SCHEDULE
14A INFORMATION
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Fonar
Corporation
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FONAR
CORPORATION
110
Marcus Drive
Melville,
New York 11747
(631)
694-2929
NOTICE
OF ANNUAL MEETING OF STOCKHOLDERS
Monday,
June 15, 2020
To
The Stockholders:
The
Annual Meeting of the stockholders of Fonar Corporation will be held at the Double Tree Hotel, Wilmington Downtown, 700 King Street,
Wilmington, Delaware 19801 (302-655-0400), on Monday, June 15, 2020, at 10:00 a.m. local time for the following purposes:
1.
To elect five Directors to the Board of Directors.
2.
To approve, on an advisory basis, the compensation of the Company’s named executive officers.
3.
To ratify the selection of Marcum LLP as the Company’s auditors for the fiscal year ending June 30, 2020.
4.
To transact such other business as may properly come before the meeting.
Only
stockholders of record at the close of business on April 20, 2020 are entitled to notice of, and to vote at, this meeting. A list
of such stockholders will be available for examination by any stockholder for any purpose germane to the meeting, during normal
business hours, at the principal office of the Company, 110 Marcus Drive, Melville, New York, for a period of ten days prior to
the meeting.
Whether
or not you expect to attend in person, we urge you to vote your shares at your earliest convenience. You may vote by internet,
by phone or by signing, dating, and returning your proxy at your earliest convenience. Voting by internet, telephone or mail will
not prevent you from voting your stock at the meeting if you desire to do so, as your proxy is revocable at your option.
BY
ORDER OF THE BOARD OF DIRECTORS
/s/
Claudette J.V. Chan
Claudette
J.V. Chan, Secretary
PROXY
STATEMENT
FOR
ANNUAL MEETING OF
STOCKHOLDERS
TO BE HELD MONDAY, JUNE 15, 2020
This
proxy statement, which is first being made available to shareholders on or about May 5, 2020 on the internet, is furnished in
connection with the solicitation of proxies by the Board of Directors of Fonar Corporation (the "Company"), to be voted
at the annual meeting of the stockholders of the Company to be held at 10:00 a.m. on June 15, 2020 and any adjournment(s) thereof
for the purposes set forth in the accompanying Notice of Annual Meeting of Stockholders. At the same time a paper notice regarding
the availability of proxy materials will be mailed to stockholders. Stockholders who execute proxies retain the right to revoke
them at any time prior to the exercise of the powers conferred thereby. The cost of solicitation of proxies will be borne by the
Company.
The
stockholders will have several options as to how to view the materials and vote their shares.
The
Company is posting the Notice of Annual Meeting and Proxy Statement, together with the Annual Report on the internet. You may
read the materials online or print out a copy. You will also have the ability to vote online.
In
the alternative, you may elect to receive an e-mail or the traditional paper copies of the Notice of Annual Meeting and Proxy
Statement, and the Annual Report. There is no charge for receiving e-mail or paper copies, BUT you must request them if you want
them. To facilitate timely delivery please make the request as instructed on or before May 10, 2020.
To
view the materials and vote on the internet, have the 12 Digit Control Number(s) located on the Notice Regarding the Availability
of Proxy Materials available and visit: www.proxyvote.com.
Stockholders
may request a copy of the Proxy Materials:
1. By
internet – visit www.proxy.com
2. By
telephone – 1-800-579-1639
3. By
e-mail – sendmaterial@proxyvote.com
Only
stockholders of record at the close of business on April 20, 2020 will be entitled to vote at the meeting. Shares of Common Stock
are entitled to one vote per share, shares of Class B Common Stock are entitled to ten votes per share and shares of Class C Common
Stock are entitled to twenty-five votes per share. At the close of business on April 20, 2020, there were issued and outstanding
6,447,463 shares of Common Stock held of record by approximately 1,190 stockholders, 146 shares of Class B Common Stock held of
record by 11 stockholders and 382,513 shares of Class C Common Stock held of record by 3 stockholders. The shares of Class A Nonvoting
Preferred Stock, 313,438 shares held of record by approximately 1,327 stockholders at the close of business on April 20, 2020,
are not entitled to vote. Except for the shares of Class A Nonvoting Preferred Stock, there are no shares of Preferred Stock issued
and outstanding.
Any
proxy may be revoked at any time before it is exercised by delivery of a written instrument of revocation or a later dated proxy
to the Secretary of the Company at the principal executive office of the Company or, while the meeting is in session, to the Secretary
of the meeting, without, however, affecting any vote previously taken. The presence of a stockholder at the meeting will not operate
to revoke his proxy. The casting of a ballot by a stockholder who is present at the meeting, however, will revoke his proxy, but
only as to the matters on which the ballot is cast and not as to any matters on which he does not cast a ballot or as to matters
previously voted upon.
Proxies
received by management will be voted at the meeting or any adjournment thereof. EACH PROXY WILL BE VOTED IN ACCORDANCE WITH THE
SPECIFICATIONS MADE THEREIN BY THE PERSON GIVING THE PROXY. TO THE EXTENT NO CHOICE IS SPECIFIED, HOWEVER, THE PROXY WILL BE VOTED
FOR MANAGEMENT’S PROPOSALS. All of management’s proposals have been unanimously approved by the Board of Directors.
1.
ELECTION OF DIRECTORS AND MANAGEMENT INFORMATION
Five
directors are to be elected at the annual meeting, to hold office until the next annual meeting of stockholders and until their
successors are elected and qualified. It is intended that the accompanying proxy will be voted in favor of the following nominees
to serve as directors unless the stockholder indicates to the contrary on the proxy. All of the nominees are currently directors.
Management expects that each of the nominees will be available for election.
NOMINEES
FOR ELECTION OF DIRECTORS
1. Raymond
V. Damadian
2. Claudette
J.V. Chan
3. Robert
J. Janoff
4. Charles
N. O’Data
5. Ronald
G. Lehman
BIOGRAPHIES
FOR DIRECTORS AND OFFICERS
Raymond
V. Damadian, M.D. (age 84) has been the Chairman of the Board since its inception in 1978 and Treasurer since February, 2001.
Up until February 11, 2016, Dr. Damadian also served as the President and Chief Executive Officer of Fonar. Dr. Damadian was employed
by the State University of New York, Downstate Medical Center, New York, as an Associate Professor of Biophysics and Associate
Professor of Internal Medicine from 1967 until September 1979. He received an M.D. degree in 1960 from Albert Einstein College
of Medicine, New York, and a B.S. degree in mathematics from the University of Wisconsin in 1956. In addition, Dr. Damadian conducted
post-graduate work at Harvard University, where he studied extensively in the fields of physics, mathematics and electronics.
Dr. Damadian is the author of numerous articles and books on the nuclear magnetic resonance effect in human tissue, which is the
theoretical basis for the Fonar MRI scanners. He is a 1988 recipient of the National Medal of Technology. In 1989 he was inducted
into the National Inventors Hall of Fame, for his contributions in conceiving and developing the application of magnetic resonance
technology to medical applications including whole body scanning and diagnostic imaging. Dr. Damadian is the President, Treasurer
and director of Health Management Corporation of America (“HMCA”), a Manager of Imperial Management Services, LLC
(“Imperial”) and a Manager of Health Diagnostics Management, LLC (“HDM”) which three entities are subsidiaries
of Fonar.
Timothy
Damadian (age 55) has been the President and Chief Executive Officer of Fonar since February 11, 2016. From 2010 to 2016 he served
as an independent consultant, with a focus on the Company’s MRI facility management business. Timothy Damadian began his
career at Fonar in 1985, installing MRI scanners and components for Fonar customers. Over the course of the following 16 years,
he held positions of increasing authority, eventually becoming Vice President of Operations. In 1997, Timothy Damadian was appointed
President of the newly formed Health Management Corporation of America (HMCA), a wholly-owned subsidiary of Fonar that was formed
to manage medical and diagnostic imaging offices. In 2001, Timothy Damadian left Fonar to form Integrity Healthcare Management,
Inc., a diagnostic imaging management company that would eventually manage 11 MRI scanning centers in New York and Florida. The
company was a success and was sold to Health Diagnostics, LLC in 2007.
Mr.
Damadian returned to Fonar as a consultant in 2010. He also serves as a Manager of Imperial Management Services, LLC and a Manager
of Health Diagnostics Management, LLC, which are subsidiaries of HMCA.
Luciano
B. Bonanni (age 64) has served as Chief Operating Officer (COO) and Executive Vice President (EVP) for Fonar Corporation since
June 27, 2016. Prior to his appointment as COO, Mr. Bonanni had served the Company as Vice President since 1989, during which
time he oversaw general operations, research and development, manufacturing, service, sales, finance, accounting and regulatory
compliance. Prior to 1989, Mr. Bonanni held the title of Vice President of Production and Engineering from the time of Fonar’s
initial public offering in 1981. Mr. Bonanni joined the Company as an electrical engineer in 1978. He holds a Bachelor of Electrical
Engineering degree from Manhattan College.
Claudette
J.V. Chan (age 82) has been a Director of Fonar since October 1987 and Secretary of Fonar since January 2008. Mrs. Chan was employed
from 1992 through 1997 by Raymond V. Damadian, M.D. MR Scanning Centers Management Company and since 1997 by HMCA, as "site
inspector," in which capacity she was responsible for supervising and implementing standard procedures and policies for MRI
scanning centers. From 1989 to 1994 Mrs. Chan was employed by St. Matthew's and St. Timothy's Neighborhood Center, Inc., as the
director of volunteers in the "Meals on Wheels" program, a program which cares for the elderly. From approximately 1983
to 1989, Mrs. Chan was President of the Claudette Penot Collection, a retail mail-order business specializing in women's apparel
and gifts. Mrs. Chan practiced and taught in the field of nursing until 1973, when her son was born. She received a bachelor of
science degree in nursing from Cornell University in 1960. Mrs. Chan is the sister of Raymond V. Damadian.
Robert
J. Janoff (age 92) has been a Director of Fonar since February 1989. Mr. Janoff has been a self-employed New York State licensed
private investigator for more than thirty-five years and was a Senior Adjustor in Empire Insurance Group for more than 15 years
until retiring from that position on July 1, 1997. Mr. Janoff also served, from June 1985 to June 1991, as President of Action
Data Management Strategies, Ltd., a supplier of computer programs for use by insurance companies. Mr. Janoff was a member of the
Board of Directors of Harmony Heights of Oyster Bay, New York for over 25 years, which is a nonprofit residential school for girls
with learning disabilities.
Charles
N. O'Data (age 84) has been a Director of Fonar since February 1998. From 1961 to 1997, Mr. O'Data was the Vice President for
Development for Geneva College, a liberal arts college located in western Pennsylvania. In that capacity, he acted as the College's
chief investment officer. His responsibilities included management of the College's endowment fund and fund raising. In July 1997,
Mr. O'Data retired from Geneva College after 36 years of service to assume a position of National Sales Executive for SC Johnson
Company's Professional Markets Group, a unit of SC Johnson Wax, and specialized in healthcare and education sales, a position
he held until the spring of 1999. In his capacity with SC Johnson he was responsible for sales to the nation’s three largest
Group Purchasing Organizations which included some 4,000 hospitals. Mr. O'Data presently acts as an independent financial consultant
to various entities. Mr. O'Data served on the board of The Medical Center, Beaver, Pennsylvania, now a part of Heritage Valley
Health System, a 500 bed acute care facility, for 26 years, three as its Chair. Mr. O’Data also served on the board of Amerinet,
a shared-services and group purchasing organization covering seven states. He founded The Beaver County Foundation, a Community
Foundation, in 1992, and serves as its President. Mr. O'Data is listed as a finance associate in the Middle States Association,
Commission on Higher Education. The commission is the formal accrediting body for higher education in the eastern region of the
country. In this capacity he evaluates the financial aspects of educational organizations. Mr. O’Data is a graduate of Geneva
College, where he received a B.S. degree in Economics in 1958.
Ronald
G. Lehman (age 43) has been a Director of Fonar since April, 2012, when he was unanimously appointed by the remaining four Directors
to fill the vacancy resulting from the death of the former Director Robert Djerejian. From October, 2009 to the present, Mr. Lehman
has served as Managing Director of Investment Banking with Bruderman Brothers, LLC, a private New York-based broker-dealer registered
with the Securities and Exchange Commission and which is a member of the Financial Industry Regulatory Authority (FINRA) and the
Securities Investor Protection Corporation (SIPC). Mr. Lehman directly manages all facets of the firm’s transaction processes,
from deal origination, to sourcing capital, to negotiating deal structures, through documentation and closing. The firm provides
buy and sell-side advisory, capital raising, and consulting services to lower middle-market companies. Mr. Lehman specializes
in advising healthcare services companies and has recently completed several recapitalizations in the industry. He also participates
in the firm’s merchant banking investments and oversees many of these assignments. From May, 2008 to October, 2009, Mr.
Lehman served as Senior Vice President of Acquisitions at Health Diagnostics, LLC, where he managed the company’s acquisition
and corporate finance activities. From March, 2000 to May, 2008, Mr. Lehman worked for various Bruderman entities as a buy and
sell-side advisor and as a principal in several private equity transactions. From September, 1998 to March, 2000, Mr. Lehman worked
at Deutsche Bank Securities, Inc. and last held the position of Associate in their Global Custody Group. Mr. Lehman graduated
from Columbia University with a B.A. in 1998.
CORPORATE
GOVERNANCE, THE BOARD AND ITS COMMITTEES
All
of the nominees are presently directors of the Company. The five nominees will be elected to hold office for the ensuing year
or until their respective successors are elected and qualified. Of the five nominees, Messrs. Charles N. O’Data, Robert
J. Janoff and Ronald G. Lehman are independent, as defined in the Securities and Exchange Commission Regulations and Nasdaq Market
Place Rules. In making such determinations, there were no transactions, relationships or arrangements not disclosed in our SEC
filings to be considered by the Board of Directors, in determining whether the director was independent.
BOARD
MEETINGS
During
the year ended June 30, 2019 the Board of Directors unanimously consented to take action in lieu of a meeting on two occasions,
and the audit committee met four times.
The
attendance of the Board of Directors at annual meetings is not required. The Chairman of the Board, Dr. Raymond V. Damadian, however,
attends the annual meeting of stockholders where he acts as Chairman of the Meeting.
Dr.
Damadian receives no compensation for serving on the Board. The other directors are each paid $20,000 per year in their capacities
as directors. This is the sole compensation payable to the directors.
Board
Leadership Structure. The current Board Chairman is Dr. Raymond V. Damadian. In addition,
although the Company has not selected a lead independent director, Charles N. O’Data, in his capacity as Chairman of the
Audit Committee, effectively functions as such. The Company believes that the Company’s current leadership structure is
appropriate for the Company in the context of the specific circumstances facing the Company. Consideration of the Company’s
leadership structure is a continuing process which the Board of Directors and Management of the Company undertake in coordination
with each other.
The
lead independent director, Charles N. O’Data, is the Chairman of the Audit Committee. As such he plays a leading role in
the engagement of auditors and the review of the Company’s financial statements. Under certain circumstances, he has also
served as a contact point for employees.
The
Company believes its present leadership structure is successfully meeting the Company’s current needs, including:
*
|
|
Efficient
communication between Management and the Board;
|
*
|
|
Clarity
for the Company’s stockholders on corporate leadership and accountability;
|
*
|
|
The
Chairman of the Board having the Company’s strategy, operations and financial conditions;
and
|
*
|
|
Continuity
in the Company’s leadership, as the Chairman of the Board, Dr. Raymond V. Damadian, founded the Company in 1978.
|
The
Company's Board of Directors has an audit committee. There is no standing compensation committee, nominating committee or other
committee of the Board.
In
accordance with the Nasdaq Marketplace Rules, the Board of Directors adopted a written charter for the audit committee which took
effect in June, 2001 and was revised on November 17, 2004. All of the directors on the audit committee are independent.
Stockholders
may communicate with directors by writing to them at the Company in accordance with the Company’s corporate governance policies
and code of conduct, or in any other manner the particular director may provide. Depending on the sensitivity and timing of a
matter raised by a stockholder and the need for disclosure of matters to be made not to just one stockholder, but to the stockholders
as a whole, it may not be possible for the director to reply to the stockholder.
The
shareholdings of the Company’s Chairman of the Board, Dr. Raymond V. Damadian, have more than 50% of the voting power of
the Company’s outstanding stock. Consequently, the Company is a controlled company for purposes of NASDAQ Marketplace Rule
4350(c).
AUDIT
COMMITTEE
The
Audit Committee, which is comprised solely of independent directors, is governed by a Board approved charter that contains, among
other things, the Committee’s membership requirements and responsibilities. The audit committee oversees the Company’s
accounting, financial reporting processes, internal controls and audits, and consults with management and the independent public
accountants on, among other items, matters related to the annual audit, the published financial statements and the accounting
principles applied. As part of its duties, the audit committee appoints, evaluates and retains the Company’s independent
public accountants. It also maintains direct responsibility for the compensation, termination and oversight of the Company’s
independent public accountants and evaluates the independent public accountants’ qualifications, performance and independence.
Financial
Expert on Audit Committee: The Board has determined that Mr. Charles N. O’Data, is the audit committee financial expert.
The Board made a qualitative assessment of Mr. O’Data’s level of knowledge and experience based on a number of factors,
including his formal education and experience.
Board
Oversight of Risk Management. The Company faces risk in many different areas, including
business strategy; government regulation; financial condition; health care compliance; product research and development; competition
for talent; business vitality; operational efficiency; quality assurance; reputation; intellectual property; and trade secrets,
among others. The oversight function is carried out in the quarterly and annual Audit Committee meetings and by communication
and meetings with the Company’s Management, which exercises the responsibility for oversight of risk management.
AUDIT
COMMITTEE REPORT
The
audit committee has (a) reviewed and discussed the audited financial statements with management, (b) discussed with the independent
auditors the matters required to be discussed by SAS 61 (Statement on Auditing Standards No. 61) and (c) has received the written
disclosures and the letter from the independent accountants required by Independence Standards Board, Standard No. 1 and has discussed
with the independent accountants the independent accountant’s independence.
Based
on the foregoing review and discussions, the audit committee recommended to the Board of Directors that the audited financial
statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019.
The
members of the audit committee are Messrs. Charles N. O’Data, Robert J. Janoff and Ronald G. Lehman. Messrs. O’Data,
Janoff and Lehman are independent directors, as defined in the Securities and Exchange Commission Regulations and Nasdaq Market
Place Rules.
NOMINATING
COMMITTEE
The
Board of Directors does not believe it requires a separate standing nominating committee because the Board of Directors is relatively
small and can make the nominations acting as a whole. The Board does not have a policy with regard to director candidates recommended
by stockholders because the absence of such recommendations makes a formal policy unnecessary. Historically, there usually has
not been a need to identify new nominees in the absence of the resignation or death of an existing director. The remaining directors
evaluate a new nominee based on his integrity, loyalty, competence and experience, and how his background complements that of
the remaining directors.
Promoting
diversity in the selection of nominees has not yet been considered, but the Board follows a policy of nondiscrimination and equal
opportunity.
COMPENSATION
COMMITTEE
COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The
Board of Directors does not believe it requires a separate standing compensation committee because the management, under the authority
of the Chairman of the Board and the Chief Executive Officer, is best equipped to make compensation decisions. The Board reserves
the right to change this policy at any time.
Dr.
Raymond V. Damadian, who serves as Chairman of the Board, and Timothy Damadian, who serves as Chief Executive Officer and President
of the Company, participate in the deliberation and determination of executive officer and director compensation.
VOTE
REQUIRED AND BOARD RECOMMENDATION
The
directors will be elected by the vote of a plurality of the votes represented at the meeting. THE BOARD OF DIRECTORS RECOMMENDS
A VOTE FOR ALL OF THE NOMINEES FOR THE DIRECTORS OF THE COMPANY.
INFORMATION
REGARDING BENEFICIAL OWNERSHIP OF PRINCIPAL STOCKHOLDERS, DIRECTORS, AND MANAGEMENT
The
following table sets forth information regarding the beneficial ownership of the Company's common shares held by holders of at
least 5% of the shares of any class, by the nominees for directors, the Company's Chief Executive Officer, and the directors and
executive officers as a group as of the close of business on April 20, 2020.
Name
and Address of Beneficial Owner (1)
|
|
Shares
Beneficially Owned
|
|
Percent
of Class
|
Raymond
V. Damadian, M.D.
c/o
Fonar Corporation
Melville,
New York
Director
and Treasurer
5%
+ Stockholder
Common
Stock
|
|
121,402
|
|
1.88%
|
Class
C Stock
|
|
382,447
|
|
99.98%
|
Class
A Preferred
|
|
19,093
|
|
6.09%
|
Kayne
Anderson Rudnick
Investment
Management LLC (2)
1800
Avenue of the Stars, 2nd Floor
Los
Angeles, CA 90067
Common
Stock
|
|
645,283
|
|
10.01%
|
Renaissance
Technologies LLC
Renaissance
Technologies Holding Corporation (2)
800
Third Avenue
New
York, New York 10022
Common
Stock
|
|
544,716
|
|
8.45%
|
Dimensional
Fund Advisors LP (2) (3)
Building
One
6300
Bee Cave Road
Austin,
Texas 78746
Common
Stock
|
|
374,623
|
|
5.81%
|
Timothy
R. Damadian
President
and Chief Executive Officer
Common
Stock
|
|
38,000
|
|
*
|
Class
A Preferred
|
|
800
|
|
*
|
Luciano
B. Bonanni
Executive
Vice President And Chief Operating Officer
Common
Stock
|
|
41,660
|
|
|
Class
A Preferred
|
|
1,285
|
|
*
|
Claudette
Chan
Director
and Secretary
Common
Stock
|
|
106
|
|
*
|
Class
A Preferred
|
|
32
|
|
*
|
(Continued)
Name
and Address of Beneficial Owner (1)
|
|
Shares
Beneficially Owned
|
|
Percent
of Class
|
Robert
J. Janoff
Director
Common
Stock
|
|
0
|
|
*
|
Class
A Preferred
|
|
0
|
|
*
|
Charles
N. O'Data
Director
Common
Stock
|
|
658
|
|
*
|
Ronald
G. Lehman
Director
Common
Stock
|
|
1,701
|
|
*
|
All
Officers and Directors
as
a Group (7 persons)
Common
Stock
|
|
203,527
|
|
3.16%
|
Class
C Stock
|
|
382,447
|
|
99.98%
|
Class
A Preferred
|
|
21,210
|
|
6.77%
|
______________________
*
Less than one percent
1.
Address provided for each beneficial owner owning more than five percent of the voting securities of the Company.
2.
Investment Advisor
3.
Disclaims Beneficial Ownership
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
See
Item 13, “Certain Relationships and Related Transactions” of the Company’s Annual Report on Form 10-K for the
fiscal year ended June 30, 2019 which is specifically incorporated by reference herein. A copy of the Form 10-K is included in
the Annual Report to Stockholders which is being sent to the Company’s stockholders with this Proxy Statement.)
The
Company believes that each of the related transactions described therein were on terms at least as favorable to the Company as
were available from non-affiliated parties.
COMPENSATION
DISCUSSION AND ANALYSIS OF DIRECTORS AND EXECUTIVE OFFICERS
The
compensation of the Company’s executive officers is based on a combination of salary and bonuses based on performance. Decisions
concerning compensation are made on a case by case basis and not pursuant to standardized formulas, programs, policies or criteria,
except for commissions in the case of sales. The Board of Directors does not have a compensation committee and does not believe
such a committee is required, in view of the manner in which compensation matters are handled. Dr. Raymond V. Damadian and Claudette
J.V. Chan are executive officers as well as members of the Board of Directors. Dr. Damadian, who also has voting control of the
Company and serves as Chairman of the Board, Timothy Damadian, who has served as PEO and President of the Company since February
11, 2016, and Luciano Bonanni the Executive Vice President and Chief Operating Officer of the Company since June 27, 2016, participate
in the determination of executive compensation for the Company’s officers.
As
noted above, the Company's compensation policy is primarily based upon the practice of pay-for-performance. Section 162(m) of
the Internal Revenue Code imposes a limitation on the deductibility of nonperformance-based compensation in excess of $1 million
paid to the Principal Executive Officer. No officer of the Company received compensation in excess of $1 million in fiscal 2016
or in any previous fiscal year. The Board currently believes that the Company should be able to continue to manage its executive
compensation program for others so as to preserve the related federal income tax deductions.
The
Company does not believe that there are any risks arising from its compensation policies and practices for its employees that
are likely to have a material adverse effect on the Company.
The
Company maintains no pension or deferred compensation plans except for a 401(k) plan.
SUMMARY
COMPENSATION TABLE
The
following table discloses compensation received for the three years ended June 30, 2017, June 30, 2018 and June 30, 2019 by the
Company’s Principal Executive Officer, the Company’s Principal Financial Officer and any officer of the Company receiving
at least $100,000 for the year.
Name
and
|
|
|
|
|
|
|
|
|
|
|
Principal
Position
|
|
|
|
|
|
Cash
|
|
Stock
|
|
|
Position
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Awards
|
|
Total
|
Timothy
R. Damadian
|
|
|
2019
|
|
|
$
|
0
|
|
|
$
|
155,800
|
|
|
$
|
0
|
|
|
$
|
155,800
|
|
President,
Principal
|
|
|
2018
|
|
|
$
|
0
|
|
|
$
|
155,800
|
|
|
$
|
0
|
|
|
$
|
155,800
|
|
Executive
Officer
|
|
|
2017
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
305,800
|
|
|
$
|
305,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raymond
V. Damadian
|
|
|
2019
|
|
|
$
|
153,095
|
|
|
$
|
305,800
|
|
|
$
|
0
|
|
|
$
|
458,895
|
|
Chairman
of the Board;
|
|
|
2018
|
|
|
$
|
153,095
|
|
|
$
|
305,800
|
|
|
$
|
0
|
|
|
$
|
458,895
|
|
Principal
Financial Officer;
|
|
|
2017
|
|
|
$
|
158,983
|
|
|
$
|
0
|
|
|
$
|
305,800
|
|
|
$
|
464,783
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Luciano
Bonanni
|
|
|
2019
|
|
|
$
|
145,825
|
|
|
$
|
0
|
|
|
$
|
159,740
|
|
|
$
|
305,565
|
|
Executive
Vice President
|
|
|
2018
|
|
|
$
|
145,672
|
|
|
$
|
0
|
|
|
$
|
152,900
|
|
|
$
|
298,572
|
|
and
Chief Operating Officer
|
|
|
2017
|
|
|
$
|
149,378
|
|
|
$
|
0
|
|
|
$
|
305,800
|
|
|
$
|
455,178
|
|
No
executive officer has a written or unwritten employment agreement with the Company. Salaries, bonuses and discretionary stock
and stock option awards comprise the full amount of total compensation. The only exceptions are commissions, based on a percentage
of the sales prices, payable to salesmen.
Compensation
Pursuant to Stock Options and SAR Grants
No
stock options or stock appreciation rights were granted to the Company’s Principal Executive Officer and Principal Financial
Officer during fiscal 2019.
Option/SAR
Exercises and Year End Values
No
options or stock appreciation rights were exercised by the Company’s Chief Executive Officer during fiscal 2019. The Company’s
Chief Executive Officer did not hold any unexercised stock options or stock appreciation rights at the end of fiscal 2019.
DIRECTOR
COMPENSATION
The
following table shows the compensation paid to the Directors for fiscal 2019:
|
Name
|
|
Fees
earned in pad
in
cash ($)
|
|
Stock
awards ($)
|
|
Option
awards ($)
|
|
Non-equity
incentive plan compensation
|
|
Nonqualified
deferred compensation earnings
($)
|
|
All
other compensation ($)
|
|
Total
($)
|
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
(e)
|
|
(f)
|
|
(g)
|
|
(h)
|
A.
|
Claudette
J.V. Chan
|
|
$
|
20,000
|
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
$
|
20,000
|
|
B.
|
Charles
N. O'Data
|
|
$
|
20,000
|
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
$
|
20,000
|
|
C.
|
Robert
Janoff
|
|
$
|
20,000
|
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
$
|
20,000
|
|
D.
|
Ronald
G. Lehman
|
|
$
|
20,000
|
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
$
|
20,000
|
|
With
the exception of Dr. Damadian who receives no compensation for serving as a director, each director is entitled to receive $20,000
per annum for his or her services as a director of the Company, including service on any committee of the Board of Directors.
No other fees are paid to the directors for their services as directors of the Company.
2.
ADVISORY VOTE ON COMPENSATION OF THE COMPANY’S NAMED EXECUTIVE OFFICERS
The
following proposal provides the Company’s stockholders with an opportunity to vote to approve, on an advisory basis, the
compensation of the Company’s named executive officers, as disclosed in this proxy statement. In considering your vote,
you may wish to review with care the “Compensation Discussion and Analysis” section, which provides details as to
the Company’s compensation policies, procedures and decisions, as well as the Summary Compensation Table and other related
compensation tables, notes and narrative disclosures under the executive compensation section of this proxy statement. This vote
is not intended to address any specific element of the Company’s executive compensation program, but rather the overall
compensation program for the Company’s named executive officers. This vote currently is being taken on an annual basis at
the Company’s annual meeting.
In
accordance with Section 14A of the Securities Exchange Act of 1934, we are asking stockholders to approve the following advisory
resolution at the Annual Meeting of Stockholders.
RESOLVED,
that the stockholders of Fonar Corporation (the “Corporation”) approve, on an advisory basis, the overall compensation
of the Corporation’s named executive officers disclosed in the Compensation Discussion and Analysis, Summary Compensation
Table and related compensation tables, notes and narrative discussion in this Proxy Statement for the Annual Meeting of Stockholders.
The
Board of Directors recommends a vote FOR this resolution because it believes that the policies and practices described in the
Compensation Discussion and Analysis are effective in achieving the Company’s goals of rewarding sustained financial and
operating performance and leadership excellence and aligning the executives’ long-term interests with those of the stockholders,
as well as motivating the executives to remain with the Company for long and productive careers.
This
advisory resolution, commonly referred to as a “say-on-pay” resolution, is non-binding on the Board of Directors.
Although non-binding, the Board will review and consider the voting results when evaluating our executive compensation program.
3.
RATIFICATION OF SELECTION OF AUDITORS
The
Board of Directors selected Marcum LLP, as the Company's independent auditors for the fiscal year ending June 30, 2020. The stockholders
will be asked to ratify this action by the Board. Marcum LLP were the Company’s auditors for the fiscal years ended June
30, 2017, June 30, 2018 and June 30, 2019.
One
or more representatives of Marcum LLP, are expected to be present at the Meeting with the opportunity to make a statement if they
desire to do so, and to be available to respond to appropriate questions.
The
affirmative vote of shares holding a majority of the votes represented at the meeting is required to ratify the selection of auditors
by the Board of Directors. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL.
AUDIT
FEES
The
aggregate fees billed by Marcum LLP for the audit of the Company’s annual financial statements for the fiscal year ended
June 30, 2019 and the reviews of the financial statements included in the Company’s Forms 10-Q for the fiscal year ended
June 30, 2019 were $420,000.
The
aggregate fees billed by Marcum LLP for the audit of the Company’s annual financial statements for the fiscal year ended
June 30, 2018, and the reviews of the financial statements included in the Company’s Forms 10-Q for the fiscal year ended
June 30, 2018 were $421,000.
All
work on the audits in each of the last two fiscal years was performed by full-time permanent employees of Marcum LLP.
AUDIT-RELATED
FEES
No
fees were billed by Marcum LLP for the fiscal years ended June 30, 2019 and June 30, 2018 for services related to the audit or
review of our financial statements that are not included under the caption “AUDIT FEES”.
TAX
FEES
No
fees were billed by Marcum LLP for tax compliance, tax advice or tax planning in the fiscal years ended June 30, 2019 and June
30, 2018.
ALL
OTHER FEES
No
fees were billed by Marcum LLP for any other services during the fiscal years ended June 30, 2019 and June 30, 2018.
Since
January 1, 2013, the audit committee has adopted policies and procedures for pre-approving all non-audit work performed by its
auditors. Specifically, the committee must pre-approve the use of the auditors for all such services. The audit committee has
pre-approved all non-audit work since that time and in making its determination has considered whether the provision of such services
was compatible with the independence of the auditors. Marcum LLP has not provided any services in addition to audit services in
fiscal 2019 and 2018. Any other services to be performed would have been presented by Marcum LLP to the committee or its chairman,
and the matter would then have been evaluated and a decision made.
PROPOSALS
OF STOCKHOLDERS
Proposals
of stockholders intended to be presented at next year’s annual meeting of stockholders must be received by the Company no
later than January 5, 2021 to be included in the Company's proxy statement and form of proxy related to that meeting.
SOLICITATION
OF PROXIES
The
proxy accompanying this proxy statement is solicited by the Board of Directors of the Company. Proxies may be solicited by officers,
directors, and regular supervisory and executive employees of the Company, none of whom will receive any additional compensation
for their services. Such solicitations may be made personally, or by mail, e-mail, facsimile, telephone, telegraph, or messenger.
The Company will pay persons holding shares of stock in their names or in the names of nominees, but not owning such shares beneficially,
such as brokerage houses, banks, and other fiduciaries, for the expense of forwarding solicitation materials to their principals.
All of the costs of solicitation of proxies will be paid by the Company.
VOTING
TABULATION
The
election of the Company's directors requires a plurality of the votes represented in person or by proxy at the meeting. The ratification
of proposals and the selection of auditors requires the affirmative vote of a majority of the votes represented in person or by
proxy at the meeting. Votes cast by proxy or in person at the meeting will be tabulated by the Company.
A
stockholder who abstains from voting on any or all proposals will be included in the number of shareholders present at the meeting
for the purpose of determining the presence of a quorum. Abstentions will not be counted either in favor of or against the election
of the nominees or other proposals. Under the rules of the National Association of Securities Dealers, brokers holding stock for
the accounts of their clients who have not been given specific voting instructions as to a matter by their clients in certain
cases may vote their clients' proxies in their own discretion. Where a proposal requires a majority of the votes present for its
passage, an abstention or broker non-vote will have the same effect as a negative vote.
OTHER
MATTERS
The
Board of Directors does not intend to bring any other business before the meeting, and so far as is known to the Board, no matters
are to be brought before the meeting except as specified in the notice of the meeting. However, as to any other business which
may properly come before the meeting, it is intended that proxies, in the form enclosed, will be voted in respect thereof in accordance
with the judgment of the persons voting such proxies, where the authorization to do so has been granted.
