SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the fiscal year ended June 30, 2014
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _____________ to _____________
Commission File No. 0-10248
___________________________
FONAR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State of incorporation)
11-2464137
(IRS Employer Identification Number)
110 Marcus Drive, Melville, New York
(Address of principal executive offices)
11747
(Zip Code)
(631) 694-2929
(Registrant's telephone number, including area code)
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
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]
FONAR CORPORATION AND SUBSIDIARIES
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 No 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,
2013 based on the closing price of $21.21 per share on such date as reported on the NASDAQ System,
was approximately $125 million. The other outstanding classes do not have a readily determinable
market value.
As of September 5, 2014, 6,050,840 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
INDEX TO 10-K
Business
Properties
Legal Proceedings
Mine Safety Disclosures Not Applicable
Market for Registrant’s Common Equity and Related Stockholder Matters
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operation.
Qualitative and Quantitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Report of Independent Registered Public Accounting Firm on Internal Control
Over Financial Reporting
Other Information
Directors and Executive Officers of the Registrant.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management
Certain Relationships and Related Transactions
Principal Accounting Fees and Services .
Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
PART I
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV
ITEM 15.
SIGNATURES
3
3
24
25
25
25
25
26
27
33
33
73
73
75
77
77
77
79
81
82
83
84
84
87
Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 32.1
Subsidiaries of the Registrant
Independent Registered Public Accounting Firm’s Consent
Section 302 Certification
Section 906 Certification
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FONAR CORPORATION AND SUBSIDIARIES
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 Management Corporation of America (“HMCA”). HMCA performs services through two
subsidiaries. In fiscal 2011, HMCA assigned its assets and liabilities to a limited liability company,
Imperial Management Services, LLC (“Imperial”) for a controlling interest in Imperial. In addition to
Imperial, in fiscal 2013, HMCA purchased a 50.5% interest in another limited liability company, Health
Diagnostic Management, LLC (“HDM”), which, with some exceptions, conducts the same business as
HMCA. HMCA and HDM provide management services, administrative services, billing and collection
services, office space, equipment, repair, maintenance service, and clerical and other non-medical
personnel to medical providers, engaged in diagnostic imaging. HDM, however, in addition to acting as a
management company, owns and operates four diagnostic imaging facilities in Florida, where the
corporate practice of medicine is permitted.
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 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 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).
The product we are promoting is our Upright® MRI. Our patented Upright® MRI is unique in the industry
in that it allows patients to be scanned in fully weight-bearing conditions, such as standing, sitting or
bending in any position that causes adverse symptoms. This means that an abnormality or injury, such
as a slipped disk can be visualized where it may not have been seen with the patient lying down. 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.
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.
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FONAR CORPORATION AND SUBSIDIARIES
COMPANY OVERVIEW.
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 diagnoses 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 under full weight-bearing conditions, 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.
Although we are emphasizing sales of the Upright® MRI, because of uncertain economic conditions and
the resulting weakening demand, revenues recognized from the sale of Upright® MRI scanners
decreased in fiscal 2014 by 70.26% from fiscal 2013 (approximately $3.2 million in fiscal 2013 compared
to approximately $957,000 in fiscal 2014). Note that we recognize revenue on a percentage of
completion basis. Accordingly, revenue is recognized as each sub-assembly of a scanner is
manufactured. Consequently the revenues for a fiscal period do not necessarily relate to orders placed in
that period or payments received.
The Company completed a private placement of equity and succeeded in raising $6,000,000 on May 2,
2011. The offering consisted of Preferred Class A membership interests in a newly formed limited liability
company, Imperial Management Services, LLC (“Imperial”). Class B membership interests, all of which
were retained by the Company’s subsidiary, HMCA, hold a 90% equity interest in Imperial. The Class A
membership interests are entitled to receive a dividend of 18% per annum of their capital contributions to
the limited liability company. HMCA contributed all of its assets, together with its liabilities, to Imperial as
HMCA’s capital contribution.
On February 13, 2013, HMCA entered into an agreement to acquire a 50.5% interest in Health
Diagnostics Management, LLC (“HDM”). On March 5, 2013 HDM purchased from Health Diagnostics,
LLC (“HD”) and certain of its subsidiaries, a business managing 14 MRI scanning centers, located in the
States of New York and Florida for a total purchase price aggregating $35.9 million.
As a result of the Imperial and HDM transactions, as of August 31, 2014, HMCA through Imperial and
HDM, managed a total of 24 MRI scanning centers, 17 of which are located in New York and 7 of which
are located in Florida, and 23 of which have Upright® MRI scanners.
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 or 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.
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FONAR CORPORATION AND SUBSIDIARIES
For instance, the Fonar Upright® technology has demonstrated its key value on patients with the Arnold-
Chiari Syndrome, cerebellar tonsil ectopia (CTE), 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 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 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 compression which is
occurring so they can 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 Tonsil 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 which allows the patient to stand during the MRI exam. Fonar has developed a new RF receiver
and scanning protocol that for the first time allows scoliosis patients to obtain diagnostic pictures of their
spines without the risks of x-rays. A study by the National Cancer Institute (2000) of 5,466 women with
scoliosis reported a 70% increase in breast cancer resulting from 24.7 chest x-rays these patients
received on the average in the course of their scoliosis treatment.
The Upright® MRI 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 for a large (42”) flat-screen TV that is mounted on the wall. The default position for
the bed is a tilt back of seven degrees that minimizes patient motion. Special 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.
The Fonar 360™ is an enlarged room sized magnet in which the floor, ceiling and walls of the scan room
are part of the magnet frame. Consequently, this scanner allows 360 degree access to the patient, and
physicians and family members are able to enter the scanner and approach the patient.
Although the Fonar 360™ MRI is not now being actively marketed, the first Fonar 360™ MRI scanner,
installed at the Oxford-Nuffield Orthopedic Center in Oxford, United Kingdom, is carrying a full diagnostic
imaging caseload.
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FONAR CORPORATION AND SUBSIDIARIES
The Upright® MRI is designed to maximize image quality through an optimal combination of signal-to-
noise (S/N) and contrast-to-noise (C/N) ratios. The technical improvements realized in this scanner’s
design over its lower field strength predecessors also include increased image-processing speed and
diagnostic flexibility.
Fonar created the high-field open MRI market segment. High-field open MRIs operate at significantly
higher magnetic field strengths than the 0.2-0.35 Tesla open MRIs that preceded them, and, therefore,
benefit 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 that must be considered when it
comes to image quality 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 provide various features allowing for versatile diagnostic capability. For example,
SMART™ scanning allows for same-scan customization of up to 63 slices, 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.
The console for these scanners includes a mouse-driven, multi-window interface for easy operation and a
42-inch, 1280 x 1024-pixel, 20-up, high-resolution image monitor with features such as electronic
magnifying glass and real-time, continuous zoom and pan.
During fiscal 2014, sales of our Upright® MRI scanners accounted for approximately 1.4% of our total
revenues and 7.9% of our medical equipment revenues, as compared to 6.5% of total revenues and
21.6% of medical equipment revenues in fiscal 2013. These results reflect the decrease in our sales of
scanners.
Our 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.
WORKS-IN-PROGRESS
All of our products and works-in-progress seek to bring to the public MRI products that are expected to
provide important advances against serious disease.
