FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION
13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended DECEMBER
31, 2014
[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________
to _____________
Commission file number 0-10248
FONAR CORPORATION
____________________________________________
(Exact name of registrant as specified
in its charter)
DELAWARE |
|
11-2464137 |
(State or other jurisdiction of |
|
(I.R.S. Employer |
Incorporation or organization) |
|
Identification No.) |
|
|
|
110 Marcus Drive Melville, New York |
|
11747 |
(Address of principal executive offices) |
|
(Zip Code) |
Registrant's telephone number, including
area code: (631) 694-2929
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO ___
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for shorter period
that the registrant was required to submit and post such files. YES _X_ NO ___
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act.(Check one): Large accelerated filer___ Accelerated filer_X_ Non-accelerated
filer___ Smaller reporting company___
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ___ NO _X_
Indicate the number of shares outstanding of
each of the issuer's classes of common stock, as of the close of the latest practicable date.
Class |
Outstanding at January 31, 2015 |
Common Stock, par value $.0001 |
6,050,840
|
Class B Common Stock, par value $.0001 |
146 |
Class C Common Stock, par value $.0001 |
382,513 |
Class A Preferred Stock, par value $.0001 |
313,438 |
FONAR CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION |
PAGE |
|
|
Item 1. Financial Statements |
3 |
|
|
Condensed Consolidated Balance Sheets - December 31, 2014 (Unaudited) and June 30, 2014 |
3 |
|
|
Condensed Consolidated Statements of Income for the Three Months Ended December 31, 2014 and December 31, 2013 (Unaudited) |
6 |
|
|
Condensed Consolidated Statements of Income for the Six Months Ended December 31, 2014 and December 31, 2013 (Unaudited) |
7 |
|
|
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2014 and December 31, 2013 (Unaudited) |
8 |
|
|
Notes to Condensed Consolidated Financial Statements (Unaudited) |
9 |
|
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
20 |
|
|
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
28 |
|
|
Item 4. Controls and Procedures |
28 |
|
|
PART II - OTHER INFORMATION |
28 |
|
|
Item 1. Legal Proceedings |
28 |
|
|
Item 1A. Risk Factors |
28 |
|
|
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
29 |
|
|
Item 3. Defaults Upon Senior Securities |
29 |
|
|
Item 4. Mine Safety Disclosures |
29 |
|
|
Item 5. Other Information |
29 |
|
|
Item 6. Exhibits |
29 |
|
|
Signatures |
29 |
Page 2
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts and shares in
thousands, except per share amounts)
(UNAUDITED)
ASSETS
| |
December 31, 2014 | |
June 30, 2014 * |
Cash and cash equivalents | |
$ | 11,674 | | |
$ | 9,952 | |
Accounts receivable – net | |
| 5,028 | | |
| 4,450 | |
Accounts receivable - related party | |
| 60 | | |
| — | |
Medical receivable – net | |
| 8,898 | | |
| 8,808 | |
Management and other fees receivable – net | |
| 13,740 | | |
| 11,970 | |
Management and other fees receivable – related medical practices – net | |
| 3,469 | | |
| 3,427 | |
Costs and estimated earnings in excess of billing on uncompleted contracts | |
| 726 | | |
| 760 | |
Inventories | |
| 2,363 | | |
| 2,444 | |
Prepaid expenses and other current assets | |
| 823 | | |
| 1,011 | |
Total Current Assets | |
| 46,781 | | |
| 42,822 | |
Deferred income tax asset | |
| 5,740 | | |
| 5,740 | |
Property and equipment – net | |
| 13,951 | | |
| 15,030 | |
Goodwill | |
| 1,767 | | |
| 1,767 | |
Other intangible assets – net | |
| 9,933 | | |
| 10,509 | |
Other assets | |
| 868 | | |
| 922 | |
Total Assets | |
$ | 79,040 | | |
$ | 76,790 | |
*Condensed from audited financial statements.
See accompanying notes to condensed consolidated financial
statements.
Page 3
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts and shares in
thousands, except per share amounts)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
| |
December 31, 2014 | |
June 30, 2014 * |
Current Liabilities: | |
| | | |
| | |
Current
portion of long-term debt and capital leases | |
$ | 2,894 | | |
$ | 2,891 | |
Accounts payable | |
| 2,397 | | |
| 2,482 | |
Other current liabilities | |
| 8,470 | | |
| 9,024 | |
Unearned revenue on service contracts | |
| 5,052 | | |
| 4,731 | |
Unearned
revenue on service contracts - related party | |
| 55 | | |
| — | |
Customer advances | |
| 1,819 | | |
| 1,927 | |
Billings in excess of costs and estimated earnings on uncompleted contracts | |
| 168 | | |
| 142 | |
Total Current Liabilities | |
| 20,855 | | |
| 21,197 | |
Long-Term Liabilities: | |
| | | |
| | |
Deferred income tax liability | |
| 584 | | |
| 584 | |
Due to related medical practices | |
| 229 | | |
| 234 | |
Long-term debt and capital leases, less current portion | |
| 6,935 | | |
| 8,482 | |
Other liabilities | |
| 217 | | |
| 386 | |
Total Long-Term Liabilities | |
| 7,965 | | |
| 9,686 | |
Total Liabilities | |
| 28,820 | | |
| 30,883 | |
*Condensed from audited financial statements.
See accompanying notes to condensed consolidated financial
statements.
Page 4
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts and shares in
thousands, except per share amounts)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| December 31, 2014 | | |
| June 30, 2014 * | |
STOCKHOLDERS' EQUITY: | |
| | | |
| | |
Class A non-voting preferred stock $.0001 par value; 453 shares authorized at December 31, 2014 and June 30, 2014, 313 issued and outstanding at December 31, 2014 and June 30, 2014 | |
| — | | |
| — | |
Preferred stock $.001 par value; 567 shares authorized at December 31, 2014 and June 30, 2014, issued and outstanding – none | |
| — | | |
| — | |
Common Stock $.0001 par value; 8,500 shares authorized at December 31, 2014 and June 30, 2014, 6,062 and 6,057 issued at December 31, 2014 and June 30, 2014, respectively; 6,051 and 6,046 outstanding at December 31, 2014 and June 30, 2014, respectively | |
| 1 | | |
| 1 | |
Class B Common Stock (10 votes per share) $ .0001 par value; 227 shares authorized at December 31, 2014 and June 30, 2014, .146 issued and outstanding at December 31, 2014 and June 30, 2014 | |
| — | | |
| — | |
Class C Common Stock (25 votes per share) $.0001 par value; 567 shares authorized at December 31, 2014 and June 30, 2014, 383 issued and outstanding at December 31, 2014 and June 30, 2014 | |
| — | | |
| — | |
Paid-in capital in excess of par value | |
| 175,413 | | |
| 175,284 | |
Accumulated deficit | |
| (144,066 | ) | |
| (149,259 | ) |
Notes receivable from employee stockholders | |
| (35 | ) | |
| (39 | ) |
Treasury stock, at cost - 12 shares of common stock at December 31, 2014 and June 30, 2014 | |
| (675 | ) | |
| (675 | ) |
Total Fonar Corporation Stockholder Equity | |
| 30,638 | | |
| 25,312 | |
Noncontrolling interests | |
| 19,582 | | |
| 20,595 | |
Total Stockholders' Equity | |
| 50,220 | | |
| 45,907 | |
Total Liabilities and Stockholders' Equity | |
$ | 79,040 | | |
$ | 76,790 | |
*Condensed from audited financial statements.
See accompanying notes to condensed consolidated financial
statements.