DATED:
Melville, New York, May 5, 2020
A
COPY OF THE COMPANY'S FORM 10-K REPORT FOR FISCAL YEAR 2019 CONTAINING INFORMATION ON OPERATIONS, FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION, IS AVAILABLE UPON REQUEST. PLEASE WRITE TO:
INVESTOR
RELATIONS DEPARTMENT
FONAR
CORPORATION
110
MARCUS DRIVE
MELVILLE,
NEW YORK 11747
FONAR CORPORATION
Proxy
- Annual Meeting of Stockholders
June
15, 2020, 10:00 AM
THIS
PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The
undersigned, a stockholder of Fonar Corporation (the "Company"), hereby revoking any proxy heretofore given, does hereby
appoint Raymond V. Damadian, Luciano Bonanni, Daniel Culver and Ellen Yeske, and each of them, proxies with full power of substitution,
for and in the name of the undersigned to attend the Annual Meeting of the Stockholders of the Company to be held at the Double
Tree Hotel, Wilmington Downtown, 700 King Street, Wilmington, Delaware on June 15, 2020, at 10:00 a.m., local time, and at any
adjournment(s) thereof, and there to vote upon all matters specified in the notice of said meeting, as set forth herein, and upon
such other business as may properly and lawfully come before the meeting, all shares of stock of the Company which the undersigned
would be entitled to vote if personally present at said meeting.
THIS
PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN,
SUCH SHARES WILL BE VOTED FOR ALL PROPOSALS.
The
Board of Directors Recommends you vote FOR the following:
No.
1. Election of Directors
|
FOR
ALL
|
|
WITHOLD
ALL
|
|
FOR
ALL EXCEPT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INSTRUCTION:
To withhold authority to vote for any individual nominee(s), mark "FOR ALL EXCEPT" and circle or cross out the name(s)
of those nominee(s).
01
- Raymond V. Damadian, 02 - Claudette J. V. Chan, 03 - Robert J. Janoff,
04
- Charles N. O'Data, 05 – Ronald G. Lehman
The
Board of Directors recommends you vote for proposals 2, 3 and 4:
No.
2. On an advisory basis, to approve the executive compensation.
No.
3. To ratify the selection of Marcum LLP as the Company's independent auditors for the
fiscal year ended June 30, 2020.
No.
4. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the meeting.
__________________________________
_______________________
Signature
Date
__________________________________
_______________________
Signature
(Joint owners) Date
Please
sign exactly as your name(s) appear(s) hereon or on your stock certificate(s). When signing as an attorney, executor, proxy, administrator,
trustee, guardian or other fiduciary, please give full title as such. Joint owners should each sign personally. All holders must
sign. If a corporation, please sign in full corporate name, by an authorized officer. If a partnership, limited liability company
or other entity, please sign in the company’s name by an authorized person, indicating your capacity.
ANNUAL
REPORT
2019
FONAR
CHAIRMAN’S LETTER TO SHAREHOLDERS
May 2020
Dear
Shareholders:
As
you know, we are in the midst of one of the most formidable crises our country has ever known. It is certainly the most
challenging our Company has ever faced. Sadly, the COVID-19 (coronavirus) pandemic has caused sickness and death across
the globe, and every day its accompanying uncertainty continues to generate fear, stress, and anxiety for all of us. We hope that
you and your loved ones are safe and that its impact on your lives has been minimal.
The
Company is feeling it as well. In the current quarter, the pandemic is having a negative effect on HMCA Management Fee revenue
as well as FONAR Service revenue. The financial impact of the COVID-19 on the Company will be fully accessed over the coming months.
But be assured that FONAR is doing everything in its power in order to survive the COVID-19 pandemic and continue on its path
of steady growth and profitability
As
of December 31, 2019, FONAR posted 39 consecutive quarters of positive net income and positive income from operations.
Fiscal
Year Ended June 30,
|
|
Total
FONAR Revenue
|
|
Total
FONAR Net (Loss) Income
|
|
Diluted
Net (Loss) Income Per Common Share
|
|
2010
|
|
|
$
|
31,815,555
|
|
|
$
|
(3,012,742
|
)
|
|
$
|
(0.61
|
)
|
|
2011
|
|
|
$
|
33,136,395
|
|
|
$
|
3,309,019
|
|
|
$
|
0.55
|
|
|
2012
|
|
|
$
|
39,444,419
|
|
|
$
|
6,875,075
|
|
|
$
|
0.91
|
|
|
2013
|
|
|
$
|
49,141,814
|
|
|
$
|
10,256,362
|
|
|
$
|
1.34
|
|
|
2014
|
|
|
$
|
68,505,477
|
|
|
$
|
13,396,769
|
|
|
$
|
1.58
|
|
|
2015
|
|
|
$
|
69,050,996
|
|
|
$
|
15,430,383
|
|
|
$
|
1.95
|
|
|
2016
|
|
|
$
|
73,368,210
|
|
|
$
|
18,795,517
|
|
|
$
|
2.38
|
|
|
2017
|
|
|
$
|
78,036,586
|
|
|
$
|
23,678,798
|
|
|
$
|
2.92
|
|
|
2018
|
|
|
$
|
81,516,994
|
|
|
$
|
25,457,185
|
|
|
$
|
3.10
|
|
|
2019
|
|
|
$
|
87,192,887
|
|
|
$
|
20,513,674
|
|
|
$
|
2.22
|
|
FONAR’s
diagnostic imaging management subsidiary, Health Management Company of America (HMCA), continues as FONAR’s primary source
of income and growth. HMCA currently manages eighteen (18) facilities in New York and seven (7) in Florida.
HMCA
was formed in 1997 in order for FONAR to expand into the MRI practice management business. At the time, FONAR was seeking a steady
and reliable source of revenue, which for years had been difficult to attain in the fluctuating MRI equipment sales arena. The
expansion was quite natural. After all, FONAR was the inventor of MR scanning, a leader in MRI innovation, and having worked with
hundreds of its customers for nearly 20 years, was very familiar with the management of independent MRI scanning centers. Having
observed and evaluated their methods, strategies, and practices, we were able to develop a well-designed business plan that eventually
resulted in HMCA becoming the company’s leading source of revenue and profit.
HMCA’s
continuing success is primarily attributable to leadership of my son, President and CEO Timothy R. Damadian, his highly experienced
and competent management team, and the ever-increasing appeal of the UPRIGHT® MRI, also known as the STAND-UP® MRI, among
patients and their physicians. Since Tim and his team took the reins in 2010, Total Revenues-Net has grown from $38.1 million
to $87.2 million, representing an effective annual growth rate of 8.6%. In calendar year 2009, the total MRI scan volume at HMCA-managed
facilities was 29,000. The MRI scan volume in calendar 2019 was 189,000.
The
importance of the FONAR UPRIGHT® MRI to the success of HMCA cannot be overstated. Physicians are seeing how the diagnostic
information obtained from having their patients scanned in weight-bearing positions, when appropriate, such as sitting, bending
or standing, can lead to treatment plans that result in better patient outcomes. Scanning patients in these positions is possible
only on the patent-protected UPRIGHT® MRI. It is well known that most MRI studies are of the spine, and it is widely reported
that about 80% of adults experience low back pain at some point in their lifetimes. This explains why the UPRIGHT® MRI has
gained traction in the medical community.
Additionally,
there has been, and will no doubt continue to be, a significant portion of the patient population that seek to avoid or flatly
refuse to have their MRI exams in a claustrophobia-inducing “tunnel” or “tube” MRI, which is typical of
most MRIs. To their relief, the UPRIGHT® MRI allows most patients to be scanned while sitting and watching a wide-screen TV.
We have, for years, benefitted substantially from this unique and highly-prized feature and, since the design of the UPRIGHT®
MRI remains patent-protected by FONAR, we will continue to enjoy this competitive advantage in the future.
HMCA’s
growth strategy has three components. First, we continually strive to increase scan volume by applying proven marketing techniques
and providing outstanding service to patients and their physicians. Second, we install additional MRI scanners at sites in need
of reducing patient backlog and/or sites that would benefit from expanded MRI services to their referral bases. Multi-MRI facilities
are very cost effective. Aside from the expense of the added equipment, the only other major costs are those associated with the
additional space needed to house the equipment and a few more staff members to accommodate the increase in patient volume. Third,
we acquire or establish de novo sites in locations that would enhance or expand our existing networks. We find such locations
by conducting thorough demographic studies, identifying the primary major medical insurance carriers in the region, and evaluating
the competitive landscape.
Prior
to the disruption due to the COVID-19 pandemic, the Company had planned to invest between four and six million dollars in four
HMCA projects in Fiscal 2020. We installed a second MRI scanner at the Ormond Beach, Florida facility in October, 2019.
The installation of the first MRI scanner in what will be a two-MRI facility in Pembroke Pines, Florida is still expected to be
completed by the end of the fiscal year. However, the installations of a second MRI in Westchester County, New York and
a second MRI in Suffolk County, New York have been delayed and are now expected to be completed in the early part of the first
quarter of Fiscal 2021. At that point, we will have a total of 38 MRI scanners and 26 locations under our management.
FONAR,
the Inventor of MR Scanning™, introduced the world’s first commercial MRI in 1980. We went public in 1981 and have
installed over 400 MRIs all over the world. Located in Melville, New York, we continue to manufacture, sell, service and upgrade
FONAR scanners.
Our
signature product is the FONAR UPRIGHT® Multi-Position™ MRI (also known as the Stand-Up® MRI), the only whole-body
MRI that performs Position™ Imaging (pMRI™) and scans patients in numerous weight-bearing positions, i.e. standing,
sitting, in flexion and extension, as well as the conventional lie-down position. The UPRIGHT® MRI has detected problems that
were underestimated or missed entirely on “weightless-only” MRI scanners, particularly scans of the spine. With its
ability to “see it all,” the UPRIGHT® MRI provides referring physicians the means to achieve better outcomes for
their patients. The scanner is unique in another way as well: its comfort and openness make it the Patient-Friendly™ MRI.
The claustrophobic rejection rate by patients is close to zero, which makes the UPRIGHT® MRI very appealing not only to patients,
but to referring physicians who need to accommodate patients who are fearful of or cannot tolerate the confining ‘tubes”
or “tunnels” of conventional MRI scanners.
|
Ø
|
FONAR’s
Ongoing Research
|
Over
the past few years we have been making cines (movies) of the cerebrospinal fluid (CSF) as it flows up and down the neck and around
the brain. Thanks to the UPRIGHT® MRI’s ability to scan patients in weight-bearing positions as well as in the recumbent,
non-weight-bearing position, we are finding significant postural differences in CSF flow. These differences may provide clues
which will enable physicians to find solutions to a variety of unsolved medical problems and the power to quantify the degree
to which the impaired CSF flow responsible for the patient’s symptoms have been rectified by the patient’s surgical
and non-surgical CCJ (Cranio-Cervical Junction) treatment. Currently, our research is focused on quantifying CSF flow and the
velocity at which it navigates through the neck and head. We’ve been able to use this quantitative CSF data collected from
asymptomatic patients to identify the degree to which CSF flow impairment is responsible for the patient’s symptoms and
the degree to which the patient’s surgical or non-surgical CCJ treatment has restored the patient’s critical brain
and central nervous symptom’s physiology to normal. We are also hopeful that our research may lead to a new understanding
of the role of CSF on neurologic diseases, such as MS.
MRI
has brought a new dimension to medical treatment: the power to visualize anatomic detail in the body's vital soft issues (brain,
heart, kidney, liver, spleen, lungs, pancreas, and intestines) plus MRI's new power to non-invasively quantify (e.g. measure T1,
T2, diffusion, chemical spectra) the response of these vital tissues to treatment.
Research
and Development remains a priority at FONAR. R&D expenses have increased by 7% to $1.0 M for the 6 months ending December
31, 2019 as compared to the same period in 2018, with most of the increases directed to developing various upgrades for the UPRIGHT®
MRI.
FONAR
celebrated a special anniversary on September 17, 2019: It was 50 years ago that I first thought about developing a device using
magnetic resonance to scan the human body to detect cancer. On September 17, 1969, I sent a letter to Dr. George Mirick of the
Health Research Council of the City of New York requesting financial support for equipment to follow up his promising line of
research. In that letter, I wrote, “I will make every effort myself and through collaborators, to establish that all tumors
can be recognized by their potassium relaxation times or H2O-proton spectra and proceed with the development of instrumentation
and probes that can be used to scan the human body externally for early signs of malignancy. Detection of internal tumors during
the earliest stages of their genesis should bring us very close to the total eradication of this disease,” marking the origination
of the MRI scanner.
It
was during the following year, on June 18, 1970, that I performed the first experiments whereby I discovered the distinctly elongated
time-lapsed signal marking differences between normal and cancerous tissue, as well as differences among various normal organs
themselves that make the MRI image. That was my ‘Eureka!’ moment. The results of my experiments were subsequently
published in the journal Science on March 19, 1971.
According
to Magnetic Resonance in Medicine, A Critical Introduction (2018), there are approximately 50,000 MRIs in the world.
Perhaps
Professor Donlin Long, M.D., former Chairman of Neurosurgery, Johns Hopkins University, says it best: MRI is “The Single
Most Important Diagnostic Discovery in the History of All of Medicine.” Professor Long made this statement on November
10, 2018, when I was awarded the Excellence in Medicine Medal of Honor from the Chiari & Syringomyelia Foundation at Brooks’s
in London, England. He was joined by Fraser Henderson, M.D., a neurosurgeon and member of the steering committee for the Chiari
& Syringomyelia Foundation, who said, “Raymond Damadian revolutionized medicine with the discovery and development of
MRI.”
FONAR’s
unique MRI technology and its well-managed subsidiary, HMCA, have given us 39 consecutive quarters of positive net income and
positive income from operations. I am confident that we will weather the COVID-19 storm and continue to be successful for years
to come.
As
always, I remain grateful to our stockholders, customers and employees for their loyal support.
Sincerely,
Raymond
V. Damadian
SECURITIES
AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
_____________________
FORM
10-K
_____________________
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended June 30, 2019
OR
[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For
the transition period from _____________ to _____________
Commission
File No. 0-10248
___________________________
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FONAR
CORPORATION
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(Exact
name of registrant as specified in its charter)
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DELAWARE
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11-2464137
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(State
of incorporation)
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(IRS
Employer Identification Number)
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110
Marcus Drive, Melville, New York
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11747
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(Address
of principal executive offices)
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(Zip
Code)
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(631)
694-2929
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(Registrant's
telephone number, including area code)
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____________________________________________________
Securities
registered pursuant to Section 12(b) of the Act:
Common
Stock, par value $.0001 per share
Securities
registered pursuant to Section 12(g) of the Act:
None
_________________________________________________________________________
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ____ No __X__
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ____ No
__X__
FONAR
CORPORATION AND SUBSIDIARIES
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 (1) 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 (Section 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
___X____ No ______
Indicate
by check mark if disclosure of delinquent filers, pursuant to Item 405 of Regulation S-K, §229.405 of this Chapter, is not
contained, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any amendment to the Form 10-K. [X]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of “large accelerated filer”, “accelerated filer and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ____ Accelerated filer __X__. Non-accelerated filer ____
Smaller
reporting company ____
(Do
not check if a 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__
The
aggregate market value of the shares of Common Stock held by non-affiliates as of December 31, 2018 based on the closing price
of $20.24 per share on such date as reported on the NASDAQ System, was approximately $130 million. The other outstanding classes
do not have a readily determinable market value.
As
of September 13, 2019, 6,447,463 shares of Common Stock, 146 shares of Class B Common Stock, 382,513 shares of Class C Common
Stock and 313,438 shares of Class A Non-voting Preferred Stock of the registrant were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
None
FONAR
CORPORATION AND SUBSIDIARIES
FORM
10-K ITEMS
PART
I
ITEM
1. BUSINESS
GENERAL
Fonar
Corporation, sometimes referred to as the "Company" or "Fonar", is a Delaware corporation which was incorporated
on July 17, 1978. Our address is 110 Marcus Drive, Melville, New York 11747 and our telephone number is 631-694-2929. Fonar also
maintains a website at www.fonar.com. Fonar provides copies of its filings with the Securities and Exchange Commission on Forms
10-K, 10-Q and 8-K and amendments to these reports to stockholders on request.
We
conduct our business in two segments. Our medical equipment segment is conducted directly through Fonar. Our physician management
and diagnostic services segment is conducted through our subsidiary Health Diagnostic Management, LLC (“HMCA”), also
called Health Management Company of America. HMCA provides management services, administrative services, billing and collection
services, credentialing services, contract negotitions, compliance consulting, purchasing, IT services, hiring, conducting interviews
and managing personnel, storage of medical records, office space, equipment, repair, maintenance service, and clerical and other
non-medical personnel to medical providers engaged in diagnostic imaging. In addition to acting as a management company, HMCA
owns and operates four diagnostic imaging facilities in Florida, where the corporate practice of medicine is permitted.
FONAR
CORPORATION AND SUBSIDIARIES
We
restructured the corporate organization of our physician and diagnostic services management segment of our business effective
July 1, 2015. Imperial Management Services, LLC (“Imperial”), a subsidiary which owned the assets used in the business
of its parent, Health Management Corporation of America (which is wholly-owned by Fonar), transferred those assets to Health Diagnostics
Management, LLC (“HDM”), which is another subsidiary of Health Management Corporation of America. As a result, going
forward our physician and diagnostic management business will be conducted entirely through HDM, which is operating under the
assumed name Health Management Company of America.
Fonar
is engaged in the business of designing, manufacturing, selling and servicing magnetic resonance imaging scanners, also referred
to as "MRI" or "MR" scanners, which utilize MRI technology for the detection and diagnosis of human disease,
abnormalities, other medical conditions and injuries. Fonar’s founders built the first MRI scanner in 1977 and Fonar introduced
the first commercial MRI scanner in 1980. Fonar is also the originator of the iron-core non-superconductive and permanent magnet
MRI technology.
Fonar’s
iron frame technology made Fonar the originator of "open" MRI scanners. We introduced the first "open" MRI
in 1980. Since that time we have concentrated on further application of our “open” MRI, introducing most recently
the Upright® Multi-Position™” MRI scanner (also referred to as the “Upright®” or “Stand-Up®”
MRI scanner) and the Fonar 360™ MRI scanner. The Fonar 360™ MRI is not presently being marketed.
See
Note 17 to the Consolidated Financial Statements for separate financial information regarding our medical equipment and physician
and diagnostic management services segments.
FORWARD
LOOKING STATEMENTS.
Certain
statements made in this Annual Report on Form 10-K 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.
These forward-looking statements 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. These assumptions 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 Annual Report will prove to be accurate. In light of the significant uncertainties
inherent in our forward-looking statements, 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.
FONAR
CORPORATION AND SUBSIDIARIES
THE
UPRIGHT® MRI SCANNER
The
Upright® MRI scanner is the product we are presently promoting. The Upright® MRI (also known as the “Stand-Up®
MRI”) is a “whole-body” MRI, meaning it can be used to scan any part of the body. Unlike conventional recumbent
MRI scanners, the Upright® MRI permits MRI scans to be made in the weight-bearing state. The Upright® MRI allows patients
to be scanned while standing, sitting, bending or lying down. This means that an abnormality or injury, such as a slipped disk,
may be scanned in a weight-bearing posture, which more often than not is the position in which patients experience pain. An adjustable
bed allows patients to stand, sit or lie on their backs, sides or stomachs. The Upright® MRI is by design a non-claustrophobic
MRI scanner. We have introduced the name “Upright®” as an alternative to “Stand-Up®” because of
the multiplicity of positions in which the patient may be scanned where the patient is not standing.
Currently,
HMCA manages a total of 25 MRI scanning facilities, four of which are owned by subsidiaries of Health Management Corporation of
America. Eighteen facilities are located in New York and seven are located in Florida. (The four facilities owned by the HMCA
subsidiaries are in Florida, where the corporate practice of medicine is permitted.) Twenty-three of the currently operating facilities
are equipped with Upright® MRI scanners. We believe that the utilization of Fonar Upright® MRI scanning systems, which
are produced under the protection of our patents, have been a significant factor in the increased patient volume of the scanning
facilities. In addition, a new facility managed by the Company is scheduled to be opened by the end of the second quarter of fiscal
2020 in Pembroke Pines, Florida and a total of three additional scanners are scheduled to be added to existing facilities: one
in White Plains, New York, one in Islandia, New York and one in Ormond Beach, Florida.
MEDICAL
EQUIPMENT SEGMENT
PRODUCTS
The
Fonar Upright® MRI is a weight-bearing whole-body open MRI system which enables positional MRI (pMRI®) applications. Operating
at a magnetic field strength of 0.6 Tesla, the scanner is a powerful, diagnostically versatile and cost-effective open MRI that
provides a broad range of clinical capabilities and a complete set of imaging protocols. Patients can be scanned standing, bending,
sitting, upright at an intermediate angle and in the conventional recumbent position. This multi-positional MRI system accommodates
an unrestricted range of motion for flexion, extension, lateral bending, and rotation studies of the cervical (upper) and lumbar
(lower) spine. Previously difficult patient scanning positions can be achieved and compared using the system’s MRI-compatible,
three-dimensional, motorized patient handling system. The system’s lift and tilt functions deliver the targeted anatomical
region to the center of the magnet. True image orientation is assured, regardless of the rotation angle, via computer read-back
of the table’s position.
There
is considerable evidence that the weight-bearing Upright® MRI provides medical benefits not duplicated by any other MRI scanner
because patient positioning plays a critical role in detecting clinically significant pathology.
FONAR
CORPORATION AND SUBSIDIARIES
For
instance, 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 and entrapped 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. The brain structures “entrapped” in Chiari Syndrome are the lowest
lying structures of the brain, the tonsils of the cerebellum. The Chiari Syndrome is therefore alternately named Cerebellar Tonsillar
Ectopia (CTE) indicating the displacement (ectopia) of these Cerebellar tonsils in this syndrome. Classic symptoms of the Chiari
Syndrome include the “drop attack,” where the patient unexpectedly experiences an explosive rush or nervous discharge
at the base of the brain which rushes down the body to the extremities, causing the patient to collapse in a temporary neuromuscular
paralysis; this subsides when the patient is lying down. Conventional lie-down MRI scanners cannot make an adequate evaluation
of the pathology since the patient’s pathology is most visible and the symptoms are most acute when the patient is scanned
in the upright weight-bearing position.
A
publication in the Journal “Brain Injury” (Brain Injury 2010, 24 (7-8) 988-994) of 1,200 neck pain patients reported
that the fallen cerebellar tonsils of the brain (CTE) were missed 75% of the time when the patient was scanned only in the recumbent
position. It is critical to have an image of the patient in an upright position so that the neurosurgeons can fully evaluate the
extent of the brain stem and choose the most appropriate surgical approach for the operative repair.
The
study was published by 10 authors from distinguished universities in the United States and around the world. The study reported
that Cerebellar Tonsillar Ectopia Herniation (CTE) was missed 75% of the time when the patient was scanned lying down instead
of upright. At the current rate of 1,000,000 automobile whiplash injuries in the U.S. per year, 600,000 patients each year would
have the pathology responsible for their symptoms go undetected if they were examined solely in a conventional recumbent-only
MRI.
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 that 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 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.
FONAR
CORPORATION AND SUBSIDIARIES
Other
important new applications are Upright® imaging of the pelvic floor and abdomen to image prolapses and inguinal hernias. Fonar
has also developed the first non-invasive method to image the prostate: the patient simply sits on a flat, seat-like coil.
The
Upright® MRI is also the world’s most non-claustrophobic whole-body MRI scanner. Patients can simply walk into the magnet,
stand or sit for their scans and then walk out. The magnet’s front-open and top-open design provides an unprecedented degree
of comfort because there is nothing in front of the patient’s face except a large (42”) flat-screen TV that is mounted
on the wall. The default position for the bed is a tilt back of six degrees that minimizes patient motion. Special RF receiver
coil fixtures, a patient seat, Velcro straps, and transpolar stabilizing bars are also used to keep the patient comfortable and
motionless throughout the scanning process.
Full-range-of-motion
studies of the joints in a multiple of directions are possible, an especially promising feature for sports injuries. Full range
of motion cines, or movies, of the lumbar spine can also be achieved under full body weight.
Fonar
created the high-field open MRI market segment. The Fonar Upright® MRI operates at a significantly higher magnetic field strength
than the 0.2-0.35 Tesla open MRIs that preceded it, and, therefore, benefits from more of the MRI image-producing signal needed
to make high-quality MRI images.
Fonar
maximizes image quality through an optimal combination of image signal to noise (S/N) and contrast-to noise (C/N) ratios. Technical
improvements incorporated into the scanner design include increased image processing speed, high-S/N Organ Specific(TM) RF receiver
coils, high performance front-end electronics featuring high-speed, wide-dynamic-range analog-to-digital conversion and a miniaturized
ultra-low-noise pre-amplifier, high-speed automatic tuning, bandwidth-optimized pulse sequences, multi-bandwidth sequences, and
off-center FOV imaging capability.
In
addition to the signal-to-noise ratio, however, a major determinant of image quality that must be considered is contrast, the
quality that enables reading physicians to clearly distinguish adjacent, and sometimes minute, anatomical structures from their
surroundings. This quality is measured by contrast-to-noise ratios (C/N). Unlike S/N, which increases with increasing field strength,
relaxometry studies have shown that C/N peaks in the mid-field range and actually falls off precipitously at higher field strengths.
The Upright® MRI scanners operate squarely in the optimum C/N range.
FONAR’s
scanners are equipped with a variety of software features which enhance versatility and diagnostic capability. For example, SMART™
scanning allows for same-scan customization of multi-slice scans, each slice with its own thickness, resolution, angle and position.
This is an important feature for scanning parts of the body that include small-structure sub-regions requiring finer slice parameters.
There is also Multi-Angle Oblique™ (MAO) imaging, and oblique imaging.
During
fiscal 2019, sales of our Upright® MRI scanners accounted for approximately 0.8% of our total revenues and 7.7% of our medical
equipment revenues, as compared to 0.9% of total revenues and 6.4% of medical equipment revenues in fiscal 2018.
FONAR
CORPORATION AND SUBSIDIARIES
FONAR’s
principal selling, marketing and advertising efforts have been focused on the Upright® MRI, which we believe is a particularly
unique product, being the only MRI scanner which is both open and allows for weight-bearing imaging. We expect to continue our
focus on the Upright® MRI in the immediate future.
The
materials and components used in the manufacture of our products (circuit boards, computer hardware components, electrical components,
steel and plastic) are generally available at competitive prices. We have not had difficulty acquiring such materials.
PRODUCT
MARKETING
The
principal markets for the Company's scanners are private diagnostic imaging centers and hospitals.
We
use internal and independent manufacturer’s representatives for domestic and foreign markets. None of Fonar’s competitors
are entitled to make the Fonar Upright® MRI scanner.
Fonar’s
Website includes interactive product information for interested customers.
During
fiscal 2018, foreign sales were made to customers in the United Arab Emirates and the United Kingdom. CEO Matthias Schulz of Medserena,
Fonar’s principal foreign sales representative and distributor, has said, “The large number of requests coming from
our physicians in Germany are arising because of the special medical need for FONAR’s unique technology. This is in spite
of an intensely active MRI market in Germany, where there are already many conventional lie-down MRIs installed.” Medserena
also has further expanded in the United Kingdom with the opening of a Fonar Upright® MRI scanner in Manchester, England.
Fonar’s
marketing strategy has been designed to reach key purchasing decision makers with information concerning the Upright® MRI.
This has led to many inquiries and to some sales of the Upright® MRI scanner and is intended to increase Fonar’s presence
in the medical market. Fonar focuses on four target audiences: neurosurgeons, orthopaedic surgeons, radiologists and physicians
in general.
1) Neurosurgeons
and Orthopaedic Surgeons: These are the surgeons who can most benefit from the superior diagnostic benefits of the Fonar Upright®
MRI with its Multi-Position® MRI diagnostic ability.
2) Radiologists:
These physicians can now offer a new Multi-Position®, weight-bearing MRI modality to their referring physicians.
3) All
Physicians: The vast number of doctors who send patients for MRI’s need to be aware of the diagnostic advantages of the
Fonar Upright® Multi-Position™.
Our
advertising for Fonar and HMCA re-enforces the unique value provided by Fonar MRI scanners. We have increased internet awareness
of our product by driving patient traffic to the Upright® scanning centers we manage via the Fonar website (www.fonar.com)
as well as by creating Websites for each HMCA location. These websites give prospective customers of Upright® MRI scanners
a view of operating Upright® MRI centers and highlight the benefits of using an Upright® MRI scanner. The success of HMCA-managed
sites not only increases management fees to HMCA but encourages new sales for Fonar as well. A complete list of the sites managed
by HMCA can be found at HMCA’s website, hmca.com.
FONAR
CORPORATION AND SUBSIDIARIES
SERVICE
AND UPGRADES FOR MRI SCANNERS
Our
customer base of installed scanners has been and will continue to be an additional source of income, independent of direct sales.
Income
is generated from the installed base in two principal areas, namely, service and upgrades. Service and maintenance revenues from
our external installed base were approximately $9.2 million in fiscal 2018 and $8.3 million in fiscal 2019. Our objective is to
maintain service revenues at present levels or better, based on the longevity of the technology, and the refurbishments and upgrades
which keep the scanners competitive with the latest techniques.
We
also anticipate that our scanners will result in upgrades income in future fiscal years. The potential for upgrades income, originates
in the versatility and productivity of the Upright® Imaging technology. New medical uses for MRI technology are constantly
being discovered and are anticipated for the Upright® Imaging technology as well. New features can often be added to the scanner
by the implementation of little more than versatile new software packages, which when coupled with hardware upgrades can add years
of useful life to the scanner.
RESEARCH
AND DEVELOPMENT
During
the fiscal year ended June 30, 2019, we incurred expenditures of $1,812,347, none of which were capitalized, on research and development,
as compared to $1,755,747, none of which were capitalized, during the fiscal year ended June 30, 2018.
Research
and development activities have focused principally on software improvements to the user interface of the MRI scanner. The Windows-based
Sympulse™ platform controls all of the functions of the Upright® scanner except those of the versatile, multi-position
patient table. Separate, dedicated, motion-control software is used to maneuver the Upright® bed, and development of this
software is ongoing as well.
While
software improvements to the user interface are important in their own right, significant value is added to the MRI scanner by
the modification of existing protocols for examining various parts of the body, and the development of new protocols that utilize
new underlying capabilities of the pulse sequence software. Over time, FONAR users have become accustomed to the steady improvement
in the recommended clinical protocols that accompany new software releases. More significantly, in recent years we have seen increasing
adoption of FONAR-recommended clinical protocols over those developed on site. This is a testament to the superior image quality
they produce in attractively short scan times.
The
development of clinically practical scan protocols and software depends on close contact between research and development scientists
and engineers, and end users. That close contact is facilitated in part by the relationship with HMCA and the scanning centers.
In addition to that collaboration, R&D staff have pursued a variety of novel and Upright® MRI-specific research projects.
It is anticipated that these will ultimately lead to new applications that are made available to existing customers as upgrade
add-ons to their machines. For example, phase-contrast imaging techniques originally developed for angiography have recently been
applied to cerebro-spinal fluid (CSF) flow. Analysis of CSF flow in upright and recumbent postures may prove to be of significant
value in the evaluation of a variety of disorders.
FONAR
CORPORATION AND SUBSIDIARIES
BACKLOG
Our
backlog of unfilled orders at September 10, 2019 was approximately $788,000, as compared to $692,000 at September 5, 2018. It
is expected that the existing backlog of orders will be filled within the 2019 fiscal year.
PATENTS
AND LICENSE
We
currently have numerous patents in effect which relate to the technology and components of our MRI scanners. We believe that these
patents, and the know-how we have developed, are material to our business.
One
of our patents, issued in the name of Dr. Damadian and licensed to Fonar, was United States patent No. 3,789,832, Apparatus and
Method for Detecting Cancer in Tissue, also referred to in this report as the "1974 Patent". The 1974 Patent was the
first MRI patent issued by the United States Patent Office. The development of our MRI scanners has been based upon the 1974 Patent,
and we believe that the 1974 Patent was the first of its kind to utilize MR to scan the human body and to detect cancer. The 1974
Patent was extended beyond its original 17-year term and expired in February, 1992.
We
have significantly enhanced our patent position within the industry and now possesses a substantial patent portfolio which provides
us, under the aegis of United States patent law, "the exclusive right to make, use and sell" many of the scanner features
which Fonar pioneered and which are now incorporated in most MRI scanners sold by the industry. As of June 30, 2019, 213 patents
had been issued to Fonar, and approximately 18 patents were pending. A number of Fonar’s existing patents specifically relate
to protecting Fonar’s position in the Upright MRI market. The patents further enhance Dr. Damadian's pioneer patent, the
1974 Patent, that initiated the MRI industry and provided the original invention of MRI scanning. The terms of the patents in
Fonar’s portfolio extend to various times.
We
also have patent cross-licensing agreements with other MRI manufacturers. We have not licensed, however, any technology relating
to Upright® MRI scanning.
PRODUCT
COMPETITION
MRI
SCANNERS
MRI
takes advantage of the nuclear magnetic resonance signal elicited from the body's tissues and the exceptional sensitivity of this
signal for detecting disease discovered by Fonar. Much of the serious disease of the body occurs in the soft tissue of vital organs.
The maximum contrast available by x-ray with which to discriminate disease is 4%. Brain cancers differ from surrounding healthy
brain by only 1.6% while the contrast in the brain by MRI is 25 times greater at 40%. X-ray contrasts among the body’s soft
tissues are maximally 4%. Their contrast by MRI is 32.5 times greater (130%).
The
soft tissue contrasts with which to distinguish cancers on images by MRI are up to 180%. In the case of cancer these contrasts
can be even more marked making cancers readily visible and detectable anywhere in the body. This is because the nuclear resonance
signals from the body's normal soft tissue vital organs, as discovered in the original publication that founded MRI, differ so
dramatically from each other (e.g. small intestine 257 milliseconds, brain 595 milliseconds). Liver cancer and healthy liver signals
differ by 180% for example.
A
majority of the MRI scanners in use in hospitals and outpatient facilities and at mobile sites in the United States are based
on high field (1.5 - 3.0 Tesla) air core superconducting magnet technology.
FONAR
CORPORATION AND SUBSIDIARIES
The
remainder, described as Open MRIs, are recumbent-only machines based on Fonar’s
original iron-frame vertical magnetic field magnet design. These systems have been manufactured
and sold by many of our largest competitors over the years. They generally operate at
low field strengths (0.2 - 0.35 Tesla). Their prevalence in the marketplace has led to
the perception of the medical community that Open MRIs are useful only for anxious and
claustrophobic patients, that the Open MRI’s image quality is poor, and that the
scan times are long. Recently our competitors have introduced higher field strength Open
MRI products (0.5 – 1.2 Tesla). Significantly better imaging performance (especially
at 1.2 T) compared to the low field strength systems, is beginning to change that perception.