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FONAR CORPORATION AND SUBSIDIARIES
MRI takes advantage of the nuclear resonance signal elicited from the body's tissues and the exceptional
sensitivity of this signal for detecting disease. Much of the serious disease of the body occurs in the soft
tissue of vital organs. The principal diagnostic modality currently in use for detecting disease, as in the
case of x-ray mammography, is diagnostic x-rays. X-rays discriminate soft tissues, such as healthy breast
tissue and cancerous tissue poorly, because the x-ray particle traverses the various soft tissues almost
equally thereby causing target films to be nearly equally exposed by x-rays passing through adjacent soft
tissues and creating healthy and cancerous shadows on the film that differ little in brightness. The image
contrast in x-ray between cancerous and healthy breast tissue is poor, making the detection of breast
cancers by the x-ray mammogram less than optimal and forcing the mammogram to rely on the presence
or absence of microscopic stones called “microcalcifications” instead of being able to “see” the breast
cancer itself. If microcalcifications are not present to provide the missing contrast, then the breast cancer
goes undetected. They frequently are not present. 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 tissues differ so
dramatically. Liver cancer and healthy liver signals differ by 180% for example. Thus there is some
urgency to bring to market an MRI based breast scanner that can overcome the x-ray limitation and
assure that mammograms do not miss serious lesions. The added benefit of MRI mammography relative
to x-ray mammography is the elimination of the need for the patient to disrobe and the painful
compression of the breast typical of the x-ray mammogram. The patient is scanned in her street clothes
in MRI mammography. Moreover MRI mammogram scans the entire chest wall including the axilla for the
presence of nodes which the x-ray mammogram cannot reach.
We view our Upright® MRI as having the potential for being an ideal breast examination machine as it
permits the patient to be seated for the examination, which would allow easy access for an MRI guided
breast biopsy when needed. The Fonar 360™ MRI scanner would also be ideal for breast examinations.
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 reaching customers.
Fonar has targeted orthopedic surgeons and neurosurgeons, particularly spine surgeons, as important
markets for the Upright® MRI. Accordingly, Fonar has exhibited at annual meetings of The American
Academy of Orthopaedic Surgeons (AAOS); the North American Spine Society (NASS); the American
Association of Neurological Surgeons (AANS); and the Congress of Neurological Surgeons (CNS).
Recognition of the importance of the Fonar Upright® MRI continues to grow. During fiscal 2014, sales
were made to customers in Dubai, United Arab Emirates, Wasilla, Alaska and to Medserena in Frankfurt,
Germany. CEO Matthais Schulz 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 expanded its market to the United Kingdom with the opening of a Fonar
Upright® MRI scanner in London.
Even high-field 3.0 Tesla MRI scanners cannot overshadow the importance of Fonar’s unique technology.
In August, 2010, a distinguished board-certified radiologist in Florida, the owner/operator of two multi-
modality imaging centers equipped with MRIs, ordered a Fonar Upright® MRI. He initially considered
purchasing a 3.0 Tesla lie-down MRI, but decided instead to buy the Fonar Upright® Multi-Position™ MRI
when he became aware of its many unique imaging capabilities.
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FONAR CORPORATION AND SUBSIDIARIES
Fonar’s marketing strategy has been designed to reach key purchasing decision makers with information
concerning our flagship product, 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’s
advertising has been directed at 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® diagnostic
ability. Advertisements to them have appeared in the journal Spine, The Journal of Neurosurgery,
and the Journal of the American Academy of Orthopedic Surgery.
2) Radiologists: This segment of the campaign is aimed at the physicians who now have a new
modality to offer their referring physicians. Our advertisements directed to them have appeared
in Radiology and Diagnostic Imaging.
3) All Physicians: These advertising efforts have been directed to the total physician audience, so
that the vast number of doctors who send patients for MRI’s are aware of the diagnostic
advantages of the Fonar Upright® Multi-Position™ MRI. Advertisements directed to this audience
have appeared in the Journal of the American Medical Association.
This advertising has featured a series of compelling messages. One advertisement pointed out that the
AMA book, Guides to the Evaluation of Permanent Impairment, indicates that diagnosis must be
performed upright in flexion and extension. Another advertisement was educational and headlined,
“Discover the power of Upright® Imaging”. Fonar realizes that peer-to-peer communications is the most
powerful way to speak to physicians. Consequently, testimonials from surgeons and radiologists have
been used to promote our Upright® MRI scanner. The first such advertisement featured five surgeons
and two radiologists, explaining the Multi-Position® diagnostic benefits of the Fonar Upright® MRI
scanner to them. Another advertisement featured a leading radiologist, telling why he bought 12 Fonar
Upright® MRI scanners and planned to buy more.
Also, our advertising for HMCA also serves as advertising for Fonar MRI scanners. We have increased
internet awareness of our product by driving patient traffic to the Upright® scanning centers we manage
by installing Websites for every location. These websites and advertising give prospective customers of
Upright® MRI scanners a view of operating Upright® MRI centers and 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.
To meet the demand for high-field open MRI scanners, Fonar plans to devote its principal efforts to
marketing the Upright® MRI. The Upright® MRI is the only scanner in the industry that has the unique
capability of scanning patients under weight-bearing conditions and in various positions. Utilizing a 6000
gauss (0.6 Tesla field strength) iron core electromagnet, the Upright® MRI scanner magnets are among
the highest field "Open MRI" scanners in the industry.
The Upright® MRI is also suited to fill a demand for better diagnoses of scoliosis patients, who must be
standing for the exam. Scoliosis patients are typically subjected to routine x-ray exams for years. In the
past, an x-ray machine was the only modality that could provide that service. Typical MRI scanners
cannot provide this service because the patient cannot stand up inside of them. The Fonar Upright® MRI
scanner is the only MRI scanner which allows the patient to stand during the exam. The Fonar Upright®
Scanner avoids radiation of the x-ray machines currently used for scoliosis, which have been reported by
the National Cancer Institute to cause a 70% increase in the risk of breast cancer. 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.
We also will seek to introduce new MRI applications for our scanners such as MRI-directed interventions.
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FONAR CORPORATION AND SUBSIDIARIES
Our areas of operations are principally in the United States. During the fiscal year ended June 30, 2014,
2.5% of the Company's revenues were generated by foreign sales, as compared to 2.1% for fiscal 2013.
We are seeking to promote foreign sales and have sold scanners in various foreign countries. Foreign
sales, however, have not yet proved to be a significant source of revenue.
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 $10.2 million in
fiscal 2014 and $11.0 million in fiscal 2013. Notwithstanding the decrease in service revenues in fiscal
2014, we expect service revenues to be essentially stable under present circumstances as customers
enter into service contracts when the warranties on their scanners expire, replacing lost service contracts
resulting from older scanners being taken out of service.
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, 2014, we incurred expenditures of $1,760,821, none of which was
capitalized, on research and development, as compared to $1,438,560, none of which was capitalized,
during the fiscal year ended June 30, 2013.
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.
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FONAR CORPORATION AND SUBSIDIARIES
BACKLOG
Our backlog of unfilled orders at September 10, 2014 was approximately $2.9 million, as compared to
$1.5 million at September 26, 2013. It is expected that the existing backlog of orders will be filled within
the 2015 fiscal year.
PATENTS AND LICENSES
We currently have numerous patents in effect which relate to the technology and components of the 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 of 4,552 (as of February 13, 2013) MRI patents 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, 2014, 189 patents had been
issued to Fonar, and approximately 23 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
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 super conducting magnet technology.