Page 5
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts and shares in
thousands, except per share amounts)
(UNAUDITED)
| |
FOR THE THREE MONTHS ENDED DECEMBER 31, |
REVENUES | |
2014 | |
2013 |
Product sales – net | |
$ | 375 | | |
$ | 755 | |
Service and repair fees – net | |
| 2,499 | | |
| 2,548 | |
Service and repair fees – related parties - net | |
| 28 | | |
| 28 | |
Patient fee revenue, net of contractual allowances and discounts | |
| 6,629 | | |
| 5,894 | |
Provision for bad debts for patient fee | |
| (2,897 | ) | |
| (2,223 | ) |
Management and other fees – net | |
| 8,613 | | |
| 8,274 | |
Management and other fees – related medical practices – net | |
| 1,845 | | |
| 2,333 | |
Total Revenues – Net | |
| 17,092 | | |
| 17,609 | |
COSTS AND EXPENSES | |
| | | |
| | |
Costs related to product sales | |
| 237 | | |
| 631 | |
Costs related to service and repair fees | |
| 474 | | |
| 587 | |
Costs related to service and repair fees – related parties | |
| 5 | | |
| 6 | |
Costs related to patient fee revenue | |
| 1,902 | | |
| 2,028 | |
Costs related to management and other fees | |
| 5,180 | | |
| 5,190 | |
Costs related to management and other fees – related medical practices | |
| 1,240 | | |
| 1,270 | |
Research and development | |
| 359 | | |
| 374 | |
Selling, general and administrative | |
| 3,824 | | |
| 4,352 | |
Provision for bad debts | |
| 273 | | |
| (124 | ) |
Total Costs and Expenses | |
| 13,494 | | |
| 14,314 | |
Income From Operations | |
| 3,598 | | |
| 3,295 | |
Interest Expense | |
| (172 | ) | |
| (237 | ) |
Investment Income | |
| 60 | | |
| 60 | |
Other Expense | |
| (2 | ) | |
| — | |
Income Before Provision for Income Taxes and Noncontrolling Interests | |
| 3,484 | | |
| 3,118 | |
Provision for Income Taxes | |
| 29 | | |
| 70 | |
Net Income | |
| 3,455 | | |
| 3,048 | |
Net Income – Noncontrolling Interests | |
| (797 | ) | |
| (905 | ) |
Net Income – Controlling Interests | |
$ | 2,658 | | |
$ | 2,143 | |
Net Income Available to Common Stockholders | |
$ | 2,485 | | |
$ | 2,003 | |
Net Income Available to Class A Non-Voting Preferred Stockholders | |
$ | 129 | | |
$ | 104 | |
Net Income Available to Class C Common Stockholders | |
$ | 44 | | |
$ | 36 | |
Basic Net Income Per Common Share Available to Common Stockholders | |
$ | 0.41 | | |
$ | 0.33 | |
Diluted Net Income Per Common Share Available to Common Stockholders | |
$ | 0.40 | | |
$ | 0.33 | |
Basic and Diluted Income Per Share – Class C Common | |
$ | 0.12 | | |
$ | 0.09 | |
Weighted Average Basis Shares Outstanding – Common Stockholders | |
| 6,051 | | |
| 6,006 | |
Weighted Average Diluted Shares Outstanding – Common Stockholders | |
| 6,179 | | |
| 6,133 | |
Weighted Average Basic Shares Outstanding – Class C Common | |
| 383 | | |
| 383 | |
Weighted Average Diluted Shares Outstanding – Class C Common | |
| 383 | | |
| 383 | |
See accompanying notes to condensed consolidated financial
statements.
Page 6
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts and shares in
thousands, except per share amounts)
(UNAUDITED)
| |
FOR THE SIX MONTHS ENDED DECEMBER 31, |
| |
2014 | |
2013 |
REVENUES | |
| | | |
| | |
Product sales – net | |
$ | 1,646 | | |
$ | 783 | |
Service and repair fees – net | |
| 4,989 | | |
| 5,060 | |
Service and repair fees – related parties - net | |
| 55 | | |
| 55 | |
Patient fee revenue, net of contractual allowances and discounts | |
| 13,416 | | |
| 11,721 | |
Provision for bad debts for patient fee | |
| (6,042 | ) | |
| (4,262 | ) |
Management and other fees – net | |
| 17,351 | | |
| 16,417 | |
Management and other fees – related medical practices – net | |
| 3,662 | | |
| 4,666 | |
Total Revenues – Net | |
| 35,077 | | |
| 34,440 | |
COSTS AND EXPENSES | |
| | | |
| | |
Costs related to product sales | |
| 1,322 | | |
| 678 | |
Costs related to service and repair fees | |
| 981 | | |
| 1,131 | |
Costs related to service and repair fees – related parties | |
| 11 | | |
| 12 | |
Costs related to patient fee revenue | |
| 3,801 | | |
| 3,877 | |
Costs related to management and other fees | |
| 10,379 | | |
| 10,264 | |
Costs related to management and other fees – related medical practices | |
| 2,609 | | |
| 2,490 | |
Research and development | |
| 756 | | |
| 769 | |
Selling, general and administrative | |
| 7,403 | | |
| 8,089 | |
Provision for bad debts | |
| 779 | | |
| (218 | ) |
Total Costs and Expenses | |
| 28,041 | | |
| 27,092 | |
Income From Operations | |
| 7,036 | | |
| 7,348 | |
Interest Expense | |
| (376 | ) | |
| (480 | ) |
Investment Income | |
| 122 | | |
| 121 | |
Other Expense | |
| (2 | ) | |
| (151 | ) |
Income Before Provision for Income Taxes and Noncontrolling Interests | |
| 6,780 | | |
| 6,838 | |
Provision for Income Taxes | |
| 69 | | |
| 170 | |
Net Income | |
| 6,711 | | |
| 6,668 | |
Net Income – Noncontrolling Interests | |
| (1,518 | ) | |
| (2,088 | ) |
Net Income – Controlling Interests | |
$ | 5,193 | | |
$ | 4,580 | |
Net Income Available to Common Stockholders | |
$ | 4,856 | | |
$ | 4,280 | |
Net Income Available to Class A Non-Voting Preferred Stockholders | |
$ | 251 | | |
$ | 223 | |
Net Income Available to Class C Common Stockholders | |
$ | 86 | | |
$ | 77 | |
Basic Net Income Per Common Share Available to Common Stockholders | |
$ | 0.80 | | |
$ | 0.71 | |
Diluted Net Income Per Common Share Available to Common Stockholders | |
$ | 0.79 | | |
$ | 0.70 | |
Basic and Diluted Income Per Share – Class C Common | |
$ | 0.22 | | |
$ | 0.20 | |
Weighted Average Basis Shares Outstanding – Common Stockholders | |
| 6,050 | | |
| 5,992 | |
Weighted Average Diluted Shares Outstanding – Common Stockholders | |
| 6,178 | | |
| 6,120 | |
Weighted Average Basic Shares Outstanding – Class C Common | |
| 383 | | |
| 383 | |
Weighted Average Diluted Shares Outstanding – Class C Common | |
| 383 | | |
| 383 | |
See accompanying notes to condensed consolidated financial
statements.