However, Fonar continues to maintain its competitive advantage at 0.6 Tesla due to our
front-open non-claustrophobic configuration in which there is nothing in front of the
patient’s face, and our unique ability to scan patients in weight-bearing positions
that is sometimes more consequential than a small increase in the image resolution and
decrease in scan time. It is also noteworthy that our horizontal transaxial magnetic
field allows the Upright MRI, in contrast to the recumbent-only Open MRIs, to use the
same flat planar-style radiofrequency receiver coil as the high-field MRI systems to
image the lumbar and thoracic spine.
One
of the Upright MRI’s big competitive advantages is that it is dramatically different from the Open MRI in several important
ways:
The
Upright MRI does something clinically valuable that the high-field MRI machines cannot do (i.e. positional imaging, weight-bearing
imaging).
Although
the patient can extend his arms and possibly see out the sides while recumbent in an Open MRI, there is still a large intimidating
magnet pole very close to and directly in front of the patient’s face. The Upright MRI allows the patient to look directly
out of the scanner and view a large flatscreen TV.
The
Upright MRI uses the same configuration RF receiver coil as a high-field MRI system to image the spine. Open MRIs cannot do this.
(This is because of the rule in MRI that the axis of symmetry of the RF receiver coil should be perpendicular to the direction
of the main magnetic field). The upright patient sits comfortably with his back against a flat (“planar”) RF receiver
coil in our horizontal transaxial magnetic field. In contrast, the vertical magnetic field in the recumbent-only Open MRI precludes
the use of this type of receiver coil.
Relative
to the high-field systems, the Upright MRI has two major competitive advantages:
Sometimes
patient positioning is more consequential than a small increase in the image resolution and decrease in the scan time. As it is
critical for physicians to not “miss” anything in the images, they recognize that the position-dependent pathology
visualized with the Upright MRI will be invisible (“missed”) if their patients are scanned at a higher field strength.
Image
artifacts arising from metal implants such as surgical screws are diminished with the 0.6 Tesla Upright MRI compared to those
from the high-field MRIs. It is well known that such artifacts get smaller as the MRI magnet’s field strength is reduced,
so the anatomy adjacent to implanted hardware will be less obscured with the Upright MRI. This is particularly valuable for surgeons
referring their postoperative patients for diagnostic imaging studies.
FONAR
CORPORATION AND SUBSIDIARIES
Fonar
faces competition within the MRI industry from such firms as General Electric Company,
Philips N.V., Toshiba Corporation, Hitachi Corporation and Siemens A.G. Most competitors
have marketing and financial resources more substantial than those available to us. They
have in the past, and may in the future, heavily discount the sales price of their scanners.
Such competitors sell both high field air core superconducting MRI scanners and iron
frame products. Fonar’s original iron frame design, ultimately imitated by Fonar’s
competitors to duplicate Fonar’s origination of “Open” MRI magnets,
gave rise to current patent protected Upright® MRI technology with the result that
Fonar today is the unique and only supplier of the highest field MRI magnets (0.6 Tesla)
that are not superconducting, do not use liquid helium and are not therefore susceptible
to severe consequences and downtime cause by a system quench.
The
iron frame, because it controls the magnetic lines of force and places them where wanted and removes them from where not wanted,
provides a more versatile magnet design than is possible with air core magnets. Air core magnets contain no iron but consist entirely
of turns of current carrying wire.
Fonar
expects to be the leader in weight-bearing and positional MRI for providing dynamic visualization of body parts including the
spine and extremities.
OTHER
IMAGING MODALITIES
Fonar’s
MRI scanners also compete with other diagnostic imaging systems, all of which are based upon the ability of energy waves to penetrate
human tissue and to be detected by either photographic film or electronic devices for presentation of an image on a display monitor.
Three different kinds of energy waves - X-ray, gamma and sound - are used in medical imaging techniques which compete with MRI
medical scanning, the first two of which involve exposing the patient to potentially harmful radiation. These other imaging modalities
compete with MRI products on the basis of specific applications.
X-rays
are the most common energy source used in imaging the body and are employed in three imaging modalities:
1.
Conventional X-ray systems, the oldest method of imaging, are typically used to image bones and teeth. The image resolution of
adjacent structures that have high contrast, such as bone adjacent to soft tissue, is excellent, while the discrimination between
soft tissue organs is poor because of the nearly equivalent penetration of x-rays.
2.
Computerized Tomography, also referred to as "CT", systems couple computers to x-ray instruments to produce cross-sectional
images of particular large organs or areas of the body. The CT scanner addresses the need for images, not available by conventional
radiography, that display anatomic relationships spatially. However, CT images are generally limited to the transverse plane and
cannot readily be obtained in the two other planes, sagittal and coronal. Improved picture resolution is available at the expense
of increased exposure to x-rays from multiple projections. Furthermore, the pictures obtained by this method are computer reconstructions
of a series of projections and, once diseased tissue has been detected, CT scanning cannot be focused for more detailed pictorial
analysis or obtain a chemical analysis.
3.
Digital radiography systems add computer image processing capability to conventional x-ray systems. Digital radiography can be
used in a number of diagnostic procedures which provide continuous imaging of a particular area with enhanced image quality and
reduced patient exposure to radiation.
FONAR
CORPORATION AND SUBSIDIARIES
Nuclear
medicine systems, which are based upon the detection of gamma radiation generated by radioactive pharmaceuticals introduced into
the body, are used to provide information concerning soft tissue and internal body organs and particularly to examine organ function
over time.
Ultrasound
systems emit, detect and process high frequency sound waves reflected from organ boundaries and tissue interfaces to generate
images of soft tissue and internal body organs. Although the images are substantially less detailed than those obtainable with
x-ray methods, ultrasound is generally considered harmless and therefore has found particular use in imaging the pregnant uterus.
X-ray
machines, ultrasound machines, digital radiography systems and nuclear medicine compete with the MRI scanners by offering significantly
lower price and space requirements. However, Fonar believes that the utility of the images produced by its MRI scanners is generally
superior to the utility of the images produced by those other methodologies.
GOVERNMENT
REGULATION
FDA
Regulation
The
Food and Drug Administration in accordance with Title 21 of the Code of Federal Regulations regulates the manufacturing and marketing
of Fonar’s MRI scanners. The regulations can be classified as either pre-market or post-market. The pre-market requirements
include obtaining marketing clearance, proper device labeling, establishment registration and device listing. Once the products
are on the market, Fonar must comply with post-market surveillance controls. These requirements include the Quality Systems Regulation,
or “QSR”, also known as Current Good Manufacturing Practices or CGMPs, and Medical Device Reporting, also referred
to as MDR regulations. The QSR is a quality assurance requirement that covers the design, packaging, labeling and manufacturing
of a medical device. The MDR regulation is an adverse event-reporting program.
Classes
of Products
Under
the Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetic Act, all medical devices are classified by the FDA
into one of three classes. A Class I device is subject only to general controls, such as labeling requirements and manufacturing
practices; a Class II device must comply with certain performance standards established by the FDA; and a Class III device must
obtain pre-market approval from the FDA prior to commercial marketing. Fonar’s products are Class II devices. Class II devices
are subject to "General Controls"; General Controls include:
1.
Establishment registration of companies which are required to register under 21 CFR Part 807.20, such as manufacturers, distributors,
re-packagers and re-labelers.
2.
Medical device listing with FDA of devices to be marketed.
3.
Manufacturing devices in accordance with the Current Good Manufacturing Practices Quality System Regulation in 21 CFR Part 820.
4.
Labeling devices in accordance with labeling regulations in 21 CFR Part 801 or 809.
5.
Submission of a Premarket Notification, pursuant to 510(k), before marketing a device.
FONAR
CORPORATION AND SUBSIDIARIES
In
addition to complying with general controls, Class II devices are also subject to special controls. Special controls may include
special labeling requirements, guidance documents, mandatory performance standards and post-market surveillance.
On
October 3, 2000 Fonar received FDA clearance for the Upright® MRI under the name “Indomitable”.
Premarketing
Submission
Each
person who wants to market Class I, II and some III devices intended for human use in the U.S. must submit a 510(k) to FDA at
least 90 days before marketing unless the device is exempt from 510(k) requirements. A 510(k) is a pre-marketing submission made
to FDA to demonstrate that the device to be marketed is as safe and effective, that is, substantially equivalent, SE, to a legally
marketed device that is not subject to pre-market approval, PMA. Applicants must compare their 510(k) device to one or more similar
devices currently on the U.S. market and make and support their substantial equivalency claims.
The
FDA is committed to a 90-day clearance after submission of a 510(k), provided the 510(k) is complete and there is no need to submit
additional information or data.
The
510(k) is essentially a brief statement and description of the product. As Fonar’s scanner products are Class II products,
there are no pre-market data requirements.
An
investigational device exemption, also referred to as IDE, allows the investigational device to be used in a clinical study pending
FDA clearance in order to collect safety and effectiveness data required to support the Premarket Approval, also referred to as
PMA, application or a Premarket Notification pursuant to 510(k), submission to the FDA. Clinical studies are most often conducted
to support a PMA.
For
the most part, however, we have not found it necessary to utilize IDE’s. The standard 90 day clearance for our new MRI scanner
products classified as Class II products makes the IDE unnecessary, particularly in view of the time and effort involved in compiling
the information necessary to support an IDE.
Quality
System Regulation
The
Quality Management System is applicable to the design, manufacture, administration of installation and servicing of magnetic resonance
imaging scanner systems. The FDA has authority to conduct detailed inspections of manufacturing plants, to establish Good Manufacturing
Practices which must be followed in the manufacture of medical devices, to require periodic reporting of product defects and to
prohibit the exportation of medical devices that do not comply with the law.
Medical
Device Reporting Regulation
Manufacturers
must report all MDR reportable events to the FDA. Each manufacturer must review and evaluate all complaints to determine whether
the complaint represents an event which is required to be reported to FDA. Section 820.3(b) of the Quality Systems regulation
defines a complaint as, "any written, electronic or oral communication that alleges deficiencies related to the identity,
quality, durability, reliability, safety, effectiveness, or performance of a device after it is released for distribution."
FONAR
CORPORATION AND SUBSIDIARIES
A
report is required when a manufacturer becomes aware of information that reasonably suggests that one of their marketed devices
has or may have caused or contributed to a death, serious injury, or has malfunctioned and that the device or a similar device
marketed by the manufacturer would be likely to cause or contribute to a death or serious injury if the malfunction were to recur.
Malfunctions
are not reportable if they are not likely to result in a death, serious injury or other significant adverse event experience.
A
malfunction which is or can be corrected during routine service or device maintenance still must be reported if the recurrence
of the malfunction is likely to cause or contribute to a death or serious injury if it were to recur.
We
have established and maintained written procedures for implementation of the MDR regulation. These procedures include internal
systems that:
provide
for timely and effective identification, communication and evaluation of adverse events;
provide
a standardized review process and procedures for determining whether or not an event is reportable; and
provide
procedures to insure the timely transmission of complete reports.
These
procedures also include documentation and record keeping requirements for:
information
that was evaluated to determine if an event was reportable;
all
medical device reports and information submitted to the FDA;
any
information that was evaluated during preparation of annual certification reports; and
systems
that ensure access to information that facilitates timely follow up and inspection by FDA.
FDA
Enforcement
FDA
may take the following actions to enforce the MDR regulation:
FDA-Initiated
or Voluntary Recalls
Recalls
are regulatory actions that remove a hazardous, potentially hazardous, or a misbranded product from the marketplace. Recalls are
also used to convey additional information to the user concerning the safe use of the product. Either FDA or the manufacturer
can initiate recalls.
There
are three classifications, i.e., I, II, or III, assigned by the Food and Drug Administration to a particular product recall to
indicate the relative degree of health hazard presented by the product being recalled.
FONAR
CORPORATION AND SUBSIDIARIES
Class
I
Is
a situation in which there is a reasonable probability that the use of, or exposure to, a violative product will cause serious
adverse health consequences or death.
Class
II
Is
a situation in which use of, or exposure to, a violative product may cause temporary or medically reversible adverse health consequences
or where the probability of serious adverse health consequences is remote.
Class
III
Is
a situation in which use of, or exposure to, a violative product is not likely to cause adverse health consequences.
Fonar
has initiated six voluntary recalls. Five of the recalls were Class II and one was Class III. The recalls involved making minor
corrections to the product in the field. Frequently, corrections which are made at the site of the device are called field corrections
as opposed to recalls.
Civil
Money Penalties
The
FDA, after an appropriate hearing, may impose civil money penalties for violations of the FD&C Act that relate to medical
devices. In determining the amount of a civil penalty, FDA will take into account the nature, circumstances, extent, and gravity
of the violations, the violator's ability to pay, the effect on the violator's ability to continue to do business, and any history
of prior violations.
Warning
Letters
FDA
issues written communications to a firm, indicating that the firm may incur more severe sanctions if the violations described
in the letter are not corrected. Warning letters are issued to cause prompt correction of violations that pose a hazard to health
or that involve economic deception. The FDA generally issues the letters before pursuing more severe sanctions.
Seizure
A
seizure is a civil court action against a specific quantity of goods which enables the FDA to remove these goods from commercial
channels. After seizure, no one may tamper with the goods except by permission of the court. The court usually gives the owner
or claimant of the seized merchandise approximately 30 days to decide a course of action. If they take no action, the court will
recommend disposal of the goods. If the owner decides to contest the government's charges, the court will schedule the case for
trial. A third option allows the owner of the goods to request permission of the court to bring the goods into compliance with
the law. The owner of the goods is required to provide a bond or, security deposit, to assure that they will perform the orders
of the court, and the owner must pay for FDA supervision of any activities by the company to bring the goods into compliance.
Citation
A
citation is a formal warning to a firm of intent to prosecute the firm if violations of the FD&C Act are not corrected. It
provides the firm an opportunity to convince FDA not to prosecute.
Injunction
An
injunction is a civil action filed by FDA against an individual or company. Usually, FDA files an injunction to stop a company
from continuing to manufacture, package or distribute products that are in violation of the law.
FONAR
CORPORATION AND SUBSIDIARIES
Prosecution
Prosecution
is a criminal action filed by FDA against a company or individual charging violation of the law for past practices.
Foreign
and Export Regulation
We
obtain approvals as necessary in connection with the sales of our products in foreign countries. In some cases, FDA approval has
been sufficient for foreign sales as well. Our standard practice has been to require either the distributor or the customer to
obtain any such foreign approvals or licenses which may be required.
Legally
marketed devices that comply with the requirements of the Food Drug & Cosmetic Act require a Certificate to Foreign Government
issued by the FDA for export. Other devices that do not meet the requirements of the FD&C Act but comply with the laws of
a foreign government require a Certificate of Exportability issued by the FDA. All products which we sell have FDA clearance and
would fall into the first category.
Foreign
governments have differing requirements concerning the import of medical devices into their respective jurisdictions. The European
Union, also referred to as EU, has some essential requirements described in the EU’s Medical Device Directive, also referred
to as MDD. In order to export to one of these countries, we must meet the essential requirements of the MDD and any additional
requirements of the importing country. The essential requirements are similar to some of the requirements mandated by the FDA.
In addition the MDD requires that we enlist a Notified Body to examine and assess our documentation, a Technical Construction
File, and verify that the product has been manufactured in conformity with the documentation. The notified body must carry out
or arrange for the inspections and tests necessary to verify that the product complies with the essential requirements of the
MDD, including safety performance and Electromagnetic Compatibility, also referred to as EMC. Also required is a Quality System,
ISO-13485, assessment by the Notified Body. We were approved for ISO 13485 certification for its Quality Management System in
April, 2003.
We
received clearance to sell the Upright® MRI scanners in the EU in May, 2002.
Other
countries require that their own testing laboratories perform an evaluation of our devices. This requires that we must bring the
foreign agency’s personnel to the USA to perform the evaluation at our expense before exporting.
Some
countries, including many in Latin America and Africa, have very few regulatory requirements, beyond FDA clearance.
To
date, Fonar has been able to comply with all foreign regulatory requirements applicable to its export sales.
FONAR
CORPORATION AND SUBSIDIARIES
PHYSICIAN
AND DIAGNOSTIC SERVICES MANAGEMENT BUSINESS
In
2011, Health Management Corporation of America (HMCA) transferred its business and assets to Imperial management Services, LLC
(“Imperial”), a New York limited liability company, in connection with raising capital from investors. HMCA maintained
a majority interest in Imperial. The assets continued to be used in our business of managing diagnostic imaging centers.
Through
an agreement dated March 6, 2013, HMCA acquired another business engaged in the management and, in the case of four sites located
in Florida, the ownership, of diagnostic imaging facilities. The purchase was made through a new limited liability company, Health
Diagnostics Management, LLC (“HDM”), which raised part of the capital necessary for the acquisition from investors.
The investors received in the aggregate 49.5% of the interest in HDM. (HDM did not take over the operation of the four Florida
sites until April, 2013.)
On
July 1, 2015, the corporate organization was restructured under HDM, with Health Management Corporation of America owning 45.8%,
Imperial owning 24.2%, and investors owning 30% of HDM.
On
June 30, 2016, the Company purchased 100% of the equity in Turnkey Services of New York, LLC and 100% of the equity in TK2 Equipment
Management, LLC. Turnkey Services of New York, LLC and TK2 Equipment Management, LLC, both by way of several operating leases,
had provided the Company with ancillary diagnostic imaging equipment to our managed (and in the case of four Florida sites, owned)
MRI facilities.
As
a result of scheduled re-acquisitions of interest held by investors as of July 1, 2016, HDM now is owned by Health Management
Corporation of America (70%) and investors (30%).
HDM
now operates under the assumed name “Health Management Company of America” (“HMCA”).
The
combined business (HDM, Imperial and Health Management Corporation of America) will be referred to as “HMCA” for all
periods before and after July 1, 2015, unless otherwise indicated.
HMCA
provides comprehensive non-medical management services to diagnostic imaging facilities. These services include administrative
services, billing and collection services, credentialing services, contract negotiations, compliance consulting, purchasing IT
services, hiring, conducting interviews, training, supervision and management of non-medical personnel, storage of medical records,
office space, equipment, repair maintenance services, accounting, assistance with compliance matters and the development and implementation
of practice growth and marketing strategies.
As
of August 1, 2019, HMCA managed a total of 25 MRI centers. For the 2019 fiscal year, the revenues HMCA recognized from the MRI
facilities had increased to $77.2 million, and for the 2018 fiscal year the revenues were increased to $71.7 million. Four of
these facilities in Florida are owned by HMCA subsidiaries.
HMCA
GROWTH STRATEGY
HMCA’s
growth strategy focuses on upgrading and expanding the existing facilities it manages and expanding the number of facilities it
manages for its clients, including new sites. In connection with improving the performance of the facilities, we have added high
field MRI scanners, extremity scanners and x-ray machines to the Upright® MRI scanner at certain of the sites where such additional
diagnostic imaging modalities are expected to produce the greatest return.
FONAR
CORPORATION AND SUBSIDIARIES
PHYSICIAN
AND DIAGNOSTIC MANAGEMENT SERVICES
HMCA’s
services to the facilities it manages encompass substantially all of their business operations. Each facility is controlled, however,
not by HMCA, but by the physician owner, or in the case of the four Florida sites owned by HMCA subsidiaries, by the medical director,
and all medical services are performed by physicians and other medical personnel under the physician-owner’s supervision.
HMCA is the management company and performs services of a non-medical nature. These services include:
1.
Offices and Equipment. HMCA identifies, negotiates leases for and/or provides office space and equipment to its clients. This
includes technologically sophisticated medical equipment. HMCA also provides improvements to leaseholds, assistance in site selection
and advice on improving, updating, expanding and adapting to new technology.
2.
Personnel. HMCA staffs all the non-medical positions of its clients with its own employees, eliminating the client's need to interview,
train and manage non-medical employees. HMCA processes the necessary tax, insurance and other documentation relating to employees.
3.
Administrative. HMCA assists in the scheduling of patient appointments, purchasing of office and medical supplies and equipment
and handling of reporting, accounting, processing and filing systems. It prepares and files the physician portions of complex
applications to enable its clients to participate in managed care programs and to qualify for insurance reimbursement. HMCA assists
the clients to implement programs and procedures to ensure full and timely regulatory compliance and appropriate cost reimbursement
under no-fault insurance and Workers' Compensation guidelines, as well as compliance with other applicable governmental requirements
and regulations, including HIPAA and other privacy requirements.
4.
Billing and Collections. HMCA is responsible for the billing and collection of revenues from third-party payors including those
governed by No-Fault and Workers' Compensation statutes. HMCA is presently using a third party to perform its billing and collection
services for its clients’ No-Fault and Workers’ Compensation scanning business.
5.
Cost Saving Programs. Based on available volume discounts, HMCA seeks to assist in obtaining favorable pricing for office and
medical supplies, medical imaging film, equipment, contrast agents, such as gadolinuim, and magnavist and other inventory for
its clients.
6.
Diagnostic Imaging and Ancillary Services. HMCA can offer access to diagnostic imaging equipment through diagnostic imaging facilities
it manages. The Company is expanding the ancillary services offered in its network to include x-rays, and other MRI equipment
such as high-field (1.5 or 3.0 Tesla magnet strength) MRI scanners and extremity MRI scanners.
7.
Marketing Strategies. HMCA is responsible for developing and proposing marketing plans for its clients.
8.
Expansion Plans. HMCA assists the clients in developing expansion plans including the opening of new or replacement facilities
where appropriate.
HMCA’s
objective is to free physicians from as many non-medical duties as is practicable, allowing physicians to spend less time on business
and administrative matters and more time practicing medicine.
FONAR
CORPORATION AND SUBSIDIARIES
The
exceptions to this general model of operation are four of the facilities acquired by
HMCA from Health Diagnostics, LLC in April, 2013 in Florida. These Florida facilities
are owned by limited liability companies which, as our subsidiaries, conduct their operations
directly and bill and collect their fees from the patients and third party payors.
The
facilities enter into contracts with third party payors, including managed care companies. None of HMCA’s clients, however,
participate in any capitated plans or other risk sharing arrangements. Capitated plans are those HMO programs where the provider
is paid a flat monthly fee per patient.
The
management fees payable by the facilities to HMCA are flat monthly fees. In fiscal 2018, the aggregate amount of management fees
was $4,195,975 per month. In fiscal 2019, the aggregate amount of management fees was $4,389,498 per month.
Fees
under the management agreements are subject to adjustment by mutual agreement on an annual basis.
Dr.
Damadian owns three HMCA-managed MRI facilities in Florida. The fees for these three sites in Florida owned by Dr. Damadian are
flat monthly fees which are subject to adjustment by mutual agreement on an annual basis. In fiscal 2019, the aggregate monthly
amount of management fees payable to HMCA by these sites was $796,704.
The
Florida facilities owned by HMCA subsidiaries directly bill their patients or the patients’ insurance carriers. Patient
fees net of provision for bad debt were $24,207,536 in fiscal 2019.
HMCA
contracts with an outside billing company (located in Melville, New York) to perform billing and collection for their clients’
No-Fault and Workers’ Compensation business. The fixed monthly fees were $85,000 for HMCA in fiscal 2018 and fiscal 2019.
The Company also entered into a one year renewable agreement to provide IT services to the billing company for a monthly fee of
$23,884.
HMCA
MARKETING
HMCA's
marketing strategy is to expand the business and improve the facilities which it manages. HMCA is seeking to increase the number
of locations of those facilities where market conditions are promising and to promote growth of our clients' and Florida subsidiaries’
patient volume and revenue.
DIAGNOSTIC
IMAGING FACILITIES
Diagnostic
imaging facilities managed by HMCA provide diagnostic imaging services to patients referred by physicians. The facilities are
operated in a manner which eliminates the admission and other administrative inconveniences of in-hospital diagnostic imaging
services. Imaging services are performed in an outpatient setting by trained medical technologists under the direction of physicians.
Following diagnostic procedures, the images are reviewed by the interpreting physicians who prepare reports of these tests and
their findings. The vast majority of reports for the New York facilities are transcribed by HMCA personnel and the remainder are
outsourced to professional transcription services. Reports for the Florida facilities are outsourced to professional transcription
services.
HMCA
develops marketing programs and educational programs in an effort to establish and maintain referring physician relationships
for our clients and Florida subsidiaries.
FONAR
CORPORATION AND SUBSIDIARIES
Managed
care providers are an important factor in the diagnostic imaging industry. To further its position, HMCA is seeking to expand
the imaging modalities offered at its managed and owned diagnostic imaging facilities. Three facilities in New York and five facilities
in Florida have two or more MRI scanners. One facility in New York and two in Florida also perform x-rays. A new facility managed
by the Company is scheduled to be opened by the end of the second quarter of fiscal 2020 in Pembroke Pines, Florida, and a total
of three additional scanners are scheduled to be added to the existing facilities, one in White Plains, New York, one in Islandia,
New York and one in Ormond Beach, Florida.
REIMBURSEMENT
HMCA’s
clients receive reimbursements for their services through Medicare, Medicaid, managed care, private commercial insurance, third
party administrators, Workers’ Compensation, No-Fault and other insurance.
Medicare
The
Medicare program provides reimbursement for hospitalization, physician, diagnostic and certain other services to eligible persons
65 years of age and over and certain other individuals. Providers are paid by the federal government in accordance with regulations
promulgated by the Department of Health and Human Services, HSS, and generally accept the payment with nominal deductible and
co-insurance amounts required to be paid by the service recipient, as payment in full. Hospital inpatient services are reimbursed
under a prospective payment system. Hospitals receive a specific prospective payment for inpatient treatment services based upon
the diagnosis of the patient.
Under
Medicare’s prospective payment system for hospital outpatient services, or OPPS, a hospital is paid for outpatient services
on a rate per service basis that varies according to the ambulatory payment classification group, or APC, to which the service
is assigned rather than on a hospital’s costs. Each year the Centers for Medicare and Medicaid Services, or CMS, publishes
new APC rates that are determined in accordance with the promulgated methodology.
Services
provided in non-hospital based freestanding facilities are paid under the Medicare Physician Fee Schedule, or MPFS. All of HMCA’s
clients are presently in this category. The MPFS is updated on an annual basis and sometimes modified more frequently.
Healthcare
Reform Legislation
Healthcare
reform legislation enacted in the first quarter of 2010 by the Patient Protection and Affordable Care Act or PPACA, specifically
requires the U.S. Department of Health and Human Services, in computing physician practice expense relative value units, to increase
the equipment utilization factor for advanced diagnostic imaging services (such as MRI, CT and PET) from a presumed utilization
rate of 50% to 65% for 2010 through 2012, 70% in 2013, and 75% thereafter. Excluded from the adjustment are low-technology imaging
modalities such as ultrasound, X-ray and fluoroscopy. The Health Care and Education Reconciliation Act of 2010 (H.R. 4872) or
Reconciliation Act, which was approved by the President on March 30, 2010, amends the provision for higher presumed utilization
of advanced diagnostic imaging services to a presumed rate of 75%. These changes may result in decreased revenue for the services
performed by our clients for Medicare beneficiaries. Other changes in reimbursement for services rendered by Medicare Advantage
plans may also reduce the revenues for services rendered to Medicare Advantage enrollees.
FONAR
CORPORATION AND SUBSIDIARIES
We
have experienced reimbursement reductions for radiology services provided to Medicare beneficiaries, including reductions pursuant
to the Deficit Reduction Act, or DRA.
The
DRA, which became effective in 2007, set reimbursement for the technical component for imaging services (excluding diagnostic
and screening mammography) in non-hospital based freestanding facilities at the lesser of OPPS or the MPFS.
In
addition to the foregoing changes to the usage assumptions, CMS’ 2010 regulatory changes to the MPFS also included a downward
adjustment to services primarily involving the technical component rather than the physician work component, by adjusting downward
malpractice payments for these services. These adjustments have been phased in over a four year period. For our fiscal year ended
June 30, 2019, Medicare revenues represented approximately 4.0% of the revenues for HMCA’s clients and subsidiaries
as compared to 4.4% for the fiscal year ended June 30, 2018. In January, 2014 additional reductions in Medicare reimbursement
were adopted, and New York State is expected to propose reducing Workers’ Compensation reimbursements.
Because
of the many variables involved, we are unable to predict how the legislative mandates contained in PPACA will be implemented,
in their complete and final form, whether any additional changes to PPACA or regulations (including interpretations), will occur
in the future, or what effect any other future legislation or regulation would have on our business. Many commercial insurance
companies, however, tie their reimbursement rates to the government reimbursement levels.
Medicaid
The
Medicaid program is a jointly-funded federal and state program providing coverage for low-income persons. In addition to federally-mandated
basic services, the services offered and reimbursement methods vary from state to state. In many states, Medicaid reimbursement
is patterned after the Medicare program; however, an increasing number of states have established or are establishing payment
methodologies intended to provide healthcare services to Medicaid patients through managed care arrangements. In fiscal 2019,
approximately 0.13% of the revenues of HMCA’s clients were attributable to Medicaid, as compared to 0.15% in fiscal 2018.
Four of the Florida facilities (those owned by HMCA subsidiaries) do not participate in Medicaid.
Managed
Care and Private Insurance.
Health
Maintenance Organizations, or HMO’s, Preferred Provider Organizations, or PPOs, and other managed care organizations attempt
to control the cost of healthcare services by a variety of measures, including imposing lower payment rates, preauthorization
requirements, limiting services and mandating less costly treatment alternatives. Managed care contracting is competitive and
reimbursement schedules in many cases can be at or below Medicare reimbursement levels. Some managed care organizations have reduced
or otherwise limited, and other managed care organizations may reduce or otherwise limit, reimbursement in response to reductions
in government reimbursement. These reductions could have an adverse impact on our financial condition and results of operations.
These reductions have been, and any future reductions may be, similar to the reimbursement reductions proposed by CMS, Congress
and the current federal government administration.
FONAR
CORPORATION AND SUBSIDIARIES
HMCA
COMPETITION
The
physician and diagnostic management services field is highly competitive. A number of large hospitals have acquired medical practices
and this trend may continue. HMCA expects that more competition will develop. Many competitors have greater financial and other
resources than HMCA.
With
respect to the diagnostic imaging facilities managed by HMCA, the outpatient diagnostic imaging industry is highly competitive.
Competition focuses primarily on attracting physician referrals at the local market level and increasing referrals through relationships
with managed care organizations, as well as emphasizing to potential referral sources the advantages of Upright® MRI scanning.
HMCA believes that principal competitors for the diagnostic imaging centers are hospitals and independent or management company-owned
imaging centers. Competitive factors include quality and timeliness of test results, ability to develop and maintain relationships
with managed care organizations and referring physicians, type and quality of equipment, facility location, convenience of scheduling
and availability of patient appointment times. HMCA believes that it will be able to effectively meet the competition in the outpatient
diagnostic imaging industry with the Fonar Upright® MRI scanners and strategically placed high field MRI scanners at its facilities.
GOVERNMENT
REGULATION APPLICABLE TO HMCA
FEDERAL
REGULATION
The
healthcare industry is highly regulated and changes in laws and regulations can be significant. Changes in the law or new interpretation
of existing laws can have a material effect on our permissible activities, the relative costs associated with doing business and
the amount of reimbursement by government and other third-party payors.
Federal
False Claims Act
The
federal False Claims Act and, in particular, the False Claims Act’s “qui tam” or “whistleblower”
provisions allow a private individual to bring actions in the name of the government alleging that a defendant has made false
claims for payment from federal funds. After the individual has initiated the lawsuit the government must decide whether to intervene
in the lawsuit and to become the primary prosecutor. If the government declines to join the lawsuit, the individual may choose
to pursue the case alone, although the government must be kept apprised of the progress of the lawsuit, and may intervene later.
Whether or not the federal government intervenes in the case, it will receive the majority of any recovery.
When
an entity is determined to have violated the federal False Claims Act, it must pay three times the actual damages sustained by
the government, plus mandatory civil penalties for each separate false claim and the government’s attorneys’ fees.
Liability arises when an entity knowingly submits, or causes someone else to submit, a false claim for reimbursement to the federal
government. The False Claims Act defines the term “knowingly” broadly, though simple negligence will not give rise
to liability under the False Claims Act. Examples of the other actions which may lead to liability under the False Claims Act:
Failure
to comply with the many technical billing requirements applicable to our Medicare and Medicaid business.
Failure
to comply with the prohibition against billing for services ordered or supervised by
a physician who is excluded from any federal healthcare program, or the prohibition against
employing or contracting with any person or entity excluded from any federal
healthcare
program.
FONAR
CORPORATION AND SUBSIDIARIES
Failure
to comply with the Medicare physician supervision requirements for the services we provide, or the Medicare documentation requirements
concerning physician supervision.
The
Fraud Enforcement and Recovery Act of 2009 expanded the scope of the False Claims Act by, among other things, broadening protections
for whistleblowers and creating liability for knowingly retaining a government overpayment, acting in deliberate ignorance of
a government overpayment or acting in reckless disregard of a government overpayment. The recently enacted healthcare reform bills
in the form of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act
of 2010 (collectively, “PPACA”) expanded on changes made by the 2009 Fraud Enforcement and Recovery Act with regard
to such “reverse false claims.” Under PPACA, the knowing failure to report and return an overpayment within 60 days
of identifying the overpayment or by the date a corresponding cost report is due, whichever is later, constitutes a violation
of the False Claims Act. HMCA and its clients have never been sued under the False Claims Act and believe they are in compliance
with the law.
Stark
Law
Under
the federal Self-Referral Law, also referred to as the "Stark Law", which is applicable to Medicare and Medicaid patients,
and the self-referral laws of various States, certain health practitioners, including physicians, chiropractors and podiatrists,
are prohibited from referring their patients for the provision of designated health services, including diagnostic imaging and
physical therapy services, to any entity with which they or their immediate family members have a financial relationship, unless
the referral fits within one of the specific exceptions in the statutes or regulations. The federal government has taken the position
that a violation of the federal Stark Law is also a violation of the Federal False Claims Act. Statutory exceptions under the
Stark Law include, among others, direct physician services, in-office ancillary services rendered within a group practice, space
and equipment rental and services rendered to enrollees of certain prepaid health plans. Some of these exceptions are also available
under the State self-referral laws. HMCA believes that it and its clients are in compliance with these laws.