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).
Recently our competitors have attempted to introduce higher field strength Open MRI products, but the
perception of the medical community is still that Open MRIs are useful only for anxious and
claustrophobic patients, their image quality is poor, scan times are long, image resolution is low and they
don’t do anything clinically valuable that high-field MRIs don’t already do.
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 actually does something clinically valuable that the high-field MRI machines cannot do
(i.e. positional imaging, weight-bearing imaging).
Although the patient can extend their 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 look directly out of the scanner and watch TV because there is nothing
in front of their face.
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FONAR CORPORATION AND SUBSIDIARIES
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 their 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).
The Upright® MRI’s magnetic field strength is 2-3 times that of many Open MRIs still in operation today.
Relative to the high-field systems, the Upright® MRI has two major competitive advantages:
Patient positioning sometimes trumps 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 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 (.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 place them where wanted and remove
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. No other company possesses the patented Upright® MRI
technology necessary to achieve Upright® positional MRI imaging.
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 television 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.
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FONAR CORPORATION AND SUBSIDIARIES
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.
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 quality of the images produced by its MRI scanners is generally superior to the quality 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.
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FONAR CORPORATION AND SUBSIDIARIES
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.
In addition to complying with general controls, Class II devices are also subject to special controls.
labeling requirements, guidance documents, mandatory
Special controls may
performance standards and post-market surveillance.
include special
On October 3, 2000 Fonar received FDA clearance for the Upright® MRI.
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."
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.
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FONAR CORPORATION AND SUBSIDIARIES
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.
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 five voluntary recalls. Four 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.
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FONAR CORPORATION AND SUBSIDIARIES
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.
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.
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FONAR CORPORATION AND SUBSIDIARIES
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-9001, assessment by the Notified Body. We were approved for ISO 9001 certification for its
Quality Management System in April, 1999.
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.
HEALTH MANAGEMENT CORPORATION OF AMERICA
IMPERIAL MANAGEMENT SERVICES, LLC
HEALTH DIAGNOSTICS MANAGEMENT, LLC
PHYSICIAN AND DIAGNOSTIC SERVICES MANAGEMENT BUSINESS
Health Management Corporation of America, formed under the name U.S. Health Management
Corporation and referred to as "HMCA", was organized by FONAR in March 1997. HMCA was formed as
a wholly-owned subsidiary to engage in the business of providing comprehensive management services
to diagnostic imaging facilities. The services we provide include development, administration, leasing of
office space, facilities and equipment, provision of supplies, staffing, training and supervision of non-
medical personnel, credentialing, accounting, billing and collection, assistance with compliance matters
and the development and implementation of practice growth and marketing strategies.
In May 2011, HMCA transferred all of its assets, liabilities and business to Imperial Management
Services, LLC, a limited liability company which is controlled but not wholly-owned by HMCA. Imperial is
continuing the business of HMCA utilizing the same facilities, equipment and personnel as HMCA. This
transaction did not result in a change of control or policy, but was solely a means to raise capital.
On February 13, 2013, HMCA entered into an agreement with investors to acquire a 50.5% controlling
interest in a newly formed limited liability company, Health Diagnostics Management, LLC (HDM).
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. The transfer of the Florida facilities took place in April, 2013,
following some required regulatory approvals.
HMCA is the controlling, but not sole owner of these two limited liability companies, Imperial and HDM,
through which HMCA conducts its business. The investors are passive investors, in that their
membership interests do not give them the right to participate in the management of either company.
As of September 5, 2014, HMCA and HDM managed a total of 24 MRI centers. For the 2013 fiscal year,
the revenues HMCA and HDM recognized from the MRI facilities increased to $34.3 million, and in fiscal
2014 the revenues recognized from the MRI facilities further increased to $56.6 million.
For the sake of simplicity and to avoid confusion, HMCA, Imperial and HDM are, unless otherwise
indicated referred to as “HMCA” for all periods before and after the Imperial and HDM transactions.
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FONAR CORPORATION AND 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. Our most important effort in this regard has
been to promote and facilitate the replacement of existing MRI scanners with new Fonar Upright® MRI
scanners. As a result, we presently have Upright® MRI scanners at all but one of the MRI facilities we
manage.
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, by the physician owner, not HMCA, and all medical services are
performed by the physicians and other medical personnel under the physician-owner’s supervision.
HMCA is the management company and performs services of a non-professional 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, equipment, contrast agents, such as gadolinuim,
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 may expand the
ancillary services offered in its network to include x-rays and other MRI equipment such as
extremity 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. Practices can
treat patients more efficiently if the physicians can spend less time on business and administrative
matters and more time practicing medicine.
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FONAR CORPORATION AND SUBSIDIARIES
HMCA provides its services pursuant to negotiated contracts with its clients. While HMCA believes it can
provide the greatest value to its clients by furnishing the full range of services appropriate to that client,
HMCA would also be willing to enter into contracts providing for a more limited spectrum of management
services.
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 fees paid by the facilities to HMCA are flat monthly fees. In fiscal 2013, the aggregate amount of
management fees were $1,708,739 per month up to March 5, 2013. As a result of the HDM acquisition
and the addition of 14 MRI scanning centers, the aggregate amount of management fees increased to
$3,469,438 per month commencing March 5, 2013. In fiscal 2014, the aggregate amount of management
fees was $3,483,916.
Fees under the management agreements are subject to adjustment by mutual agreement on an annual
basis.
Dr. Damadian owns three of the MRI facilities in Florida managed by HMCA. 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 2014, the aggregate amount of management fees paid to HMCA
by these sites was $615,144.
Patient fees for the Florida subsidiaries which directly bill their patients were $24,307,192 in fiscal 2014.
HMCA and HDM contract with Tritech Healthcare Management (Plainview, New York) to perform billing
and collection for their clients’ No-Fault and Workers’ Compensation business. The fixed monthly fees
were $30,000 for HMCA and $55,000 for HDM in fiscal 2014.
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 and HDM provide diagnostic imaging services to patients
referred by physicians who are either in private practice or affiliated with managed care providers or other
payor groups. 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 employed by
the diagnostic imaging facilities. Following diagnostic procedures, the images are reviewed by the
interpreting physicians who prepare a report of these tests and their findings. Reports for the New York
facilities are transcribed by HMCA personnel and reports for the Florida facilities are outsourced to
independent contractors.
HMCA develops marketing programs in an effort to establish and maintain profitable referring physician
relationships and to maximize reimbursement yields. HMCA also directs its marketing efforts at managed
care providers.
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. Two facilities in New York and two facilities in Florida have two MRI scanners. One
facility in New York and two in Florida also perform x-rays.
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FONAR CORPORATION AND SUBSIDIARIES
REIMBURSEMENT
HMCA’s clients receive reimbursements for their services through Medicare, Medicaid, managed care
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.
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.
We have experienced reimbursement reductions
beneficiaries, including reductions pursuant to the Deficit Reduction Act, or DRA.
for radiology services provided
to Medicare
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, 2014, Medicare revenues represented approximately 6.5% of the revenues for HMCA’s clients
as compared to 7.6% for the fiscal year ended June 30, 2013. In January, 2014 additional reductions
were adopted, and New York State is proposing to reduce 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.
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FONAR CORPORATION AND SUBSIDIARIES
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 2014, approximately 0.25% of the revenues of HMCA’s clients were attributable
to Medicaid, as compared to 0.5% in fiscal 2013.