Page 7
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Amounts and shares in
thousands, except per share amounts)
(UNAUDITED)
| |
FOR THE SIX MONTHS ENDED DECEMBER 31, |
| |
2014 | |
2013 |
Cash Flows from Operating Activities: | |
| | | |
| | |
Net income | |
$ | 6,711 | | |
$ | 6,668 | |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 1,776 | | |
| 1,954 | |
Provision for bad debts | |
| 6,820 | | |
| 4,044 | |
Non-cash considerations | |
| 76 | | |
| 155 | |
Compensatory element of stock issuances | |
| 53 | | |
| 86 | |
Stock option exercised | |
| — | | |
| 31 | |
(Increase) decrease in operating assets, net: | |
| | | |
| | |
Accounts, management fee and medical receivable(s) | |
| (9,360 | ) | |
| (7,261 | ) |
Notes receivable | |
| 103 | | |
| 60 | |
Costs and estimated earnings in excess of billings on uncompleted contracts | |
| 34 | | |
| (609 | ) |
Inventories | |
| 80 | | |
| (485 | ) |
Prepaid expenses and other current assets | |
| 131 | | |
| 210 | |
Other assets | |
| 8 | | |
| 42 | |
Increase (decrease) in operating liabilities, net: | |
| | | |
| | |
Accounts payable | |
| (84 | ) | |
| 189 | |
Other current liabilities | |
| (178 | ) | |
| 1,580 | |
Customer advances | |
| (108 | ) | |
| 183 | |
Billings in excess of costs and estimated earnings on
uncompleted contracts | |
| 26 | | |
| — | |
Other liabilities | |
| (169 | ) | |
| (58 | ) |
Due to related medical practices | |
| (6 | ) | |
| (2 | ) |
Income tax payable | |
| — | | |
| (20 | ) |
Net cash provided by operating activities | |
| 5,913 | | |
| 6,767 | |
Cash Flows from Investing Activities: | |
| | | |
| | |
Purchases of property and equipment | |
| (55 | ) | |
| (277 | ) |
Cost of patents | |
| (67 | ) | |
| (58 | ) |
Net cash used in investing activities | |
| (122 | ) | |
| (335 | ) |
Cash Flows from Financing Activities: | |
| | | |
| | |
Repayment of borrowings and capital lease obligations | |
| (1,543 | ) | |
| (2,195 | ) |
Distributions to noncontrolling interests | |
| (2,530 | ) | |
| (2,696 | ) |
Repayment of notes receivable from employee stockholders | |
| 4 | | |
| 13 | |
Net cash used in financing activities | |
| (4,069 | ) | |
| (4,878 | ) |
Net Increase in Cash and Cash Equivalents | |
| 1,722 | | |
| 1,554 | |
Cash and Cash Equivalents – Beginning of Period | |
| 9,952 | | |
| 7,871 | |
Cash and Cash Equivalents - End of Period | |
$ | 11,674 | | |
$ | 9,425 | |
See accompanying notes to condensed consolidated financial
statements.
Page 8
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
(Amounts and shares in
thousands, except per share amounts)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and six months ended December 31, 2014, are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30, 2015. 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 29, 2014 for the fiscal
year ended June 30, 2014.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The unaudited condensed consolidated financial statements include
the accounts of FONAR Corporation, its majority and wholly-owned subsidiaries and partnerships (collectively the “Company”).
All significant intercompany accounts and transactions have been eliminated in consolidation.
Earnings Per Share
Basic earnings per share
(“EPS”) is computed based on the weighted average number of shares common stock and stock equivalents
outstanding, net of common stock. In accordance with ASC topic 260-10, “Participating Securities and the Two-Class
method”, the Company used the Two-Class method for calculating basic earnings per share and applied the if converted
method in calculating diluted earnings per share for the three and six months ended December 31, 2014 and December 31,
2013.
Diluted EPS reflects the potential dilution
from the exercise or conversion of all dilutive securities into common stock based on the average market price of common shares
outstanding during the period. For the three and six months ended December 31, 2014 and December 31, 2013, diluted EPS for common
shareholders includes 128 shares upon conversion of Class C Common.
Page 9
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
(Amounts and shares in
thousands, except per share amounts)
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share (Continued)
| |
Three months ended December 31, 2014 | |
Three months ended December 31, 2013 |
Basic | |
| Total | | |
| Common Stock | | |
| Class C Common Stock | | |
| Total | | |
| Common Stock | | |
| Class C Common Stock | |
Numerator: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net income available to common stockholders | |
$ | 2,658 | | |
$ | 2,485 | | |
$ | 44 | | |
$ | 2,143 | | |
$ | 2,003 | | |
$ | 36 | |
Denominator: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Weighted average shares outstanding | |
| 6,051 | | |
| 6,051 | | |
| 383 | | |
| 6,006 | | |
| 6,006 | | |
| 383 | |
Basic income per common share | |
$ | 0.44 | | |
$ | 0.41 | | |
$ | 0.12 | | |
$ | 0.36 | | |
$ | 0.33 | | |
$ | 0.09 | |
Diluted
Denominator: |
|
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Weighted average shares outstanding | |
| | | |
| 6,051 | | |
| 383 | | |
| | | |
| 6,006 | | |
| 383 | |
Stock options | |
| | | |
| — | | |
| — | | |
| | | |
| — | | |
| — | |
Convertible Class C Stock | |
| | | |
| 128 | | |
| — | | |
| | | |
| 128 | | |
| — | |
Total Denominator for diluted earnings per share | |
| | | |
| 6,179 | | |
| 383 | | |
| | | |
| 6,133 | | |
| 383 | |
Diluted income per common share | |
| | | |
$ | 0.40 | | |
$ | 0.12 | | |
| | | |
$ | 0.33 | | |
$ | 0.09 | |
Page 10
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
(Amounts and shares in
thousands, except per share amounts)
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share (Continued)
| |
Six months ended December 31, 2014 | |
Six months ended December 31, 2013 |
Basic | |
| Total | | |
| Common Stock | | |
| Class C Common Stock | | |
| Total | | |
| Common Stock | | |
| Class C Common Stock | |
Numerator: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net income available to common stockholders | |
$ | 5,193 | | |
$ | 4,856 | | |
$ | 86 | | |
$ | 4,580 | | |
$ | 4,280 | | |
$ | 77 | |
Denominator: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Weighted average shares outstanding | |
| 6,050 | | |
| 6,050 | | |
| 383 | | |
| 5,992 | | |
| 5,992 | | |
| 383 | |
Basic income per common share | |
$ | 0.86 | | |
$ | 0.80 | | |
$ | 0.22 | | |
$ | 0.76 | | |
$ | 0.71 | | |
$ | 0.20 | |
Diluted Denominator: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Weighted average shares outstanding | |
| | | |
| 6,050 | | |
| 383 | | |
| | | |
| 5,992 | | |
| 383 | |
Stock options | |
| | | |
| — | | |
| — | | |
| | | |
| — | | |
| — | |
Convertible Class C Stock | |
| | | |
| 128 | | |
| — | | |
| | | |
| 128 | | |
| — | |
Total Denominator for diluted earnings per share | |
| | | |
| 6,178 | | |
| 383 | | |
| | | |
| 6,120 | | |
| 383 | |
Diluted income per common share | |
| | | |
$ | 0.79 | | |
$ | 0.22 | | |
| | | |
$ | 0.70 | | |
$ | 0.20 | |
Recent Accounting Pronouncements
The FASB has issued ASU No. 2014-09, Revenue
from Contracts with Customers. This ASU supercedes the revenue recognition requirements in Accounting Standards Codification
605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity
recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those goods or services. This ASU is effective on January 1, 2017 and
should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially
applying the ASU recognized at the date of initial application. The adoption of this standard is not expected to have a material
impact on the Company’s condensed consolidated financial position and results of operations.
FASB, the Emerging Issues Task Force and the
SEC have issued certain other accounting standards, updates, and regulations as of December 31, 2014 that will become effective
in subsequent periods; however, management does not believe that any of those updates would have significantly affected our financial
accounting measures or disclosures had they been in effect during 2014 or 2013, and it does not believe that any of those pronouncements
will have a significant impact on our condensed consolidated financial statements at the time they become effective.
Page 11
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
(Amounts and shares in
thousands, except per share amounts)
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Reclassifications
Certain prior year amounts have been reclassified
to conform to the current year presentation. The reclassifcations did not have any effect on reported consolidated net income for
any periods presented.
NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT
AND OTHER FEES RECEIVABLE
Receivables, net is comprised of the following
at December 31, 2014:
| |
Accounts Receivable | |
Allowance for doubtful accounts | |
Net |
Accounts receivable | |
$ | 5,330 | | |
$ | 302 | | |
$ | 5,028 | |
Accounts receivable - related party | |
$ | 60 | | |
| — | | |
$ | 60 | |
Medical receivables | |
$ | 27,858 | | |
$ | 18,960 | | |
$ | 8,898 | |
Management and other fees receivable | |
$ | 25,375 | | |
$ | 11,635 | | |
$ | 13,740 | |
Management and other fees receivable from related medical practices ("PC’s") | |
$ | 3,872 | | |
$ | 403 | | |
$ | 3,469 | |
Receivables, net is comprised of the following
at June 30, 2014:
| |
Accounts Receivable | |
Allowance for doubtful accounts | |
Net |
Accounts receivable | |
$ | 4,707 | | |
$ | 257 | | |
$ | 4,450 | |
Accounts receivable - related party | |
$ | — | | |
| — | | |
$ | — | |
Medical receivable | |
$ | 21,726 | | |
$ | 12,918 | | |
$ | 8,808 | |
Management and other fees receivable | |
$ | 22,872 | | |
$ | 10,902 | | |
$ | 11,970 | |
Management and other fees receivable from related medical practices ("PC’s") | |
$ | 3,830 | | |
$ | 403 | | |
$ | 3,427 | |
The Company's customers are concentrated in
the healthcare industry.