Anti-kickback
Regulation
We
are subject to federal and state laws which govern financial and other arrangements between healthcare providers. These include
the federal anti-kickback statute which, among other things, prohibits the knowing and willful solicitation, offer, payment or
receipt of any remuneration, direct or indirect, in cash or in kind, in return for or to induce the referral of patients for items
or services covered by Medicare, Medicaid and certain other governmental health programs. Under PPACA, knowledge of the anti-kickback
statute or the specific intent to violate the law is not required. Violation of the anti-kickback statute may result in civil
or criminal penalties and exclusion from the Medicare, Medicaid and other federal healthcare programs, and according to PPACA,
now provides a basis for liability under the False Claims Act. In addition, it is possible that private parties may file “qui
tam” actions based on claims resulting from relationships that violate the anti-kickback statute, seeking significant financial
rewards. Many states have enacted similar statutes, which are not limited to items and services paid for under Medicare or a federally
funded healthcare program. Neither HMCA nor its clients engage in this practice.
In
fiscal 2019, approximately 4.0% of the revenues of HMCA’s clients were attributable to Medicare and 0.13% were attributable
to Medicaid. In fiscal 2018, approximately 4.4% of the revenues of HMCA’s clients were attributable to Medicare and 0.15%
were attributable to Medicaid.
FONAR
CORPORATION AND SUBSIDIARIES
Deficit
Reduction Act (DRA)
On
February 8, 2006, the President signed into law the DRA. Effective January 1, 2007, the DRA provides that Medicare reimbursement
for the technical component for imaging services (excluding diagnostic and screening mammography) performed in freestanding facilities
will be capped. Payment is the lesser of the Medicare Physician Fee Schedule or the Hospital Outpatient Prospective Payment System
(OPPS) rates. Implementation of these reimbursement reductions contained in the DRA has had an adverse effect on our business.
We have been able to counter this effect by increasing our clients’ scan volumes through our vigorous marketing efforts
and reducing our operating expenses.
The
DRA also codified the reduction in reimbursement for multiple images on contiguous body parts previously announced by CMS, the
agency responsible for administering the Medicare program. In November 2005, CMS announced that it would pay 100% of the technical
component of the higher priced imaging procedure and 50% of the technical component of each additional imaging procedure for imaging
procedures involving contiguous body parts within a family of codes when performed in the same session. CMS had indicated that
it would phase in this 50% rate reduction over two years, so that the reduction was 25% for each additional imaging procedure
in 2006 and another 25% reduction in 2007. However, for services furnished on or after July 1, 2010, the PPACA requires the full
50% reduction to be implemented.
Health
Insurance Portability and Accountability Act
Congress
enacted the Health Insurance Portability and Accountability Act of 1996, or HIPAA, in part, to combat healthcare fraud and to
protect the privacy and security of patients’ individually identifiable healthcare information. HIPAA, among other things,
amends existing crimes and criminal penalties for Medicare fraud and enacts new federal healthcare fraud crimes, including actions
affecting non-government healthcare benefit program by means of false or fraudulent representations in connection with the delivery
of healthcare services is subject to a fine or imprisonment, or potentially both. In addition, HIPAA authorizes the imposition
of civil money penalties against entities that employ or enter into contracts with excluded Medicare or Medicaid program participants
if such entities provide services to federal health program beneficiaries. A finding of liability under HIPAA could have a material
adverse effect on our business, financial condition and results of operations.
Further,
HIPAA requires healthcare providers and their business associates to maintain the privacy and security of individually identifiable
protected health information (“PHI”). HIPAA imposes federal standards for electronic transactions, for the security
of electronic health information and for protecting the privacy of PHI. The Health Information Technology for Economic and Clinical
Health Act of 2009 (“HITECH”), signed into law on February 17, 2009, dramatically expanded, among other things, (1)
the scope of HIPAA to now apply directly to “business associates,” or independent contractors who receive or obtain
PHI in connection with providing a service to a covered entity, (2) substantive security and privacy obligations, including new
federal security breach notification requirements to affected individuals, DHHS and prominent media outlets, of certain breaches
of unsecured PHI, (3) restrictions on marketing communications and a prohibition on covered entities or business associates from
receiving remuneration in exchange for PHI, and (4) the civil and criminal penalties that may be imposed for HIPAA violations,
increasing the annual cap in penalties from $25,000 to $1.5 million per occurrence. In 2013 additional legal requirements were
adopted to provide further protection for PHI.
FONAR
CORPORATION AND SUBSIDIARIES
In
addition, many states have enacted comparable privacy and security statues or regulations that, in some cases, are most stringent
than HIPAA requirements. In those cases it may be necessary to modify our operations and procedures to comply with the more stringent
state laws, which may entail significant and costly changes for us. We believe that we are in compliance with such state laws
and regulations. However, if we fail to comply with applicable state laws and regulations, we could be subject to additional sanctions.
We
believe that we are in compliance with the current HIPAA requirements, as amended by HITECH, together with other legislation and
regulations, and comparable state laws, but we anticipate that we may encounter certain costs associated with future compliance.
Moreover, we cannot guarantee that enforcement agencies or courts will not make interpretations of the HIPAA standards that are
inconsistent with ours, or the interpretations of our contracted radiology practices or their affiliated physicians. A finding
of liability under the HIPAA standards may result in significant criminal and civil penalties. Noncompliance also may result in
exclusion from participation in government programs, including Medicare and Medicaid. These actions could have a material adverse
effect on our business, financial condition, and results of operations.
Civil
Money Penalty Law and Other Federal Statutes
The
Civil Money Penalty, or CMP, law covers a variety of practices. It provides a means of administrative enforcement of the anti-kickback
statute, and prohibits false claims, claims for medically unnecessary services, violations of Medicare participating provider
or assignment agreements and other practices. The statute gives the Office of Inspector General of the HHS the power to seek substantial
civil fines, exclusion and other sanctions against providers or others who violate the CMP prohibitions.
In
addition, in 1996, Congress created a new federal crime: healthcare fraud and false statements relating to healthcare matters.
The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including
private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government sponsored
programs such as the Medicare and Medicaid programs.
Certificates
of Need
Some
states require hospitals and certain other healthcare facilities and providers to obtain a certificate of need, or CON, or similar
regulatory approval prior to establishing certain healthcare operations or services, incurring certain capital projects and/or
the acquisition of major medical equipment including MRI and PET/CT systems. We are not operating in any such states.
Patient
Protection and Affordable Care Act
On
March 23, 2010, President Obama signed into law healthcare reform legislation in the form of PPACA. The implementation of
this law will likely have a profound impact on the healthcare industry. Most of the provisions of PPACA are being phased in over
time and can be conceptualized as a broad framework not only to provide health insurance coverage to millions of Americans, but
to fundamentally change the delivery of care by bringing together elements of health information technology, evidence-based medicine,
chronic disease management, medical “homes,” care collaboration and shared financial risk in a way that will accelerate
industry adoption and change. There are also many provisions addressing cost containment, reductions of Medicare and other payments
and heightened compliance requirements and additional penalties, which will create further challenges for providers. We are unable
to predict the full impact of PPACA at this time due to the law’s complexity and current lack of implementing regulations
or interpretive guidance. Moving forward, we believe that the federal government will likely have greater involvement in the healthcare
industry than in prior years.
FONAR
CORPORATION AND SUBSIDIARIES
State
Regulation
In
addition to the federal self-referral law and federal Anti-kickback statute, many States, including those in which HMCA and its
clients operate, have their own versions of self-referral and anti-kickback laws. These laws are not limited in their applicability,
as are the federal laws, to specific programs. HMCA believes that it and its clients are in compliance with these laws.
Various
States prohibit business corporations from practicing medicine. Various States, including New York, also prohibit the sharing
of professional fees or fee splitting. Consequently, in New York HMCA leases space and equipment to clients and provides clients
with a range of non-medical administrative and managerial services for agreed upon fees. Under Florida law a business entity can
bill patients and third party payors directly if that entity is properly licensed through AHCA. All of the seven facilities in
Florida are licensed healthcare clinics through AHCA.
HMCA’s
clients and subsidiaries generate revenue from patients covered by no-fault insurance and workers' compensation programs. For
the fiscal year ended June 30, 2019 approximately 57.5% of our clients’ receipts were from patients covered by no-fault
insurance and approximately 9.2% of our client’s receipts were from patients covered by workers’ compensation programs.
For the fiscal year ended June 30, 2018, approximately 56.8% of HMCA’s clients’ receipts were from patients covered
by no-fault insurance and approximately 8.3% of HMCA’s clients’ receipts were from patients covered by workers’
compensation programs. The foregoing numbers do not include payments from third party administrators. In the event that changes
in these laws alter the fee structures or methods of providing service, or impose additional or different requirements, HMCA could
be required to modify its business practices and services in ways that could be more costly to HMCA or in ways that decrease the
revenues which HMCA receives from its clients.
Compliance
Program
We
maintain a program to monitor compliance with federal and state laws and regulations applicable to the healthcare entities. The
compliance program includes the adoption of (i) Standards of Conduct for our employees and affiliates and (ii) a process that
specifies how employees, affiliates and others may report regulatory or ethical concerns. We believe that our compliance program
meets the relevant standards provided by the Office of Inspector General of the Department of Health and Human Services.
An
important part of our compliance program consists of conducting periodic audits of various aspects of our operations and that
of the contracted radiology practices. We also assist our clients with educational programs designed to familiarize them with
the regulatory requirements and specific elements of our compliance program.
HMCA
believes that it and its clients are in compliance with applicable Federal, State and local laws. HMCA does not believe that such
laws will have any adverse material effect on its business.
EMPLOYEES
Fonar
and HMCA had approximately 500 employees as of September 5, 2019. This total number included employees engaged in production,
customer support, research and development, information technology, employees engaged in marketing and sales, billing and collection,
as well as transcriptionists, Florida technologists, field service technicians and individuals in various administrative positions.
A significant number of employees were employed at the MRI facilities managed or owned by HMCA, primarily in administrative positions.
FONAR
CORPORATION AND SUBSIDIARIES
ITEM
1A. RISK FACTORS
An
investment in our securities 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 HMCA. 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 and reducing our operating
expenses, thereby maintaining profitability in this business segment. There is, however,
no assurance that we will be able to continue to do so.
|
|
2.
|
Demand
for MRI Scanners. The reduced reimbursement rates also affects our sales of MRI scanners
negatively. With lower revenue projections, prospective customers would demand lower
prices for scanners. Although the reduced reimbursements may not affect foreign demand,
a lower number of sales in the aggregate could reduce economies of scale and consequently,
profit margins.
|
|
3.
|
Manufacturing
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.
|
|
4.
|
Dependence
on Referrals. HMCA derives substantially all of its revenue, directly or indirectly,
from fees charged for the diagnostic imaging services performed at the facilities. We
depend on referrals of patients from unaffiliated physicians and other third parties
to the facilities we manage or own for the services we perform. If these physicians and
other third parties were to reduce the number of patients they refer or discontinue referring
patients, scan volumes could decrease, which would reduce our net revenue and operating
margins.
|
|
5.
|
Pressure
to Control Healthcare Costs. One of the principal objectives of health maintenance organizations
and preferred provider organizations is to control the cost of healthcare services. Healthcare
providers participating in managed care plans may be required to refer diagnostic imaging
tests to certain providers depending on the plan in which a covered patient is enrolled.
In addition, managed care contracting has become very competitive. The expansion of health
maintenance organizations, preferred provider organizations and other managed care organizations
within New York or Florida could have a negative impact on the utilization and pricing
of services performed at the facilities HMCA manages or owns to the extent these organizations
exert control over patients’ access to diagnostic imaging services, selections
of the provider of such services and reimbursement rates for those services.
|
|
6.
|
Scanning
Facility Competition. The market for diagnostic imaging services is highly competitive.
The facilities we manage or own compete for patients on the basis of reputation, location
and the quality of diagnostic imaging services. Groups of radiologists, established hospitals,
clinics and other independent organizations that own and operate imaging equipment are
the principal competitors.
|
FONAR
CORPORATION AND SUBSIDIARIES
|
7.
|
Eligibility
Changes to Insurance Programs. Due to potential decreased availability of healthcare
through private employers, the number of patients who are uninsured or participate in
governmental programs may increase. Healthcare reform legislation will increase the participation
of individuals in the Medicaid program in states that elect to participate in the expanded
Medicaid coverage. A shift in payor mix from managed care and other private payors to
government payors or an increase in the number of uninsured patients may result in a
reduction in the rates of reimbursement or an increase in uncollectible receivables or
uncompensated care, with a corresponding decrease in net revenue. Policies now being
offered under various insurance plans are expected to reduce demand for MRI scans as
they become less affordable. Changes in the eligibility requirements for governmental
programs such as the Medicaid program and state decisions on whether to participate in
the expansion of such programs also could increase the number of patients who participate
in such programs and the number of uninsured patients. Even for those patients who remain
in private insurance plans, changes to those plans could increase patient financial responsibility,
resulting in a greater risk of uncollectible receivables. These factors and events could
have a material adverse effect on our business, financial condition, and results of operations.
|
8,
Proposed Reduction of New York Workers’ Compensation Benefits. A proposal was published by the New York State Workers’
Compensation Board (“NYSWCB”) in 2014 to change the fee schedule for Workers’ Compensation payments. Initially,
the fees proposed would be set at approximately 130% of the Medicare fees. This would reduce fees for the most commonly billed
radiology procedures by approximately 60%. Further, since the Workers’ Compensation fees are coupled with the New York State
No Fault Program, radiology providers would suffer similar reductions for No-Fault fees. We and the HMCA clients wrote to the
NYSWCB to argue against this proposal, and other affected parties commented as well. Since then, no further action has been taken
by the NYSWCB to advance the 2014 proposal. On the contrary, the NYSWCB has adopted fee increases. There can be no assurance,
however, that the NYSWCB will not modify their present position, or if they elect to do so, the extent to which the NYSWCB would
do so. A significant reduction in Workers’ Compensation and No-Fault fees could have a material adverse impact on our business.
9.
Possible changes in Florida Insurance Law. In early 2019, two senate bills and one house bill in Florida were introduced, all
of them calling for the repeal of PIP and replacing PIP with $25,000 Bodily Injury Coverage and Property Damage Liability Coverage.
Another Florida senate bill was introduced that would preserve PIP but dramatically cut reimbursement rates. None of the proposed
bills ever made it onto the 2019 legislative agenda, but similar efforts in the future might be successful. Currently, drivers
and passengers get car damages and PIP, paid for up to $10,000, no matter who is at fault in an accident. Drivers have to pay
an additional cost to insurance companies to pay for bodily injuries, which covers them if they are at fault. While PIP is required,
coverage for bodily injury is not. The insurance industry is pushing to scrap PIP and instead mandate all motorists to carry coverage
that includes a minimum of $25,000 bodily injury if they are at fault. Eliminating PIP would mean that the $10,000 drivers now
get paid toward medical costs through their insurers might not be there for them to pay for injured drivers. Importantly, payments
would be reduced by approximately 60% due to claims being paid at commercial rates or through legal settlements instead of at
the presently prevailing PIP fee schedule. This would negatively impact our seven diagnostic imaging facilities (both those we
own and those we manage) with more unpaid bills, lower reimbursement rates and elongated waiting times.
FONAR
CORPORATION AND SUBSIDIARIES
10.
Federal and state privacy and information security laws. We must comply with numerous federal and state laws and regulations governing
the collection, dissemination, access, use, security and privacy of PHI, including HIPAA and its implementing privacy and security
regulations, as amended by the federal HITECH Act and collectively referred to as HIPAA. If we fail to comply with applicable
privacy and security laws, regulations and standards, properly maintain the integrity of our data, protect our proprietary rights
to our systems, or defend against cybersecurity attacks, our business, reputation, results of operations, financial position and
cash flows could be materially and adversely affected.
Information
security risks have significantly increased in recent years in part because of the proliferation of new technologies, the use
of the internet and telecommunications technologies to conduct our operations, and the increased sophistication and activities
of organized crime, hackers, terrorists and other external parties, including foreign state agents. Our operations rely on the
secure processing, transmission and storage of confidential, proprietary and other information in our computer systems and networks.
11.
Changes in Domestic and Worldwide Economic Conditions. We are subject to risk arising from adverse changes in general domestic
and global economic conditions, including recession or economic slowdown and disruption of credit markets. Turbulence and uncertainty
in the United States and international markets and economies may adversely affect our liquidity, financial condition, revenues,
profitability and business operations generally.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
Fonar
and HMCA currently lease approximately 78,000 square feet of office and plant space at its principal offices in Melville, New
York. The term of the lease runs through November, 2026. Management believes that the premises will be adequate for its current
needs. HMCA also maintains office space for the Facilities owned by its subsidiaries in Florida and for its clients at the clients’
sites in New York and Florida under leases having various terms. HMCA owns the building for the client’s premises in Tallahassee,
Florida. The Company received approval from the Suffolk County IDA on February 29, 2016 of a 50% property tax abatement, valued
at $440,000, over a 10 year period commencing January, 2017.
ITEM
3. LEGAL PROCEEDINGS
Matt
Malek Madison v. Fonar Corporation, United States District Court, Northern District of California, was commenced by plaintiff
on August 27, 2007 to recover a down payment for a scanner in the amount of $300,000, with interest. The plaintiff sought costs
of suit and attorney’s fees as well. Fonar answered the complaint and sued the plaintiff for breach of contract in the amount
of $450,000. The case went to trial before a judge, and judgment was awarded to the plaintiff. Fonar appealed the trial court’s
decision, but on January 31, 2012, the U.S. Court of Appeals for the 9th Circuit affirmed the lower court’s decision awarding
the plaintiff the $300,000 deposit with prejudgment interest from July 1, 2006. After no action being taken by the plaintiff for
several years, on June 30, 2016 Fonar received a letter from plaintiff’s attorney seeking payment of the judgment. The plaintiff
has agreed to accept the sum of $300,000 in full satisfaction of the judgment, which amount was paid in October, 2016.
ITEM
4. MINE SAFETY DISCLOSURES. Not Applicable
FONAR
CORPORATION AND SUBSIDIARIES
PART
II
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our
Common Stock is traded in the Nasdaq SmallCap market under the National Association of Securities Dealers Automated Quotation
System, also referred to as "NASDAQ", under the symbol FONR. The following table sets forth the high and low trades
reported in NASDAQ System for the periods shown.
Fiscal
Quarter
|
|
High
|
|
Low
|
January
|
|
-
|
|
March
|
|
|
|
2016
|
|
|
$
|
18.27
|
|
|
$
|
12.76
|
|
April
|
|
-
|
|
June
|
|
|
|
2016
|
|
|
$
|
21.95
|
|
|
$
|
13.65
|
|
July
|
|
-
|
|
September
|
|
|
|
2016
|
|
|
$
|
23.90
|
|
|
$
|
19.10
|
|
October
|
|
-
|
|
December
|
|
|
|
2016
|
|
|
$
|
21.01
|
|
|
$
|
15.70
|
|
January
|
|
-
|
|
March
|
|
|
|
2017
|
|
|
$
|
20.85
|
|
|
$
|
17.30
|
|
Apri
|
|
-
|
|
June
|
|
|
|
2017
|
|
|
$
|
29.40
|
|
|
$
|
17.20
|
|
July
|
|
-
|
|
September
|
|
|
|
2017
|
|
|
$
|
31.90
|
|
|
$
|
25.31
|
|
October
|
|
-
|
|
December
|
|
|
|
2017
|
|
|
$
|
33.75
|
|
|
$
|
21.10
|
|
January
|
|
-
|
|
March
|
|
|
|
2018
|
|
|
$
|
29.95
|
|
|
$
|
22.15
|
|
April
|
|
-
|
|
June
|
|
|
|
2018
|
|
|
$
|
30.10
|
|
|
$
|
25.31
|
|
July
|
|
-
|
|
September
|
|
|
|
2018
|
|
|
$
|
28.80
|
|
|
$
|
23.70
|
|
October
|
|
-
|
|
December
|
|
|
|
2018
|
|
|
$
|
25.77
|
|
|
$
|
19.63
|
|
January
|
|
-
|
|
March
|
|
|
|
2019
|
|
|
$
|
23.85
|
|
|
$
|
20.01
|
|
March
|
|
-
|
|
June
|
|
|
|
2019
|
|
|
$
|
23.00
|
|
|
$
|
18.85
|
|
July
|
|
-
|
|
September
17
|
|
|
|
2019
|
|
|
$
|
25.25
|
|
|
$
|
20.44
|
|
On
September 19, 2019, we had approximately 1,016 stockholders of record of our Common Stock, 8 stockholders of record of our Class
B Common Stock, 3 stockholders of record of our Class C Common Stock and 1,131 stockholders of record of our Class A Non-voting
Preferred Stock.
At
the present time, the only class of our securities for which there is a market is the Common Stock.
We
currently have a policy of retaining earnings to finance the development and expansion of our business. We expect to continue
this policy for the foreseeable future.
FONAR
CORPORATION AND SUBSIDIARIES
Performance
Graph
The
following graph compares the annual change in the Company’s cumulative total shareholder return on its Common Stock during
a period commencing on June 30, 2015 and ending on June 30, 2019 (as measured by dividing (i) the sum of (A) the cumulative amount
of dividends for the measurement period, assuming dividend reinvestment and (B) the difference between the Company’s share
price at the end and the beginning of the measurement period; by (ii) the share price at the beginning of the measurement period)
with the cumulative total return of each of: (a) the CRSP Composite Total Return Index for Nasdaq (“Nasdaq”)(XCMP);
(b) the CRSP Total Return Index for Nasdaq Medical Equipment Manufacturers (“Nas-MED”)(NQUSB4535T); and (c) the CRSP
Total Return Index for Nasdaq Healthcare companies (“Nas-Hea.”)(NQUSB4533T) during such period, assuming a $100 investment
on June 30, 2015. The stock price performance on the graph below is not necessarily indicative of future price performance.
Relative
Dollar Values
|
|
6/30/15
|
|
6/30/16
|
|
6/30/17
|
|
6/29/18
|
|
6/28/19
|
Fonar
Common (FONR)
|
|
$
|
100.00
|
|
|
$
|
192.44
|
|
|
$
|
262.29
|
|
|
$
|
250.95
|
|
|
$
|
203.31
|
|
NASDAQ
(XCMP)
|
|
$
|
100.00
|
|
|
$
|
98.32
|
|
|
$
|
126.14
|
|
|
$
|
155.91
|
|
|
$
|
168.04
|
|
NAS-Med
(NQUSB4535T)
|
|
$
|
100.00
|
|
|
$
|
116.29
|
|
|
$
|
138.01
|
|
|
$
|
159.40
|
|
|
$
|
190.43
|
|
NAS-Hea
(NQUSB4533T)
|
|
$
|
100.00
|
|
|
$
|
94.61
|
|
|
$
|
113.45
|
|
|
$
|
140.46
|
|
|
$
|
144.59
|
|
Source:
Nasdaq.net
FONAR
CORPORATION AND SUBSIDIARIES
ITEM
6. SELECTED FINANCIAL DATA.
The
following selected consolidated financial data has been extracted from our consolidated financial statements for the five years
ended June 30, 2019. This consolidated selected financial data should be read in conjunction with our consolidated financial statements
and the related notes included in Item 8 of this form.
As
of and For the Periods
Ended June 30,
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
STATEMENT
OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
87,192,887
|
|
|
$
|
81,515,994
|
|
|
$
|
78,036,586
|
|
|
$
|
73,368,210
|
|
|
$
|
69,050,996
|
|
Cost
of revenues
|
|
$
|
43,984,593
|
|
|
$
|
41,950,770
|
|
|
$
|
38,052,425
|
|
|
$
|
38,870,898
|
|
|
$
|
38,404,281
|
|
Research
and Development Expenses
|
|
$
|
1,812,173
|
|
|
$
|
1,755,747
|
|
|
$
|
1,480,670
|
|
|
$
|
1,631,846
|
|
|
$
|
1,812,398
|
|
Net
Income
|
|
$
|
20,513,674
|
|
|
$
|
25,452,185
|
|
|
$
|
23,678,798
|
|
|
$
|
18,795,517
|
|
|
$
|
15,430,383
|
|
Basic
Net Income per common share
|
|
$
|
2.26
|
|
|
$
|
3.16
|
|
|
$
|
2.98
|
|
|
$
|
2.43
|
|
|
$
|
2.00
|
|
Diluted
Net Income per common share
|
|
$
|
2.22
|
|
|
$
|
3.10
|
|
|
$
|
2.92
|
|
|
$
|
2.38
|
|
|
$
|
1.95
|
|
Basic
weighted average number of shares outstanding
|
|
|
6,354,103
|
|
|
|
6,287,510
|
|
|
|
6,161,599
|
|
|
|
6,050,893
|
|
|
|
6,050,632
|
|
Diluted
Weighted average number of shares outstanding
|
|
|
6,481,607
|
|
|
|
6,415,014
|
|
|
|
6,289,103
|
|
|
|
6,178,397
|
|
|
|
6,178,136
|
|
BALANCE
SHEET DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital
|
|
$
|
70,998,783
|
|
|
$
|
52,497,840
|
|
|
$
|
39,177,703
|
|
|
$
|
24,946,326
|
|
|
$
|
24,828,161
|
|
Total
Assets
|
|
$
|
133,560,210
|
|
|
$
|
118,310,945
|
|
|
$
|
98,762,566
|
|
|
$
|
84,887,606
|
|
|
$
|
76,492,077
|
|
Long-term
debt and obligations under capital leases
|
|
$
|
273,112
|
|
|
$
|
306,035
|
|
|
$
|
336,761
|
|
|
$
|
2,059,236
|
|
|
$
|
5,699,302
|
|
Stockholder’s
equity
|
|
$
|
118,112,103
|
|
|
$
|
102,234,471
|
|
|
$
|
82,909,953
|
|
|
$
|
60,776,307
|
|
|
$
|
50,783,513
|
|
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
INTRODUCTION.
Fonar
was formed in 1978 to engage in the business of designing, manufacturing and selling MRI scanners. HMCA, a subsidiary of Fonar,
provides management services to diagnostic imaging facilities.
Fonar's
principal MRI product is its Stand-Up® MRI (also called Upright® MRI) scanner. The Stand-Up® MRI allows patients to
be scanned for the first time under weight-bearing conditions. The Stand-Up® MRI is the only MRI capable of producing images
in the weight-bearing state.
At
0.6 Tesla field strength, the Upright® MRI is among the highest field open MRI scanners in the industry, offering non-claustrophobic
MRI together with high-field image quality. Fonar’s open MRI scanners were the first high field strength open MRI scanners
in the industry.
FONAR
CORPORATION AND SUBSIDIARIES
HMCA
generates revenues from providing comprehensive management services, including development, administration, accounting, billing
and collection services, together with office space, medical equipment, supplies and non-medical personnel to its clients. Revenues
are in the form of fees which are earned under contracts with HMCA’s clients except for its three Florida subsidiaries which
engage in the practice of medicine, and bill and collect fees from patients, insurers and other third party payors directly.
For
the fiscal years ended June 30, 2019 and June 30, 2018 10.7% and 11.0%, respectively, of total revenues were derived from contracts
with facilities owned by Dr. Raymond V. Damadian, the President and principal stockholder of Fonar. The agreements with these
MRI facilities are for one-year terms which renew automatically on an annual basis, unless terminated. The fees for these sites,
which are located in Florida, are flat monthly fees.
For
services for which Medicare is billed directly, the sites are paid under the Medicare Physician Fee Schedule, which is updated
on an annual basis. Under the Medicare statutory formula, payments under the Physician Fee Schedule would have decreased for the
past several years if Congress failed to intervene.
Many
private payors use the Medicare Physician Fee Schedule to determine their own reimbursement rates.
While
Congress has repeatedly intervened to mitigate the negative reimbursement impact associated with the formula, there is no guarantee
that Congress will continue to do so in the future. Moreover, the existing methodology may result in significant yearly fluctuations
in the Medicare Physician Fee Schedule amounts, which may be unrelated to changes in the actual costs of providing physician services.
The
2013 Medicare Physician Fee Schedule expands a reduction in reimbursement for multiple images. Payment will be made at 75% for
the professional component and 50% for the technical component of the second and subsequent scans furnished by the same physician,
to the same patient, in the same session, on the same day.
In
addition, effective January 1, 2014, Medicare made significant reductions in the MRI fee schedule, by nearly 40% for some MRI
studies.
Critical
Accounting Policies
Our
discussion and analysis of financial condition and results of operations are based on our consolidated financial statements that
were prepared in accordance with U.S. generally accepted accounting principles, or GAAP. Management makes estimates
and assumptions when preparing financial statements. These estimates and assumptions affect various matters, including:
our
reported amounts of assets and liabilities in our consolidated balance sheets at the dates of the financial statements
our
disclosure of contingent assets and liabilities at the dates of the financial statements; and
our
reported amounts of net revenue and expenses in our consolidated statements of operations during the reporting periods
These
estimates involve judgments with respect to numerous factors that are difficult to predict and are beyond management’s control. As
a result, actual amounts could differ materially from these estimates.
FONAR
CORPORATION AND SUBSIDIARIES
The
Securities and Exchange Commission defines critical accounting estimates as those that are both most important to the portrayal
of a company’s financial condition and results of operations and require management’s most difficult, subjective or
complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and
may change in subsequent periods. In the notes to our consolidated financial statements, we discuss our significant accounting
policies.
We
believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation
of our consolidated financial statements. We recognize revenue and related costs of revenue from sales contracts for our MRI scanners
and major upgrades, under the percentage-of-completion method. Under this method, we recognize revenue and related costs of revenue,
as each sub-assembly is completed. Amounts received in advance of our commencement of production are recorded as customer advances.
We
continuously, qualitatively and quantitatively evaluate the realizability (including both positive and negative evidence) of the
net deferred tax assets and assess the valuation allowance periodically. Our evaluation considers the financial condition of the
Company and both the business conditions and regulatory environment of the industry. If future taxable income or other factors
are not consistent with our expectations, an adjustment to our allowance for net deferred tax assets may be required. For
net deferred tax assets we consider estimates of future taxable income, including tax planning strategies, in determining whether
our net deferred tax assets are more likely than not to be realized. Our ability to project future taxable income may be significantly
affected by our ability to determine the impact of regulatory changes which could adversely affect our future profits. As a result,
the benefits of our net operating loss carry forwards could expire before they are utilized.
At
June 30, 2018, the net deferred tax asset was valued at $22,450,000. At June 30, 2019, the net deferred tax asset was valued at
$20,694,480.
We
depreciate our long-lived assets over their estimated economic useful lives with the exception of leasehold improvements where
we use the shorter of the assets useful lives or the lease term of the facility for which these assets are associated.
The
Company provides for medical receivables that could become uncollectible by establishing
an allowance for doubtful accounts in order to adjust medical receivables to estimated
net realizable value. In evaluating the collectability of medical receivables, the Company
considers a number of factors, including the age of the account, historical collection
experiences, payor type, current economic conditions and other relevant factors. There
are various factors that impact collection trends, such as payor mix, changes in the
economy, increase burden on copayments to be made by patients with insurance and business
practices related to collection efforts. These factors continuously change and can have
an impact on collection trends and the estimation process.
We
amortize our intangible assets, including patents, and capitalized software development costs, over the shorter of the contractual/legal
life or the estimated economic life. Our amortization life for patents and capitalized software development costs is 15 to 17
years and 5 years, respectively. Our amortization of the non-competition agreements entered into with certain individuals in connection
with the HDM transaction are depreciated over seven years, and customer relationships are amortized over 20 years.
FONAR
CORPORATION AND SUBSIDIARIES
Goodwill
is recorded as a result of business combinations. Management evaluates goodwill, at a minimum, on an annual basis and whenever
events and changes in circumstances suggest that the carrying amount may not be recoverable. Impairment of goodwill is tested
by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The fair
value of a reporting unit is estimated using a combination of the income or discounted cash flows approach and the market approach,
which uses comparable market data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered
impaired and a second step is performed to measure the amount of impairment loss, if any. Based on our test for goodwill impairment,
we noted no impairment related to goodwill. However, if estimates or the related assumptions change in the future, we may be required
to record impairment charges to reduce the carrying amount of goodwill.
We
periodically assess the recoverability of long-lived assets, including property and equipment, intangibles and management agreements,
when there are indications of potential impairment, based on estimates of undiscounted future cash flows. The amount of impairment
is calculated by comparing anticipated discounted future cash flows with the carrying value of the related asset. In performing
this analysis, management considers such factors as current results, trends, and future prospects, in addition to other economic
factors.
RESULTS
OF OPERATIONS. FISCAL 2019 COMPARED TO FISCAL 2018
In
fiscal 2019, we recognized net income of $20.5 million on revenues of $87.2 million, as compared to net income of $25.5 million
on revenues of $81.5 million for fiscal 2018. This represents an increase in revenues of 6.5%. Patient fee revenue net of contractual
allowances increased by 13.8%. Total costs and expenses increased by 5.2%. Our consolidated operating results improved by $2.4
million to an operating income of $22.1 million for fiscal 2019 as compared to operating income of $19.7 million for fiscal 2018.
Discussion
of Operating Results of Medical Equipment Segment
Fiscal
2019 Compared to Fiscal 2018
Revenues
attributable to our medical equipment segment increased by 1.8% to $10.0 million in fiscal 2019 from $9.8 million in fiscal 2018,
with product sales revenues increasing by 190.6% from $603,000 in fiscal 2018 to $1.8 million in fiscal 2019. Service revenue
decreased from $9.2 million in fiscal 2018 to $8.3 million in fiscal 2019.
The
Upright® MRI is unique in that it permits MRI scans to be performed on patients upright
in the weight-bearing state and in multiple positions that correlate with symptoms.
Product
sales to unrelated parties increased by 190.6% in fiscal 2019 from $603,000 in fiscal 2018 to $1.8 million in fiscal 2019. There
were no product sales to related parties in fiscal 2019 or 2018.
We
believe that one of our principal challenges in achieving greater market penetration is attributable to the better name recognition
and larger sales forces of our larger competitors such as General Electric, Siemens, Hitachi, Philips and Toshiba and the ability
of some of our competitors to offer attractive financing terms through affiliates, such as G.E. Capital.
In
addition, lower reimbursement rates have reduced the demand for our MRI products, resulting in lower sales volumes. As a result
of fewer sales, service revenues have decreased since as older scanners are taken out of service, there are fewer new scanners
available to sign service contracts.
FONAR
CORPORATION AND SUBSIDIARIES
The
operating loss for the medical equipment segment increased from an operating loss of $3.0 million in fiscal 2018 to an operating
loss of $3.4 million in fiscal 2019. The losses are attributable most significantly to the fact that costs increased by a greater
amount than revenues.
We
recognized revenues of $779,000 from the sale of our Upright® MRI scanners in fiscal 2019, while in fiscal 2018, we recognized
revenues of $43,000 from the sale of Upright® MRI scanners.