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
are 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. The development and expansion of HMOs, PPOs and other managed
care organizations within our core markets could have a negative impact on utilization of our services in
certain markets and/or affect the revenues per procedure we can collect, since such organizations will
exert greater control over patients’ access to diagnostic imaging services, the selection of the provider of
such services and the reimbursement thereof.
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 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.
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FONAR CORPORATION AND SUBSIDIARIES
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.
• 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.
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FONAR CORPORATION AND SUBSIDIARIES
In fiscal 2014, approximately 6.5% of the revenues of HMCA’s clients were attributable to Medicare and
0.25% were attributable to Medicaid. In fiscal 2013, approximately 7.6% of the revenues of HMCA’s
clients were attributable to Medicare and 0.5% were attributable to Medicaid.
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
will be the lesser of the Medicare Physician Fee Schedule or the Hospital Outpatient Prospective
Payment System (HOPS) rates. Implementation of these reimbursement reductions contained in the
DRA has had an adverse effect on our business. In fiscal 2012, however, we were able to counter this
effect by increasing our clients’ scan volumes through our vigorous marketing efforts.
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 scheduled for 2007.
However, for services furnished on or after July 1, 2010, the PPACA requires the full 50% reduction to be
implemented. We believe that the impact of this final 25% reduction will not materially affect our
operations.
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 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.
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FONAR CORPORATION AND SUBSIDIARIES
We believe that we are in compliance with the current HIPAA requirements, as amended by HITECH, 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.
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.
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FONAR CORPORATION AND SUBSIDIARIES
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, and at four of the seven facilities in Florida, HMCA’s subsidiaries do so.
HMCA’s clients generate revenue from patients covered by no-fault insurance and workers' compensation
programs. For the fiscal year ended June 30, 2014 approximately 43.4% of our clients’ receipts were
from patients covered by no-fault insurance and approximately 6.3% of our client’s receipts were from
patients covered by workers’ compensation programs. For the fiscal year ended June 30, 2013,
approximately 37.0% of HMCA’s clients’ receipts were from patients covered by no-fault insurance and
approximately 3.8% 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. We have a compliance officer who is charged with implementing and supervising
our compliance program, which 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 to our compliance officer. 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 conduct mandatory educational
programs designed to familiarize our employees 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 its subsidiaries, HMCA and HDM had approximately 430 employees as of August 1, 2014.
This total number included 15 in production, 30 in customer support, 8 in research and development, 4 in
information technology, 48 in marketing and sales, 42 transcriptionists, 30 technologists, 39 in billing and
collections, and 214 in various administrative positions. Approximately 231 employees employed at the
MRI facilities managed or owned by HMCA and HDM, primarily in administrative positions.
ITEM 2. PROPERTIES
Fonar currently leases 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 2016. Management believes that the premises
will be adequate for its current needs. HMCA and HD already have consolidated their headquarters with
those of Fonar as part of the Company’s cost cutting measures. HMCA and HD maintain leased office
premises for their clients at the clients’ sites under leases having various terms.
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FONAR CORPORATION AND SUBSIDIARIES
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. Although down
payments are usually expressly non-refundable in Fonar’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; Fonar’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. 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. Fonar 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. Although the case has been concluded, the plaintiff has not taken any steps to
collect the judgment.
ITEM 4. MINE SAFETY DISCLOSURES. Not Applicable
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
January - March
April - June
July - September
January - March
April - June
July - September
January - March
April - June
High
Low
$2.89
$6.80
$4.12
$7.44
$7.94
$6.70
$27.95
$18.70
$1.68
$2.68
$3.02
$4.42
$5.67
$5.12
$16.20
$11.28
2012
2012
2012
2013
2013
2013
2014
2014
On September 2, 2014, we had approximately 1,813 stockholders of record of our Common Stock, 11
stockholders of record of our Class B Common Stock, 3 stockholders of record of our Class C Common
Stock and 1,807 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 paid cash dividends in fiscal 1998 and the first three quarters of fiscal 1999 on monies we received
from the enforcement of our patents. Except for these dividends, we have not paid any cash dividends.
Except for these dividends, we expect that we will retain earnings to finance the development and
expansion of our business for the foreseeable future.
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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, 2014. 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,
2014
2013
2012
2011
2010
STATEMENT
OF
OPERATIONS
Revenues
$68,505,477 $49,141,814 $39,444,419 $33,136,395
$31,815,555
Cost of revenues
$37,247,449 $26,121,365 $21,195,680 $18,479,550
$18,620,220
Research and
Development
Expenses
Net Income (Loss)
Basic Net Income
(Loss) per
common share
Diluted Net
Income (Loss) per
common share
Basic Weighted
average number
of shares
outstanding
Diluted Weighted
average number
of shares
outstanding
BALANCE
SHEET
DATA
Working capital
(deficiency)
Total Assets
Long-term debt
and obligations
under capital
leases
Stockholder’s
(deficiency) equity
$1,760,821
$1,438,560
$1,242,656
$1,440,032
$2,458,342
$13,396,769 $10,256,362
$6,875,073
$3,309,019
($3,012,742)
$1.62
$1.37
$0.93
$0.56
($0.61)
$1.58
$1.34
$0.91
$0.55
($0.61)
6,009,822
5,933,318
5,778,695
5,264,795
4,932,044
6,137,326
6,060,822
5,906,199
5,392,299
4,932,044
$21,624,952 $16,748,144
$4,805,347
($575,628)
($10,025,577)
$76,789,843 $73,150,650 $33,635,002 $31,580,674
$21,628,845
$8,481,830 $12,887,005
$777,274
$1,746,286
$1,638,963
$45,906,592 $37,799,276 $11,101,065
$5,865,814
($5,775,966)
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FONAR CORPORATION AND SUBSIDIARIES
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. In 1997, we formed a wholly-owned subsidiary, Health Management Corporation of America,
also referred to as HMCA and formerly known as U.S. Health Management Corporation, in order to
expand into the physician and diagnostic management services business. HMCA currently provides its
services exclusively to diagnostic imaging facilities.
Fonar's principal MRI product is its Stand-Up®/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 and Fonar 360™ magnets are 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.
HMCA commenced operations in July, 1997 and 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 three
Florida subsidiaries which bill and collect fees from patients, insurers and other third party payors directly.
For the fiscal years ended June 30, 2014 and June 30, 2013, 11.1% and 23.0%, respectively, of total
revenues were derived from contracts with facilities owned by Dr. Raymond V. Damadian, the President
of Fonar and HMCA, 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.
Industry Updates
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 expanded a reduction in reimbursement for multiple images
on contiguous body parts to new services, namely diagnostic cardiovascular services and ophthalmology
services. Medicare has a longstanding policy to reduce payment by 50% for the second and subsequent
procedures furnished to the same beneficiary by a single physician or physicians in the same group
practice on the same day.
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FONAR CORPORATION AND SUBSIDIARIES
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.
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 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 evaluate the realizability of the net deferred tax assets and assess the valuation allowance
periodically. 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.
In 2013 we recorded a valuation allowance resulting in a deferred tax asset of $2,473,892. As of June
30, 2012, we had recorded a valuation allowance which reduced our deferred tax assets to equal our
deferred tax liability. At June 30, 2014, the deferred tax asset was $5,156,297.
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.