Accounts Receivable
Credit risk with respect to the Company’s
accounts receivable related to product sales and service and repair fees is limited due to the customer advances received prior
to the commencement of work performed and the billing of amounts to customers as sub-assemblies are completed. Service and repair
fees are billed on a monthly or quarterly basis and the Company does not continue providing these services if accounts receivable
become past due. The Company controls credit risk with respect to accounts receivable from service and repair fees through its
credit evaluation process, credit limits, monitoring procedures and reasonably short collection terms. The Company performs ongoing
credit authorizations before a product sales contract is entered into or service and repair fees are provided.
Page 12
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
(Amounts and shares in
thousands, except per share amounts)
(UNAUDITED)
NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT
AND OTHER FEES RECEIVABLE (Continued)
Medical Receivables
Medical receivables are due under fee-for-service
contracts from third party payors, such as hospitals, government sponsored healthcare programs, patient’s legal counsel and
directly from patients. Substantially all the revenue relates to patients residing in Florida. The carrying amount of the medical
receivable is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected.
The Company continuously monitors collections from its clients and maintains an allowance for bad debts based upon the Company’s
historical collection experience. The Company determines uncollectible accounts based
on specific agings, specific payor collection issues that have been identified and based on payor classifications and historical
experience at each site.
Management and Other Fees Receivable
The Company's receivables from the related and
non-related professional corporations (PC's) substantially consist of fees outstanding under management agreements. Payment of
the outstanding fees is dependent on collection by the PC's of fees from third party medical reimbursement organizations, principally
insurance companies and health management organizations.
Payment of the management fee receivables from
the PC’s may be impaired by the inability of the PC’s to collect in a timely manner their medical fees from the third
party payors, particularly insurance carriers covering automobile no-fault and workers compensation claims due to longer payment
cycles and rigorous informational requirements and certain other disallowed claims. Approximately 52% and 49% of the PCs’
net revenues for the three months ended December 31, 2014 and 2013, respectively, were derived from no-fault and personal injury
protection claims. Approximately 53% and 50% of the PCs’ net revenues for the six months ended December 31, 2014 and 2013,
respectively, were derived from no-fault and personal injury protection claims. The Company considers the aging of its accounts
receivable in determining the amount of allowance for doubtful accounts. The Company generally takes all legally available steps
to collect its receivables. Credit losses associated with the receivables are provided for in the condensed consolidated financial
statements and have historically been within management's expectations.
Net revenues from management and other fees
charged to the related PCs accounted for approximately 10.8% and 13.2% of the consolidated net revenues for the three months ended
December 31, 2014 and 2013, respectively. Net revenues from management and other fees charged to the related PCs accounted for
approximately 10.4% and 13.5% of the consolidated net revenues for the six months ended December 31, 2014 and 2013, respectively.
Tallahassee Magnetic Resonance Imaging, PA,
Stand Up MRI of Boca Raton, PA and Stand Up MRI & Diagnostic Center, PA (all related medical practices) entered into a guaranty
agreement, pursuant to which they cross guaranteed all management fees which are payable to the Company, which have arisen under
each individual management agreement.
Page 13
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
(Amounts and shares in
thousands, except per share amounts)
(UNAUDITED)
NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT
AND OTHER FEES RECEIVABLE (Continued)
Management and Other Fees Receivable (Continued)
The Company’s patient fee revenue, net
of contractual allowances and discounts less the provision for bad debts for the three and six months ended December 31, 2014 and
2013 are summarized in the following tables.
| |
For the Three Months Ended December 31, |
| |
2014 | |
2013 |
Commercial Insurance/ Managed Care | |
$ | 1,074 | | |
$ | 1,011 | |
Medicare/Medicaid | |
| 307 | | |
| 439 | |
Workers' Compensation/Personal Injury | |
| 3,146 | | |
| 3,455 | |
Other | |
| 2,102 | | |
| 989 | |
Patient Fee Revenue, net of contractual allowances and discounts | |
| 6,629 | | |
| 5,894 | |
Provision for Bad Debts | |
| (2,897 | ) | |
| (2,223 | ) |
Net Patient Fee for Revenue | |
$ | 3,732 | | |
$ | 3,671 | |
| |
For the Six Months Ended December 31, |
| |
2014 | |
2013 |
Commercial Insurance/ Managed Care | |
$ | 2,154 | | |
$ | 2,111 | |
Medicare/Medicaid | |
| 604 | | |
| 818 | |
Workers' Compensation/Personal Injury | |
| 6,841 | | |
| 6,350 | |
Other | |
| 3,817 | | |
| 2,442 | |
Patient Fee Revenue, net of contractual allowances and discounts | |
| 13,416 | | |
| 11,721 | |
Provision for Bad Debts | |
| (6,042 | ) | |
| (4,262 | ) |
Net Patient Fee for Revenue | |
$ | 7,374 | | |
$ | 7,459 | |
Page 14
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
(Amounts and shares in
thousands, except per share amounts)
(UNAUDITED)
NOTE 4 - INVENTORIES
Inventories included in the accompanying condensed consolidated balance
sheet consist of the following:
| |
December 31, 2014 | |
June 30, 2014 |
Purchased parts, components and supplies | |
$ | 2,170 | | |
$ | 2,094 | |
Work-in-process | |
| 193 | | |
| 350 | |
Total Inventories | |
$ | 2,363 | | |
$ | 2,444 | |
NOTE 5 – COSTS AND ESTIMATED EARNINGS
ON UNCOMPLETED CONTRACTS
Information relating
to uncompleted contracts is as follows:
| |
December 31, 2014 | |
June 30, 2014 |
Costs incurred on uncompleted contracts | |
$ | 2,973 | | |
$ | 1,885 | |
Estimated earnings | |
| 2,252 | | |
| 1,746 | |
Subtotal | |
| 5,225 | | |
| 3,631 | |
Less: Billings to date | |
| 4,667 | | |
| 3,013 | |
Total Costs and estimated earnings in excess of billings on uncompleted contracts | |
$ | 558 | | |
$ | 618 | |
Included in the accompanying
condensed consolidated balance sheets under the following captions:
| |
December 31, 2014 | |
June 30, 2014 |
Costs and estimated earnings in excess of billings on uncompleted contracts | |
$ | 726 | | |
$ | 760 | |
Less: Billings in excess of costs and estimated earnings on uncompleted contracts | |
| 168 | | |
| 142 | |
Total Costs and estimated earnings in excess of billings on uncompleted contracts | |
$ | 558 | | |
| 618 | |
PAGE 15
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
(Amounts and shares in
thousands, except per share amounts)
(UNAUDITED)
NOTE 6 – OTHER INTANGIBLE ASSETS
Other intangible assets, net of accumulated
amortization, in the accompanying condensed consolidated balance sheet consist of the following:
| |
December 31, 2014 | |
June 30, 2014 |
Capitalized software development costs | |
$ | 7,418 | | |
$ | 7,418 | |
Patents and copyrights | |
| 4,475 | | |
| 4,408 | |
Non-compete | |
| 4,100 | | |
| 4,100 | |
Customer relationships | |
| 3,800 | | |
| 3,800 | |
Gross Other intangible assets | |
| 19,793 | | |
| 19,726 | |
Less: Accumulated amortization | |
| 9,860 | | |
| 9,217 | |
Other Intangible Assets | |
$ | 9,933 | | |
$ | 10,509 | |
Amortization of patents and copyrights for the
three months ended December 31, 2014 and 2013 amounted to $46 and $45, respectively.
Amortization of capitalized software development
costs for the three months ended December 31, 2014 and 2013 amounted to $81 and $108, respectively.
Amortization of non-compete for the three months
ended December 31, 2014 and 2013 amounted to $147 and $147, respectively.
