity profile of the fixed rate instruments held by us at
March 31, 2007.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
WEIGHTED AVERAGE INTEREST RATE
Investments
Year of in Fixed Rate Weighted Average
Maturity Instruments Interest Rate
-------- ------------- ----------------
3/31/08 $ 0 0.00%
3/31/09 1,000,000 3.85%
3/31/10 1,798,062 3.15%
3/31/11 200,000 4.41%
-------------
Total: $ 2,998,062
=============
Fair Value
at 3/31/07 $ 2,905,235
==============
All of our revenue, expense and capital purchasing activities are
transacted in United States dollars.
See Note 13 to the consolidated Financial Statements in our Form 10-K as of
and for the year ended June 30, 2006 for information on long-term debt.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
The Company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures performed as of the end of the period covered by this
report, the principal executive and acting principal financial officer of the
Company concluded that disclosure controls and procedures were effective.
(b) Change in internal controls.
The Company continues to enhance its controls and procedures related to the
financial reporting process, improvements that were established during the
latter part of fiscal 2005. This included hiring an outside consultant to assist
with technical accounting and reporting issues, developing more standardized
closing procedures and implementing a more formal process for documenting the
weekly management meetings to review operating performance and results.
There have been no changes in our internal control over financial reporting
that occurred during the most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings: There were no material changes in litigation for the
first nine months of fiscal 2007.
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:
At the Annual Meeting of the Company held on April 16, 2007, the following
items were voted upon by the stockholders
1. Election of Directors
a. Raymond V. Damadian 337,219,493 (For) 9,170,995 (Withheld)
b. Claudette J.V. Chan 338,781,982 (For) 7,608,507 (Withheld)
c. Robert J. Janoff 339,918,376 (For) 6,456,129 (Withheld)
d. Charles N. O'Data 340,619,481 (For) 5,755,007 (Withheld)
e. Robert Djerejian 340,625,357 (For) 5,765,132 (Withheld)
2. Authority to Effect Stock Split
252,581,222 (For)
7,501,484 (Against)
39,498 (Abstain)
86,269,284 (Non-Votes)
3. Authority to Effect Reduction of Authorized Shares
253,107,116 (For)
6,973,109 (Against)
40,979 (Abstain)
86,269,284 (Non-Votes)
4. Ratification of Auditors
342,825,556 (For)
2,898,567 (Against)
66,374 (Abstain)
5. Limit on Management Compensation
10,033,145 (For)
249,336,533 (Against)
751,526 (Abstain)
86,269,284 (Non-Votes)
Item 5 - Other Information: None
Item 6 - Exhibits and Reports on Form 8-K: Exhibit 31.1 Certification See
Exhibits Exhibit 32.1 Certification See Exhibits 8-K (earnings press
release) filed on September 15, 2006 8-K (earnings press release)
filed on November 13, 2006 8-K (Nasdaq Staff Determination) filed on
December 21, 2006 8-K (earnings press release) filed on February 9,
2007
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 11, 2007