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FONR > SEC Filings for FONR > Form 10-Q on 14-Nov-2012All Recent SEC Filings

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Form 10-Q for FONAR CORP


14-Nov-2012

Quarterly Report


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

For the three month period ended September 30, 2012, we reported a net income of $1.8 million on revenues of $9.5 million as compared to net income of $1.8 million on revenues of $9.6 million for the three month period ended September 30, 2011. We recognized an operating income of $1.9 million for the three month period ended September 30, 2012 compared to an operating income of $1.8 million for the three month period ended September 30, 2011.

Overall, our revenues decreased 1.0% from $9.6 million for the first three months of fiscal 2012 to $9.5 million for the first three months of fiscal 2013. Although management fees increased by 17.0% from $4.9 million for the first three months of fiscal 2012 to $5.7 million for the first three months of fiscal 2013, service and repair fees decreased 6.7% from $2.9 million the first three months of fiscal 2012 to $2.7 million the first three months of fiscal 2013, and revenues from product sales decreased 41.4%, from $1.8 million for the first three months of 2012 to $1.0 million for the first three months of fiscal 2013.

The decrease in our revenues was offset by a larger decrease in our costs and expenses, and consequently we recognized an increased operating income for the three months ended September 30, 2012 of $1.9 million as compared to an operating income of $1.8 million for the three months ended September 30, 2011. The decrease in costs and expenses of 2.7% from $7.8 million in the first three months of fiscal 2012 to $7.6 million in the first three months of fiscal 2013, exceeded the decrease in revenues of 1.0%, from $9.6 million in the first three months of fiscal 2012 to $9.5 million in the first three months of fiscal 2013.

Our continuing efforts to control costs, combined with our intensive efforts to increase our management fees, the adoption of a new billing and collection contract in fiscal 2011 and the addition of an additional site to the sites we manage, are responsible for our profitability during the three months ended September 30, 2012.

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FONAR CORPORATION AND SUBSIDIARIES

Forward Looking Statements

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

Results of Operations

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

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

Trends in the first three months of fiscal 2013 include an increase in management and other fee revenues, and a decline in product sales revenues, and service and repair fees. Also costs related to product sales decreased 28.4% from $1.5 million for the first three months of fiscal 2012 to $1.1 million for the first three months of fiscal 2013, which corresponds to the decrease in product sales. We will continue to focus on our marketing efforts to improve sales performance and increase patient volume at the MRI facilities managed by HMCA-IMPERIAL in fiscal 2013. In addition, we will monitor our cost control program and will continue to reduce costs as necessary.

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FONAR CORPORATION AND SUBSIDIARIES

For the three month period ended September 30, 2012, as compared to the three month period ended September 30, 2011 overall revenues from MRI product sales decreased 41.4% ($1.0 million compared to $1.8 million). Continuing tight credit and world-wide economic uncertainty have depressed the market for our MRI products, which in the overwhelming majority of cases are purchased on credit.

Service revenues for the three month period ended September 30, 2012 as compared to the three month period ended September 30, 2011 decreased 6.7% ($2.7 million compared to $2.9 million). Unrelated party service and repair fees decreased 6.7% ($2.7 million compared to $2.9 million) and related party service and repair fees remained constant at $27,000 for the three month period ended September 30, 2011 and the three month period ended September 30, 2012. We anticipate that there will be increases in service revenues as warranties on installed scanners expire over time.

There were approximately $265,000 in foreign revenues for the first three months of fiscal 2013 as compared to approximately $279,000 in foreign revenues for the first three months of fiscal 2012, representing a decrease in foreign revenues of 5%. We do not regard this as a material trend, but as part of a normal variation resulting from low volumes of foreign sales.

Overall, for the first three months of fiscal 2013, revenues for the medical equipment segment decreased by 19.8% to $3.8 million from $4.7 million for the first three months of fiscal 2012.

The revenues generated by HMCA-IMPERIAL increased by 17.0%, to $5.7 million for the first three months of fiscal 2013 as compared to $4.9 million for the first three months of fiscal 2012. This trend reflects an increase in the percentage of our revenues derived from our diagnostic facilities management segment relative to our revenues derived from our medical equipment segment (60.3% for the first three months of fiscal 2013 compared to 51.0% for the first three months of fiscal 2012). The increase in HMCA-IMPERIAL revenues was the result of increased marketing efforts for the scanning centers and the opening of a new center.