Amortization of customer relationships for the
three months ended December 31, 2014 and 2013 amounted to $47 and $48, respectively.
Amortization of patents and copyrights for the
six months ended December 31, 2014 and 2013 amounted to $91 and $89, respectively.
Amortization of capitalized software development
costs for the six months ended December 31, 2014 and 2013 amounted to $164 and $217, respectively.
Amortization of non-compete for the six months
ended December 31, 2014 and 2013 amounted to $293 and $293, respectively.
Amortization of customer relationships for the
six months ended December 31, 2014 and 2013 amounted to $95 and $92, respectively.
Page 16
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
(Amounts and shares in
thousands, except per share amounts)
(UNAUDITED)
NOTE 7 – OTHER CURRENT LIABILITIES
Other current liabilities in the accompanying
condensed consolidated balance sheet consist of the following:
| |
December 31, 2014 | |
June 30, 2014 |
Accrued salaries, commissions and payroll taxes | |
$ | 767 | | |
$ | 835 | |
Accrued interest | |
| 117 | | |
| 117 | |
Litigation accruals | |
| 589 | | |
| 664 | |
Sales tax payable | |
| 2,569 | | |
| 2,665 | |
Legal and other professional fees | |
| 409 | | |
| 439 | |
Accounting fees | |
| 168 | | |
| 325 | |
Self-funded health insurance reserve | |
| 390 | | |
| 306 | |
Interest and penalty - sales tax | |
| 2,415 | | |
| 2,374 | |
Purchase scanners | |
| 100 | | |
| 450 | |
Other | |
| 946 | | |
| 849 | |
Total Other Current Liabilities | |
$ | 8,470 | | |
$ | 9,024 | |
NOTE 8 – STOCKHOLDERS EQUITY
Common Stock
During the six months ended December 31, 2014, the Company issued
5 shares of common stock to employees and consultants as compensation valued at $53 under a stock bonus plan.
Page 17
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
(Amounts and shares in
thousands, except per share amounts)
(UNAUDITED)
NOTE 9 - SEGMENT AND RELATED INFORMATION
The Company operates in two industry segments
- manufacturing and the servicing of medical equipment and management of diagnostic imaging centers.
The accounting policies of the segments are
the same as those described in the summary of significant accounting policies as disclosed in the Company’s 10-K as of June
30, 2014. 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:
| |
Medical Equipment | |
Management Of Diagnostic Imaging Centers | |
Totals |
For the three months ended December 31, 2014 | |
| | | |
| | | |
| | |
Net revenues from external customers | |
$ | 2,902 | | |
$ | 14,190 | | |
$ | 17,092 | |
Inter-segment net revenues | |
$ | 501 | | |
$ | — | | |
$ | 501 | |
Income from operations | |
$ | 446 | | |
$ | 3,152 | | |
$ | 3,598 | |
Depreciation and amortization | |
$ | 75 | | |
$ | 813 | | |
$ | 888 | |
Capital expenditures | |
$ | 21 | | |
$ | 29 | | |
$ | 50 | |
| |
| | | |
| | | |
| | |
For the three months ended December 31, 2013 | |
| | | |
| | | |
| | |
Net revenues from external customers | |
$ | 3,331 | | |
$ | 14,278 | | |
$ | 17,609 | |
Inter-segment net revenues | |
$ | 495 | | |
$ | — | | |
$ | 495 | |
Income from operations | |
$ | (31 | ) | |
$ | 3,326 | | |
$ | 3,295 | |
Depreciation and amortization | |
$ | 60 | | |
$ | 912 | | |
$ | 972 | |
Capital expenditures | |
$ | 26 | | |
$ | 80 | | |
$ | 106 | |
| |
| | | |
| | | |
| | |
For the six months ended December 31, 2014 | |
| | | |
| | | |
| | |
Net revenues from external customers | |
$ | 6,690 | | |
$ | 28,387 | | |
$ | 35,077 | |
Inter-segment net revenues | |
$ | 1,002 | | |
$ | — | | |
$ | 1,002 | |
Income from operations | |
$ | 824 | | |
$ | 6,212 | | |
$ | 7,036 | |
Depreciation and amortization | |
$ | 151 | | |
$ | 1,625 | | |
$ | 1,776 | |
Capital expenditures | |
$ | 67 | | |
$ | 55 | | |
$ | 122 | |
| |
| | | |
| | | |
| | |
For the six months ended December 31, 2013 | |
| | | |
| | | |
| | |
Net revenues from external customers | |
$ | 5,898 | | |
$ | 28,542 | | |
$ | 34,440 | |
Inter-segment net revenues | |
$ | 990 | | |
$ | — | | |
$ | 990 | |
Income from operations | |
$ | 131 | | |
$ | 7,217 | | |
$ | 7,348 | |
Depreciation and amortization | |
$ | 218 | | |
$ | 1,736 | | |
$ | 1,954 | |
Capital expenditures | |
$ | 73 | | |
$ | 262 | | |
$ | 335 | |
Page 18
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
(Amounts and shares in
thousands, except per share amounts)
(UNAUDITED)
NOTE 10– SUPPLEMENTAL CASH FLOW INFORMATION
During the six months ended December 31, 2014
and December 31, 2013, the Company paid $284 and $361 for interest, respectively.
During the six months ended December 31, 2014
and December 31, 2013, the Company paid $69 and $190 for income taxes, respectively.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Litigation
The Company is subject to legal proceedings
and claims arising from the ordinary course of its business, including personal injury, customer contract and employment claims.
In the opinion of management, the aggregate liability, if any, with respect to such actions, will not have a material adverse effect
on the consolidated financial position or results of operations of the Company.
There were no material changes in litigation
from that reported in our Form 10-K for the fiscal year ended June 30, 2014 and our form 10-Q for the first quarter of fiscal 2015.
Other Matters
The Company is also delinquent in filing sales
tax returns for certain states, for which the Company has transacted business. As of December 31, 2014, the Company has recorded
tax obligations of approximately $2,569 plus interest and penalties of approximately $2,415. The Company is in the process of determining
the regulatory requirements in order to become compliant.
The Company maintains a self-funded health insurance
program with a stop-loss umbrella policy with a third party insurer to limit the maximum potential liability for individual claims
to $100 per person and for a maximum potential claim liability based on member enrollment. With respect to this program, the Company
considers historical and projected medical utilization data when estimating its health insurance program liability and related
expense. As of December 31, 2014 and June 30, 2014, the Company had approximately $390 and $306, respectively, in reserve for its
self-funded health insurance programs. The reserves are included in “Other current liabilities” in the condensed consolidated
balance sheets.
The Company regularly analyzes its reserves
for incurred but not reported claims, and for reported but not paid claims related to its reinsurance and self-funded insurance
programs. The Company believes its reserves are adequate. However, significant judgment is involved in assessing these reserves
such as assessing historical paid claims, average lags between the claims’ incurred date, reported dates and paid dates,
and the frequency and severity of claims. There may be differences between actual settlement amounts and recorded reserves and
any resulting adjustments are included in expense once a probable amount is known. There were no significant adjustments recorded
in the periods covered by this report
Page 19
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
(Amounts and shares in
thousands, except per share amounts)
(UNAUDITED)
NOTE 12 - INCOME TAXES
ASC topic 740 prescribes a recognition threshold
and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken
in a corporate tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon
examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the benefit
recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits”. A liability is recognized
(or amount of net operating loss carryforward or amount of tax refundable is reduced) for an unrecognized tax benefit because it
represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized
as a result of applying the provisions of ASC topic 740.
In accordance with ASC topic 740, interest costs
related to unrecognized tax benefits are required to be calculated (if applicable) and would be classified as “Interest expense,
net”. Penalties if incurred would be recognized as a component of “Selling, general and administrative” expenses.
The Company files corporate income tax returns
in the United States (federal) and in various state and local jurisdictions. In most instances, the Company is no longer subject
to federal, state and local income tax examinations by tax authorities for years prior to 2009.