Research
and development expenses, increased to $1.8 million in fiscal 2019 from $1.75 million in fiscal 2018. Our expenses for fiscal
2019 represented continued research and development of Fonar’s scanners, Fonar’s new hardware and software product,
Sympulse® and new surface coils to be used with the Upright® MRI scanner.
Discussion
of Operating Results of Physician and Diagnostic Services Management Segment.
Fiscal
2019 Compared to Fiscal 2018
Revenues
attributable to the Company's physician and diagnostic services management segment, HMCA, increased by 7.7% to $77.2 million in
fiscal 2019 from $71.7 million in fiscal 2018. The increase in revenues was due to $2.9 million of patient fees (net of contractual
allowances and discounts less provision for bad debts) from patient and third party payors recognized by four of the facilities
in Florida. One of these locations added additional medical equipment which allowed it to increase volume coupled with an increase
in management and other fees of $2.2 million.
Cost
of revenues as a percentage of the related revenues for our physician and diagnostic services management segment increased from
$37.9 million or 52.9% of related revenues for the year ended June 30, 2018 to $40.2 million, or 52.0% of related revenues for
the year ended June 30, 2019. The revenues increased more than the costs relating to these revenues.
Operating
results of this segment increased from operating income of $22.7 million in fiscal 2018 to operating income of $25.6 million in
fiscal 2019. We believe that our efforts to expand and improve the operation of our physician and diagnostic services management
segment are directly responsible for the profitability of this segment and our company as a whole.
Discussion
of Certain Consolidated Results of Operations
Fiscal
2019 Compared to Fiscal 2018
Interest
and investment income increased in 2019 compared to 2018. We recognized interest income of $482,573 in 2019 as compared to $262,569
in fiscal 2018, representing an increase of 83.8%.
Interest
expense of $98,636 was recognized in fiscal 2019, as compared to interest expense of $160,074 in fiscal 2018. This was due to
additional principal payments being made to retire our debt.
While
revenue increased by 7.0%, selling, general and administrative expenses increased by 6.2% to $19.3 million in fiscal 2019 from
$18.1 million in fiscal 2018.
The
compensatory element of stock issuances increased from $1,954,744 in fiscal 2018 to $1,990,380 in fiscal 2019.
FONAR
CORPORATION AND SUBSIDIARIES
Revenue
from service and repair fees decreased from $9.2 million in fiscal 2018 to $8.3 million in fiscal 2019.
Continuing
our tradition as the originator of MRI, we remain committed to maintaining our position as the leading innovator of the industry
through investing in research and development. In fiscal 2019 we continued our investment in the development of our new MRI scanners,
together with software and upgrades, with an investment of $1,812,347 in research and development, none of which was capitalized,
as compared to $1,755,747, none of which was capitalized, in fiscal 2018. The research and development expenditures were approximately
18.1% of revenues attributable to our medical equipment segment and 2.1% of total revenues in 2019, and 17.8% of medical equipment
segment revenues and 2.1% of total revenues in fiscal 2018. This represented a 3.2% increase in research and development expenditures
in fiscal 2019 as compared to fiscal 2018.
For
the physician and diagnostic services management segment, HMCA, revenues increased, from $71.7 million in fiscal 2018 to $77.2
million in fiscal 2019. This is primarily attributable to an increase in patient scans resulting from our marketing efforts.
For
the fiscal year 2019 the Company recorded an income tax expense of $2.0 million compared with an income tax benefit of $5.5 million
for 2018. Net income for the year ended June 30, 2018, reflects income tax benefits associated with the changes to the net deferred
income tax assets of $4.9 million and also the benefits associated with the AMT Carryforward Tax Credit of $1.2 million, available
as a cash refund. The Company has recorded a net deferred tax asset of $20.6 million as of June 30, 2019, primarily relating to
the tax benefits from the net operating loss carry forwards available to offset future taxable income. The utilization of these
tax benefits is dependent on the Company generating future taxable income and other factors. A partial valuation allowance will
be maintained until evidence exists to support that it is no longer needed, (principally related to research and development credits).
Discussion
of Operating Results of Medical Equipment Segment
Fiscal
2018 Compared to Fiscal 2017
In
fiscal 2018, we recognized net income of $25.5 million on revenues of $81.5 million, as compared to net income of $23.7 million
on revenues of $78.0 million for fiscal 2017. Our consolidated operating results improved by $600,000 to an operating income of
$19.7 million for fiscal 2018 as compared to an operating income of $19.1 million for fiscal 2017.
Revenues
attributable to our medical equipment segment decreased by 12.3% to $9.8 million in fiscal 2018 from $11.2 million in fiscal 2017,
with product sales revenues decreasing by 61.7% from $1.6 million in fiscal 2017 to $603,000 in fiscal 2018. Service revenue decreased
from $9.6 million in fiscal 2017 to $9.2 million in fiscal 2018.
Product
sales to unrelated parties decreased by 61.7% in fiscal 2018 from $1.6 million in fiscal 2017 to $603,000 in fiscal 2018. There
were no product sales to related parties in fiscal 2018 or 2017.
FONAR
CORPORATION AND SUBSIDIARIES
The
operating loss for the medical equipment segment increased from a loss of $2.3 million in fiscal 2017 to an operating loss of
$3.0 million in fiscal 2018. This decrease was attributable most significantly to the fact that costs increased and the revenues
decreased.
We
recognized revenues of $43,000 from the sale of our Upright® MRI scanners in fiscal 2018, while in fiscal 2017, we recognized
revenues of $714,000 from the sale of Upright® MRI scanners.
Research
and development expenses, increased to $1.8 million in fiscal 2018 from $1.5 million in fiscal 2017. Our research and development
expenses represented continued research and development of our scanners, our new hardware and software product, Sympulse®
and new surface coils to be used with the Upright® MRI scanner.
Discussion
of Operating Results of Physician and Diagnostic Services Management Segment.
Fiscal
2018 Compared to Fiscal 2017
Revenues
attributable to the Company's physician and diagnostic services management segment, HMCA, increased by 7.3% to $71.7 million in
fiscal 2018 from $66.8 million in fiscal 2017. The increase in revenues was primarily due to including $1.0 million of patient
fees (net of contractual allowances and discounts less provision for bad debts) from patient and third party payors recognized
by four of the facilities in Florida. One of these locations added additional medical equipment which allowed it to increase volume
coupled with an increase in management and other fees of $5.0 million.
Cost
of revenues as a percentage of the related revenues for our physician and diagnostic services management segment increased from
$34.1 million or 51.0% of related revenues for the year ended June 30, 2017 to $37.9 million, or 52.0% of related revenues for
the year ended June 30, 2018.
Operating
results of this segment increased from operating income of $21.4 million in fiscal 2017 to operating income of $22.7 million in
fiscal 2018. We believe that our efforts to expand and improve the operation of our physician and diagnostic services management
segment are directly responsible for the profitability of this segment and our company as a whole.
Discussion
of Certain Consolidated Results of Operations
Fiscal
2018 Compared to Fiscal 2017
Interest
and investment income increased in 2018 compared to 2017. We recognized interest income of $262,569 in 2018 as compared to $193,141
in fiscal 2017, representing an increase of 35.9%.
Interest
expense of $160,074 was recognized in fiscal 2018, as compared to interest expense recovery $23,299 in fiscal 2017.
While
revenue increased by 4.5%, selling, general and administrative expenses decreased by 6.6% to $18.1 million in fiscal 2018 from
$19.4 million in fiscal 2017.
The
compensatory element of stock issuances decreased from approximately $2,397,276 in fiscal 2017 to $1,954,744 in fiscal 2018, reflecting
a decrease in Fonar’s use of its stock bonus plans to pay employees and others.
FONAR
CORPORATION AND SUBSIDIARIES
.
A
recovery of bad debts of $614,680 in fiscal 2018 as compared to a provision of bad debts of $477,577 in fiscal 2017, reflected
a increase in reserves for certain indebtedness in fiscal 2018 by our physician and diagnostic services management segment. In
addition in fiscal 2018, the Company recorded a provision for bad debts for patient fee revenue of $17.9 million for the four
MRI facilities in Florida which bill patients and third party payors directly. The three Florida sites managed by HMCA jointly
and severally guaranteed the payment of their management fees to HMCA, further securing HMCA’s management fee receivables.
For
the fiscal year 2018 the Company recorded an income tax benefit of $5.7 million compared with $4.3 million for 2017. The Company
recorded a net deferred tax asset of $22.5 million as of June 30, 2018.
Revenue
from service and repair fees decreased from $9.6 million in fiscal 2017 to $9.2 million in fiscal 2018.
In
fiscal 2018 we continued our investment in the development of our new MRI scanners, together with software and upgrades, with
an investment of $1,755,747 in research and development, none of which was capitalized, as compared to $1,480,670, none of which
was capitalized, in fiscal 2017. The research and development expenditures were approximately 17.8% of revenues attributable to
our medical equipment segment and 2.1% of total revenues in 2018, and 13.2% of medical equipment segment revenues and 1.9% of
total revenues in fiscal 2017. This represented a 18.6% increase in research and development expenditures in fiscal 2018 as compared
to fiscal 2017.
We
have been taking steps to improve HMCA revenues by our marketing efforts, which focus on the unique capability of our Upright®
MRI scanners to scan patients in different positions. We have also been increasing the number of health insurance plans in which
our clients participate.
Our
management fees are dependent on collection by our clients of fees from reimbursements from Medicare, Medicaid, private insurance,
no fault and workers’ compensation carriers, self–pay and other third-party payors. The health care industry is experiencing
the effects of the federal and state governments’ trend toward cost containment, as governments and other third-party payors
seek to impose lower reimbursement and utilization rates and negotiate reduced payment schedules with providers. The cost-containment
measures, consolidated with the increasing influence of managed-care payors and competition for patients, have resulted in reduced
rates of reimbursement for services provided by our clients from time to time. Our future revenues and results of operations may
be adversely impacted by future reductions in reimbursement rates.
Certain
third-party payors have proposed and implemented changes in the methods and rates of reimbursement that have had the effect of
substantially decreasing reimbursement for diagnostic imaging services that HMCA’s clients provide. To the extent reimbursement
from third-party payors is reduced, it will likely have an adverse impact on the rates they pay us, as they would need to reduce
the management fees they pay HMCA to offset such decreased reimbursement rates. Furthermore, many commercial health care insurance
arrangements are changing, so that individuals bear greater financial responsibility through high deductible plans, co-insurance
and higher co-payments, which may result in patients delaying or foregoing medical procedures. More frequently, however, patients
are scanned and we experience difficulty in collecting deductibles and co-payments. We expect that any further changes to the
rates or methods of reimbursement for services, which reduce the reimbursement per scan of our clients may partially offset the
increases in scan volume we are working to achieve for our clients, and indirectly will result in a decline in our revenues.
FONAR
CORPORATION AND SUBSIDIARIES
On
March 23, 2010, President Obama signed into law healthcare reform legislation in the form of the Patient Protection and Affordable
Care Act, or PPACA. Healthcare cost containment, reductions of Medicare and other payments, and increased regulation will present
additional challenges for healthcare providers. We are unable to predict the full impact of PPACA, or the possible amendment or
repeal and replacement of PPACA. It may, however, adversely affect the revenues or the profitability of either or both our medical
equipment segment and physician and diagnostic services management segment.
In
addition, the use of radiology benefit managers, or RBM’s has increased in recent years. It is common practice for health
insurance carriers to contract with RBMs to manage utilization of diagnostic imaging procedures for their insureds. In many cases,
this leads to lower utilization of imaging procedures based on a determination of medical necessity. The efficacy of RBMs is still
a highly controversial topic. We cannot predict whether the healthcare legislation or the use of RBMs will negatively impact our
business, but it is possible that our financial position and results of operations could be negatively affected.
LIQUIDITY
AND CAPITAL RESOURCES
Cash,
and cash equivalents and short term investments increased by 47.6% from $19.6 million at June 30, 2018 to $29.0 million at June
30, 2019.
Cash
provided by operating activities for fiscal 2019 approximated $19.4 million. Cash provided by operating activities was attributable
to the net income of $20.5 million, depreciation and amortization of $3.8 million, deferred income tax expense benefit of $1.8
million which was offset by the increase in accounts, medical and management fee receivables of $6.1 million.
Cash
used in investing activities for fiscal 2019 approximated $18.6 million. The use of cash from investing activities was attributable
to purchases of property and equipment of $3.4 million, short term investments of $15.1 million and costs of patents of $128,000.
Cash
used by financing activities for fiscal 2019 approximated $6.6 million. The principal uses of cash in financing activities included
the repayment of loans and capital lease obligations of $30,000, and distributions to non-controlling interests of $6.6 million.
Total
liabilities decreased by 3.9% during fiscal 2019, from approximately $16.1 million at June 30, 2018 to approximately $15.4 million
at June 30, 2019.
As
at June 30, 2019, our obligations included approximately $2.7 million in various state sales taxes, inclusive of penalties and
interest. The Company is in the process of negotiating settlements of these obligations.
At
June 30, 2019, we had working capital of approximately $71.0 million as compared to working capital of $52.5 million at June 30,
2018, and stockholders’ equity of $118.1 million at June 30, 2019 as compared to stockholders’ equity of $102.2 million
at June 30, 2018. For the year ended June 30, 2019, we realized a net income of $20.5 million.
Our
principal sources of liquidity are derived from revenues.
FONAR
CORPORATION AND SUBSIDIARIES
Our
business plan includes a program for manufacturing and selling our Upright® MRI scanners. In addition, we are enhancing our
revenue by participating in the physician and diagnostic services management business through our subsidiary, HMCA and have upgraded
the facilities which it manages, most significantly by the replacement of the original MRI scanners with new Upright® MRI
scanners. Presently, 24 of the 25 MRI facilities managed or owned by HMCA, are equipped with Upright® MRI scanners. We have
also intensified our marketing activities through the hiring of additional marketers for HMCA’s clients.
Our
business plan also calls for a continuing emphasis on providing our customers with enhanced equipment service and maintenance
capabilities and delivering state-of-the-art, innovative and high quality equipment upgrades at competitive prices. Fees for on-going
service and maintenance from our installed base of scanners were $9.2 million for the year ended June 30, 2018 and $8.3 million
for the year ended June 30, 2019.
In
order to promote profitability and to reduce demands on our cash and other liquid reserves, we maintain an aggressive program
of cost cutting. Previously, these measures included consolidating HMCA’s office space with Fonar’s office space and
reducing the size of our workforce, compensation and benefits. We continue to reduce and contain expenses across the board. The
cost reductions are intended to enable us to withstand periods of low volumes of MRI scanner sales, by keeping expenditures at
levels which can be supported by service revenues and HMCA revenues.
Current
economic credit conditions have contributed to a slower than optimal business environment. As a result, our business may suffer,
should the credit markets not improve in the near future. The direct impact of these conditions is not fully known.
Revenues
from HMCA have been the principal reason for our profitability, and we have so far been able to maintain and increase such revenues
by increasing the number of scans being performed by the sites we manage and those we own, notwithstanding reductions in reimbursement
rates from third party payors. The likelihood and effect of any subsequent reductions is not fully known.
Capital
expenditures for fiscal 2019 approximated $3.4 million. Capitalized patent costs were approximately $128,000. Purchases of property
and equipment were approximately $3.4 million.
Fonar
has not committed to making capital expenditures in the 2020 fiscal year, except for placing additional scanners at facilities
located in Ormond Beach, Florida and Islandia and White Plains, New York. Also, we signed a lease for a new location for a new
facility in Pembroke Pines, Florida.
The
Company believes that its business plan has been responsible for the past five consecutive fiscal years of profitability (fiscal
2019, fiscal 2018, fiscal 2017, fiscal 2016 and fiscal 2015) and that its capital resources will be adequate to support operations
at current levels through June 30, 2020.
ITEM
7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK
The
Company does not have any investments in marketable securities, foreign currencies, mutual funds, certificates of deposit or other
fixed rate instruments. All of our funds are in cash accounts or money market accounts which are liquid.
All
of our revenue, expense and capital purchasing activities are transacted in United States dollars.
See
Note 10 to the consolidated Financial Statements for information on long-term debt.
FONAR
CORPORATION AND SUBSIDIARIES
ITEM
8.
FINANCIAL
STATEMENTS
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
FONAR
Corporation and Subsidiaries
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of FONAR Corporation and Subsidiaries (the “Company”) as
of June 30, 2019 and 2018, the related consolidated statements of income, stockholders’ equity and cash flows for each of
the three years in the period ended June 30, 2019, and the related notes (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended June
30, 2019, in conformity with accounting principles generally accepted in the United States of America.
We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"),
the Company's internal control over financial reporting as of June 30, 2019, based on the criteria established in Internal Control
- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013, and our
report dated September 30, 2019, expressed an adverse opinion on the effectiveness of the Company’s internal control over
financial reporting because of the existence of a material weakness.
Basis
for Opinion
These
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/
Marcum LLP
Marcum
LLP
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Continued)
We
have served as the Company’s auditor since 1990, such date takes into account the merger of Tabb, Conigliaro, McGann, P.C.
(“Tabb”) into another firm in approximately 2001 and the former partners of Tabb joining Marcum LLP in 2002.
New
York, New York
September
30, 2019
FONAR
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
ASSETS
|
|
June
30,
|
|
|
2019
|
|
2018
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
13,882,013
|
|
|
$
|
19,633,742
|
|
Short
term investments
|
|
|
15,094,816
|
|
|
|
—
|
|
Accounts
receivable – net of allowances for doubtful accounts of $190,244 at June 30, 2019 and 2018
|
|
|
3,736,662
|
|
|
|
3,813,576
|
|
Medical
receivables –net of allowances for doubtful accounts of $22,727,698 at June 30, 2018
|
|
|
15,728,935
|
|
|
|
13,350,772
|
|
Management
and other fees receivable – net of allowances for doubtful accounts of $9,404,944 and $10,983,022 at June 30, 2019 and
2018, respectively
|
|
|
25,709,489
|
|
|
|
21,863,431
|
|
Management
and other fees receivable – related party medical practices – net of allowances for doubtful accounts of $2,310,731
and $1,711,385 at June 30, 2019 and 2018, respectively
|
|
|
6,500,614
|
|
|
|
5,535,096
|
|
Costs
and estimated earnings in excess of billings on uncompleted contracts
|
|
|
525,110
|
|
|
|
86,638
|
|
Inventories
|
|
|
1,798,166
|
|
|
|
1,431,380
|
|
Income
tax receivable
|
|
|
600,000
|
|
|
|
—
|
|
Prepaid
expenses and other current assets
|
|
|
1,512,917
|
|
|
|
1,349,907
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
85,088,722
|
|
|
|
67,064,542
|
|
Income
taxes receivable
|
|
|
600,000
|
|
|
|
1,200,000
|
|
Deferred
income tax asset
|
|
|
20,937,747
|
|
|
|
22,689,011
|
|
Property
and Equipment – Net
|
|
|
16,985,617
|
|
|
|
16,492,278
|
|
Goodwill
|
|
|
3,985,397
|
|
|
|
3,985,397
|
|
Other
Intangible Assets – Net
|
|
|
4,755,675
|
|
|
|
5,601,656
|
|
Other
Assets
|
|
|
1,207,052
|
|
|
|
1,278,061
|
|
Total
Assets
|
|
$
|
133,560,210
|
|
|
$
|
118,310,945
|
|
See
accompanying notes to consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
LIABILITIES
|
|
June
30,
|
|
|
2019
|
|
2018
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt and capital leases
|
|
$
|
40,530
|
|
|
$
|
38,332
|
|
Accounts
payable
|
|
|
1,861,227
|
|
|
|
1,300,250
|
|
Other
current liabilities
|
|
|
7,577,416
|
|
|
|
8,177,995
|
|
Unearned
revenue on service contracts
|
|
|
3,812,115
|
|
|
|
4,191,930
|
|
Customer
deposits
|
|
|
798,651
|
|
|
|
858,195
|
|
Total
Current Liabilities
|
|
|
14,089,939
|
|
|
|
14,566,702
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Liabilities:
|
|
|
|
|
|
|
|
|
Deferred
income tax liability
|
|
|
243,267
|
|
|
|
239,011
|
|
Due
to related party medical practices
|
|
|
92,663
|
|
|
|
227,543
|
|
Long-term
debt and capital leases, less current portion
|
|
|
273,112
|
|
|
|
306,035
|
|
Other
liabilities
|
|
|
749,126
|
|
|
|
737,183
|
|
Total
Long-Term Liabilities
|
|
|
1,358,168
|
|
|
|
1,509,772
|
|
Total
Liabilities
|
|
|
15,448,107
|
|
|
|
16,076,474
|
|
Commitments,
Contingencies and Other Matters
See
accompanying notes to consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
STOCKHOLDERS'
EQUITY
|
|
June
30,
|
|
|
2019
|
|
2018
|
Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
Class
A non-voting preferred stock $.0001 par value; 453,000 shares authorized at June 30, 2019 and 2018, 313,438 issued and outstanding
at June 30, 2019 and 2018
|
|
$
|
31
|
|
|
$
|
31
|
|
Preferred
stock $.001 par value; 567,000 shares authorized at June 30, 2019 and 2018, issued and outstanding – none
|
|
|
—
|
|
|
|
—
|
|
Common
stock $.0001 par value; 8,500,000 shares authorized at June 30, 2019 and 2018, 6,369,125 and 6,299,154 issued at June 30,
2019 and 2018, respectively; 6,357,482 and 6,287,511 outstanding at June 30, 2019 and 2018, respectively
|
|
|
638
|
|
|
|
630
|
|
Class
B convertible common stock (10 votes per share) $.0001 par value; 227,000 shares authorized at June 30, 2019 and 2018, 146
issued and outstanding at June 30, 2019 and 2018
|
|
|
—
|
|
|
|
—
|
|
Class
C common stock (25 votes per share) $.0001 par value; 567,000 shares authorized at June 30, 2019 and 2018, 382,513 issued
and outstanding at June 30, 2019 and 2018
|
|
|
38
|
|
|
|
38
|
|
Paid-in
capital in excess of par value
|
|
|
181,086,517
|
|
|
|
179,131,780
|
|
Accumulated
deficit
|
|
|
(64,455,456
|
)
|
|
|
(79,772,587
|
)
|
Notes
receivable from employee stockholders
|
|
|
—
|
|
|
|
(9,213
|
)
|
Treasury
stock, at cost – 11,643 shares of common stock at June 30, 2019 and 2018
|
|
|
(675,390
|
)
|
|
|
(675,390
|
)
|
Total
Fonar Corporation’s Stockholders’ Equity
|
|
|
115,956,378
|
|
|
|
98,675,289
|
|
Noncontrolling
interests
|
|
|
2,155,725
|
|
|
|
3,559,182
|
|
Total
Stockholders' Equity
|
|
|
118,112,103
|
|
|
|
102,234,471
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
133,560,210
|
|
|
$
|
118,310,945
|
|
See
accompanying notes to consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
|
For
the Years Ended June 30,
|
|
|
2019
|
|
2018
|
|
2017
|
Revenues
|
|
|
|
|
|
|
Patient
fee revenue, net of contractual allowances and discounts
|
|
$
|
24,207,536
|
|
|
$
|
39,165,413
|
|
|
$
|
36,400,600
|
|
Provision
for bad debts for patient fee
|
|
|
—
|
|
|
|
(17,896,528
|
)
|
|
|
(16,171,434
|
)
|
Patient
fee revenue – net
|
|
|
24,207,536
|
|
|
|
21,268,885
|
|
|
|
20,229,166
|
|
Product
sales – net
|
|
|
1,751,221
|
|
|
|
602,541
|
|
|
|
1,572,148
|
|
Service
and repair fees – net
|
|
|
8,152,173
|
|
|
|
9,124,728
|
|
|
|
9,537,040
|
|
Service
and repair fees – related parties – net
|
|
|
110,000
|
|
|
|
110,000
|
|
|
|
110,000
|
|
Management
and other fees – net
|
|
|
43,617,093
|
|
|
|
41,422,958
|
|
|
|
38,361,514
|
|
Management
and other fees – related party medical practices – net
|
|
|
9,354,864
|
|
|
|
8,986,882
|
|
|
|
8,226,718
|
|
Total
Revenues – Net
|
|
|
87,192,887
|
|
|
|
81,515,994
|
|
|
|
78,036,586
|
|
Costs
and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
related to product sales
|
|
|
778,734
|
|
|
|
751,221
|
|
|
|
931,501
|
|
Costs
related to service and repair fees
|
|
|
3,009,097
|
|
|
|
3,212,527
|
|
|
|
2,996,736
|
|
Costs
related to service and repair fees – related parties
|
|
|
40,603
|
|
|
|
38,728
|
|
|
|
34,564
|
|
Costs
related to patient fee revenue
|
|
|
10,789,308
|
|
|
|
10,256,951
|
|
|
|
8,987,673
|
|
Costs
related to management and other fees
|
|
|
23,419,796
|
|
|
|
22,778,202
|
|
|
|
20,828,581
|
|
Costs
related to management and other fees – related party medical practices
|
|
|
5,947,055
|
|
|
|
4,913,141
|
|
|
|
4,273,370
|
|
Research
and development
|
|
|
1,812,347
|
|
|
|
1,755,747
|
|
|
|
1,480,670
|
|
Selling,
general and administrative, inclusive of compensatory element of stock issuances of $1,990,380, $1,954,744 and $2,397,276
for the years ended June 30, 2019, 2018 and 2017, respectively
|
|
|
19,261,755
|
|
|
|
18,125,266
|
|
|
|
19,407,411
|
|
Total
Costs and Expenses
|
|
|
65,058,695
|
|
|
|
61,831,783
|
|
|
|
58,940,506
|
|
Income
from Operations
|
|
|
22,134,192
|
|
|
|
19,684,211
|
|
|
|
19,096,080
|
|
Other
Income and (Expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(98,636
|
)
|
|
|
(160,074
|
)
|
|
|
28,299
|
|
Investment
income
|
|
|
482,573
|
|
|
|
262,569
|
|
|
|
193,141
|
|
Other
income (expense)– net
|
|
|
1,065
|
|
|
|
(4,271
|
)
|
|
|
(1,156
|
)
|
Income
before (provision) benefit for income taxes and noncontrolling interests
|
|
|
22,519,194
|
|
|
|
19,782,435
|
|
|
|
19,316,364
|
|
(Provision)
benefit for Income Taxes
|
|
|
(2,005,520
|
)
|
|
|
5,669,750
|
|
|
|
4,362,434
|
|
Net
Income
|
|
$
|
20,513,674
|
|
|
$
|
25,452,185
|
|
|
$
|
23,678,798
|
|
Net
Income – Noncontrolling Interests
|
|
|
(5,196,543
|
)
|
|
|
(4,221,383
|
)
|
|
|
(4,058,177
|
)
|
Net
Income – Attributable to FONAR
|
|
$
|
15,317,131
|
|
|
$
|
21,230,802
|
|
|
$
|
19,620,621
|
|
See
accompanying notes to consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME (Continued)
|
|
For
the Years Ended June 30,
|
|
|
2019
|
|
2018
|
|
2017
|
Net
Income Available to Common Stockholders
|
|
$
|
14,366,798
|
|
|
$
|
19,899,823
|
|
|
$
|
18,390,586
|
|
Net
Income Available to Class A Non-Voting Preferred Stockholders
|
|
$
|
708,302
|
|
|
$
|
992,005
|
|
|
$
|
916,769
|
|
Net
Income Available to Class C Common Stockholders
|
|
$
|
242,031
|
|
|
$
|
338,974
|
|
|
$
|
313,266
|
|
Basic
Net Income Per Common Share Available to Common Stockholders
|
|
$
|
2.26
|
|
|
$
|
3.16
|
|
|
$
|
2.98
|
|
Diluted
Net Income Per Common Share Available to Common Stockholders
|
|
$
|
2.22
|
|
|
$
|
3.10
|
|
|
$
|
2.92
|
|
Basic
and Diluted Income Per Share – Class C Common
|
|
$
|
0.63
|
|
|
$
|
0.89
|
|
|
$
|
0.82
|
|
Weighted
Average Basic Shares Outstanding – Common Stockholders
|
|
|
6,354,103
|
|
|
|
6,287,510
|
|
|
|
6,161,599
|
|
Weighted
Average Diluted Shares Outstanding – Common Stockholders
|
|
|
6,481,607
|
|
|
|
6,415,014
|
|
|
|
6,289,103
|
|
Weighted
Average Basic and Diluted Shares Outstanding – Class C Common
|
|
|
382,513
|
|
|
|
382,513
|
|
|
|
382,513
|
|
See
accompanying notes to consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR
THE YEARS ENDED JUNE 30, 2019, 2018 AND 2017
|
|
Class
A Non-Voting Preferred
|
|
Common
Shares
|
|
Stock
Amount
|
|
Class
C Common Stock
|
Balance
- June 30, 2016
|
|
$
|
31
|
|
|
|
6,051,166
|
|
|
$
|
607
|
|
|
$
|
38
|
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Stock
issued to employees under stock bonus plans
|
|
|
—
|
|
|
|
193,221
|
|
|
|
19
|
|
|
|
—
|
|
Payments
on notes receivable from employee stockholders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance
of stock for acquistion
|
|
|
—
|
|
|
|
42,884
|
|
|
|
4
|
|
|
|
—
|
|
Stock
option exercised
|
|
|
—
|
|
|
|
240
|
|
|
|
—
|
|
|
|
—
|
|
Distributions
to noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance
- June 30, 2017
|
|
$
|
31
|
|
|
|
6,287,511
|
|
|
$
|
630
|
|
|
$
|
38
|
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Payments
on notes receivable from employee stockholders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Distributions
to noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance
- June 30, 2018
|
|
$
|
31
|
|
|
|
6,287,511
|
|
|
$
|
630
|
|
|
$
|
38
|
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Stock
issued to employees under stock bonus plans
|
|
|
—
|
|
|
|
69,971
|
|
|
|
8
|
|
|
|
—
|
|
Payments
on notes receivable from employee stockholders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Distributions
to noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance
- June 30, 2019
|
|
$
|
31
|
|
|
|
6,357,482
|
|
|
$
|
638
|
|
|
$
|
38
|
|
See
accompanying notes to consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR
THE YEARS ENDED JUNE 30, 2019, 2018 AND 2017
|
|
Paid-in
Capital in Excess of Par Value
|
|
Accumulated
Deficit
|
|
Notes
Receivable From Employee Stockholders
|
Balance
- June 30, 2016
|
|
$
|
173,702,335
|
|
|
$
|
(120,624,010
|
)
|
|
$
|
(23,879
|
)
|
Net
income
|
|
|
—
|
|
|
|
19,620,621
|
|
|
|
—
|
|
Stock
issued to employees under stock bonus plans
|
|
|
4,636,559
|
|
|
|
—
|
|
|
|
—
|
|
Payments
on notes receivable from employee stockholders
|
|
|
—
|
|
|
|
—
|
|
|
|
7,333
|
|
Issuance
of stock for acquisition
|
|
|
791,206
|
|
|
|
—
|
|
|
|
—
|
|
Stock
option exercised
|
|
|
1,680
|
|
|
|
|
|
|
|
—
|
|
Distributions
to noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance
- June 30, 2017
|
|
$
|
179,131,780
|
|
|
$
|
(101,003,389
|
)
|
|
$
|
(16,546
|
)
|
Net
income
|
|
|
—
|
|
|
|
21,230,802
|
|
|
|
—
|
|
Payments
on notes receivable from employee stockholders
|
|
|
—
|
|
|
|
—
|
|
|
|
7,333
|
|
Distributions
to noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance
- June 30, 2018
|
|
$
|
179,131,780
|
|
|
$
|
(79,772,587
|
)
|
|
$
|
(9,213
|
)
|
Net
income
|
|
|
—
|
|
|
|
15,317,131
|
|
|
|
—
|
|
Stock
issued to employees under stock bonus plans
|
|
|
1,954,737
|
|
|
|
—
|
|
|
|
—
|
|
Payments
on notes receivable from employee stockholders
|
|
|
—
|
|
|
|
—
|
|
|
|
9,213
|
|
Distributions
to noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance
- June 30, 2019
|
|
$
|
181,086,517
|
|
|
$
|
(64,455,456
|
)
|
|
$
|
—
|
|
See
accompanying notes to consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR
THE YEARS ENDED JUNE 30, 2019, 2018 AND 2017
|
|
Treasury
Stock
|
|
Noncontrolling
Interests
|
|
Total
|
Balance
- June 30, 2016
|
|
$
|
(675,390
|
)
|
|
$
|
8,396,575
|
|
|
$
|
60,776,307
|
|
Net
income
|
|
|
—
|
|
|
|
4,058,177
|
|
|
|
23,678,798
|
|
Stock
issued to employees under stock bonus plans
|
|
|
—
|
|
|
|
—
|
|
|
|
4,636,578
|
|
Payments
on notes receivable from employee stockholders
|
|
|
—
|
|
|
|
—
|
|
|
|
7,333
|
|
Issuance
of stock for acquisition
|
|
|
—
|
|
|
|
—
|
|
|
|
791,210
|
|
Stock
option exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
1,680
|
|
Distributions
to noncontrolling interests
|
|
|
—
|
|
|
|
(6,981,953
|
)
|
|
|
(6,981,953
|
)
|
Balance
- June 30, 2017
|
|
$
|
(675,390
|
)
|
|
$
|
5,472,799
|
|
|
$
|
82,909,953
|
|
Net
income
|
|
|
—
|
|
|
|
4,221,383
|
|
|
|
25,452,185
|
|
Payments
on notes receivable from employee stockholders
|
|
|
—
|
|
|
|
—
|
|
|
|
7,333
|
|
Distributions
to noncontrolling interests
|
|
|
|
|
|
|
(6,135,000
|
)
|
|
|
(6,135,000
|
)
|
Balance
- June 30, 2018
|
|
$
|
(675,390
|
)
|
|
$
|
3,559,182
|
|
|
$
|
102,234,471
|
|
Net
income
|
|
|
—
|
|
|
|
5,196,543
|
|
|
|
20,513,674
|
|
Stock
issued to employees under stock bonus plans
|
|
|
—
|
|
|
|
—
|
|
|
|
1,954,745
|
|
Payments
on notes receivable from employee stockholders
|
|
|
—
|
|
|
|
—
|
|
|
|
9,213
|
|
Distributions
to noncontrolling interests
|
|
|
—
|
|
|
|
(6,600,000
|
)
|
|
|
(6,600,000
|
)
|
Balance
- June 30, 2019
|
|
$
|
(675,390
|
)
|
|
$
|
2,155,725
|
|
|
$
|
118,112,103
|
|
See
accompanying notes to consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For
the Years Ended June 30,
|
|
|
2019
|
|
2018
|
|
2017
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
20,513,674
|
|
|
$
|
25,452,185
|
|
|
$
|
23,678,798
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
3,836,491
|
|
|
|
3,899,851
|
|
|
|
3,533,564
|
|
(Credit)
Provision for bad debts
|
|
|
(978,730
|
)
|
|
|
(614,680
|
)
|
|
|
477,577
|
|
Deferred
income tax benefit
|
|
|
1,755,520
|
|
|
|
(4,919,750
|
)
|
|
|
(4,969,669
|
)
|
Income
tax receivable
|
|
|
—
|
|
|
|
(1,200,000
|
)
|
|
|
—
|
|
Compensatory
element of stock issuances
|
|
|
—
|
|
|
|
—
|
|
|
|
2,397,276
|
|
Stock
issued for costs and expenses
|
|
|
1,954,745
|
|
|
|
—
|
|
|
|
2,239,302
|
|
Stock
option exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
1,680
|
|
(Increase)
decrease in operating assets, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts,
medical and management fee receivables
|
|
|
(6,134,095
|
)
|
|
|
(4,328,239
|
)
|
|
|
(5,899,611
|
)
|
Notes
receivable
|
|
|
(12,689
|
)
|
|
|
(894,665
|
)
|
|
|
11,511
|
|
Costs
and estimated earnings in excess of billings on uncompleted contracts
|
|
|
(438,472
|
)
|
|
|
649,423
|
|
|
|
(736,061
|
)
|
Inventories
|
|
|
(366,786
|
)
|
|
|
192,882
|
|
|
|
450,038
|
|
Prepaid
expenses and other current assets
|
|
|
(79,641
|
)
|
|
|
(1,553
|
)
|
|
|
(513,507
|
)
|
Other
assets
|
|
|
329
|
|
|
|
15,008
|
|
|
|
254,721
|
|
Increase
(decrease) in operating liabilities, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
560,977
|
|
|
|
(122,967
|
)
|
|
|
168,733
|
|
Other
current liabilities
|
|
|
(980,394
|
)
|
|
|
525,113
|
|
|
|
(3,660,895
|
)
|
Customer
advances
|
|
|
(59,544
|
)
|
|
|
70,311
|
|
|
|
(410,855
|
)
|
Billings
in excess of costs and estimated earnings on uncompleted contracts
|
|
|
—
|
|
|
|
—
|
|
|
|
(206,623
|
)
|
Other
liabilities
|
|
|
11,943
|
|
|
|
16,404
|
|
|
|
8,783
|
|
Due
to related party medical practices
|
|
|
(134,880
|
)
|
|
|
—
|
|
|
|
(17,498
|
)
|
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
19,448,448
|
|
|
|
18,739,323
|
|
|
|
16,807,264
|
|
See
accompanying notes to consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For
the Years Ended June 30,
|
|
|
2019
|
|
2018
|
|
2017
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(3,355,456
|
)
|
|
|
(2,777,948
|
)
|
|
|
(2,851,158
|
)
|
Short
term investment
|
|
|
(15,094,816
|
)
|
|
|
|
|
|
|
|
|
Cost
of acquisition
|
|
|
—
|
|
|
|
(58,274
|
)
|
|
|
(1,312,769
|
)
|
Cost
of patents
|
|
|
(128,393
|
)
|
|
|
(108,829
|
)
|
|
|
(155,156
|
)
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(18,578,665
|
)
|
|
|
(2,945,051
|
)
|
|
|
(4,319,083
|
)
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment
of borrowings and capital lease obligations
|
|
|
(30,725
|
)
|
|
|
(172,484
|
)
|
|
|
(3,990,078
|
)
|
Repayment
of notes receivable from employee stockholders
|
|
|
9,213
|
|
|
|
7,333
|
|
|
|
7,333
|
|
Distributions
to noncontrolling interests
|
|
|
(6,600,000
|
)
|
|
|
(6,135,000
|
)
|
|
|
(6,981,953
|
)
|
Proceeds
received from acquisition -net
|
|
|
—
|
|
|
|
—
|
|
|
|
87,829
|
|
NET
CASH USED IN FINANCING ACTIVITIES
|
|
|
(6,621,512
|
)
|
|
|
(6,300,151
|
)
|
|
|
(10,876,869
|
)
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(5,751,729
|
)
|
|
|
9,494,121
|
|
|
|
1,611,312
|
|
CASH
AND CASH EQUIVALENTS – BEGINNING OF YEAR
|
|
|
19,633,742
|
|
|
|
10,139,621
|
|
|
|
8,528,309
|
|
CASH
AND CASH EQUIVALENTS – END OF YEAR
|
|
$
|
13,882,013
|
|
|
$
|
19,633,742
|
|
|
$
|
10,139,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
1 - DESCRIPTION OF BUSINESS AND LIQUIDITY AND CAPITAL RESOURCES
Description
of Business
FONAR
Corporation (the “Company” or “FONAR”) is a Delaware corporation, which was incorporated on July 17, 1978.