Page 28
FONAR CORPORATION AND SUBSIDIARIES
We amortize our intangible assets, including patents, purchased management agreements 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, is depreciated over seven years, and
customer relationships are amortized over 20 years.
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 2014 COMPARED TO FISCAL 2013
In fiscal 2014, we recognized net income of $13.4 million on revenues of $68.5 million, as compared to
net income of $10.3 million on revenues of $49.1 million for fiscal 2013. This represents an increase in
revenues of 39.5%. The increased revenue for fiscal 2014 resulted primarily from the inclusion of the
revenues of HDM for a full fiscal year. Unrelated party management fees increased by 62%. Total costs
and expenses increased by 35%. Our consolidated operating results improved by $4.8 million to an
operating income of $12.3 million for fiscal 2014 as compared to an operating income of $7.5 million for
fiscal 2013.
Discussion of Operating Results of Medical Equipment Segment
Fiscal 2014 Compared to Fiscal 2013
Revenues attributable to our medical equipment segment decreased by 18.9% to $12.1 million in fiscal
2014 from $14.9 million in fiscal 2013, with product sales revenues decreasing by 52.3% from $3.9 million
in fiscal 2013 to $1.9 million in fiscal 2014. Service revenue decreased from $11.0 million in fiscal 2013
to $10.2 million in fiscal 2014.
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 decreased by 52.3% in fiscal 2014 from $3.9 million in fiscal 2013 to
$1.9 million in fiscal 2014. There were no product sales to related parties in fiscal 2014 or 2013.
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. Nevertheless, no other competitor offers a whole
body weight-bearing multi-position MRI scanner as the FONAR Upright® MRI.
The operating results for the medical equipment segment increased from income of $140,000 in fiscal
2013 to income of $469,000 in fiscal 2014. This increase is attributable most significantly to the fact that
costs decreased by a greater amount than the revenues decreased.
We recognized revenues of $957,000 from the sale of our Upright® MRI scanners in fiscal 2014, while in
fiscal 2013, we recognized revenues of $3.2 million from the sale of Upright® MRI scanners.
Page 29
FONAR CORPORATION AND SUBSIDIARIES
Research and development expenses, increased by 22.4% to $1.8 million in fiscal 2014 as compared to
$1.4 million in fiscal 2013. Our expenses for fiscal 2014 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 2014 Compared to Fiscal 2013
Revenues attributable to the Company's physician and diagnostic services management segment,
HMCA, increased by 65.2% to $56.5 million in fiscal 2014 from $34.3 million in fiscal 2013. The increase
in revenues was primarily due to the 14 additional scanning facilities acquired in the HDM transaction,
which resulted in the recognition of $35.9 million in revenues from HDM, including $13.9 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.
Cost of revenues as a percentage of the related revenues for our physician and diagnostic services
management segment increased from $19.2 million or 39.2% of related revenues for the year ended June
30, 2013 to $33.7 million, or 59.6% of related revenue for the year ended June 30, 2014.
Operating results of this segment increased from operating income of $7.4 million in fiscal 2013 to
operating income of $11.8 million in fiscal 2014. We believe that the 14 additional facilities managed by
HDM and 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 2014 Compared to Fiscal 2013
Interest and investment income decreased in 2014 compared to 2013. We recognized interest income of
$238,928 in 2014 as compared to $217,598 in fiscal 2013, representing an increase of 9.8%.
Interest expense of $884,541 was recognized in fiscal 2014, as compared to $500,362 in fiscal 2013,
representing an increase of 76.8%.
While revenue increased by 39.4%, selling, general and administrative expenses increased by 23.1% to
$15.4 million in fiscal 2014 from $12.5 million in fiscal 2013.
The compensatory element of stock issuances decreased from approximately $415,021 in fiscal 2013 to
$223,000 in fiscal 2014, reflecting a decrease in Fonar’s use of its stock bonus plans to pay employees
and others.
The higher provision for bad debts of $1.8 million in fiscal 2014 as compared to $1.5 million in fiscal 2013,
reflected an increase in reserves for certain indebtedness in fiscal 2014 by our physician and diagnostic
services management segment. In addition in fiscal 2014, the Company recorded a provision for bad
debts for patient fee revenue of $10.3 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.
Revenue from service and repair fees decreased from $11.0 million in fiscal 2013 to $10.2 million in fiscal
2014.
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 2014 we
continued our investment in the development of our new MRI scanners, together with software and
upgrades, with an investment of $1,760,821 in research and development, none of which was capitalized,
as compared to $1,438,560, none of which was capitalized, in fiscal 2013. The research and development
expenditures were approximately 14.6% of revenues attributable to our medical equipment segment and
2.6% of total revenues in 2014, and 9.7% of medical equipment segment revenues and 2.9% of total
revenues in fiscal 2013. This represented a 22.4% increase in research and development expenditures
in fiscal 2014 as compared to fiscal 2013.
Page 30
FONAR CORPORATION AND SUBSIDIARIES
The physician and diagnostic services management segment, HMCA, revenues increased, from $34.3
million in fiscal 2013 to $56.5 million in fiscal 2014. This is primarily attributable to increased revenue
resulting from the HDM acquisition for a full fiscal year.
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.
Marketing expenditures may increase, as the Company continues its efforts to promote sales.
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. 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.
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. The implementation of this law will likely have a
profound impact on the healthcare industry, most of which will go into effect in fiscal 2014 and thereafter.
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
at this time, but anticipate the possibility that it may reduce the profitability of both our medical equipment
segment and physician and diagnostic services management segment. In addition there are also political
uncertainties which may result in the repeal or modification of PPACA or the adoption of alternative
medical cost containment and insurance requirements.
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 high 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, cash equivalents and marketable securities increased by 26.4% from $7.9 million at June 30, 2013
to $10.0 million at June 30, 2014.
Cash provided by operating activities for fiscal 2014 approximated $13.4 million. Cash provided by
operating activities was attributable to the net income of $13.4 million, depreciation and amortization of
$3.8 million, which was offset by the deferred income tax benefit of $2.7 million and the increase in
accounts, medical and management fee receivables of $4.0 million.
Page 31
FONAR CORPORATION AND SUBSIDIARIES
Cash used in investing activities for fiscal 2014 approximated $835,000. The use of cash from investing
activities was attributable to purchases of property and equipment of $621,000, and costs of patents of
$214,000.
Cash used by financing activities for fiscal 2014 approximated $10.4 million. The principal uses of cash in
financing activities included the repayment of loans and capital lease obligations of $4.4 million,
distributions to non-controlling interests of $5.0 million and a redemption of non-controlling interests of
$1.1 million.
Total liabilities decreased by 13.3% during fiscal 2014, from approximately $35.4 million at June 30, 2013
to approximately $30.9 million at June 30, 2014.
As at June 30, 2014, our obligations included approximately $5.0 million in various state sales taxes,
inclusive of penalties and interest. The Company will attempt to obtain a reduction of penalties in
negotiating final settlements.
At June 30, 2014, we had working capital of approximately $21.6 million as compared to working capital
of $16.7 million at June 30, 2013, and stockholders’ equity of $45.9 million at June 30, 2014 as compared
to stockholders’ equity of $37.8 million at June 30, 2013. For the year ended June 30, 2014, we realized
a net income of $13.4 million.
Our principal sources of liquidity have been derived from investments, revenues and the proceeds of
loans obtained in connection with the HDM acquisition.