The Company recorded a deferred tax asset of
$5,740 and a deferred tax liability of $584 as of December 31, 2014, primarily relating to net operating loss carryforwards of
approximately $137,252 available to offset future taxable income through 2034. The net operating losses begin to expire in 2019
for federal tax purposes and in 2014 for state income tax purposes.
The ultimate realization of deferred tax assets
is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible.
The Company considers projected future taxable income and tax planning strategies in making this assessment. At present, the Company
does have a sufficient history of income and anticipates profitability in the coming years and has concluded that it is more-likely-than-not
that the Company will be able to realize a portion of its tax benefits in the near future and therefore a valuation allowance was
established for the partial value of the deferred tax asset.
A valuation allowance will be
maintained until sufficient positive evidence exists to support the reversal of any portion or all of the valuation. Should
the Company continue to remain profitable in future periods with supportable trends, the valuation allowance will be reversed
accordingly.
NOTE 13- SUBSEQUENT EVENTS
On January 8, 2015, the Company purchased 20%
of the Class A members ownership interest in Health Diagnostic Management LLC for a cost of $4,971. After this transaction, the
Company has a 60.4% ownership interest.
Page 20
FONAR CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
For the six month period
ended December 31, 2014, we reported a net income of $6.7 million on revenues of $35.1 million as compared to net income of $6.7
million on revenues of $34.4 million for the six month period ended December 31, 2013. Operating income declined, by 4.2% from
$7.3 million for the six month period ended December 31, 2013 to $7.0 million for the six month period ended December 31, 2014.
For the three month period
ended December 31, 2014, however, we reported net income of $3.5 million on revenues of $17.1 as compared to net income of $3.0
million on revenues of $17.6 million for the three month period ended December 31, 2013.
The revenue increase of
1.8%, from $34.4 million for the first six months of fiscal 2014 to $35.1 million for the first six months of fiscal 2015, was
due mainly to a 110% increase in product sales from $783,000 for the first six months of fiscal 2014 to $1.6 million for the first
six months of fiscal 2015.
Offsetting these increases,
however, was a decline in net patient fees from $7.5 million for the first six months of fiscal 2014, to $7.4 million for the first
six months of fiscal 2015 (patient fees less the provision for bad debts for patient fees). Patient fees represent fees for services
paid directly by patients to facilities owned by us. All patient fees are derived from our Florida facilities.
In addition, service and
repair fees decreased slightly by 1.4% to $5.0 million for the first six months of fiscal 2015 from $5.1 million for the first
six months of fiscal 2014.
The increase in our revenues
was smaller than the increase in our costs and expenses, and as a result, our operating income decreased by 4.2% to $7.0 million
for the six months ended December 31, 2014, from $7.3 million for the six months ended December 31, 2013. Costs and expenses increased
3.5% from $27.1 million in the first six months of fiscal 2014 to $28.0 million in the first six months of fiscal 2015, while revenues
increased only 1.8%, from $34.4 million in the first six months of fiscal 2014 to $35.1 million in the first three months of fiscal
2015.
Fonar’s wholly-owned
subsidiary, Health Management Corporation of America (“HMCA”), is the controlling, but not sole owner of two limited
liability companies, Imperial Management Services, LLC (“Imperial”) and Health Diagnostics Management, LLC (“HDM”),
through which HMCA conducts its business. The outside investors are passive investors, and do not have the right to participate
in the management of either company. For the sake of simplicity, HMCA, Imperial and HDM are, unless otherwise indicated, referred
to as “HMCA”.
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.
Page 21
FONAR CORPORATION AND SUBSIDIARIES
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 HMCA and its subsidiaries.
Effective May 2, 2011,
HMCA contributed all of its assets, liabilities and business to Imperial Management Services, LLC (“Imperial”), which
is controlled but not wholly-owned by HMCA. Imperial is conducting the business of HMCA utilizing the same facilities, equipment
and personnel. This transaction did not result in a change of control or policy, but was solely a means to raise capital. The membership
interests of the non-controlling investors in Imperial are redeemable over a five year period.
Effective March 5, 2013,
HDM, in which HMCA then had a 50.5% interest (60.4% after an acquisition of 20% of investors’ membership interests on January
8, 2015), acquired twelve (12) Stand-Up® MRI Centers and two (2) other scanning centers from Health Diagnostics, LLC. The contribution
of these new scanning centers to the operating results of the Company are reflected in both the first six months of fiscal 2015,
and the first six months of fiscal 2014.
Manufacturing and Service
of MRI Equipment
Revenues from MRI product
sales increased to $1.6 million for the first six months of fiscal 2015 from $783,000 for the first six months of fiscal 2014.
This increase, however, reflects a volatility resulting from low sales volume. During the first six months of fiscal 2014 we sold
one scanner; during the first six months of fiscal 2015 we sold two scanners. Continuing tight credit and economic uncertainty,
including lower reimbursement rates for MRI scans, have depressed the market for our MRI scanner products.
Costs related to product
sales also increased 95.0% from $678,000 for the six month period ended December 31, 2013 to $1.3 million for the six month period
ended December 31, 2014. However costs related to product sales decreased 62.4% from $631,000 for the three month period ended
December 31, 2013 to $237,000 for the three month period ended December 31, 2014.
The volatility in the product
sales figures reflect the low sales volume. The greater revenues in the first half of fiscal 2015, as a case in point, reflect
the recognition of revenues from the sale of two MRI scanners. We do not regard the changes as indicative of a material trend.
Service revenues decreased
1.4% from $5.1 million for the six month period ended December 31, 2013 to $5.0 million for the six month period ended December
31, 2014. Service revenues also decreased 1.9% from $2.6 million for the three month period ended December 31, 2013 to $2.5 million
for the three month period ended December 31, 2014.
Costs relating to providing
service for the first six months of fiscal 2015 decreased by 13.2% from $1.1 million in the first six months of fiscal 2014 to
$992,000 in the first six months of fiscal 2015. Costs related to providing service for the three month period ended December 31,
2014 decreased 19.2% from $593,000 for the three month period ended December 31, 2013 to $479,000 for the three month period ended
December 31, 2014. 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.
There were approximately
$1.7 million in foreign revenues for the first six months of fiscal 2015 as compared to approximately $1.0 million in foreign revenues
for the first six months of fiscal 2014, representing an increase in foreign revenues of 72%. We do not regard this as a material
trend, but as part of a normal although sometimes volatile variation resulting from low volumes of foreign sales.
Page 22
FONAR CORPORATION AND SUBSIDIARIES
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 that are recognized in a fiscal quarter or quarters following
the quarter in which the sale was made.
Revenues for the medical
equipment segment as a whole increased by 13.4% to $6.7 million for the six months of fiscal 2015 from $5.9 million for the first
six months of fiscal 2014. Operating results for our medical equipment segment increased to an operating income of $824,000 for
the first six months of fiscal 2015 as compared to an operating income of $131,000 for the first six months of fiscal 2014. For
the first six months of fiscal 2015, our medical equipment segment recognized net income of $784,000, compared to a net loss of
$31,000 in the same period of fiscal 2014.
Diagnostic Facilities Management Services
HMCA revenues decreased
slightly in the first six months of fiscal 2015 by 0.5% to $28.4 million from $28.5 million for the first six months of fiscal
2014. The percentage of our revenues derived from our diagnostic facilities management segment relative to the percentage of our
revenues derived from our medical equipment segment decreased slightly (80.9% for the first six months of fiscal 2015 compared
to 82.9% for the first six months of fiscal 2014).
The decrease in HMCA revenues
is principally due to the lower revenues of facilities managed or owned by HMCA, resulting from the decrease in reimbursement rates
paid by insurers, Medicare and other government programs for MRI scans to HMCA’s clients and scanning centers. These developments
are not unique to HMCA or HMCA’s clients but are being experienced by the industry in general.
HMCA has been able to limit
the effect of lower reimbursement rates by increasing the scan volume of the facilities it manages.
As a result of our vigorous
marketing efforts, which increased the number of scans performed at our centers and at our client’s centers from 64,905 in
the first six months of fiscal 2014 to 70,676 in the first six months of fiscal 2015, there was only a small decrease in scanning
center and HMCA revenue.