FONAR is engaged in the research, development, production and marketing of medical scanning equipment, which uses principles of
Magnetic Resonance Imaging ("MRI") for the detection and diagnosis of human diseases. In addition to deriving revenues
from the direct sale of MRI equipment, revenue is also generated from our installed-base of customers through our service and
upgrade programs.
FONAR,
through its wholly-owned subsidiary Health Management Corporation of America ("HMCA") provides comprehensive management
services to diagnostic imaging facilities. The services provided by the Company include development, administration, leasing of
office space, facilities and medical equipment, provision of supplies, staffing and supervision of non-medical personnel, legal
services, accounting, billing and collection and the development and implementation of practice growth and marketing strategies.
On
July 1, 2015, the Company restructured the corporate organization of the management of diagnostic imaging centers segment of our
business. The reorganization was structured to more completely integrate the operations of Health Management Corporation of America
and HDM. Imperial contributed all of its assets (which were utilized in the business of Health Management Corporation of America)
to HDM and received a 24.2% interest in HDM. Health Management Corporation of America retained a direct ownership interest of
45.8% in HDM, and the original investors in HDM retained a 30.0% ownership interest in the newly expanded HDM. The entire management
of diagnostic imaging centers business segment is now being conducted by HDM.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
consolidated financial statements include the accounts of FONAR Corporation, its majority and wholly-owned subsidiaries and partnerships.
The operating activities of subsidiaries are included in the accompanying consolidated statements from the date of acquisition.
All significant intercompany accounts and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The most significant estimates
relate to receivable allowances, intangible assets, income taxes and related tax asset valuation allowances, useful lives of property
and equipment, contingencies, revenue recognition and the assessment of litigation. In addition, healthcare industry reforms and
reimbursement practices will continue to impact the Company's operations and the determination of contractual and other allowance
estimates. Actual results could differ from those estimates.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventories
Inventories
consist of purchased parts, components and supplies, as well as work-in-process, and are stated at the lower of cost, determined
on the first-in, first-out method, or market.
Property
and Equipment
Property
and equipment procured in the normal course of business is stated at cost. Property and equipment purchased in connection with
an acquisition is stated at its estimated fair value, generally based on an appraisal. Property and equipment is being depreciated
for financial accounting purposes using the straight-line method over their estimated useful lives. Leasehold improvements are
being amortized over the shorter of the useful life or the remaining lease term. Upon retirement or other disposition of these
assets, the cost and related accumulated depreciation of these assets are removed from the accounts and the resulting gains or
losses are reflected in the results of operations. Expenses for maintenance and repairs are charged to operations. Renewals and
betterments are capitalized. Maintenance and repair expenses totaled approximately $1,557,000, $1,451,000 and $1,116,000 for the
years ended June 30, 2019, 2018 and 2017, respectively. The estimated useful lives in years are generally as follows:
Diagnostic
equipment
|
|
|
5–13
|
|
Research,
development and demonstration equipment
|
|
|
3-7
|
|
Machinery
and equipment
|
|
|
2-7
|
|
Furniture
and fixtures
|
|
|
3-9
|
|
Leasehold
improvements
|
|
|
2–10
|
|
Building
|
|
|
28
|
|
Long-Lived
Assets
The
Company periodically assesses the recoverability of long-lived assets, including property and equipment and intangibles, other
than goodwill, when there are indications of potential impairment, based on estimates of undiscounted future cash flows. The amount
of impairment is calculated by comparing anticipated discounted future cash flows with the carrying value of the related asset.
In performing this analysis, management considers such factors as current results, trends, and future prospects, in addition to
other economic factors.
Deferred
Rent
Rent
expense is recorded on the straight-line method based on the total minimum rent payments required over the term of the lease.
The cumulative difference between the lease expense recorded under this method and the contractual lease payment terms is recorded
as deferred rent.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other
Intangible Assets
1)
Capitalized Software Development Costs
Capitalization
of software development costs begins upon the establishment of technological feasibility. Technological feasibility for the Company’s
computer software is generally based upon achievement of a detail program design free of high risk development issues and the
completion of research and development on the product hardware in which it is to be used. The establishment of technological feasibility
and the ongoing assessment of recoverability of capitalized computer software development costs require considerable judgment
by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated
future gross revenue, estimated economic life and changes in software and hardware technology. Prior to reaching technological
feasibility those costs are expensed as incurred and included in research and development.
Amortization
of capitalized software development costs commences when the related products become available for general release to customers.
Amortization is provided on a product by product basis. The annual amortization is the greater of the amount computed using (a)
the ratio that current gross revenue for a product bears to the total of current and anticipated future gross revenue for that
product, or (b) the straight-line method over the remaining estimated economic life of the product.
The
Company periodically performs reviews of the recoverability of such capitalized software development costs. At the time a determination
is made that capitalized amounts are not recoverable, based on the estimated cash flows to be generated from the applicable software,
any remaining capitalized amounts are written off.
2)
Patents and Copyrights
Amortization
is calculated on the straight-line basis over 15 years.
3)
Non-Competition Agreements
The
non-competition agreements are being amortized on the straight line basis over the length of the agreement (7 years).
4)
Customer Relationships
Amortization
is calculated on the straight line basis over 20 years.
Goodwill
Generally
accepted accounting principles in the United States require the Company to perform a goodwill impairment test annually and more
frequently when negative conditions or a triggering event arises. Impairment of goodwill is tested at the reporting unit level
by comparing the reporting unit’s carrying amount, including goodwill to the fair value of the reporting unit. If the carrying
amount of the reporting unit exceeds its fair value, goodwill is considered potentially impaired and a second step is performed
to measure the amount of impairment loss, if any.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Acquired
assets and assumed liabilities
Pursuant
to ASC No. 805-10-25, if the initial accounting for a business combination is incomplete by the end of the reporting period in
which the combination occurs, but during the allowed measurement period not to exceed one year from the acquisition date, the
Company adjusts the provisional amounts recognized at the acquisition date by means of adjusting the amount recognized for goodwill.
Revenue
Recognition
Revenue
on sales contracts for scanners, included in “product sales” in the accompanying consolidated statements of operations,
is recognized under the percentage-of-completion method in accordance with FASB ASC 605-35, “Revenue Recognition –
Construction-Type and Production-Type Contracts”. The Company manufactures its scanners under specific contracts that provide
for progress payments. Production and installation take approximately three to six months.
Revenue
on scanner service contracts is recognized on the straight-line method over the related contract period, usually one year.
Revenue
from product sales (upgrades and supplies) is recognized upon shipment.
Revenue
under management contracts is recognized based upon contractual agreements for management services rendered by the Company primarily
under various long-term agreements with various medical providers (the "PCs"). As of June 30, 2019, the Company has
twenty two management agreements of which three are with PC’s owned by Raymond V. Damadian, M.D., Chairman of the Board
of FONAR (“the Related medical practices”) and nineteen are with PC’s, which are all located in the state of
New York (“the New York PC’s”), owned by two unrelated radiologists. The contractual fees for services rendered
to the PCs consists of fixed monthly fees per diagnostic imaging facility ranging from approximately $54,000 to $481,000. All
fees are re-negotiable at the anniversary of the agreements and each year thereafter. The Company records a provision for bad
debts for estimated uncollectible fees, which is reflected in other operating expenses on the Statement of Operations. Revenue
under lease contracts is recognized based upon contractual agreements for the leasing of medical equipment primarily under long
term contracts to various unrelated PC’s. All fees are re-negotiable at the anniversary of the agreements and each year
thereafter.
On
July 1, 2018, the Company adopted the new revenue recognition accounting standard issued by the Financial Accounting Standards
Board (“FASB”) and codified in the ASC as topic 606 (“ASC 606”). The revenue recognition standard in ASC
606 outlines a single comprehensive model for recognizing revenue as performance obligations, defined in a contract with a customer
as goods or services transferred to the customer in exchange for consideration, are satisfied. The standard also requires expanded
disclosures regarding the Company’s revenue recognition policies and significant judgments employed in the determination
of revenue.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue
Recognition (Continued)
The
Company applied the modified retrospective approach to all contracts when adopting ASC 606. As a result, at the adoption of ASC
606 the majority of what was previously classified as the provision for bad debts in the statement of operations is now reflected
as implicit price concessions (as defined in ASC 606) and therefore included as a reduction to net operating revenues in 2019.
For changes in credit issues not assessed at the date of service, the Company will prospectively recognize those amounts in other
operating expenses on the statement of operations. For periods prior to the adoption of ASC 606, the provision for bad debts has
been presented consistent with the previous revenue recognition standards that required it to be presented separately as a component
of net operating revenues. Additionally, upon adoption of ASC 606 the allowance for doubtful accounts of approximately $22.7 million
as of July 1, 2018 was reclassified as a component of net patient accounts receivable. Other than these changes in presentation
on the condensed consolidated statement of operations and condensed consolidated balance sheet, the adoption of ASC 606 did not
have a material impact on the consolidated results of operations for the year ended June 30, 2019 and is not expected to have
a material impact on its consolidated results of operations on a prospective basis.
Our
revenues generally relate to net patient fees received from various payers and patients themselves under contracts in which
our performance obligations are to provide diagnostic services to the patients. Revenues are recorded during the period our obligations
to provide diagnostic services are satisfied. Our performance obligations for diagnostic services are generally satisfied over
a period of less than one day. The contractual relationships with patients, in most cases, also involve a third-party payer (Medicare,
Medicaid, managed care health plans and commercial insurance companies, including plans offered through the health insurance exchanges)
and the transaction prices for the services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated
with (managed care health plans and commercial insurance companies) the third-party payers. The payment arrangements with third-party
payers for the services we provide to the related patients typically specify payments at amounts less than our standard charges
and generally provide for payments based upon predetermined rates per diagnostic services or discounted fee-for-service rates.
Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations
and the frequent changes in managed care contractual terms resulting from contract renegotiations and renewals.
The
Company’s patient fee revenues, net of contractual allowances and discounts less the provision for bad debts for the years
ended June 30, 2019, 2018 and 2017 are summarized in the following table.
|
|
For
the Year Ended June 30,
|
|
|
2019
|
|
2018
|
|
2017
|
Commercial
Insurance/ Managed Care
|
|
$
|
5,218,656
|
|
|
$
|
4,729,514
|
|
|
$
|
4,904,892
|
|
Medicare/Medicaid
|
|
|
1,172,543
|
|
|
|
1,233,078
|
|
|
|
1,274,436
|
|
Workers'
Compensation/Personal Injury
|
|
|
16,790,025
|
|
|
|
25,358,543
|
|
|
|
23,240,829
|
|
Other
|
|
|
1,026,312
|
|
|
|
7,844,278
|
|
|
|
6,980,443
|
|
Patient
Fee Revenue, net of contractual allowances and discounts
|
|
|
24,207,536
|
|
|
|
39,165,413
|
|
|
|
36,400,600
|
|
Provision
for Bad Debts
|
|
|
—
|
|
|
|
(17,896,528
|
)
|
|
|
(16,171,434
|
)
|
Net
Patient Fee Revenue
|
|
$
|
24,207,536
|
|
|
$
|
21,268,885
|
|
|
$
|
20,229,166
|
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Research
and Development Costs
Research
and development costs are charged to expense as incurred. The costs of equipment that are acquired or constructed for research
and development activities, and have alternative future uses (either in research and development, marketing or production), are
classified as property and equipment and depreciated over their estimated useful lives.
Advertising
Costs
Advertising
costs are expensed as incurred. Advertising expense approximated $538,000, $607,000 and $531,000 for the years ended June 30,
2019, 2018 and 2017, respectively.
Shipping
Costs
The
Company’s shipping and handling costs are included in revenue from product sales and the related expense included in costs
related to product sales is $13,695, $9,370 and $8,224 for the years ended June 30, 2019, 2018 and 2017, respectively.
Income
Taxes
Deferred
tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax basis
of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.
Customer
Advances
Cash
advances and progress payments received on sales orders are reflected as customer advances until such time as revenue recognition
occurs.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings
Per Share
Basic
earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted average
number of shares of common stock outstanding during the period. 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 years ended June 30, 2019, 2018 and 2017.
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 years ended June 30, 2019, 2018 and 2017, diluted
EPS for common shareholders includes 127,504 shares upon conversion of Class C Common.
|
|
June
30, 2019
|
Basic
|
|
Total
|
|
Common
Stock
|
|
Class
C Common Stock
|
Numerator:
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$
|
15,371,131
|
|
|
$
|
14,366,798
|
|
|
$
|
242,031
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
6,354,103
|
|
|
|
6,354,103
|
|
|
|
382,513
|
|
Basic
income per common share
|
|
$
|
2.41
|
|
|
$
|
2.26
|
|
|
$
|
0.63
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
6,354,103
|
|
|
|
382,513
|
|
Class
C Common Stock
|
|
|
|
|
|
|
127,504
|
|
|
|
—
|
|
Total
Denominator for diluted earnings per share
|
|
|
|
|
|
|
6,481,607
|
|
|
|
382,513
|
|
Diluted
income per common share
|
|
|
|
|
|
$
|
2.22
|
|
|
$
|
0.63
|
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings
Per Share (Continued)
|
|
June
30, 2018
|
Basic
|
|
Total
|
|
Common
Stock
|
|
Class
C Common Stock
|
Numerator:
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$
|
21,230,802
|
|
|
$
|
19,899,823
|
|
|
$
|
338,974
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
6,287,510
|
|
|
|
6,287,510
|
|
|
|
382,513
|
|
Basic
income per common share
|
|
$
|
3.38
|
|
|
$
|
3.16
|
|
|
$
|
0.89
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
6,287,510
|
|
|
|
382,513
|
|
Class
C Common Stock
|
|
|
|
|
|
|
127,504
|
|
|
|
—
|
|
Total
Denominator for diluted earnings per share
|
|
|
|
|
|
|
6,415,014
|
|
|
|
382,513
|
|
Diluted
income per common share
|
|
|
|
|
|
$
|
3.10
|
|
|
$
|
0.89
|
|
|
|
June
30, 2017
|
Basic
|
|
Total
|
|
Common
Stock
|
|
Class
C Common Stock
|
Numerator:
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$
|
19,620,621
|
|
|
$
|
18,390,586
|
|
|
$
|
313,266
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
6,161,599
|
|
|
|
6,161,599
|
|
|
|
382,513
|
|
Basic
income per common share
|
|
$
|
3.18
|
|
|
$
|
2.98
|
|
|
$
|
0.82
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
6,161,599
|
|
|
|
382,513
|
|
Class
C Common Stock
|
|
|
|
|
|
|
127,504
|
|
|
|
—
|
|
Total
Denominator for diluted earnings per share
|
|
|
|
|
|
|
6,289,103
|
|
|
|
382,513
|
|
Diluted
income per common share
|
|
|
|
|
|
$
|
2.92
|
|
|
$
|
0.82
|
|
Cash
and Cash Equivalents
Cash
and cash equivalents includes cash on hand, cash in banks, investments in certificates of deposit with original maturities of
90 days or less, and money market funds.
Short
Term Investments
Short
term investments include certificates of deposit with original maturities of greater than 90 days.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentration
of Credit Risk
Cash:
The Company maintains its cash and cash equivalents with various financial institutions, which exceed federally insured limits
throughout the year. At June 30, 2019, the Company had cash on deposit of approximately $11,842,000 in excess of federally insured
limits of $250,000.
Related
Parties: Net revenues from related parties accounted for approximately 11%, 11% and 11% of the consolidated net revenues for the
years ended June 30, 2019, 2018 and 2017, respectively. Net management fee receivables from the related party medical practices
accounted for approximately 13%, 12% and 13% of the consolidated accounts receivable for the years ended June 30, 2019, 2018 and
2017, respectively.
See
Note 3 regarding the Company’s concentrations in the healthcare industry.
Fair
Value of Financial Instruments
The
financial statements include various estimated fair value information at June 30, 2019 and 2018, as required by ASC topic 820,
"Disclosures about Fair Value of Financial Instruments". Such information, which pertains to the Company's financial
instruments, is based on the requirements set forth in that Statement and does not purport to represent the aggregate net fair
value to the Company.
The
Company has established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring and revaluing fair value.
These tiers include, Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs
other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable
inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The
following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is
practicable to estimate that value:
Cash
and cash equivalents: The carrying amount approximates fair value because of the short-term maturity of those instruments.
Short
term investments: The carrying amount approximates fair value because of the short-term maturity of those instruments. Such amounts
include Certificates of Deposits with original maturities greater than 90 days. These securities are classified as Level 1.
Receivable
and accounts payable: The carrying amounts approximate fair value because of the short maturity of those instruments.
Notes
receivable: The carrying amount approximates fair value because the discounted present value of the cash flow generated by the
parties approximates the carrying value of the amounts due to the Company.
Long-term
debt and notes payable: The carrying amounts of debt and notes payable approximate fair value due to the length of the maturities,
the interest rates being tied to market indices and/or due to the interest rates not being significantly different from the current
market rates available to the Company.
All
of the Company's financial instruments are held for purposes other than trading.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent
Accounting Pronouncements
In
May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, (Topic 606). ASU 2014-09 requires an entity
to recognize as revenue the amount that reflects the consideration which it expects to be entitled in exchange for goods and services
as it transfers control to its customers. It also requires more detailed disclosures to enable users of the financial statements
to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The
Company earns revenue from the sale of scanners, maintenance contracts, product upgrades, patient services and management fees.
Under the new guidance, the reporting for patient services revenue will be reported differently. All other streams of revenue
will not be impacted by the new guidance. The primary change for healthcare providers under the new guidance relates to revenue
generated from patient services, with patient responsibility for payment. Under the new guidance, the Company is required to report
an implicit price concession (both initially and for the subsequent changes in estimates) as a reduction of revenues as opposed
to bad debt expense as a component of operating expenses. The Company will record any changes in expectation of collection amounts
due to patient specific events that suggests that the patient no longer has the ability and intent to pay the amount due through
the bad debt expense, as that is more indicative of a change in the customer’s credit worthiness as opposed to change in
the transaction price.
The
new standard supersedes most current revenue guidance, including industry-specific guidance. The guidance became effective for
the Company on July 1, 2018 and as part of adopting the standard, the Company identified revenue streams of like contracts to
allow for ease of implementation. The Company used primarily a portfolio approach to apply the new model to classes of customers
with similar characteristics. The impact of adopting the new standard on our total revenue; and income from operations is not
material. While the adoption of ASU 2014-09 will impact the presentation of net operating revenues in our Consolidated Statements
of Operations and will impact certain disclosures, it will not materially impact our financial position, results of operations
or cash flows. There was no cumulative effect of a change in accounting principle recorded related to the adoption of ASU 2014-09
on July 1, 2018.
In
January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and Other
(Topic 350). The amendments in this update simplify the test for goodwill impairment by eliminating Step 2 from the impairment
test, which required the entity to perform procedures to determine the fair value at the impairment testing date of its assets
and liabilities following the procedure that would be required in determining fair value of assets acquired and liabilities assumed
in a business combination. The amendments in this update are effective for public companies for annual or any interim goodwill
impairment tests in fiscal years beginning after December 15, 2019. We are evaluating the impact of adopting this guidance on
our Consolidated Financial Statements.
In
January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805); Clarifying the Definition of a Business. The amendments
in this update clarify the definition of a business to help companies evaluate whether transactions should be accounted for as
acquisitions or disposals of assets or businesses. The amendments in this update are effective for public companies for annual
periods beginning after December 15, 2017, including interim periods within those periods. The Company has adopted this guidance
on our Consolidated Financial Statements and it has no impact on the Company’s financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent
Accounting Pronouncements(Continued)
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) and in July 2018 ASU 2018-11, Leases (Topic 842): Targeted
Improvements. The guidance requires the recognition of lease right-of-use assets and lease liabilities by lessees for those leases
previously classified as operating. This guidance was issued to increase transparency and comparability among organizations by
disclosing key information about leasing arrangements and requiring the recognition of current and non-current right-of-use assets
and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of right-of-use
assets and lease liabilities by lessees for those leases classified as operating leases. ASU 2016-02 is effective for fiscal years
beginning after December 15, 2018. The Company will adopt this guidance on July 1, 2019, as required, electing to apply retrospectively
at the period of adoption. The adoption of this guidance will have a material impact on the Company’s balance sheet for
the present value of its operating lease liabilities and related right-of-use assets, for which the Company will record approximately
$18.8 million of lease liabilities and right-of-use assets. The Company does not believe that the adoption of this guidance will
have a material effect on its future results of operations, cash flows or debt covenants.
FASB,
the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of June
30, 2019 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 2019 or 2018, and
it does not believe that any of those pronouncements will have a significant impact on our consolidated financial statements at
the time they become effective.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year presentation. The reclassifications did not have any
effect on reported net income for any periods presented.
NOTE
3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE
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.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE (CONTINUED)
Medical
Receivable
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 allowances for contractual
adjustments and 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 (“PCs”) substantially consist
of fees outstanding under management agreements. Payment of the outstanding fees is dependent on collection by the PCs 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 67%, 65% and 62%, respectively, of the PCs’ 2019, 2018 and 2017 net revenues 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 consolidated financial statements and have historically been within management's
expectations.
Net
revenues from management and other fees charged to the related party medical practices accounted for approximately 11%, 11% and
11%, of the consolidated net revenues for the years ended June 30, 2019, 2018 and 2017, respectively.
Tallahassee
Magnetic Resonance Imaging, PA, Stand Up MRI of Boca Raton, PA and Stand Up MRI & Diagnostic Center, PA (all related party
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.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE (CONTINUED)
The
following table sets forth the number of our facilities for the years ended June 30, 2019, 2018 and 2017.
|
|
For
The Year Ended June 30,
|
|
|
2019
|
|
2018
|
|
2017
|
Total
Facilities Owned or Managed (at Beginning of Year)
|
|
|
26
|
|
|
|
26
|
|
|
|
25
|
|
Facilities
Added by:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Internal
development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Managed
Facilities Closed
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
Facilities Owned or Managed (at End of Year)
|
|
|
26
|
|
|
|
26
|
|
|
|
26
|
|
NOTE
4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information
relating to uncompleted contracts as of June 30, 2019 and 2018 is as follows:
|
|
As
of June 30,
|
|
|
2019
|
|
2018
|
Costs
incurred on uncompleted contracts
|
|
$
|
448,437
|
|
|
$
|
448,437
|
|
Estimated
earnings
|
|
|
1,088,675
|
|
|
|
309,248
|
|
|
|
|
1,537,112
|
|
|
|
757,685
|
|
Less:
Billings to date
|
|
|
1,012,002
|
|
|
|
671,047
|
|
|
|
$
|
525,110
|
|
|
$
|
86,638
|
|
NOTE
5 – INVENTORIES
Inventories
included in the accompanying consolidated balance sheets consist of:
|
|
As
of June 30,
|
|
|
2019
|
|
2018
|
Purchased
parts, components and supplies
|
|
$
|
1,639,777
|
|
|
$
|
1,312,299
|
|
Work-in-process
|
|
|
158,389
|
|
|
|
119,081
|
|
|
|
$
|
1,798,166
|
|
|
$
|
1,431,380
|
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
6 - PROPERTY AND EQUIPMENT
Property
and equipment, at cost, less accumulated depreciation and amortization, at June 30, 2019 and 2018, is comprised of:
|
|
As
of June 30,
|
|
|
2019
|
|
2018
|
Diagnostic
equipment
|
|
$
|
26,090,218
|
|
|
$
|
24,296,957
|
|
Research,
development and demonstration equipment
|
|
|
3,605,906
|
|
|
|
2,987,531
|
|
Machinery
and equipment
|
|
|
2,069,055
|
|
|
|
2,069,055
|
|
Furniture
and fixtures
|
|
|
3,122,102
|
|
|
|
3,036,539
|
|
Leasehold
improvements
|
|
|
8,023,292
|
|
|
|
7,165,035
|
|
Building
|
|
|
939,614
|
|
|
|
939,614
|
|
|
|
|
43,850,187
|
|
|
|
40,494,731
|
|
Less:
Accumulated depreciation and amortization
|
|
|
26,864,570
|
|
|
|
24,002,453
|
|
|
|
$
|
16,985,617
|
|
|
$
|
16,492,278
|
|
Depreciation
and amortization of property and equipment for the years ended June 30, 2019, 2018 and 2017 was $2,862,117, $2,748,174 and $2,303,554,
respectively.
NOTE
7 - OTHER INTANGIBLE ASSETS
Other
intangible assets, net of accumulated amortization, at June 30, 2019 and 2018 are comprised of:
|
|
As
of June 30,
|
|
|
2019
|
|
2018
|
Capitalized
software development costs
|
|
$
|
7,004,847
|
|
|
$
|
7,004,847
|
|
Patents
and copyrights
|
|
|
4,964,199
|
|
|
|
4,835,806
|
|
Non-competition
agreements
|
|
|
4,100,000
|
|
|
|
4,100,000
|
|
Customer
relationships
|
|
|
3,800,000
|
|
|
|
3,800,000
|
|
|
|
|
19,869,046
|
|
|
|
19,740,653
|
|
Less:
Accumulated amortization
|
|
|
15,113,371
|
|
|
|
14,138,997
|
|
|
|
$
|
4,755,675
|
|
|
$
|
5,601,656
|
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
7 - OTHER INTANGIBLE ASSETS (CONTINUED)
The
estimated amortization of other intangible assets for the five years ending June 30, 2024 and thereafter is as follows:
For
the Years Ending June 30,
|
|
Total
|
|
Patents
and Copyrights
|
|
Non-
competition
|
|
Customer
Relationships
|
|
2020
|
|
|
$
|
771,830
|
|
|
$
|
191,353
|
|
|
$
|
390,477
|
|
|
$
|
190,000
|
|
|
2021
|
|
|
|
381,860
|
|
|
|
191,860
|
|
|
|
—
|
|
|
|
190,000
|
|
|
2022
|
|
|
|
380,470
|
|
|
|
190,470
|
|
|
|
—
|
|
|
|
190,000
|
|
|
2023
|
|
|
|
383,929
|
|
|
|
193,929
|
|
|
|
—
|
|
|
|
190,000
|
|
|
2024
|
|
|
|
375,561
|
|
|
|
185,561
|
|
|
|
—
|
|
|
|
190,000
|
|
|
Thereafter
|
|
|
|
2,462,025
|
|
|
|
815,358
|
|
|
|
—
|
|
|
|
1,646,667
|
|
|
|
|
|
$
|
4,755,675
|
|
|
$
|
1,768,531
|
|
|
$
|
390,477
|
|
|
$
|
2,596,667
|
|
The
weighted average amortization period for other intangible assets is 11.5 years and they have no expected residual value.
Information
related to the above intangible assets for the years ended June 30, 2019, 2018 and 2017 is as follows:
|
|
As
of June 30,
|
|
|
2019
|
|
2018
|
|
2017
|
Balance
– Beginning of Year
|
|
$
|
5,601,656
|
|
|
$
|
6,644,504
|
|
|
$
|
7,719,358
|
|
Amounts
capitalized
|
|
|
128,393
|
|
|
|
108,829
|
|
|
|
155,156
|
|
Software
or patents written off
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
)
|
Amortization
|
|
|
(974,374
|
)
|
|
|
(1,151,677
|
)
|
|
|
(1,230,010
|
)
|
Balance
– End of Year
|
|
$
|
4,755,675
|
|
|
$
|
5,601,656
|
|
|
$
|
6,644,504
|
|
Amortization
of patents and copyrights for the years ended June 30, 2019, 2018 and 2017 amounted to $198,660, $202,630 and $194,296, respectively.
Amortization
of capitalized software development costs for the years ended June 30, 2019, 2018 and 2017 was $0, $173,333 and $260,000, respectively.
Amortization
of non-competition agreements for the years ended June 30, 2019, 2018 and 2017 amounted to $585,714, $585,714 and $585,714, respectively.
Amortization
of customer relationships for the years ended June 30, 2019, 2018 and 2017 amounted to $190,000, $190,000 and $190,000, respectively.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
8 - CAPITAL STOCK
Common
Stock
Cash
dividends payable on the common stock shall, in all cases, be on a per share basis, one hundred twenty percent (120%) of the cash
dividend payable on shares of Class B common stock and three hundred sixty percent (360%) of the cash dividend payable on a share
of Class C common stock.
Class
B Common Stock
Class
B common stock is convertible into shares of common stock on a one-for-one basis. Class B common stock has 10 votes per share.
There were 146 of such shares outstanding at June 30, 2019, 2018 and 2017.
Class
C Common Stock
On
April 3, 1995, the stockholders ratified a proposal creating a new Class C common stock and authorized the exchange offering of
three shares of Class C common stock for each share of the Company's outstanding Class B common stock. The Class C common stock
has 25 votes per share, as compared to 10 votes per share for the Class B common stock and one vote per share for the common stock.
The Class C common stock was offered on a three-for-one basis to the holders of the Class B common stock. Although having greater
voting power, each share of Class C common stock has only one-third of the rights of a share of Class B common stock to dividends
and distributions. Class C common stock is convertible into shares of common stock on a three-for-one basis.
Class
A Non-Voting Preferred Stock
On
April 3, 1995, the stockholders ratified a proposal consisting of the creation of a new class of Class A non-voting preferred
stock with special dividend rights and the declaration of a stock dividend on the Company's common stock consisting of one share
of Class A non-voting preferred stock for every five shares of common stock. The stock dividend was payable to holders of common
stock on October 20, 1995. Class A non-voting preferred stock issued pursuant to such stock dividend approximates 313,000 shares.
The
Class A non-voting preferred stock is entitled to a special dividend equal to 3-1/4% of first $10 million, 4-1/2% of next $20
million and 5-1/2% on amounts in excess of $30 million of the amount of any cash awards or settlements received by the Company
in connection with the enforcement of five of the Company's patents in its patent lawsuits, less the revised special dividend
payable on the common stock with respect to one of the Company's patents.