We recognize MRI scanner sales revenues on the "percentage of completion" basis, which means the revenues are recognized as the scanner is manufactured. Revenues recognized in a particular quarter do not necessarily reflect new orders or progress payments made by customers in that quarter. We build the scanner as the customer meets certain benchmarks in its site preparation in order to minimize the time lag between incurring costs of manufacturing and our receipt of the cash progress payments from the customer which are due upon delivery. Consequently, there can be a disparity between the revenues recognized in a fiscal period and the number of product sales. Generally, the recognized revenue results from revenues from a scanner sale are recognized in a fiscal quarter or quarters following the quarter in which the sale was made.

Costs related to product sales decreased by 28.4% from $1.5 million in the first quarter of fiscal 2012 to $1.1 million in the first quarter of 2013, resulting from a decrease in the manufacturing activity.

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FONAR CORPORATION AND SUBSIDIARIES

Costs related to providing service for the first quarter increased by 6.5% from $821,000 in the first quarter of fiscal 2012 to $874,000 in fiscal 2013, notwithstanding a decrease in service revenues of only 6.7%, from $2.9 million in the first quarter of fiscal 2012 to $2.7 million in the first quarter of fiscal 2013. Certain of the costs of providing service (employee salaries and overhead, for example) are not directly tied to revenue. Notwithstanding the foregoing, we believe that an important factor in controlling our service costs is our ability to monitor the performance of customers' scanners from our facilities in Melville, New York on a daily basis, and to detect and repair any irregularities before more serious problems result.

Overall, the operating results for our medical equipment segment decreased to an operating income of $227,000 for the first quarter of fiscal 2013 as compared to an operating income of $751,000 for the first quarter of 2012.

HMCA-IMPERIAL revenues increased in the first quarter of fiscal 2013 by 17.0% to $5.7 million from $4.9 million for the first quarter of fiscal 2012, primarily due to increased revenues from our New York locations. Contributing to the increase in revenue was the increase in management and other fees resulting from renegotiating our annual management contracts with the professional corporations we manage, the opening of a new facility along with the acquisition of a new billing and collection contract with Health Diagnostics LLC.

We now manage eleven sites, all of which are equipped with FONAR UPRIGHT® MRI scanners. HMCA-IMPERIAL experienced an operating income of $1.6 million for the first three months of fiscal 2013 compared to operating income of $1.0 million for the first three months of fiscal 2012. The greater operating income was due primarily to an increase in management and other fees and the acquisition of a new billing and collection contract.

HMCA-IMPERIAL cost of revenues for the first three months of fiscal 2013 as compared to the first three months of fiscal 2012 remained constant at $3.0 million. HMCA's cost of revenues include expenditures we have been making to improve HMCA revenues through our marketing efforts, which focus on the unique capability of our Upright® MRI Scanners to scan patients in different positions.

The decrease in our consolidated net revenues of 1.0% from $9.6 million in the first quarter of fiscal 2012 to $9.5 million in the first quarter of fiscal 2013 was coupled with a decrease of 2.7% in total costs and expenses from $7.8 million in the first quarter of fiscal 2012 compared to $7.6 million in the first quarter of fiscal 2013. As a result, our income from operations of $1.8 million in the first quarter of fiscal 2012 increased to $1.9 million in the first quarter of fiscal 2013.

Selling, general and administrative expenses increased by 8.3% to $2.2 million in the first three months of fiscal 2013 from $2.0 million in the first three months of fiscal 2012. The compensatory element of stock issuances, which is included in selling, general and administrative expenses, was $0 for the first three months of fiscal 2013 and for the first three months of fiscal 2012.

Research and development expenses increased by 0.3% to $330,000 for the first three months of fiscal 2013 as compared to $329,000 for the first three months of fiscal 2012.

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FONAR CORPORATION AND SUBSIDIARIES

Interest expense in the first three months of fiscal 2013 decreased by 29.0% to $76,000 from $107,000 in the first three months of fiscal 2012.

Inventories increased by 14.7% to $2.5 million at September 30, 2012 as compared to $2.2 million at June 30, 2012 representing the purchase of raw materials and components in our inventory to fill orders.