We manage twenty-four sites,
twenty-three of which are equipped with Fonar Upright® MRI scanners (our Stand-Up® MRI Scanners are also called Upright®
MRI Scanners). HMCA experienced an operating income of $6.2 million for the first six months of fiscal 2015 compared to operating
income of $7.2 million for the first six months of fiscal 2014.
HMCA’s cost of revenues
for the first six months of fiscal 2015 as compared to the first six months of fiscal 2014 increased by 1.0% from $16.6 million
to $16.8 million.
Consolidated
For the first six months
of fiscal 2015, our consolidated net revenues increased by 1.8% to $35.1 million from $34.4 million for the first six months of
fiscal 2014, while total costs and expenses increased by 3.5% to $28.0 million for the first six months of fiscal 2015 from $27.1
million for the first six months of fiscal 2014. As a result, our operating income of $7.3 million in the first six months of fiscal
2014 decreased to $7.0 million in the first six months of fiscal 2015.
Page 23
FONAR CORPORATION AND SUBSIDIARIES
Selling, general and administrative
expenses decreased by 8.5% to $7.4 million in the first six months of fiscal 2015 from $8.1 million in the first six months of
fiscal 2014 as we continued our cost-cutting policies. The compensatory element of stock issuances, which is included
in selling, general and administrative expenses, decreased 38.1% to $53,200 for the first six months of fiscal 2015 from $86,000
for the first six months of fiscal 2014. We do not regard this as reflecting a trend, since the expenses are relatively small in
either case.
Research and development
expenses decreased by 1.7% to $756,000 for the first six months of fiscal 2015 as compared to $769,000 for the first six months
of fiscal 2014.
Interest expense in the
first six months of fiscal 2015 decreased by 21.7% to $376,000 from $480,000 in the first six months of fiscal 2014. The decrease
was due to the repayment of debt incurred by Fonar in connection with the acquisition of HDM.
Inventories remained constant
at $2.4 million at December 31, 2014 compared to June 30, 2014. This represents our purchase of raw materials and components which
have not yet been used to fill orders.
Net Management fee and medical
receivables increased by 7.9% to $26.1 million at December 31, 2014 from $24.2 million at June 30, 2014.
The results of operations
for the first six months of fiscal 2015 reflect a slight decrease in revenues from management, patient and other fees, as compared
to the first six months of fiscal 2014 ($28.4 million for the first six months of fiscal 2015 as compared to $28.5 million for
the first six months of fiscal 2014), and an increase in MRI equipment segment revenues ($6.7 million as compared to $5.9 million).
Revenues were 19.1% from the MRI equipment segment as compared to 80.9% from HMCA, for the first six months of fiscal 2015, as
compared to 17.1% from the MRI equipment segment and 82.9% from HMCA for the first six months of fiscal 2014. It is too early to
determine whether these variations constitute a trend.
The implementation of the
Patient Protection and Affordable Care Act (PPACA) is likely to have a profound impact on the healthcare industry. We are beginning
to see some impact of the Act on our business, in the reduction of reimbursement rates, but are unable to predict the degree of
the effect of the new legislative mandates and regulations on our MRI equipment segment or HMCA in the future.
We are committed to improving
our operating results and dealing with the challenges posed by new legislative and regulatory requirements. 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.
As mentioned, one of the
effects of the PPACA on our business has been the reduction in Medicare reimbursement rates for MRI scans. This also has resulted
in a reduction in the reimbursement rates by commercial insurers and government programs which tie their reimbursement rates to
those of Medicare. Nevertheless, the increased patient volume of the scanning centers has enabled us to maintain a healthy profitability
in spite of these challenges. We believe we are pursuing the correct policies to cope with these problems and to improve the Company’s
operating results.
Our Upright® MRI (also
referred to as the Stand-Up® MRI), together with our works-in-progress, are intended to significantly improve our competitive
position.
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FONAR CORPORATION AND SUBSIDIARIES
The 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 and therefore, in general enables the treating physician to achieve a better treatment outcome for his patient. 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, a particularly promising feature for sports injuries.
Fonar has announced a major
diagnostic breakthrough in multiple sclerosis achieved with advanced Upright® MRI. Medical researchers at FONAR published a
paper reporting a diagnostic breakthrough in multiple sclerosis (MS), based on observations made possible by the Company’s
unique 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 and the antigenic polypeptides it contains 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," appears in the
of the journal Physiological Chemistry and Physics and Medical NMR (Sept. 20, 2011).
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, because 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 this pathology since the patient's pathology is most visible and the symptoms most acute when the patient
is scanned in the upright fully weight-bearing position.
A combined study of 1,200
neck pain patients published in “Brain Injury” (July 2010) by eight university medical centers reported that cerebellar
tonsil ectopia (CTE) of 1mm or greater was found and visualized 2.5 times (250%) more frequently when patients who had sustained
automobile whiplash injuries were scanned upright rather than lying down.
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 a complete evaluation of the extent of the patient’s scoliosis, 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 an 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 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® 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 Fonar Upright® MRI to detect spine pathology, including spondylolisthesis, disc herniations and disc degeneration, as
compared to visualizations of the spine produced by traditional single position static MRIs.
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FONAR CORPORATION AND SUBSIDIARIES
The UCLA study by MRI of
1,302 back pain patients when they were in the Fonar Upright® MRI 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 the Upright® 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® MRI thereby enabling the extent of spinal canal stenosis that existed in patients to be measured.
Spinal canal stenosis gives rise to the symptom complex intermittent neurogenic claudication manifest as debilitating pain in the
back and lower extremities, weakness and difficulties in ambulation and leg paresthesias. Spinal canal stenosis is a spinal compression
syndrome separate and distinct from the more common nerve compression syndrome of the spinal nerves as they exit the vertebral
column through the bony neural foramen.
The Fonar Upright® 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.
Liquidity and Capital Resources
Cash and cash equivalents
increased by 17.3% from $10.0 million at June 30, 2014 to $11.7 million at December 31, 2014, primarily as a result of collections.
Cash provided by
operating activities for the first six months of fiscal 2015 was $5.9 million. Cash provided by operating activities was
attributable principally to net income of $6.7 million, a provision for bad debts of $6.8 million, and depreciation and
amortization of $1.8 million, offset by an increase in accounts, management fee and medical receivables of $9.3 million.
Cash used in investing activities
for the first six months of fiscal 2015 was $122,000. The principal uses of cash used in investing activities during the first
six months of fiscal 2015 consisted of patent costs of $67,000 and the purchase of property and equipment of $55,000.
Cash used by financing activities
for the first six months of fiscal 2015 was $4.1 million. The principal uses of cash in financing activities during the first six
months of fiscal 2015 were the repayment of principal on long-term debt and capital lease obligations of $1.5 million, and distributions
to non-controlling interests of $2.5 million.
Total liabilities decreased
by 6.7% to $28.8 million at December 31, 2014 from $30.9 million at June 30, 2014. Other current liabilities decreased from $9.0
million at June 30, 2014 to $8.5 million at December 31, 2014 along with a decrease in long-term debt and capital lease obligations
from $8.5 million to $6.9 million. The current portion of our unearned revenue on service contracts increased from $4.7 million
to $5.1 million. Customer deposits decreased to $1.8 million at December 31, 2014 as compared to $1.9 million at June 30, 2014.
As of December 31, 2014,
the total of $20.9 million in other current liabilities included accrued salaries and payroll taxes of $1.1 million, and sales
taxes of $2.6 million plus accrued interest and penalties of $2.4 million.
Page 26
FONAR CORPORATION AND SUBSIDIARIES
Our working capital increased
to $25.9 million at December 31, 2014 from $21.6 million at June 30, 2014. This resulted from an increase in current assets ($42.8
million at June 30, 2014 as compared to $46.8 million at December 31, 2014), and a decrease in current liabilities from $21.2 million
at June 30, 2014 to $20.9 million at December 31, 2014.
Fonar has not committed
to making any significant capital expenditures for the remainder of the 2015 fiscal year.
Our business plan calls
for a continuing emphasis on providing our customers with enhanced equipment service and maintenance capabilities and delivering
state-of-the-art, innovative and high quality equipment and upgrades at competitive prices.