The
Class A non-voting preferred stock participates on an equal per share basis with the common stock in any dividends declared and
ranks equally with the common stock on distribution rights, liquidation rights and other rights and preferences (other than the
voting rights).
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
8 - CAPITAL STOCK (Continued)
Stock
Bonus Plans
On
April 23, 2010, the Board approved the 2010 Stock Bonus Plan. The plan entitles the Company to reserve 2,000,000 shares of common
stock. On August 10, 2010, the Company filed Form S-8 to register the 2,000,000 shares. As of June 30, 2019, 646,905 shares of
common stock of FONAR were available for future grant under this plan. For the years ended June 30, 2019, 2018 and 2017, 69,971,
0 and 193,461 shares were issued respectively.
Options
The
Company had stock option plans, which provide for the awarding of incentive and non-qualified stock options to employees, directors
and consultants who may contribute to the success of the Company. The options granted vest either immediately or ratably over
a period of time from the date of grant, typically three or four years, at a price determined by the Board of Directors or a committee
of the Board of Directors, generally the fair value of the Company's common stock at the date of grant. The options must be exercised
within ten years from the date of grant.
NOTE
9 – CONTROLLING AND NONCONTROLLING INTERESTS
On
February 13, 2013 the Company entered into an agreement with outside investors to acquire a 50.5% controlling interest in a newly
formed limited liability company, Health Diagnostics Management LLC (HDM). According to the February 13, 2013 LLC operating agreement
of HDM there are two classes of members; Class A members and one Class B member. The Class A members have an ownership interest
of 49.5% of HDM. The Class B member (HMCA) has an ownership of 50.5% of HDM. On all matters on which members may vote every member
is entitled to cast the percentage of votes equal to their percentage of ownership interest. Profits and losses on all items of
income, gain or loss, deductions or other allocations of the Company will be allocated among the members in the same proportions
as their membership interests in the Company bear to all the Class A and Class B membership interests of the Company in the aggregate
outstanding. All of the depreciation and amortization of the assets of the Company will be allocated solely to the Class A members,
unless and until their interests have been redeemed by the Company in full pursuant to the provisions of the operating agreement.
The Company contributed $20,200,000 to HDM and the group of outside investors contributed $19,800,000 for its non-controlling
membership interest.
On
March 5, 2013 HDM purchased from Health Diagnostics, LLC (“HD”) and certain of its subsidiaries, a business managing
twelve (12) Stand-Up MRI Centers and two (2) other scanning centers located in the States of New York and Florida for a total
purchase price (including consideration of $1.5 million to outside investors) aggregating $35.9 million. Concurrently with the
acquisition, HDM entered into several consulting and non-competition agreements for a consideration of $4.1 million. The acquisition
was accounted for using the purchase method in accordance with ASC 805, “Business Combinations”. The Company recognized
and measured goodwill as of the acquisition date, as the excess of the fair value of the consideration paid over the fair value
of the identified net assets acquired.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
9 – CONTROLLING AND NONCONTROLLING INTERESTS (Continued)
On
January 8, 2015, the Company purchased 20% of the Class A members ownership interest at a cost of $4,971,094. The Company has
a 60.4% ownership interest in HDM after this transaction.
Amount
of each class of HDM members’ equity as of June 30, 2019, 2018 and 2017
|
|
June
30, 2019
|
|
June
30, 2018
|
|
June
30, 2017
|
|
|
|
Class
A Members
|
|
|
|
Class
B Member
|
|
|
|
Class
A Members
|
|
|
|
Class
B Member
|
|
|
|
Class
A Members
|
|
|
|
Class
B Member
|
|
Opening
Members’ Equity
|
|
$
|
3,559,182
|
|
|
$
|
31,775,922
|
|
|
$
|
5,472,799
|
|
|
$
|
27,988,982
|
|
|
$
|
8,396,575
|
|
|
$
|
23,314,842
|
|
Share
of Net Income
|
|
|
5,196,543
|
|
|
|
20,167,864
|
|
|
|
4,221,383
|
|
|
|
18,101,940
|
|
|
|
4,058,177
|
|
|
|
16,947,624
|
|
Distributions
|
|
|
(6,600,000
|
)
|
|
|
(15,400,000
|
)
|
|
|
(6,135,000
|
)
|
|
|
(14,315,000
|
)
|
|
|
(6,981,953
|
)
|
|
|
(12,273,484
|
)
|
Ending
Members’ Equity
|
|
$
|
2,155,725
|
|
|
$
|
36,543,786
|
|
|
$
|
3,559,182
|
|
|
$
|
31,775,922
|
|
|
$
|
5,472,799
|
|
|
$
|
27,988,982
|
|
NOTE
10 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES
Long-term
debt, notes payable and capital leases consist of the following:
|
|
2019
|
|
2018
|
Note
payable requiring monthly payments of interest at a rate of 7% until May 2009 followed by 240 monthly payments of $4,472 through
October 2026. The loan is collateralized by a building with a net book value of $481,666 as of June 30, 2019.
|
|
$
|
306,056
|
|
|
$
|
336,781
|
|
The
revolving credit note was extended to August 2020. The Company can prepay the loan in whole or part in multiples of $100,000
at any time without penalty. The note bears interest at a rate of 5.25% per annum and is payable monthly. The loan is collateralized
by substantially all of the Company’s assets. The loan also contains certain financial covenants that must be met on
a periodic basis. The note was paid in full September 2, 2014. The Company still has the ability to draw down on
the line.
|
|
|
—
|
|
|
|
—
|
|
Other
(including capital leases for property and equipment).
|
|
|
7,586
|
|
|
|
7,586
|
|
|
|
|
313,642
|
|
|
|
344,367
|
|
Less:
Current portion
|
|
|
40,530
|
|
|
|
38,332
|
|
|
|
$
|
273,112
|
|
|
$
|
306,035
|
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
10 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
The
maturities of long-term debt over the next five years and thereafter are as follows:
Years
Ending June 30,
|
|
|
|
2020
|
|
|
$
|
40,530
|
|
|
2021
|
|
|
|
35,416
|
|
|
2022
|
|
|
|
38,013
|
|
|
2023
|
|
|
|
40,820
|
|
|
2024
|
|
|
|
43,767
|
|
|
Thereafter
|
|
|
|
115,096
|
|
|
|
|
|
$
|
313,642
|
|
NOTE
11 - 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. The Company believes
there are no uncertain tax positions in prior years tax filings and therefore it has not recorded a liability for unrecognized
tax benefits.
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 2015 for federal and 2014 for state.
The
Company has recorded a deferred tax asset of $20,937,747 and a deferred tax liability of $243,267 as of June 30, 2019, primarily
relating to its net operating loss carryforwards of approximately $65,792,000 available to offset future taxable income through
2030. The net operating losses begin to expire in 2023 for federal tax and state income tax purposes.
Future
ownership changes as determined under Section 382 of the Internal Revenue code could further limit the utilization of net operating
loss carryforwards. As of June 30, 2019, no such changes in ownership have occurred.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
11 - INCOME TAXES (Continued)
The
ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which
temporary differences become deductible or when such net operating losses can be utilized. The Company considers projected future
taxable income, the regulatory environment of the industry, and tax planning strategies in making this assessment. At present,
the Company believes that it is more likely than not that the benefits from certain deferred tax asset carryforwards, will not
all be fully realized. In recognition of this inherent risk, a valuation allowance was established for the partial value of the
deferred tax asset, (principally related to research and development tax credits).
A
valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of the remainder of the
valuation.
The
valuation allowance for deferred tax assets decreased during the year ended June 30, 2019, by approximately $2,350,000. The valuation
allowance decreased by approximately $27,600,000 during the year ended June 30, 2018, of which $16,000,000 was the result of the
revalued deferred tax assets due to the Tax Cuts and Jobs Act and the benefits expected to be realized from the usage of net operating
losses given the Company’s current and projected profitable operations.
Components
of the provision (benefit) for income taxes are as follows:
|
|
Years
Ended June 30,
|
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
185,000
|
|
|
$
|
250,000
|
|
State
|
|
|
250,000
|
|
|
|
265,000
|
|
|
|
357,235
|
|
Subtotal
|
|
|
250,000
|
|
|
|
450,000
|
|
|
|
607,235
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
deferred taxes
|
|
|
1,685,299
|
|
|
|
(4,132,590
|
)
|
|
|
(4,552,702
|
)
|
State
deferred taxes
|
|
|
70,221
|
|
|
|
(787,160
|
)
|
|
|
(416,967
|
)
|
AMT
Credits
|
|
|
—
|
|
|
|
(1,200,000
|
)
|
|
|
—
|
|
Subtotal
|
|
|
1,755,520
|
|
|
|
(6,119,750
|
)
|
|
|
(4,969,669
|
)
|
|
|
$
|
2,005,520
|
|
|
$
|
(5,669,750
|
)
|
|
$
|
(4,362,434
|
)
|
A
reconciliation of the federal statutory income tax rate to the Company's effective tax rate as reported is as follows:
|
|
Years
Ended June 30,
|
|
|
2019
|
|
2018
|
|
2017
|
Taxes
at federal statutory rate
|
|
|
21.0
|
%
|
|
|
27.7
|
%
|
|
|
35.0
|
%
|
State
and local income taxes (benefit), net of federal benefit
|
|
|
4.0
|
%
|
|
|
4.0
|
%
|
|
|
4.0
|
%
|
Non
Controlling interest
|
|
|
(5.8
|
)%
|
|
|
(6.8
|
)%
|
|
|
(8.2
|
)%
|
Permanent
differences
|
|
|
(3.5
|
)%
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
Tax
Cuts and Jobs Act Rate Change
|
|
|
0
|
%
|
|
|
(26.9
|
)%
|
|
|
0
|
%
|
Decrease
in the valuation allowance
|
|
|
(2.6
|
)%
|
|
|
(18.5
|
)%
|
|
|
(55.7
|
)%
|
AMT
Credits
|
|
|
0
|
%
|
|
|
(6.4
|
)%
|
|
|
0
|
%
|
Other
|
|
|
(4.2
|
)%
|
|
|
(1.8
|
)%
|
|
|
2.2
|
%
|
Effective
income tax rate
|
|
|
8.9
|
%
|
|
|
(28.6
|
)%
|
|
|
(22.6
|
)%
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
11 - INCOME TAXES (Continued)
The
Tax Cuts and Jobs Act was signed into law on December 22, 2017 and makes numerous changes to the Internal Revenue Code. Among
other changes, the Act reduces the US corporate income tax rate to 21% effective January 1, 2018. Because the Act became effective
mid-way through the Company’s tax year, the Company had a US statutory income tax rate of 27.7% for the fiscal 2018 and
will have a 21% statutory income tax rate for fiscal years thereafter.
Under
ASC740, Accounting for Income Taxes, the enactment of the Tax Act also requires companies, to recognize the effects of changes
in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period
in which the new legislation is enacted. The Company’s gross deferred tax assets and liabilities were revalued from 35%
to 21%.
As
of June 30, 2019, the Company has net operating loss (“NOL”) carryforwards of approximately $65,792,000 that will
be available to offset future taxable income. The utilization of certain of the NOLs is limited by separate return limitation
year rules pursuant to Section 1502 of the Internal Revenue Code.
The
Company has, for federal income tax purposes, research and development tax credits and investments tax credits carryforwards aggregating
$4,602,000. However, the realization of these credits may be limited as a result of expiring prior to their utilization. These
credits can only be applied after all net operating losses have been used, which expire through 2030. As such, the Company has
established a valuation reserve for anticipated unused credits of $3,902,000.
As
of June 30, 2019, the Company has $1,200,000 in alternative minimum tax credits. In connection with tax reform, these credits
have been eliminated. Tax reform allows for corporations to carryover such unused tax credits to offset regular tax or apply for
a cash refund. As of June 30, 2018, the Company recorded an income tax receivable for expected cash refunds. The Company anticipates
receiving its first installment of reimbursement of $600,000 with the filiing of its June 30, 2019 income tax return to be filed
in fiscal 2020.
In
addition, for New York State income tax purposes, the Company has tax credit carryforwards aggregating approximately $250,000
which, are accounted for under the flow-through method. The utilization of these credits is also expected to be limited.
The
Company is also under audit with New York State for income tax and does not expect any material adjustments.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
11 - INCOME TAXES (Continued)
Significant
components of the Company's deferred tax assets and liabilities at June 30, 2019 and 2018 are as follows:
|
|
June
30,
|
|
|
2019
|
|
2018
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
3,011,480
|
|
|
$
|
3,262,504
|
|
Non-deductible
accruals
|
|
|
861,345
|
|
|
|
752,595
|
|
Net
operating carryforwards
|
|
|
16,448,054
|
|
|
|
20,665,597
|
|
Tax
credits
|
|
|
4,601,801
|
|
|
|
4,330,769
|
|
Inventory
|
|
|
65,081
|
|
|
|
55,514
|
|
Property
and equipment and depreciation
|
|
|
192,133
|
|
|
|
213,781
|
|
|
|
|
25,179,894
|
|
|
|
29,280,760
|
|
Valuation
allowance
|
|
|
(4,242,147
|
)
|
|
|
(6,591,749
|
)
|
Total
deferred tax assets
|
|
|
20,937,747
|
|
|
|
22,689,011
|
|
Intangibles
|
|
|
(243,267
|
)
|
|
|
(239,011
|
)
|
Total
deferred tax liabilities
|
|
|
(243,267
|
)
|
|
|
(239,011
|
)
|
Net
deferred tax asset
|
|
$
|
20,694,480
|
|
|
$
|
22,450,000
|
|
NOTE
12 - OTHER CURRENT LIABILITIES
Included
in other current liabilities are the following:
|
|
June
30,
|
|
|
2019
|
|
2018
|
Accrued
salaries, commissions and payroll taxes
|
|
$
|
3,897,833
|
|
|
$
|
3,438,087
|
|
Litigation
accruals
|
|
|
145,029
|
|
|
|
145,029
|
|
Sales
tax payable
|
|
|
1,671,488
|
|
|
|
2,092,403
|
|
Legal
and other professional fees
|
|
|
125,567
|
|
|
|
119,262
|
|
Accounting
fees
|
|
|
105,000
|
|
|
|
125,000
|
|
Self-funded
health insurance reserve
|
|
|
67,825
|
|
|
|
79,129
|
|
Accrued
interest and penalty
|
|
|
1,054,134
|
|
|
|
1,497,429
|
|
Other
|
|
|
510,540
|
|
|
|
681,656
|
|
|
|
$
|
7,577,416
|
|
|
$
|
8,177,995
|
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
13 - COMMITMENTS AND CONTINGENCIES
Leases
The
Company rents its operating facilities and certain equipment, pursuant to operating lease agreements expiring at various dates
through June 2028. The leases for certain facilities contain escalation clauses relating to increases in real property taxes as
well as certain maintenance costs.
Future
minimum operating lease commitments consisted of the following at June 30, 2019:
Year
Ending June 30,
|
|
Facilities
And Equipment
(Operating Lease)
|
|
2020
|
|
|
$
|
4,655,396
|
|
|
2021
|
|
|
|
4,323,037
|
|
|
2022
|
|
|
|
3,396,273
|
|
|
2023
|
|
|
|
2,778,617
|
|
|
2024
|
|
|
|
2,350,193
|
|
|
Thereafter
|
|
|
|
5,081,636
|
|
|
Total
minimum obligations
|
|
|
$
|
22,585,152
|
|
Rent
expense for operating leases approximated $4,688,000, $4,762,000 and $4,505,000, for the years ended June 30, 2019, 2018 and 2017,
respectively.
The
Company received approval from the Suffolk County IDA on February 29, 2016 of a 50% property tax abatement, valued at $440,000,
over a 10 year period commencing January 2017.
Employee
Benefit Plans
The
Company has a non-contributory 401(k) Plan (the “401(k) Plan”). The 401(k) Plan covers all non-union employees who
are at least 21 years of age with no minimum service requirements. There were no employer contributions to the Plan for the years
ended June 30, 2019, 2018 and 2017.
The
stockholders of the Company approved the 2000 Employee Stock Purchase Plan (“ESPP”) at the Company’s annual
stockholders’ meeting in April 2000. The ESPP provides for eligible employees to acquire common stock of the Company at
a discount, not to exceed 15%. This plan has not been put into effect as of June 30, 2019.
Stipulation
Agreements
The
Company has entered into stipulation agreements with a number of its creditors that in the aggregate total $142,299, which is
included in other current liabilities and other liabilities on the Company’s balance sheet as of June 30, 2019. The monthly
payments total $15,859.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
13 - COMMITMENTS AND CONTINGENCIES (Continued)
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.
Matt
Malek Madison v. Fonar Corporation, United States District Court, Northern District of California, was commenced by plaintiff
on August 27, 2007 to recover a down payment for a scanner in the amount of $300,000, with interest. The plaintiff sought costs
of suit and attorney’s fees as well. The Company answered the complaint and sued the plaintiff for breach of contract in
the amount of $450,000. Although down payments are usually expressly non-refundable in the Company’s quotations and agreements,
in this case, the quotation contemplated the sale of four scanners, and provided that the deposit would be refundable with interest,
if the customer were unable to find suitable locations in the San Francisco Bay area. The issue was whether the customer made
a good faith effort to find locations; the Company’s position was that the customer did not. The case went to trial before
a judge; the parties submitted post-trial briefs, and judgment was awarded to the plaintiff. The Company appealed the trial court’s
decision, but on January 31, 2012, the U.S. Court of Appeals for the 9th Circuit affirmed the lower court’s decision awarding
the plaintiff the $300,000 deposit with prejudgment interest from July 1, 2006. The Company sought to have the Court of Appeals
reconsider the decision en banc, (by all or a larger number of the judges on the Circuit Court of Appeals), but this was not granted.
During October 2016, the Company settled with the plaintiff for $300,000.
Other
Matters
The
Company is also delinquent in filing sales tax returns for certain states, for which the Company has transacted business. The
Company has recorded tax obligations of approximately $1,671,000 plus interest and penalties of approximately $1,054,000. The
Company is in the process of determining its 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 $100,000 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 June 30, 2019 and 2018, the Company had approximately
$68,000 and $79,000, respectively, in reserve for its self-funded health insurance programs. The reserves are included in “Other
current liabilities” in the 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 years covered by this report.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
14 - SUPPLEMENTAL CASH FLOW INFORMATION
During
the years ended June 30, 2019, 2018 and 2017, the Company paid $165,172, $44,767 and $162,022 for interest, respectively.
During
the years ended June 30, 2019, 2018 and 2017, the Company paid $304,575, $345,000 and $739,889 for income taxes, respectively.
During
the years ended June 30, 2019, 2018 and 2017, the Company issued 69,971, 0 and 106,600 shares of common stock for costs and expenses
totaling $1,954,744, $0 and $2,239,292, respectively.
NOTE
15 – RELATED PARTY TRANSACTIONS
The
CEO and President of the Company is a minority owner of a billing company, which performs billing and collection services with
respect to No-Fault and Workers’ Compensation claims of the Company’s clients. The monthly fee charged to the Company
is $85,000. On June 1, 2017, the Company also entered into a one year renewable agreement to provide IT services to the billing
company for a monthly fee of $23,884. The agreement was renewed on June 1, 2019 for another year.
Bensonhurst
MRI Limited Partnership, in which the CEO and President of the Company holds an interest, is party to an agreement with the Company
for the service and maintenance of its Upright MRI Scanner for a price of $110,000 per annum.
A
limited liability company of which the CEO and President of the Company is an owner also had a 1.375% interest in Yonkers Diagnostic
Management, LLC, a 4.5% interest in Turnkey Services of New York, LLC and a 4.3% interest in TK2 Equipment Management, LLC. Entities
in which the Executive Vice President and COO and his family had an interest had a 0.75% in Yonkers and a 5.9% in TK2 Equipment
Management . The Company acquired these entities, or the portion thereof not already owned by the Company, through a series of
merger transactions for $1,780,000 in the case of Yonkers, $1,147,715 in the case of Turnkey Services and $3,075,852 in the case
of TK2 Equipment Management.
A
company of which the CEO and President of the Company is an owner and a company in which the Executive Vice President and COO
has an interest also hold a 1.7% and 2.8% interest, respectively, in Turnkey Management of Great Neck, LLC, an entity for which
the Company performed management services. The Company acquired this through a merger transaction for $1,312,766.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
16 - SEGMENT AND RELATED INFORMATION
The
Company provides segment data in accordance with the provisions of ASC topic 280, “Disclosures about Segments of an Enterprise
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. All intersegment
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:
|
|
Manufacturing
and Servicing of Medical
|
|
Management
of Diagnostic Imaging
|
|
|
Fiscal
2019:
|
|
Equipment
|
|
Center
|
|
Totals
|
Net
revenues from external customers
|
|
$
|
10,013,394
|
|
|
$
|
77,179,493
|
|
|
$
|
87,192,887
|
|
Intersegment
net revenues *
|
|
$
|
907,084
|
|
|
$
|
—
|
|
|
$
|
907,084
|
|
(Loss)
Income from operations
|
|
$
|
(3,419,944
|
)
|
|
$
|
25,554,136
|
|
|
$
|
22,134,192
|
|
Depreciation
and amortization
|
|
$
|
370,001
|
|
|
$
|
3,466,490
|
|
|
$
|
3,836,491
|
|
Compensatory
element of stock issuances
|
|
$
|
1,990,380
|
|
|
$
|
—
|
|
|
$
|
1,990,380
|
|
Total
identifiable assets
|
|
$
|
25,065,808
|
|
|
$
|
105,198,093
|
|
|
$
|
130,263,901
|
|
Capital
expenditures
|
|
$
|
746,768
|
|
|
$
|
2,737,081
|
|
|
$
|
3,483,849
|
|
Fiscal
2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues from external customers
|
|
$
|
9,837,269
|
|
|
$
|
71,678,725
|
|
|
$
|
81,515,994
|
|
Intersegment
net revenues *
|
|
$
|
901,250
|
|
|
$
|
—
|
|
|
$
|
901,250
|
|
(Loss)
Income from operations
|
|
$
|
(2,982,778
|
)
|
|
$
|
22,666,989
|
|
|
$
|
19,684,211
|
|
Depreciation
and amortization
|
|
$
|
353,307
|
|
|
$
|
3,546,544
|
|
|
$
|
3,899,851
|
|
Compensatory
element of stock issuances
|
|
$
|
1,954,744
|
|
|
$
|
—
|
|
|
$
|
1,954,744
|
|
Total
identifiable assets
|
|
$
|
32,364,298
|
|
|
$
|
85,946,647
|
|
|
$
|
118,310,945
|
|
Capital
expenditures
|
|
$
|
346,608
|
|
|
$
|
2,540,169
|
|
|
$
|
2,886,777
|
|
Fiscal
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues from external customers
|
|
$
|
11,219,188
|
|
|
$
|
66,817,398
|
|
|
$
|
78,036,586
|
|
Intersegment
net revenues *
|
|
$
|
1,200,000
|
|
|
$
|
—
|
|
|
$
|
1,200,000
|
|
(Loss)
Income from operations
|
|
$
|
(2,292,312
|
)
|
|
$
|
21,388,392
|
|
|
$
|
19,096,080
|
|
Depreciation
and amortization
|
|
$
|
324,550
|
|
|
$
|
3,209,014
|
|
|
$
|
3,533,564
|
|
Compensatory
element of stock issuances
|
|
$
|
2,397,276
|
|
|
$
|
—
|
|
|
$
|
2,397,276
|
|
Total
identifiable assets
|
|
$
|
29,103,809
|
|
|
$
|
69,658,676
|
|
|
$
|
98,762,566
|
|
Capital
expenditures
|
|
$
|
212,983
|
|
|
$
|
2,793,331
|
|
|
$
|
3,006,314
|
|
*
Amounts eliminated in consolidation
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
16 - SEGMENT AND RELATED INFORMATION (Continued)
Export
Product Sales
The
Company’s areas of operations are principally in the United States. The Company had export sales of medical equipment amounting
to 5.3%, 41.5% and 55.9% of product sales revenues to third parties for the years ended June 30, 2019, 2018 and 2017, respectively.
The
foreign product sales, as a percentage of product sales to unrelated parties, were made to customers in the following countries:
|
|
For
the Years Ended June 30,
|
|
|
2019
|
|
2018
|
|
2017
|
United
Arab Emirates
|
|
|
—
|
%
|
|
|
7.1
|
%
|
|
|
45.4
|
%
|
Canada
|
|
|
.3
|
|
|
|
—
|
|
|
|
—
|
|
England
|
|
|
.3
|
|
|
|
29.9
|
|
|
|
4.8
|
|
Germany
|
|
|
—
|
|
|
|
4.5
|
|
|
|
—
|
|
Puerto
Rico
|
|
|
4.7
|
|
|
|
—
|
|
|
|
5.7
|
|
|
|
|
5.3
|
%
|
|
|
41.5
|
%
|
|
|
55.9
|
%
|
Foreign
Service and Repair Fees
The
Company’s areas of service and repair are principally in the United States. The Company had foreign revenues of service
and repair of medical equipment amounting to 5.9%, 5.0% and 4.6% of consolidated net service and repair fees for the years ended
June 30, 2019, 2018 and 2017, respectively. Foreign service and repair fees, as a percentage of total service and repair fees,
were provided principally to the following countries:
|
|
For
the Years Ended June 30,
|
|
|
2019
|
|
2018
|
|
2017
|
Puerto
Rico
|
|
|
1.6
|
%
|
|
|
1.5
|
%
|
|
|
1.2
|
%
|
Switzerland
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
0.2
|
|
Germany
|
|
|
1.4
|
|
|
|
1.3
|
|
|
|
1.4
|
|
England
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
0.5
|
|
United
Arab Emirates
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
—
|
|
Canada
|
|
|
0.4
|
|
|
|
—
|
|
|
|
0.1
|
|
Greece
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
0.2
|
|
Australia
|
|
|
1.0
|
|
|
|
0.9
|
|
|
|
1.0
|
|
|
|
|
5.9
|
%
|
|
|
5.0
|
%
|
|
|
4.6
|
%
|
The
Company does not have any material assets outside of the United States.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
17 – ALLOWANCE FOR DOUBTFUL ACCOUNTS
The
following represents a summary of allowance for doubtful accounts for the years ended June 30, 2019, 2018 and 2017, respectively:
Description
|
|
Balance
June 30, 2018
|
|
Additions
(1)
|
|
Deductions
|
|
Balance
June 30, 2019
|
Accounts
receivable
|
|
$
|
190,244
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
190,244
|
|
Management
and other fees receivable
|
|
|
10,983,022
|
|
|
|
(1,578,078
|
)
|
|
|
—
|
|
|
|
9,404,944
|
|
Management
and other fees receivable - related medical practices
|
|
|
1,711,385
|
|
|
|
599,346
|
|
|
|
—
|
|
|
|
2,310,731
|
|
Medical
receivables
|
|
|
22,727,698
|
|
|
|
—
|
|
|
|
22,727,698
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
|
Balance
June
30, 2017
|
|
|
|
Additions
|
|
|
|
Deductions
|
|
|
|
Balance
June
30, 2018
|
|
Accounts
receivables
|
|
$
|
190,244
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
190,244
|
|
Management
and other fees receivable
|
|
|
12,859,750
|
|
|
|
(1,744,064
|
)
|
|
|
132,664
|
|
|
|
10,983,022
|
|
Management
and other fees receivable - related medical practices
|
|
|
582,001
|
|
|
|
1,129,384
|
|
|
|
—
|
|
|
|
1,711,385
|
|
Medical
receivables
|
|
|
19,853,318
|
|
|
|
17,896,528
|
|
|
|
15,022,148
|
|
|
|
22,727,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
|
Balance
June
30, 2016
|
|
|
|
Additions
|
|
|
|
Deductions
|
|
|
|
Balance
June
30, 2017
|
|
Accounts
receivables
|
|
$
|
284,279
|
|
|
$
|
—
|
|
|
$
|
94,035
|
|
|
$
|
190,244
|
|
Management
and other fees receivable
|
|
|
13,553,005
|
|
|
|
(104,424
|
|
|
|
588,831
|
|
|
|
12,859,750
|
|
Management
and other fees receivable - related medical practices
|
|
|
392,505
|
|
|
|
582,001
|
|
|
|
392,505
|
|
|
|
582,001
|
|
Medical
receivables
|
|
|
17,451,782
|
|
|
|
16,171,434
|
|
|
|
12,547,160
|
|
|
|
19,853,318
|
|
(1)
Included in provision for bad debts.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
18 - QUARTERLY FINANCIAL DATA (UNAUDITED)
(000’s
omitted, except per share data)
|
|
September
30, 2018
|
|
December
31, 2018
|
|
March
31, 2019
|
|
June
30, 2019
|
|
Total
|
Total Revenues
– Net
|
|
$
|
20,705
|
|
|
$
|
21,225
|
|
|
$
|
22,779
|
|
|
$
|
22,484
|
|
|
$
|
87,193
|
|
Total
Costs and Expenses
|
|
|
15,163
|
|
|
|
15,245
|
|
|
|
16,171
|
|
|
|
18,480
|
|
|
|
65,059
|
|
Net
Income
|
|
|
4,492
|
|
|
|
4,864
|
|
|
|
5,201
|
|
|
|
2,665
|
|
|
|
17,222
|
|
Basic
Net Income Per Common Share Available to Common Stockholders
|
|
$
|
0.49
|
|
|
$
|
0.52
|
|
|
$
|
0.57
|
|
|
$
|
0.20
|
|
|
$
|
1.78
|
|
Diluted
Net Income Per Common Share Available to Common Stockholders
|
|
$
|
0.48
|
|
|
$
|
0.51
|
|
|
$
|
0.56
|
|
|
$
|
0.19
|
|
|
$
|
1.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2017
|
|
|
|
December
31, 2017
|
|
|
|
March
31, 2018
|
|
|
|
June
30, 2018
|
|
|
|
Total
|
|
Total Revenues
– Net
|
|
$
|
19,334
|
|
|
$
|
20,168
|
|
|
$
|
20,979
|
|
|
$
|
21,035
|
|
|
$
|
81,516
|
|
Total
Costs and Expenses
|
|
|
14,549
|
|
|
|
14,358
|
|
|
|
16,577
|
|
|
|
16,348
|
|
|
|
61,832
|
|
Net
Income
|
|
|
4,601
|
|
|
|
5,240
|
|
|
|
4,262
|
|
|
|
11,349
|
|
|
|
25,452
|
|
Basic
Net Income Per Common Share Available to Common Stockholders
|
|
$
|
0.55
|
|
|
$
|
0.62
|
|
|
$
|
0.52
|
|
|
$
|
1.47
|
|
|
$
|
3.16
|
|
Diluted
Net Income Per Common Share Available to Common Stockholders
|
|
$
|
0.54
|
|
|
$
|
0.61
|
|
|
$
|
0.51
|
|
|
$
|
1.44
|
|
|
$
|
3.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
NOTE
19 – BUSINESS COMBINATIONS
Acquisitions
On
June 15, 2017, the Company purchased 100% interest in Turnkey Equipment Management of Great Neck, LLC. The consideration and net
assets acquired is as follows:
Cash
Paid
|
|
$
|
1,312,769
|
|
Security
deposit
|
|
|
23,775
|
|
Total
Consideration
|
|
|
1,336,544
|
|
Net
assets at Fair Value
|
|
|
731,582
|
|
Goodwill
|
|
$
|
604,962
|
|
On
March 20, 2017, the Company purchased 100% interest in Radwell Leasing LLC and Radwell LLC. The net assets acquired and consideration
is as follows:
Diagnostic
Equipment
|
|
$
|
544,375
|
|
Leasehold
Improvements
|
|
|
126,237
|
|
Total
Net Assets Acquired
|
|
$
|
670,612
|
|
Stock
issued as consideration
|
|
$
|
791,210
|
|
Less
cash received - Net
|
|
|
(120,598
|
)
|
Total
Consideration
|
|
$
|
670,612
|
|
Pro
forma Results
The
results of operations of Radwell Leasing LLC, Radwell LLC and Turnkey Equipment of Great Neck LLC were diminutive and did not
affect the proforma results of operations.
NOTE
20 - REVISION
The
Company is restating its previously issued Consolidated balance sheets and Consolidated statements of cash flows as of and for
the nine month interim periods of fiscal 2019 ended March 31, 2019 to reflect a revision in presentation of short term investments
within current assets. In the aforementioned financial statements, the Company presented certain Certificates of Deposit with
financial institutions (“CDs”) with maturities greater than three months as Cash and cash equivalents, when they should
have been presented as Short-term investments. This misclassification did not impact Revenue, Operating income, Net income, Total
assets or Total current assets.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019, 2018 and 2017
The
following tables summarizes the impact of these misclassifications on the consolidated balance sheets and statements of cash
flows for the interim periods of fiscal 2019 (amount in thousands):
|
|
As
of March 31, 2019 (Unaudited)
|
Financial Statement Captions Revised
|
|
As Previously Reported
|
|
Adjustment
|
|
As Restated
|
Cash and cash equivalents
|
|
$
|
24,780
|
|
|
$
|
(15,000
|
)
|
|
$
|
9,780
|
|
Short-term investments
|
|
$
|
0
|
|
|
$
|
15,000
|
|
|
$
|
15,000
|
|
|
|
For
the Nine Months ended March 31, 2019 (Unaudited)
|
Statement of Cash Flows Captions Revised
|
|
As Previously Reported
|
|
Adjustment
|
|
As Restated
|
Cash Flows from Investing Activities
|
|
$
|
(3,157
|
)
|
|
$
|
(15,000
|
)
|
|
$
|
(18,157
|
)
|
Cash and cash equivalents - end of period
|
|
$
|
24,780
|
|
|
$
|
(15,000
|
)
|
|
$
|
9,780
|
|
NOTE
21 – SUBSEQUENT EVENTS
The
Company evaluates events that have occurred after the balance sheet date, but before the consolidated financial statements are
issued.
Subsequent
to June 30, 2019, the Company issued 89,981 shares of common stock as payment of approximately $2.0 million in other current liabilities.
FONAR
CORPORATION AND SUBSIDIARIES
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There
have been no disagreements with our independent registered public accounting firm or other matters requiring disclosure under
Regulation S-K, Item 304(b).
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As
of the end of the period covered by this Annual Report on Form 10-K, we performed an evaluation under the supervision of and with
the participation of management, including our Principal Executive Officer and our Acting Principal Financial Officer, of the
design and effectiveness of our disclosure controls and procedures(as defined in Rules 13a-15(e) or 15d-15(e) under the Securities
Exchange Act of 1934 as amended (the “Exchange Act”). Based upon that evaluation, our Principal Executive Officer
and Acting Principal Financial Officer concluded, as of the end of the period covered by this Annual Report that our disclosure
controls and procedures were not effective.