Management fee and medical receivables increased by 17.8% to $6.0 million at September 30, 2012 from $5.1 million at June 30, 2012, primarily due to renegotiated management fee contracts with an unrelated party coupled with decreased collections of outstanding receivables.

The overall trends reflected in the results of operations for the first three months of fiscal 2013 are an increase in revenues from management and other fees, as compared to the first three months of fiscal 2012 ($5.7 million for the first three months of fiscal 2013 as compared to $4.9 million for the first three months of fiscal 2012), and a decrease in MRI equipment segment revenues both absolutely ($3.8 million as compared to $4.7 million) and as compared to HMCA-IMPERIAL revenues. Revenues were $3.8 million or 39.7% from the MRI equipment segment as compared to $5.7 million or 60.3% from HMCA-IMPERIAL, for the first three months of fiscal 2013, as compared to $4.7 million or 49% from the MRI equipment segment and $4.9 million or 51%, from HMCA-IMPERIAL, for the first three months of fiscal 2012.

On March 23, 2010, President Obama signed into law healthcare reform legislation in the form of the Patient Protection and Affordable Care Act (PPACA). The implementation of this law could have a profound impact on the healthcare industry. Many of the most substantive provisions of PPACA will be phased in commencing in January, 2013. Certain of PPACA's provisions are already in effect. Many provisions will require the federal government and individual state governments to interpret and implement the new requirements and adopt appropriate regulations. Although PPACA remains the subject of significant debate, the Act has been held constitutional by the United States Supreme Court, and there is no indication that the Act will be repealed or substantially modified in the foreseeable future. We are unable to predict how many of the legislative mandates contained in PPACA will be implemented or how they will affect our MRI equipment segment or HMCA-IMPERIAL in practice.

We are committed to improving the operating results we experienced in the first three months in fiscal 2013. Nevertheless, factors beyond our control, such as the timing and rate of market growth which depend on economic conditions, including the availability of credit, payor reimbursement rates and policies, and unexpected expenditures or the timing of such expenditures, make it problematical to forecast future operating results. We believe we are pursuing the correct policies which should prove successful in improving the Company's operating results.

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

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FONAR CORPORATION AND SUBSIDIARIES

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

Fonar recently announced a major diagnostic breakthrough in multiple sclerosis achieved with advanced UPRIGHT® MRI. In a newly published paper, medical researchers at FONAR report a diagnostic breakthrough in multiple sclerosis (MS), based on observations made possible by the Company's unique FONAR UPRIGHT® Multi-Position™ MRI scanner. The findings reveal that the cause of multiple sclerosis may be biomechanical and related to earlier trauma to the neck, which can result in obstruction of the flow of cerebrospinal fluid (CSF), which is produced and stored in the central anatomic structures of the brain known as the ventricles. Since the ventricles produce a large volume of CSF each day (500
cc), the obstruction can result in a build up of pressure within the ventricles, resulting in leakage of the CSF into the surrounding brain tissue. This leakage could be responsible for generating the brain lesions of multiple sclerosis.

The paper, titled "The Possible Role of Cranio-Cervical Trauma and Abnormal CSF Hydrodynamics in the Genesis of Multiple Sclerosis," has just been published and appears in the latest issue of the journal Physiological Chemistry and Physics and Medical NMR (Sept. 20, 2011, 41: 1-17).

Recently, this capability of the FONAR UPRIGHT® technology has demonstrated its key value on patients with the Arnold-Chiari syndrome, which is believed to affect 200,000 to 500,000 Americans. In this syndrome, brain stem compression and subsequent severe neurological symptoms occur in these patients, when because of weakness in the support tissues within the skull, the brain stem descends and is compressed at the base of the skull in the foramen magnum, which is the circular bony opening at the base of the skull where the spinal cord exits the skull. Conventional lie-down MRI scanners cannot make an adequate evaluation of the pathology since the patient's pathology is most visible and the symptoms most acute when the patient is scanned in the upright weight-bearing position.