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, 23 of the 24 MRI facilities managed 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 $11.0 million for the year ended June 30, 2013 and $10.2 million for the
year ended June 30, 2014.
In order to promote profitability and to reduce demands on our cash and other liquid reserves, we
maintain an aggressive program of cost cutting. These measures included consolidating HMCA’s office
space with Fonar’s office space, reductions in the size of our workforce, compensation and benefits, as
well as across the board reduction of expenses. 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 and HDM revenues.
Current economic credit conditions have contributed to a slower than optimal business environment.
Given liquidity and credit constraints in the markets, 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 and HDM 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 2014 approximated $835,000. Capitalized patent costs were approximately
$214,000. Purchases of property and equipment were approximately $621,000.
Fonar has not committed to making capital expenditures in the 2015 fiscal year.
The Company believes that its business plan has been responsible for the past two consecutive fiscal
years of profitability (fiscal 2014 and fiscal 2013) and that its capital resources will be adequate to support
operations at current levels through June 30, 2015.
Page 32
FONAR CORPORATION AND SUBSIDIARIES
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Item 8.
FONAR CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS
At June 30, 2014 and 2013
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended June 30, 2014 and 2013
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended June 30, 2014 and 2013
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 2014 and 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
34
35
38
40
43
45
Page 33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the
Board of Directors and Stockholders of
FONAR Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of FONAR Corporation and Subsidiaries (the
“Company”) as of June 30, 2014 and 2013, and the related consolidated statements of income, stockholders’ equity
and cash flows for the years then ended. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of FONAR Corporation and Subsidiaries as of June 30, 2014 and 2013, and the
consolidated results of its operations and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), FONAR Corporation and Subsidiaries internal control over financial reporting as of June 30, 2014, based on
the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in 1992 and our report dated September 29, 2014 expressed an
adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of the
existence of a material weakness.
Very truly yours,
/s/ Marcum LLP
Marcum LLP
New York, New York
September 29, 2014
Page 34
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Current Assets:
Cash and cash equivalents
Accounts receivable – net of allowances for doubtful accounts of
$257,362 at June 30, 2014 and 2013
June 30,
2014
2013
$9,951,736
$7,870,727
4,450,125
4,443,595
Medical receivables –net of allowances for doubtful accounts of
$12,917,751 and $2,584,669 at June 30, 2014 and 2013, respectively
8,807,856
8,126,476
Management and other fees receivable – net of allowances for doubtful
accounts of $10,901,619 and $9,095,320 at June 30, 2014 and 2013,
respectively
Management and other fees receivable – related medical practices –
net of allowances for doubtful accounts of $403,047 at June 30, 2014
and 2013
11,970,388
11,465,913
3,426,982
2,381,664
Costs and estimated earnings in excess of billings on uncompleted
contracts
759,809
445,742
Inventories
Prepaid expenses and other current assets
Total Current Assets
Deferred income tax asset
Property and Equipment – Net
Goodwill
Other Intangible Assets – Net
Other Assets
Total Assets
2,443,536
2,077,088
1,011,358
1,054,551
42,821,790
37,865,756
5,740,287
2,935,750
15,029,729
17,524,494
1,767,098
1,767,098
10,508,843
11,904,248
922,096
1,153,304
$76,789,843
$73,150,650
See accompanying notes to consolidated financial statements.
Page 35
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES
Current Liabilities:
Current portion of long-term debt and capital leases
$ 2,890,816
$ 2,885,769
June 30,
2014
2013
Accounts payable
Other current liabilities
Unearned revenue on service contracts
Customer deposits
Billings in excess of costs and estimated earnings on
uncompleted contracts
Income tax payable
Total Current Liabilities
Long-Term Liabilities:
Deferred income tax liability
Due to related medical practices
Long-term debt and capital leases, less current portion
Other liabilities
Total Long-Term Liabilities
Total Liabilities
Commitments, Contingencies and Other Matters
2,481,997
9,024,033
4,730,962
1,926,813
142,217
-
2,752,479
8,494,361
4,965,415
1,857,870
142,217
19,501
21,196,838
21,117,612
583,990
234,581
8,481,830
386,012
9,686,413
30,883,251
461,858
230,626
12,887,005
654,273
14,233,762
35,351,374
See accompanying notes to consolidated financial statements.
Page 36
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
STOCKHOLDERS' EQUITY
June 30,
2014
2013
Stockholders' Equity:
Class A non-voting preferred stock $.0001 par value; 453,000
shares authorized at June 30, 2014 and 2013, 313,438 issued
and outstanding at June 30, 2014 and 2013
$ 31
$ 31
Preferred stock $.001 par value; 567,000 shares authorized at
June 30, 2014 and 2013, issued and outstanding – none
-
-
Common stock $.0001 par value; 8,500,000 shares authorized at
June 30, 2014 and 2013, 6,057,483 and 5,980,775 issued at
June 30, 2014 and 2013, respectively; 6,045,840 and 5,969,132
outstanding at June 30, 2014 and 2013, respectively
Class B common stock (10 votes per share) $.0001 par value;
227,000 shares authorized at June 30, 2014 and 2013, 146
issued and outstanding at June 30, 2014 and 2013
606
598
-
-
Class C common stock (25 votes per share) $.0001 par value;
567,000 shares authorized at June 30, 2014 and 2013, 382,513
issued and outstanding at June 30, 2014 and 2013
38
38
Paid-in capital in excess of par value
175,284,437
174,499,021
Accumulated deficit
(149,259,286)
(159,655,416)
Notes receivable from employee stockholders
(38,828)
(54,820)
Treasury stock, at cost – 11,643 shares of common stock at
June 30, 2014 and 2013
Total Fonar Corporation’s Stockholders’ Equity
Noncontrolling interests
Total Stockholders' Equity
(675,390)
(675,390)
25,311,608
20,594,984
45,906,592
14,114,061
23,685,215
37,799,276
Total Liabilities and Stockholders' Equity
$ 76,789,843
$ 73,150,650
See accompanying notes to consolidated financial statements.
Page 37
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Revenues
Product sales – net
Service and repair fees – net
For the Years
Ended June 30,
2014
2013
$ 1,877,932
$ 3,939,140
10,082,631
10,841,935
Service and repair fees – related parties – net
110,000
110,000
Patient fee revenue, net of contractual allowances and discounts
24,307,192
7,481,865
Provision for bad debts for patient fee
Management and other fees – net
(10,333,082)
(2,584,669)
34,839,969
21,493,599
Management and other fees – related medical practices – net
7,620,835
7,859,944
Total Revenues – Net
Costs and Expenses
Costs related to product sales
Costs related to service and repair fees
Costs related to service and repair fees – related parties
68,505,477
49,141,814
1,067,120
2,496,985
27,242
3,656,635
3,213,420
32,603
Costs related to patient fee revenue
7,670,484
2,704,758
Costs related to management and other fees
20,851,065
12,998,243
Costs related to management and other fees – related medical
practices
Research and development
Selling, general and administrative, inclusive of compensatory
element of stock issuances of $223,000 and $415,021 for the
years ended June 30, 2014 and 2013, respectively
Provision for bad debts
Total Costs and Expenses
Income from Operations
Other Income and (Expenses):
Interest expense
Investment income
Other (expense) income – net
Income before benefit (provision) for income taxes and
noncontrolling interests
Benefit for Income Taxes
Net Income
Net Income – Noncontrolling Interests
Net Income – Controlling Interests
5,134,553
1,760,821
3,515,706
1,438,560
15,388,239
12,501,621
1,806,299
1,544,521
56,202,808
41,606,067
12,302,669
7,535,747
(884,541)
238,928
(608,599)
(500,362)
217,598
725,488
11,048,457
7,978,471
2,348,312
2,277,891
$13,396,769
$10,256,362
(3,000,639)
(1,577,820)
$ 10,396,130
$ 8,678,542
See accompanying notes to consolidated financial statements.