Management's
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting, as is defined in
the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of financial statements for external reporting purposes in accordance
with GAAP.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A
“material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements would not
be prevented or detected on a timely basis.
The
material weakness in our internal control over financial reporting as of June 30, 2019 was related to our short-term investments
whereby we did not maintain effective controls over the accounting for short term investments and their classifications in the
financial statements.
This
material weakness resulted from the need to record a significant adjustment at year end, whereby the Company was required to segregate
$15 million of short term investments from cash and cash equivalents in the financial statements. As a result, the company’s
misclassification also effected the statement of cash flow at June 30, 2019. Short term investments with an original maturity
of three months or more cannot be classified as cash and cash equivalents. The Company also misclassified these instruments in
its March 31, 2019 10-Q.
FONAR
CORPORATION AND SUBSIDIARIES
ITEM
9A. CONTROLS AND PROCEDURES (Continued)
Evaluation
of Disclosure Controls and Procedures
Remediation
Efforts
We
are in the process of developing certain remediation steps to address the previously disclosed material weakness discussed above
and to improve our internal control over financial reporting. The Company and the Board take the control and integrity of the
Company’s financial statements seriously and believe that the remediation plan we implement is essential to maintaining
a strong internal control environment.
We
are committed to maintaining a strong internal control environment, and believe that out remediation actions will represent significant
improvements in our controls. However, the identified material weakness in internal control over financial reporting will not
be considered remediated until controls have been designed and/or controls are in operation for a sufficient period of time for
our management to conclude that the material weakness has been remediated. Additional remediation measures may be required, which
may require additional implementation time. We will continue to assess the effectiveness of our remediation efforts in connection
with our evaluations of internal control over financial reporting.
Our
management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework
in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO-2013).
Based on this evaluation, our management concluded that our internal control over financial reporting was not effective at June
30, 2019.
Marcum
LLP, the independent registered public accounting firm that audited our consolidated financial statements included in this
annual report, has issued an adverse attestation report on the effectiveness of our internal control over financial reporting
as of June 30, 2019. Their report on the audit of internal control over financial reporting appears below.
Changes
in Internal Controls over Financial Reporting
There
have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during
the most recent fiscal quarter and year ended June 30, 2019 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To
the Board of Directors and Stockholders of
FONAR
Corporation and Subsidiaries
Opinion
on Internal Control over Financial Reporting
We
have audited FONAR Corporation and Subsidiaries’ (the “Company”) internal control over financial
reporting as of June 30, 2019, based on criteria established in Internal Control-Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the
material weakness described below, the Company did not maintain, in all material respects, effective internal control over
financial reporting as of June 30, 2019, based on criteria established in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
A
material weakness is a deficiency or combination of deficiencies in internal control over financial reporting such that
there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements
will not be prevented or detected on a timely basis. The following material weakness has been identified and included in
“Management Annual Report On Internal Control Over Financial Reporting”.
Management
has identified a material weakness in controls related to the company’s classification of certain financial
instruments as cash and cash equivalents and short-term investments. As a result, the company’s misclassification also
effected the statement of cash flows at June 30, 2019.
This
material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of
the 2019 financial statements, and this report does not affect our report dated September 30, 2019, on those consolidated
financial statements.
We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”),
the consolidated balance sheets as of June 30, 2019 and 2018 and the related consolidated statements of income, stockholders’
equity, and cash flows and the related notes for each of the three years in the period ended June 30, 2019 of the Company, and
our report dated September 30, 2019 expressed an unqualified opinion on those financial statements.
Basis
for Opinion
The
Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying “Management Annual Report
on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company's internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
(CONTINUED)
We
conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition
and Limitations of Internal Control over Financial Reporting
A
company’s internal control over financial reporting is a process designed 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. A company's internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets
that could have a material effect on the financial statements.
Because
of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that degree of compliance with the policies or procedures may deteriorate.
/s/
Marcum LLP
Marcum
llp
New
York, New York
September
30, 2019
FONAR
CORPORATION AND SUBSIDIARIES
ITEM
9B. OTHER INFORMATION
None.
PART
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors
serve from the date of their election until the next annual meeting of stockholders and until their successors are elected and
qualify. With the exception of Dr. Raymond V. Damadian, who does not receive any fees for serving as a director, each director
receives $20,000 per annum for his or her service as a director. Officers serve at the discretion of the Board of Directors.
A
majority of our board of directors is composed of independent directors: Robert J. Janoff, Charles N. O’Data and Ronald
G. Lehman. The outside directors also serve as the members of the audit committee, which is a standing committee of the board
of directors having a charter describing its responsibilities. Mr. O’Data has been designated as the audit committee financial
expert. His relevant experience is described in his biographical information.
We
have adopted a code of ethics applicable to, among other personnel, our principal executive officer, principal financial officer,
controllers and persons performing similar functions. The code is designed to deter wrongdoing and to promote: 1. honest and ethical
conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
2. full, fair, accurate, timely and understandable disclosure in reports and documents that we file or submit to the Securities
and Exchange Commission and in other public communications we make; 3. compliance with applicable governmental laws, rules and
regulations; 4. the prompt internal reporting of violations of the code to an appropriate person or persons identified in the
code and 5. accountability for adherence to the code. We will provide a copy of the code to any person who requests a copy. A
person may request a copy by writing to Fonar Corporation, 110 Marcus Drive, Melville, New York 11747, to the attention of the
Legal Department or Investor Relations.
The
officers and directors of the Company are set forth below:
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Raymond
V. Damadian
|
|
|
83
|
|
|
Chairman
of the Board of Directors, Director, Principal Financial Officer, Treasurer
|
Timothy
R. Damadian
|
|
|
55
|
|
|
President,
Chief Executive Officer
|
Luciano
B. Bonanni
|
|
|
64
|
|
|
Executive
Vice President and Chief Operating Officer
|
Claudette
J.V. Chan
|
|
|
81
|
|
|
Director
|
Robert
J. Janoff
|
|
|
92
|
|
|
Director
|
Charles
N. O'Data
|
|
|
83
|
|
|
Director
|
Ronald
G. Lehman
|
|
|
43
|
|
|
Director
|
FONAR
CORPORATION AND SUBSIDIARIES
Raymond
V. Damadian, M.D. has been the Chairman of the Board since its inception in 1978 and Treasurer since February, 2001. Up until
February 11, 2016, Dr. Damadian also served as the President and Chief Executive Officer of Fonar. Dr. Damadian was employed by
the State University of New York, Downstate Medical Center, New York, as an Associate Professor of Biophysics and Associate Professor
of Internal Medicine from 1967 until September 1979. He received an M.D. degree in 1960 from Albert Einstein College of Medicine,
New York, and a B.S. degree in mathematics from the University of Wisconsin in 1956. In addition, Dr. Damadian conducted post-graduate
work at Harvard University, where he studied extensively in the fields of physics, mathematics and electronics. Dr. Damadian is
the author of numerous articles and books on the nuclear magnetic resonance effect in human tissue, which is the theoretical basis
for the Fonar MRI scanners. He is a 1988 recipient of the National Medal of Technology. In 1989 he was inducted into the National
Inventors Hall of Fame, for his contributions in conceiving and developing the application of magnetic resonance technology to
medical applications including whole body scanning and diagnostic imaging. Dr. Damadian is the President, Treasurer and director
of Health Management Corporation of America (“HMCA”), a Manager of Imperial Management Services, LLC (“Imperial”)
and a Manager of Health Diagnostics Management, LLC (“HDM”) which three entities are subsidiaries of Fonar.
Timothy
Damadian has been the President and Chief Executive Officer of Fonar since February 11, 2016. From 2010 to 2016 he served as an
independent consultant, with a focus on the Company’s MRI facility management business. Timothy Damadian began his career
at Fonar in 1985, installing MRI scanners and components for Fonar customers. Over the course of the following 16 years, he held
positions of increasing authority, eventually becoming Vice President of Operations. In 1997, Timothy Damadian was appointed President
of the newly formed Health Management Corporation of America (HMCA), a wholly-owned subsidiary of Fonar that was formed to manage
medical and diagnostic imaging offices. In 2001, Timothy Damadian left Fonar to form Integrity Healthcare Management, Inc., a
diagnostic imaging management company that would eventually manage 11 MRI scanning centers in New York and Florida. The company
was a success and was sold to Health Diagnostics, LLC in 2007. Mr. Damadian returned to Fonar as a consultant in 2010. He also
serves as a Manager of Imperial Management Services, LLC and a Manager of Health Diagnostics Management, LLC, which are subsidiaries
of HMCA.
Luciano
B. Bonanni has served as Chief Operating Officer (COO) and Executive Vice President (EVP) for Fonar Corporation since June 27,
2016. Prior to his appointment as COO, Mr. Bonanni had served the Company as Vice President since 1989, during which time he oversaw
general operations, research and development, manufacturing, service, sales, finance, accounting and regulatory compliance.
Prior to 1989, Mr. Bonanni held the title of Vice President of Production and Engineering from the time of Fonar’s initial
public offering in 1981. Mr. Bonanni joined the Company as an electrical engineer in 1978. He holds a Bachelor of Electrical Engineering
degree from Manhattan College.
Claudette
J.V. Chan has been a Director of Fonar since October 1987 and Secretary of Fonar since January 2008. Mrs. Chan was employed from
1992 through 1997 by Raymond V. Damadian, M.D. MR Scanning Centers Management Company and since 1997 by HMCA, as "site inspector,"
in which capacity she is responsible for supervising and implementing standard procedures and policies for MRI scanning centers.
From 1989 to 1994 Mrs. Chan was employed by St. Matthew's and St. Timothy's Neighborhood Center, Inc., as the director of volunteers
in the "Meals on Wheels" program, a program which cares for the elderly. From approximately 1983 to 1989, Mrs. Chan
was President of the Claudette Penot Collection, a retail mail-order business specializing in women's apparel and gifts. Mrs.
Chan practiced and taught in the field of nursing until 1973, when her son was born. She received a bachelor of science degree
in nursing from Cornell University in 1960. Mrs. Chan is the sister of Raymond V. Damadian.
FONAR
CORPORATION AND SUBSIDIARIES
Robert
J. Janoff has been a Director of Fonar since February 1989. Mr. Janoff has been a self-employed New York State licensed private
investigator for more than thirty-five years and was a Senior Adjustor in Empire Insurance Group for more than 15 years until
retiring from that position on July 1, 1997. Mr. Janoff also served, from June 1985 to June 1991, as President of Action Data
Management Strategies, Ltd., a supplier of computer programs for use by insurance companies. Mr. Janoff was a member of the Board
of Directors of Harmony Heights of Oyster Bay, New York for over 25 years, which is a nonprofit residential school for girls with
learning disabilities.
Charles
N. O'Data has been a Director of Fonar since February 1998. From 1961 to 1997, Mr. O'Data was the Vice President for Development
for Geneva College, a liberal arts college located in western Pennsylvania. In that capacity, he acted as the College's chief
investment officer. His responsibilities included management of the College's endowment fund and fund raising. In July 1997, Mr.
O'Data retired from Geneva College after 36 years of service to assume a position of National Sales Executive for SC Johnson Company's
Professional Markets Group, a unit of SC Johnson Wax, and specialized in healthcare and education sales, a position he held until
the spring of 1999. In his capacity with SC Johnson he was responsible for sales to the nation’s three largest Group Purchasing
Organizations which included some 4,000 hospitals. Mr. O'Data presently acts as an independent financial consultant to various
entities. Mr. O'Data served on the board of The Medical Center, Beaver, Pennsylvania, now a part of Heritage Valley Health System,
a 500 bed acute care facility, for 26 years, three as its Chair. Mr. O’Data also served on the board of Amerinet, a shared-services
and group purchasing organization covering seven states. He founded The Beaver County Foundation, a Community Foundation, in 1992,
and serves as its President. Mr. O'Data is listed as a finance associate in the Middle States Association, Commission on Higher
Education. The commission is the formal accrediting body for higher education in the eastern region of the country. In this capacity
he evaluates the financial aspects of educational organizations. Mr. O’Data is a graduate of Geneva College, where he received
a B.S. degree in Economics in 1958.
Ronald
G. Lehman has been a Director of Fonar since April, 2012, when he was unanimously appointed by the remaining four Directors to
fill the vacancy resulting from the death of former Director Robert Djerejian. From October, 2009 to the present, Mr. Lehman has
served as Managing Director of Investment Banking with Bruderman Brothers, LLC, a private New York-based broker-dealer registered
with the Securities and Exchange Commission and which is a member of the Financial Industry Regulatory Authority (FINRA) and the
Securities Investor Protection Corporation (SIPC). Mr. Lehman directly manages all facets of the firm’s transaction processes,
from deal origination, to sourcing capital, to negotiating deal structures, through documentation and closing. The firm provides
buy and sell-side advisory, capital raising, and consulting services to lower middle-market companies. Mr. Lehman specializes
in advising healthcare services companies and has recently completed several recapitalizations in the industry. He also participates
in the firm’s merchant banking investments and oversees many of these assignments. From May, 2008 to October, 2009, Mr.
Lehman served as Senior Vice President of Acquisitions at Health Diagnostics, LLC, where he managed the company’s acquisition
and corporate finance activities. From March, 2000 to May, 2008, Mr. Lehman worked for various Bruderman entities as a buy and
sell-side advisor and as a principal in several private equity transactions. From September, 1998 to March, 2000, Mr. Lehman worked
at Deutsche Bank Securities, Inc. and last held the position of Associate in their Global Custody Group. Mr. Lehman graduated
from Columbia University with a B.A. in 1998.
FONAR
CORPORATION AND SUBSIDIARIES
ITEM
11. EXECUTIVE COMPENSATION.
With
the exception of the Chief Executive Officer and the Chairman of the Board of Directors, the compensation of the Company's executive
officers is based on a combination of salary and bonuses based on performance. The Chairman of the Board’s compensation
consists of a salary. The Chief Executive Officer and the Chairman of the Board have no understandings with the Company with respect
to bonuses, options or other incentives; they are not subject to our general policy later discussed.
The
Board of Directors does not have a compensation Committee. Dr. Raymond V. Damadian, Chairman of the Board, controls over 50% of
the voting power of our capital stock. Dr. Damadian is both an executive officer and a member of the Board of Directors. Dr. Damadian,
the Chief Executive Officer and the Chief Operating Officer, participate in the determination of compensation for the Company’s
management and other employees.
The
Board of Directors has established an audit committee. The members of the committee are Robert J. Janoff, Charles N. O'Data and
Ronald G. Lehman.
Our
compensation policy includes a combination of salary, commissions, bonuses, stock bonuses and stock options, designed to incentivize
our employees. There is no universal plan applicable to all of our employees. The fixed and variable components of our employees’
compensation tend to be individualized, based on a combination of the employees’ performance, responsibilities and position,
our assessment of how best to motivate a person in such a position and the needs and preferences of the particular employees,
as negotiated between employees and their supervisors or management.
There
is set forth in the following Summary Compensation Table the compensation provided by us during fiscal 2019, 2018 and 2017 to
our Principal Executive Officer, and our acting Principal Financial Officer. There is set forth in the following Outstanding Equity
Awards Table and Director Compensation Table the required information.
I.
SUMMARY COMPENSATION TABLE
Name
and All Other
Principal
Position
|
|
Year
|
|
Salary
($)
|
|
Cash
Bonuses
($)
|
|
Stock
Awards
($)
|
|
Total
Compensation
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
(e)
|
|
(f)
|
Timothy
R. Damadian
|
|
|
2019
|
|
|
$
|
0
|
|
|
$
|
155,800
|
|
|
$
|
0
|
|
|
$
|
155,800
|
|
President,
Principal
|
|
|
2018
|
|
|
$
|
0
|
|
|
$
|
155,800
|
|
|
$
|
0
|
|
|
$
|
155,800
|
|
Executive
Officer
|
|
|
2017
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
305,800
|
|
|
$
|
305,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raymond
V. Damadian
|
|
|
2019
|
|
|
$
|
153,095
|
|
|
$
|
305,800
|
|
|
$
|
0
|
|
|
$
|
458,895
|
|
Chairman
of the Board,
|
|
|
2018
|
|
|
$
|
153,095
|
|
|
$
|
305,800
|
|
|
$
|
0
|
|
|
$
|
458,895
|
|
PFO
|
|
|
2017
|
|
|
$
|
158,983
|
|
|
$
|
0
|
|
|
$
|
305,800
|
|
|
$
|
464,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Luciano
Bonanni
|
|
|
2019
|
|
|
$
|
145,825
|
|
|
$
|
0
|
|
|
$
|
159,740
|
|
|
$
|
305,565
|
|
Chief
Operating Officer and
|
|
|
2018
|
|
|
$
|
145,672
|
|
|
$
|
0
|
|
|
$
|
152,900
|
|
|
$
|
298,572
|
|
Executive
Vice President
|
|
|
2017
|
|
|
$
|
149,378
|
|
|
$
|
0
|
|
|
$
|
305,800
|
|
|
$
|
455,178
|
|
FONAR
CORPORATION AND SUBSIDIARIES
II.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Name
|
|
Number
Of Securities Underlying Unexercised Options (#) Exercisable
|
|
Option
Exercise
Price
($)
|
|
Option
Exercise
Expiration
Date
|
|
|
(a)
|
|
(b)
|
|
(c)
|
Timothy
R. Damadian, President and Principal Executive Officer
|
|
|
0
|
|
|
|
0
|
|
|
N/A
|
Raymond
V. Damadian, Chairman of the Board, Treasurer and Principal Financial Officer
|
|
|
0
|
|
|
|
0
|
|
|
N/A
|
Luciano
Bonanni, Chief Operating Officer and Executive Vice President
|
|
|
0
|
|
|
|
0
|
|
|
N/A
|
III.
DIRECTOR COMPENSATION
Name
|
|
Fees
Earned or
Paid
in Cash ($)
|
|
Total
($)
|
Raymond
V. Damadian
|
|
$
|
0
|
|
|
$
|
0
|
|
Claudette
J.V. Chan
|
|
$
|
20,000
|
|
|
$
|
20,000
|
|
Robert
J. Janoff
|
|
$
|
20,000
|
|
|
$
|
20,000
|
|
Charles
N. O’Data
|
|
$
|
20,000
|
|
|
$
|
20,000
|
|
Ronald
G. Lehman
|
|
$
|
20,000
|
|
|
$
|
20,000
|
|
EMPLOYEE
COMPENSATION PLANS
Fonar’s
2005 Incentive Stock Option Plan, adopted on February 15, 2005, was intended to qualify as an incentive stock option plan under
Section 422A of the Internal Revenue code of 1954, as amended. The Plan permits the issuance of stock options covering an aggregate
of 80,000 shares of common stock of Fonar. The options issued have an exercise price equal to the fair market value of the underlying
stock on the date the option is granted, are non-transferable, are exercisable for a period not exceeding ten years, and expire
upon the voluntary termination of employment. The Plan terminated on February 14, 2015.
Fonar
adopted its 2010 Stock Bonus Plan, on June 28, 2010. This Plan permits Fonar to issue an aggregate of 2,000,000 shares of common
stock of Fonar as bonus or compensation. As of June 30, 2019, 646,905 shares were available for issuance. The Company has approved
the issuance of 69,971 shares under the Plan.
FONAR
CORPORATION AND SUBSIDIARIES
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The
following table sets forth the number and percentage of shares of Fonar’s securities held by each director, by each person
known by us to own in excess of five percent of Fonar’s voting securities and by all officers and directors as a group as
of September 10, 2019.
Name
and Address of Beneficial Owner (1)
|
|
Shares
Beneficially Owned
|
|
Percent
of Class
|
Raymond
V. Damadian, M.D.
|
|
|
|
|
|
|
|
|
c/o
Fonar Corporation, Melville, New York
|
|
|
|
|
|
|
|
|
Director
and Treasurer
|
|
|
|
|
|
|
|
|
5%
+ Stockholder
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
121,402
|
|
|
|
1.88
|
%
|
Class
C Stock
|
|
|
382,447
|
|
|
|
99.98
|
%
|
lass
A Preferred
|
|
|
19,093
|
|
|
|
6.09
|
%
|
Timothy
R. Damadian,
|
|
|
|
|
|
|
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
38,000
|
|
|
|
*
|
|
Class
A Preferred
|
|
|
800
|
|
|
|
*
|
|
Luciano
B. Bonanni,
|
|
|
|
|
|
|
|
|
Executive
Vice President
|
|
|
|
|
|
|
|
|
And
Chief Operating Officer
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
41,660
|
|
|
|
*
|
|
Class
A Preferred
|
|
|
1,285
|
|
|
|
*
|
|
Claudette
Chan
|
|
|
|
|
|
|
|
|
Director
and Secretary
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
106
|
|
|
|
*
|
|
Class
A Preferred
|
|
|
32
|
|
|
|
*
|
|
Robert
J. Janoff
|
|
|
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
0
|
|
|
|
*
|
|
Class
A Preferred
|
|
|
0
|
|
|
|
*
|
|
Charles
N. O'Data
|
|
|
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
658
|
|
|
|
*
|
|
Ronald
G. Lehman
|
|
|
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
1,213
|
|
|
|
*
|
|
All
Officers and Directors
|
|
|
|
|
|
|
|
|
as
a Group (7 persons)
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
202,039
|
|
|
|
3.15
|
%
|
Class
C Stock
|
|
|
382,368
|
|
|
|
99.98
|
%
|
Class
A Preferred
|
|
|
21,210
|
|
|
|
6.79
|
%
|
___________________________
*
Less than one percent
_______________________
1.
Address provided for each beneficial owner owning more than five percent of the voting securities of Fonar.
FONAR
CORPORATION AND SUBSIDIARIES
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant
to HMCA’s management agreements with its clients, HMCA provides comprehensive non-medical management and administrative
services, including billing and collection of accounts, payroll and accounts payable processing, office facilities, supplies and
utilities. Under the management agreements, HMCA also provides service for the Fonar Upright® MRI scanners through Fonar.
In total, as of September 5, 2019, 22 of our clients had management agreements with HMCA. Four sites in Florida are owned and
operated directly by HMCA subsidiaries.
The
fees charged under the management agreements are flat fees charged on a monthly basis. These fees ranged from $54,000 to $481,000
per month in fiscal 2019.
Dr.
Raymond Damadian, the Chairman of the Board and principal stockholder of the Company, owns three of the imaging facilities in
Florida managed by HMCA. The facilities owned by Dr. Damadian in Florida paid HMCA flat rate monthly fees ranging from $222,200
to $322,636 per month during fiscal 2019. These fees are renegotiable on an annual basis.
During
the fiscal years ended June 30, 2019, June 30, 2018 and June 30, 2017, the net revenues received by HMCA from the imaging facilities
owned by Dr. Damadian were approximately $9.4 million, $9.0 million and $8.2 million respectively.
Dr.
Damadian owns a .75% interest in Health Management Company of America’s Class A membership interests. Dr. Damadian is also
a Manager of Health Management Company of America.
Timothy
Damadian, the President and Chief Executive Officer of Fonar, is one of the owners of a billing company, which performs billing
and collection services for HMCA with respect to No-Fault and Workers’ Compensation claims of HMCA’s clients. The
monthly fee charged to HMCA is $85,000. On June 1, 2017, the Company also entered into a one year renewable agreement to provide
IT services to the billing company for a monthly fee of $23,884. Timothy Damadian is also a Manager of Health Management Company
of America. The agreement was renewed on June 1, 2018 and June 1, 2019.
A
limited liability company of which Timothy Damadian is an owner also had a 1.375% interest in Yonkers Diagnostic Management, LLC,
a 4.5% interest in Turnkey Services of New York, LLC and a 4.3% interest in TK2 Equipment Management, LLC. Entities in which Mr.
Bonanni and his family had an interest had a 0.75% in Yonkers and a 5.9% in TK2 Equipment Management. During fiscal 2017 HMCA
acquired these entities, or the portion thereof not already owned by HMCA, through a series of merger transactions for $1,780,000
in the case of Yonkers, $1,147,715 in the case of Turnkey Services and $3,075,852 in the case of TK2 Equipment Management.
A
company of which Timothy Damdian is an owner and a company in which Mr. Bonanni has an interest also held a 1.7% and 2.8% interest,
respectively, in Turnkey Management of Great Neck, LLC, a company for which HMCA performed services. During Fiscal 2017, Turnkey
Management of Great Neck, LLC was acquired by the Company through a merger transaction for $1,312,766.
Ronald
Lehman, a Director of Fonar, holds a .0378% interest in Health Management Company of America’s Class A membership interests.
Claudette
J.V. Chan, a Director and the Secretary of Fonar, owns a .0378% interest in Health Management Company of America’s Class
A Membership interests.
FONAR
CORPORATION AND SUBSIDIARIES
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Audit
Fees
The
aggregate fees billed by Marcum LLP for the audit of our annual consolidated financial statements for the fiscal year ended June
30, 2019 and the reviews of the financial statements included in our Forms 10-Q for the fiscal year ended June 30, 2019 were $420,000.
The
aggregate fees billed by Marcum LLP for the audit of our annual financial statements for the fiscal year ended June 30, 2018 and
the reviews of the financial statements included in our Forms 10-Q for the fiscal year ended June 30, 2018 were $421,000.
Audit
Related Fees
No
fees were billed by Marcum LLP for the fiscal years ended June 30, 2019 or June 30, 2018 for services related to the Audit or
review of our financial statements that are not included under the caption “Audit Fees”.
No
fees were billed by Marcum LLP for the fiscal years ended June 30, 2018 or June 30, 2017 for designing, operating, supervising
or implementing any of our financial information systems or any hardware or software systems for our financial information.
Tax
Fees
No
fees were billed by Marcum LLP for tax compliance, tax advice and tax planning in the fiscal year ended June 30, 2019.
No
fees billed by Marcum LLP for tax compliance, tax advice and tax planning in the fiscal year ended June 30, 2018.
All
Other Fees
No
fees were billed by Marcum LLP for any other services during the fiscal years ended June 30, 2019 and June 30, 2018.
Since
January 1, 2003, the audit committee has adopted policies and procedures for pre-approving all non-audit work performed by the
auditors. Specifically, the committee must pre-approve the use of the auditors for all such services. The audit committee has
pre-approved all non-audit work since that time and in making its determination has considered whether the provision of such services
was compatible with the independence of the auditors.
Our
audit committee believes that the provision by Marcum LLP of services in addition to audit services in previous years were compatible
with maintaining their independence.
FONAR
CORPORATION AND SUBSIDIARIES
PART
IV
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a)
FINANCIAL STATEMENTS AND SCHEDULES
The
following consolidated financial statements are included in Part II, Item 8.
Report
of Independent Registered Public Accounting Firm
Consolidated
Balance Sheets as at June 30, 2019 and 2018.
Consolidated
Statements of Income for the Years Ended June 30, 2019, 2018 and 2017.
Consolidated
Statements of Stockholders' Equity for the Years Ended June 30, 2019, 2018 and 2017.
Consolidated
Statements of Cash Flows for the Years Ended June 30, 2019, 2018 and 2017.
Notes
to Consolidated Financial Statements.
Information
required by schedules called for under Regulation S-X is either not applicable or is included in the consolidated financial statements
or notes to the financial statements.
b)
REPORTS ON FORM 8-K
1.
Registrant’s Report on Form 8-K
containing the Company’s Earnings Report for Fiscal Year 2019, September 16, 2019. Commission File No. 0-10248.
2.
Registrant’s
Report on Form 8-K reporting the results of the election of directors and selection of auditors at the annual meeting of stockholders,
May 21, 2019. Commission File No. 0-10248.
c)
EXHIBITS
3.1
Certificate of Incorporation, as amended, of the Registrant incorporated by reference to Exhibit 3.1 to the Registrant's registration
statement on Form S-1,Commission File No. 33-13365. October 28, 1981.
3.2
Article Fourth of the Certificate of Incorporation,
as amended, of the Registrant incorporated by reference to Exhibit 4.1 to the Registrant's registration statement on Form S-8,
Commission File No. 33-62099.
3.3
Section A of Article Fourth of the Certificate
of Incorporation, as amended, of the Registrant incorporated by reference to Exhibit 4.3 to the Registrant’s registration
statement on Form S-3, Commission File No. 333-63782.
3.4
Section A of Article Fourth of the Certificate
of Incorporation, as amended, of the Registrant incorporated by reference to Exhibit 3.3 of the Registrant’s Annual Report
on Form 10-K for the fiscal year ended June 30, 2003, Commission File No. 0-10248.
3.5
By-Laws, as amended, of the Registrant incorporated by reference to Exhibit 3.2 to the Registrant's registration statement on
Form S-1, Commission File No. 33-13365. October 28, 1981.
4.1
Specimen Common Stock Certificate incorporated by reference to Exhibit 4.1 to the Registrant's
registration statement on Form S-1, Commission File No. 33-13365. October 28, 1981.
FONAR
CORPORATION AND SUBSIDIARIES
4.2
Specimen Class B Common Stock Certificate incorporated by reference to Exhibit 4.2 to the Registrant's registration statement
on Form S-1, Commission File No. 33-13365. October 28, 1981.
10.1
License Agreement between the Registrant and Raymond V. Damadian incorporated by reference to Exhibit 10 (e) to Form 10-K for
the fiscal year ended June 30, 1983, Commission File No. 0-10248.
10.2
Stock Purchase Agreement, dated July 31, 1997,
by and between U.S. Health Management Corporation, Raymond V. Damadian, M.D. MR Scanning Centers Management Company and Raymond
V. Damadian, incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K, July 31, 1997, commission File No: 0-10248.
10.3
Merger Agreement and Supplemental Agreement dated
June 17, 1997 and Letter of Amendment dated June 27, 1997 by and among U.S. Health Management Corporation and Affordable Diagnostics
Inc. et al., incorporated by reference to Exhibit 2.1 to the Registrant's 8-K, June 30, 1997, Commission File No: 0-10248.
10.4
Stock Purchase Agreement dated March 20, 1998
by and among Health Management Corporation of America, Fonar Corporation, Giovanni Marciano, Glenn Muraca et al., incorporated
by reference to Exhibit 2.1 to the Registrant's 8-K, March 20, 1998, Commission File No: 0-10248.
10.5
Stock Purchase Agreement dated August 20, 1998
by and among Health Management Corporation of America, Fonar Corporation, Stuart Blumberg and Steven Jonas, incorporated by reference
to Exhibit 2 to the Registrant's 8-K, September 3, 1998, Commission File No. 0-10248.
10.6
2002 Incentive Stock Option Plan incorporated
by reference to Exhibit 99.1 to the Registrant’s registration statement on Form S-8, Commission File No.: 333-96557.
10.7
Asset Purchase Agreement dated July 28,
2005 among Health Plus Management Services, L.L.C., Health Management Corporation of America, Dynamic Healthcare Management, Inc.
and Fonar Corporation, incorporated by reference to Exhibit 2 to the Registrant’s Form 8-K, August 2, 2005, Commission File
No. 0-10248.
10.8
Partnership Interest Purchase Agreement dated
September 29, 2008 by and between Diagnostic Management, LLC and Raymond V. Damadian, M.D. MR Scanning Centers Management Company,
incorporated by reference to Exhibit 10.35 to Form 10-K for the fiscal year ended June 30, 2008. Commission File No. 0-10248.
10.9
2010 Stock Bonus Plan, incorporated by reference
to Exhibit 99.1 to the Registrant’s registration statement on Form S-8, Commission File No. 333-168771.
10.10
Operating Agreement for Imperial Management
Services, LLC, incorporated by reference to Exhibit 10.37 to Form 10-K for the fiscal year ended June 30, 2011. Commission File
No. 0-10248.
10.11
Operating Agreement for Health
Diagnostics Management, LLC, incorporated by reference to Exhibit 10.38 to Form 10-K for the fiscal year ended June 30, 2013.
Commission File No. 0-10248.
10.12
Modification
to Operating Agreement for Health Diagnostics Management, LLC., incorporated by reference to Exhibit 10.38 to Form 10-K for the
fiscal year ended June 30, 2013. Commission File No. 0-10248.
FONAR
CORPORATION AND SUBSIDIARIES
10.13
Purchase
Agreement dated March 5, 2013 among Health Diagnostics Management, LLC, Health Diagnostics,
LLC and others. Incorporated by reference to Exhibit 10.1 to the Registrant’s Form
8-K filed March 11, 2013. Commission File No. 0-10248.
14.1
Code of Ethics, incorporated by reference
to Exhibit 14.1 of Registrant’s Form 10-K for the fiscal year ended June 30, 2004, Commission File No.: 0-10248.
21.1
Subsidiaries of the Registrant. See Exhibits.
23.1
Independent Registered Public Accounting Firm’s Report. See Exhibits.
31.1
Section 302 Certification. See Exhibits.
32.1
Section 906 Certification. See Exhibits.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15 (d) 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
Dated:
September 30, 2019
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By:
/s/ Timothy R. Damadian
Timothy
R. Damadian,
President
and Principal Executive Officer
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By:/s/
Raymond V. Damadian
Raymond
V. Damadian,
Principal
Financial Officer,
Chairman
of the Board and Treasurer
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Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature
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Title
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Date
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/s/
Raymond V. Damadian Raymond V. Damadian
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Chairman
of the Board of Directors, Director, Principal Financial Officer, Treasurer
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September
30, 2019
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/s/
Claudette J.V. Chan Claudette J.V. Chan
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Director
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September
30, 2019
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/s/
Robert J. Janoff
Robert
J. Janoff
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Director
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September
30, 2019
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/s/
Charles N. O'Data
Charles
N. O'Data
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Director
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September
30, 2019
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/s/
Ronald G. Lehman
Ronald
G. Lehman
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Director
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September
30, 2019
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CORPORATE
INFORMATION
Corporate
Headquarters
110
Marcus Drive
Melville,
NY 11747
(631)
694-2929
Investor
Relations
FONAR
Corporation
110
Marcus Drive
Melville,
NY 11747
(631)
694-2929
Stock
Transfer Agency
Computershare
211
Quality Circle, Suite 210
College
Station, TX 77845
Shareholder
Services Number 800 962 4284
Investor
Centre™ portal: www.computershare.com/investor
Auditors
Marcum
LLP
New
York, New York
Board
of Directors
Raymond
V. Damadian, M.D.
Chairman
of the Board
Claudette
J.V. Chan
Director
Robert
Janoff
Director
Charles
N. O'Data
Director
Ronald
G. Lehman
Director
Officers
Timothy
R. Damadian
President
and Chief Executive Officer
Raymond
V. Damadian, M.D.
Chairman
of the Board and Treasurer
Luciano
B. Bonanni
Executive
Vice President and Chief Operating Officer
Claudette
J.V. Chan
Secretary
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