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FONAR CORPORATION AND SUBSIDIARIES

The UPRIGHT® MRI has also demonstrated its value for patients suffering from scoliosis. Scoliosis patients have been typically subjected to routine x-ray exams for years and must be imaged upright for an adequate evaluation of their scoliosis. Because the patient must be standing for the exam, an x-ray machine has been the only modality that could provide that service. The UPRIGHT® MRI is the only MRI scanner which allows the patient to stand during the MRI exam. Fonar has developed a new RF receiver and scanning protocol that for the first time allows scoliosis patients to obtain diagnostic pictures of their spines without the risks of x-rays. A recent study by the National Cancer Institute
(2000) of 5,466 women with scoliosis reported a 70% increase in breast cancer resulting from 24.7 chest x-rays these patients received on the average in the course of their scoliosis treatment. The UPRIGHT® MRI examination of scoliosis enables the needed imaging evaluation of the degree of spine scoliosis without exposing the patient to the risk of breast cancer from x-radiation. Currently scoliosis affects more than 3,000,000 American women.

In addition, the University of California, Los Angeles (UCLA) reported their results of their study of 1,302 patients utilizing the FONAR UPRIGHT® Multi-Position™ MRI at the 22nd Annual Meeting of the North American Spine Society on October 23, 2007. The UCLA study showed the superior ability of the Dynamic™ FONAR UPRIGHT® MRI to detect spine pathology, including spondylolisthesis, disc herniations and disc degneration, as compared to visualizations of the spine produced by traditional single position static MRIs.

The UCLA study by MRI of 1,302 back pain patients when they were UPRIGHT® and examined in a full range of flexion and extension positions made possible by FONAR's new UPRIGHT® technology established that significant "misses" of pathology were occurring with static single position MRI imaging. At L4-5, the vertebral level responsible for 49.8% of lumbar disc herniations, 35.1% of the spondylolistheses (vertebral instabilities) visualized by Dynamic™ Multi-Position™ MRI were being missed by static single position MRI (510 patients). Since this vertebral segment is responsible for the majority of all disc herniations, the finding may reveal a significant cause of failed back surgeries. The UCLA study further showed the "miss-rate" of vertebral instabilities by static only MRI was even higher, 38.7%, at the L3-4 vertebral segment. Additionally the UCLA study showed that MRI examinations of the cervical spine that did not perform extension images of the neck "missed" disc bulges 23.75% of the time (163 patients).

The UCLA study further reported that they were able to quantitatively measure the dimensions of the central spinal canal with the "highest accuracy" using the FONAR UPRIGHT® Multi-Position™ MRI thereby enabling the extent of spinal canal stenosis that existed in patients to be measured. Spinal canal stenosis gives rise to the symptom complex intermittent neurogenic claudication manifest as debilitating pain in the back and lower extremities, weakness and difficulties in ambulation and leg paresthesias. Spinal canal stenosis is a spinal compression syndrome separate and distinct from the more common nerve compression syndrome of the spinal nerves as they exit the vertebral column through the bony neural foramen.

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FONAR CORPORATION AND SUBSIDIARIES

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

The FONAR UPRIGHT® MRI can also be useful for MRI directed emergency neuro-surgical procedures as the surgeon would have unhindered access to the patient's head when the patient is supine with no restrictions in the vertical direction. This easy-entry, mid-field-strength scanner could prove ideal for trauma centers where a quick MRI-screening within the first critical hour of treatment will greatly improve patients' chances for survival and optimize the extent of recovery.

The Fonar 360™ is an enlarged room sized magnet in which the floor, ceiling and walls of the scan room are part of the magnet frame. This is made possible by Fonar's patented Iron-Frame™ technology which allows the Company's engineers to control, contour and direct the magnet's lines of flux in the patient gap where wanted and almost none outside of the steel of the magnet where not wanted. Consequently, this scanner allows surgeons and other interventional physicians to walk inside the magnet and achieve 360 degree access to the patient to perform interventional procedures.

The Fonar 360™ is presently marketed as a diagnostic scanner and is sometimes referred to as the Open Sky™ MRI. In its Open Sky™ version, the Fonar 360™ serves as an open patient friendly scanner which allows 360 degree surgical access to the patient on the scanner bed. To optimize the patient-friendly character of the Open Sky™ MRI, the walls, floor, ceiling and magnet poles are decorated with landscape murals. The patient gap is twenty inches and the magnetic field strength, like that of the FONAR UPRIGHT®, is 0.6 Tesla.