Page 38
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Continued)
Net Income Available to Common
Stockholders
Net Income Available to Class A Non-Voting Preferred
Stockholders
For the Years Ended June 30,
2014
2013
$9,720,030
$8,107,367
$503,911
$425,708
Net Income Available to Class C Common Stockholders
$172,189
$145,467
Basic Net Income Per Common Share Available to
Common Stockholders
Diluted Net Income Per Common Share Available to
Common Stockholders
Basic and Diluted Income Per Share –
Common C
$1.62
$1.58
$0.45
$1.37
$1.34
$0.38
Weighted Average Basic Shares Outstanding – Common
Stockholder
6,009,822
5,933,318
Weighted Average Diluted Shares Outstanding –
Common Stockholder
Weighted Average Basic Shares Outstanding – Class C
Common
Weighted Average Diluted Shares Outstanding – Class C
Common
6,137,326
6,060,822
382,513
382,513
382,513
382,513
See accompanying notes to consolidated financial statements.
Page 39
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2014 AND 2013
Balance - June 30, 2012
Net income
Stock issued to employees under stock bonus
plans
Payments on notes receivable from employee
stockholders
Buyout of noncontrolling interests
Redemption of noncontrolling interests
Distributions to noncontrolling interests
Proceeds from noncontrolling interest
Balance - June 30, 2013
Net income
Stock issued to employees under stock bonus
plans
Issuance of stock for goods and services
Payments on notes receivable from employee
stockholders
Stock option exercised
Redemption of noncontrolling interests
Distributions to noncontrolling interests
Class A
Non-
Voting
Preferred
Common
Shares
Stock
Amount
Class C
Common
Stock
31
5,901,262
$590
$38
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
67,870
-
-
-
-
-
8
-
-
-
-
-
-
-
-
-
-
-
-
-
31
5,969,132
$598
$38
-
21,443
45,265
-
10,000
-
-
2
5
1
-
-
-
-
-
-
-
-
-
-
-
Balance - June 30, 2014
$31
6,045,840
$606
$38
See accompanying notes to consolidated financial statements.
Page 40
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2014 AND 2013
Balance - June 30, 2012
Net income
Stock issued to employees under stock bonus
plans
Payments on notes receivable from employee
stockholders
Buyout of noncontrolling interests
Redemption of noncontrolling interests
Distributions to noncontrolling interests
Proceeds from noncontrolling interest
Paid-in Capital
in Excess of
Par Value
Treasury
Stock
Notes
Receivable
From
Employee
Stockholders
$174,084,007
($675,390)
($70,813)
-
415,013
-
-
-
-
-
-
-
-
-
-
-
-
-
15,993
-
-
-
-
Balance - June 30, 2013
$174,499,020
($675,390)
($54,820)
Net income
Stock issued to employees under stock bonus
plans
Issuance of stock for goods and services
Payments on notes receivable from employee
stockholders
Stock option exercised
Redemption of noncontrolling interests
Distributions to noncontrolling interests
-
222,998
531,820
-
30,599
-
-
-
-
-
-
-
-
-
-
-
-
15,992
-
-
-
Balance - June 30, 2014
$175,284,437
($675,390)
($38,828)
See accompanying notes to consolidated financial statements.
Page 41
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2014 AND 2013
Balance - June 30, 2012
Net income
Stock issued to employees under stock bonus
plans
Payments on notes receivable from employee
stockholders
Buyout of noncontrolling interests
Redemption of noncontrolling interests
Distributions to noncontrolling interests
Proceeds from noncontrolling interest
Accumulated
Deficit
Noncontrolling
Interests
Total
($168,333,958)
$6,096,560
$11,101,065
8,678,542
1,577,820
10,256,362
-
-
-
-
-
-
-
-
415,021
15,993
-564,315
(564,315)
(1,424,900)
(1,424,900)
(1,799,950)
(1,799,950)
19,800,000
19,800,000
Balance - June 30, 2013
($159,655,416)
$23,685,215
$37,799,276
Net income
10,396,130
3,000,639
13,396,769
Stock issued to employees under stock bonus
plans
Issuance of stock for goods and services
Payments on notes receivable from employee
stockholders
Stock option exercised
Redemption of noncontrolling interests
Distributions to noncontrolling interests
-
-
-
-
-
-
-
-
-
-
223,000
531,825
15,992
30,600
(1,125,100)
(1,125,100)
(4,965,770)
(4,965,770)
Balance - June 30, 2014
($149,259,286)
$20,594,984
$45,906,592
See accompanying notes to consolidated financial statements.
Page 42
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$13,396,769
$10,256,362
For the Years Ended June 30,
2014
2013
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
Abandoned patents or software written off
Provision for bad debts
Deferred income tax benefit – net
Gain on sale of equipment
Loss on disposition of equipment
Gain on litigation settlement
Impairment on management agreement
Compensatory element of stock issuances
Stock issued for costs and expenses
(Increase) decrease in operating assets, net:
3,817,205
250,523
1,806,299
2,421,177
66,619
1,544,521
(2,682,405)
(2,473,892)
-
657,350
-
-
223,000
531,825
(557,473)
-
(755,500)
357,500
415,021
-
Accounts, medical and management fee receivables
(4,044,002)
(3,717,440)
Notes receivable
Costs and estimated earnings in excess of billings on
uncompleted contracts
Inventories
Prepaid expenses and other current assets
Other assets
Increase (decrease) in operating liabilities, net:
Accounts payable
Other current liabilities
Customer advances
Billings in excess of costs and estimated earnings on
uncompleted contracts
Other liabilities
Due to related medical practices
Income tax payable
95,623
(314,067)
(366,448)
46,967
131,811
(270,482)
295,219
68,943
-
(268,261)
3,955
(19,501)
120,976
682,854
117,861
(698,284)
(204,037)
628,033
(414,402)
(567,914)
142,217
253,559
1,885
(80,499)
NET CASH PROVIDED BY OPERATING ACTIVITIES
13,360,323
7,539,144
See accompanying notes to consolidated financial statements.
Page 43
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM INVESTING ACTIVITIES
For the Years Ended June 30,
2014
2013
Purchases of property and equipment
$(620,697)
$(1,135,382)
Cost of acquisition
Cost of patents
NET CASH USED IN INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt
Proceeds from sale of equipment
-
(40,000,000)
(214,211)
(159,907)
(834,908)
(41,295,289)
-
-
14,689,646
700,000
Repayment of borrowings and capital lease obligations
(4,400,128)
(1,821,617)
Repayment of notes receivable from employee
stockholders
Stock option exercised
Distributions to noncontrolling interests
Redemption of noncontrolling interests
Buyout of noncontrolling interests
Proceeds from noncontrolling interest
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
CASH AND CASH EQUIVALENTS – BEGINNING OF
YEAR
15,992
30,600
15,993
-
(4,965,770)
(1,799,950)
(1,125,100)
(1,424,900)
-
(564,315)
-
19,800,000
(10,444,406)
29,594,857
2,081,009
(4,161,288)
7,870,727
12,032,015
CASH AND CASH EQUIVALENTS – END OF YEAR
$9,951,736
$7,870,727
See accompanying notes to consolidated financial statements.