Critical to our business
plan are improvement and expansion of the MRI facilities managed or owned by HMCA, and increasing the number of scans performed
at those facilities. In addition, our business plan calls for a continuing emphasis on providing our customers with enhanced equipment
service and maintenance capabilities and delivering state-of-the-art, innovative and high quality equipment and upgrades at competitive
prices.
The Company continues to
focus its efforts on increased marketing campaigns to strengthen the demand for its products and services. Management is seeking
to promote wider market recognition of Fonar’s scanner products, and to increase demand for Upright® scanning at the
facilities HMCA manages. Given the liquidity and credit constraints in the markets, and the uncertainty resulting for the Patient
Protection and Affordable Care Act, the sale of medical equipment has and may continue to suffer.
Management anticipates that
Fonar’s capital resources will continue to improve if (1) Fonar’s MRI scanner products gain wider market recognition
and acceptance resulting in increased product sales, (2) service and maintenance revenues increase as warranties on scanners expire
and (3) HMCA revenues are increased through the Company’s vigorous marketing efforts and the installation or acquisition
of more HMCA managed Upright® MRI scanners. If our marketing efforts to increase revenues fail, and we are unable to raise
debt or equity capital, we may experience a shortfall in cash, and it may be necessary to reduce operating expenses to attempt
to avoid the need to curtail our operations. Current economic, credit and political conditions have contributed to a challenging
business environment for our company. The precise impact of these conditions can not be fully predicted. There can be no assurance
that we would be able to secure additional funds if needed.
The Company believes that
its business plan has been responsible for the past three consecutive fiscal years and past two fiscal quarters of profitability
(fiscal 2012, fiscal 2013, fiscal 2014 and the first half of fiscal 2015) and that its capital resources will be adequate to support
operations at current levels through at least December 31, 2015. In the past, the Company experienced periods of working capital
deficits and prior to fiscal 2011, losses. The future effects on our business of healthcare reform legislation, the Deficit Reduction
Act, the 2.3% excise tax on sales of medical equipment, and the general economic and business climate are not known at the present
time. Nevertheless, there is a possibility of adverse consequences to our business operations from these causes.
The ultimate realization
of deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences
become deductible. The Company considers projected future taxable income and tax planning strategies in making this assessment.
A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of any portion or all
of the valuation. Should the Company continue to remain profitable in future periods with supportable trends, the valuation allowance
will be reversed accordingly.
Subsequent to the end of
the second quarter, on January 8, 2015, the Company purchased 20% of the outside investors’ membership interests in HDM
for $5.0 million, thereby increasing the Company’s interests in HDM from 50.5% to 60.4%. The result and intent of this purchase
was to increase the share of HDM’s income allocable to the Company.
Page 27
FONAR CORPORATION AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
The Company maintains its
funds in liquid accounts. None of our investments are in fixed rate instruments.
All of our revenue, expense
and capital purchasing activities are transacted in United States dollars.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains “disclosure
controls and procedures,” as such term is defined under Rule 13a-15(e) of the Exchange Act, that are designed to provide
reasonable assurance that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to the Company’s management, including its Principal Executive Officer and Acting Principal Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any control and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objective.
As required by SEC Rule
13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management,
including the Company’s Principal Executive Officer and Acting Principal Financial Officer, of the effectiveness of the design
and operation of the Company’s disclosure controls and procedures as of December 31, 2014. Based on this evaluation, the
Company’s Principal Executive Officer and Acting Principal Financial Officer concluded that the Company’s disclosure
controls and procedures were not effective as of December 31, 2014 because of the material weakness in our internal control over
financial reporting described in our Annual Report on Form 10-K. The Company is conducting the remediation process of implementing
changes in information technology general controls in order to improve controls over segregation of duties, restricted access to
programs and data, and change management activities in order to address the previously reported internal control deficiencies in
our Form 10-K. The Company will continue to take measures that may be necessary and advisable so as to institute measures to address
the material weakness.
Changes in Internal Control Over Financial Reporting
There have been no changes
in the Company’s internal control over financial reporting, during the fiscal quarter ended December 31, 2014, that have
materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1 – Legal Proceedings: There were
no material changes in litigation from that reported in our Form 10-K for the fiscal year ended June 30, 2014 and our Form 10-Q
for the fiscal quarter ended September 30, 2014.
Item 1A – Risk Factors: An investment
in the securities of the Company is subject to various risks, the most significant of which are summarized below.
1. Reduced
Reimbursement Rates. Most of our revenues are derived from our scanning center business conducted by HCMA (including HMCA’s
subsidiary HDM). Already we are experiencing lower reimbursement rates from Medicare, other government programs and private insurance
companies. To date, we have been able to counter the impact of these reductions by increasing our volume of scans, maintaining
a high level of profitability in this business segment.
Page 28
FONAR CORPORATION AND SUBSIDIARIES
2. Demand
for MRI Scanners. The reduced reimbursement rates also affects our sales of MRI scanners negatively. With lower revenue projections,
fewer prospective customers will be able to operate a profitable scanning center business, resulting in a lower demand and lower
prices for scanners. Although the reduced reimbursements may not affect foreign demand, a lower demand and number of sales in the
aggregate could reduce economies of scale and consequently, profit margins.
3. Competition.
Many if not most of our competing scanner manufacturers have significantly greater financial resources, production capacity, and
other resources than we do. Such competitors would include General Electric, Siemens, Hitachi and Phillips. Although Fonar is the
only company which can manufacture and sell the unique Stand-Up® (Upright®) MRI scanner, potential customers must be convinced
that the purchase of a Fonar scanner is their best choice. We believe that with time, that objective will be reached, particularly
with customers scanning patients having neck, back, knee and various orthopedic issues who would benefit from being scanned in
weight-bearing positions.
Item 2 – Unregistered Sales of Equity
Securities and Use of Proceeds: The Company has not issued any unregistered shares of its Common Stock during the first two quarters
of fiscal 2015.
Item 3 - Defaults Upon Senior Securities: None
Item 4 - Mine Safety Disclosure: Not Applicable
Item 5 - Other Information: None
Item 6 - Exhibits and Reports on Form 8-K:
a) Exhibit 31.1 Certification.
See Exhibits
b) Exhibit 32.1 Certification.
See Exhibits
| c) | Report on Form 8-K filed on November 10, 2014, Item 2.02: Results of Operations and Financial Condition
for the fiscal quarter ended September 30, 2014. |
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FONAR CORPORATION
(Registrant)
By: /s/ Raymond V. Damadian
Raymond V. Damadian
President & Chairman
Dated: February 10, 2015
Page 29
Exhibit 31.1
CERTIFICATION
I, Raymond V. Damadian, certify that:
1. I have reviewed this report on Form 10-Q
of Fonar Corporation;
2. Based on my knowledge, this report does
not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements,
and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. I am responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15d-15(f) for the registrant and have:
a) designed
such disclosure controls and procedures or caused such disclosure controls over procedures to be designed under my supervision
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b) designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about
the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report; and
d) disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. I have disclosed, based on my most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions):
(a) all significant
deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud,
whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: February 10, 2015
/s/ Raymond V. Damadian
Raymond V. Damadian
President, Principal Executive Officer and Acting
Principal
Financial Officer
February 10, 2015
A signed original of this written statement
required by Section 906 has been provided to Fonar Corporation and will be retained by Fonar Corporation and furnished to the Securities
and Exchange Commission or its staff upon
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of FONAR
Corporation and Subsidiaries (the “Company”) on Form 10Q for the fiscal quarter ended December 31, 2014, as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, Dr. Raymond V. Damadian, President, Chief
Executive Officer, and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to
ss. 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements
of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly
presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Dr. Raymond V. Damadian
----------------------------------
Dr. Raymond V. Damadian
President, Chief Executive Officer
and Chief Financial Officer
February 10, 2015
A signed original of this written statement
required by Section 906 has been provided to Fonar Corporation and will be retained by Fonar Corporation and furnished to the Securities
and Exchange Commission or its staff upon request.
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