In the future, we expect the Fonar 360™ to function as an interventional MRI. The enlarged room sized magnet and 360º access to the patient afforded by the Fonar 360™ permits surgeons to walk into the magnet and perform surgical interventions on the patient under direct MR image guidance. Most importantly the exceptional quality of the MRI image and its capacity to exhibit tissue detail on the image, can then be obtained real time during the procedure to guide the interventionalist. Thus surgical instruments, needles, catheters, endoscopes and the like could be introduced directly into the human body and guided directly to a malignant lesion using the MRI image. The number of inoperable lesions could be significantly reduced by the availability of this new FONAR technology. Most importantly treatment can be carried directly to the target tissue.

The first Fonar 360™ MRI scanner, installed at the Oxford-Nuffield Orthopedic Center in Oxford, United Kingdom, is now carrying a full diagnostic imaging caseload. In addition, development of the work in progress Fonar 360™ MRI image guided interventional technology is actively progressing. Fonar software engineers have completed and installed their 2nd generation tracking software at Oxford-Nuffield which is designed to enable the surgeons to insert needles into the patient and accurately advance them, under direct visual image guidance, to the target tissue, such as a tumor, so that therapeutic agents can be injected.

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FONAR CORPORATION AND SUBSIDIARIES

The Company expects marked demand for its most commanding MRI products, the FONAR UPRIGHT® MRI and the Fonar 360™ because of their exceptional features in patient diagnosis and treatment. These scanners additionally provide improved image quality and higher imaging speed because of their higher field strength of .6 Tesla. The geometry of the FONAR UPRIGHT® MRI magnet and its transverse magnetic field enables the use of two detector rf coils operating in quadrature which increases the FONAR UPRIGHT® MRI signal to noise ratio by 40%, providing a signal to noise ratio equal to a .84T recumbent only MRI scanner.

Liquidity and Capital Resources

Cash, cash equivalents and marketable securities increased by 7.3% from $12.0 million at June 30, 2012 to $12.9 million at September 30, 2012.

Cash provided by operating activities for the first three months of fiscal 2013 was $1.6 million. Cash provided by operating activities was attributable to net income of $1.8 million, a decrease of other current liabilities of $536,000, offset by an increase in inventories of $322,000, an increase in costs and estimated earnings on uncompleted contracts of $30,000 and with an increase in accounts, management fee and medical receivables of $979,000.

Cash used in investing activities for the first three months of fiscal 2013 was $247,000. The principal uses of cash used in investing activities during the first three months of fiscal 2013 consisted of capitalized software and patent costs of $36,000, and the purchase of property and equipment of $211,000.

Cash used in financing activities for the first three months of fiscal 2013 was $513,000. The uses of cash in financing activities during the first three months of fiscal 2013 were the repayment of principal on long-term debt and capital lease obligations of $266,000, along with distributions to noncontrolling interests of $249,000.

Total liabilities increased by 1.4% to $22.8 million at September 30, 2012 from $22.5 million at June 30, 2012. Other current liabilities increased from $7.7 million at June 30, 2012 to $8.0 million at September 30, 2012 coupled with a decrease in long-term debt and capital leases from $777,000 at June 30, 2012 to $706,000 at September 30, 2012, an increase in accounts payable from $2.1 million at June 30, 2012 to $2.2 million at September 30, 2012. Unearned revenue on service contracts increased to $5.7 million at September 30, 2012 as compared to $5.5 million at June 30, 2012.

As of September 30, 2012, the total of $8.0 million in other current liabilities included accrued salaries and payroll taxes of $536,000, accrued interest and penalties of $2.2 million and sales taxes of $2.9 million.

Our working capital increased to $6.4 million at September 30, 2012 from $4.8 million at June 30, 2012. This resulted from an increase in current assets ($25.9 million at June 30, 2012 as compared to $27.9 million at September 30, 2012), in particular an increase in inventories of $300,000 ($2.2 million at June 30, 2012 as compared to $2.5 million at September 30, 2012), and an increase of accounts, management and other fees receivable of $803,000 ($10.2 million at June 30, 2012 as compared to $11.0 million at September 30, 2012), slightly offset by an increase in current liabilities from $21.1 million at June 30, 2012 to $21.5 million at September 30, 2012. . . .

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