Page 44
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
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 March 5, 2013, the Company acquired a majority interest in a newly formed limited liability company,
Health Diagnostics Management LLC (HDM), a business managing 12 Stand-Up MRI centers and 2 other
scanning centers located in Florida and New York for a total cost of $40 million. HDM has a perpetual
existence. See Note 9
During May 2011, HMCA contributed all of its assets together with its liabilities to a newly formed limited
liability company, Imperial Management Services, LLC (“Imperial”), which has a perpetual existence. As
of June 30, 2014, Imperial manages 11 diagnostic imaging facilities which are located in the states of
New York and Florida.
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.
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.
Page 45
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Expenditures for maintenance and repairs are charged to operations. Renewals and betterments are
capitalized. Maintenance and repair expenses totaled approximately $1,037,000 and $598,000 for the
years ended June 30, 2014 and 2013, respectively. The estimated useful lives in years are generally as
follows:
Diagnostic equipment under capital lease
Diagnostic equipment
Research, development and demonstration equipment
Machinery and equipment
Furniture and fixtures
Leasehold improvements
Building
2.5
5–13
3-7
2-7
3-9
2–10
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.
Page 46
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
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 a period ranging from 15 to 17 years.
3) Management Agreement
The management agreement was being amortized on the straight line basis over the length of the
agreement (15 years). For the year ended June 30, 2013, the Company recorded an impairment of
$357,500 as a result of the closing of a scanning center in New York.
4) Non-Competition Agreements
The non-competition agreements are being amortized on the straight line basis over the length of the
agreement (7 years).
5) 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.
Page 47
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
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 retrospectively 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 sales of other items is recognized upon shipment.
is recognized based upon contractual agreements
Revenue under management contracts
for
management services rendered by the Company primarily under various long-term agreements with
various medical providers (the "PCs"). As of June 30, 2014, the Company has twenty management
agreements of which three are with PC’s owned by Raymond V. Damadian, M.D., President and
Chairman of the Board of FONAR (“the Related medical practices”) and seventeen 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 $35,000 to $242,000. All fees are re-negotiable at the anniversary of
the agreements and each year thereafter. 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. The lease fees for the medical equipment consist of fixed monthly fees ranging
from $2,000 to $19,000. All fees are re-negotiable at the anniversary of the agreements and each year
thereafter.
Patient fee revenue, net of contractual allowance and discounts, consist of net patient fees received from
insurance companies, third party payors (including federal and state agencies under Medicare and
Medicaid programs), hospitals and patients themselves based mainly upon established contractual billing
rates, less allowances for contractual adjustments and discounts. Patient fee revenue is recorded in the
period in which services are provided.
The Company’s patient fee revenue, net of contractual allowances and discounts less the provision for
bad debts for the years ended June 30, 2014 and 2013 are summarized in the following table.
Commercial Insurance/ Managed Care
Medicare/Medicaid
Workers' Compensation/Personal Injury
Other
Patient Fee Revenue, net of contractual allowances and discounts
Provision for Bad Debts
Net Patient Fee for Revenue
Page 48
For the Year Ended June 30,
2014
$4,217,088
1,443,020
13,369,956
5,277,128
24,307,192
(10,333,082)
$13,974,110
2013
$1,360,536
541,602
3,597,416
1,982,311
7,481,865
(2,584,669)
$4,897,196
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Doubtful Accounts – Patient Fee
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.
Research and Development Costs
Research and development costs are charged to expense as incurred. The costs of materials and
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 $889,000 and $835,000
for the years ended June 30, 2014 and 2013, 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 $1,885 and $5,838 for the years ended June 30,
2014 and 2013, 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 begins.
Page 49
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share
Basic earnings per share (“EPS”) is computed based upon the weighted average number of shares of
common stock and stock equivalents outstanding, net of common stock. In accordance with ASC topic
260-10, “Participating Securities and the Two-Class Method”, the Company used the Two-Class method
for calculating basic earnings per share and applied the if converted method in calculating diluted
earnings per share for the years ended June 30, 2014 and June 30, 2013.
Diluted EPS reflects the potential dilution from the exercise or conversion of all dilutive securities into
common stock based on the average market price of common shares outstanding during the period. For
both the year ended June 30, 2014 and June 30, 2013, diluted EPS for common shareholders includes
127,504 shares upon conversion of Class C Common.
Basic
Total
June 30, 2014
Common
Stock
Class C
Common
Stock
Numerator:
Net income Available to common stockholders
Denominator:
Weighted average shares outstanding
Basic income per common share
Diluted
Denominator:
Weighted average shares outstanding
Class C Common Stock
Total Denominator for diluted earnings per share
Diluted income per common share
$10,396,130
$9,720,030
$172,189
6,009,822
$1.73
6,009,822
$1.62
382,513
$0.45
5,933,318
127,504
6,137,326
$1.58
382,513
-
382,513
$0.45
June 30, 2013
Common
Stock
Class C
Common
Stock
Basic
Total
Numerator:
Net income Available to common stockholders
Denominator:
Weighted average shares outstanding
Basic income per common share
Diluted
Denominator:
Weighted average shares outstanding
Class C Common Stock
Total Denominator for diluted earnings per share
Diluted income per common share
$8,678,542
$8,107,367
$145,467
5,933,318
$1.46
5,933,318
$1.37
382,513
$0.38
5,933,318
127,504
6,060,822
$1.34
382,513
-
382,513
$0.38
Page 50
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents
The Company considers all short-term highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents.
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, 2014, the Company had cash on deposit
of approximately $8,035,000 in excess of federally insured limits of $250,000.
Related Parties: Net revenues from related parties accounted for approximately 11% and 16% of the
consolidated net revenues for the years ended June 30, 2014 and 2013, respectively. Net management
fee receivables from the related medical practices accounted for approximately 12% and 9% of the
consolidated accounts receivable for the years ended June 30, 2014 and 2013, 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, 2014 and 2013, 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 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.
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, notes payable and accounts 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.
Page 51
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
The FASB has issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized
Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward
Exists (a consensus of the FASB Emerging Issues Task Force). The amendments in this ASU state that
an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the
financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar
tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a
similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the
applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a
tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity
does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be
presented in the financial statements as a liability and should not be combined with deferred tax assets.
The amendments in this ASU are effective for fiscal years, and interim periods within those years,
beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied
prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is
permitted. The adoption of this standard did not have a material impact on the Company’s consolidated
financial position and results of operations.
The FASB has issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes
the revenue recognition requirements in Accounting Standards Codification 605 - Revenue Recognition
and most industry-specific guidance throughout the Codification. The standard requires that an entity
recognizes revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the company expects to be entitled in exchange for those goods or
services. This ASU is effective on January 1, 2017 and should be applied retrospectively to each prior
reporting period presented or retrospectively with the cumulative effect of initially applying the ASU
recognized at the date of initial application. The adoption of this standard is not expected to have a
material impact on the Company’s consolidated financial position and results of operations
FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards,
updates, and regulations as of June 30, 2014 that will become effective in subsequent periods; however,
management does not believe that any of those updates would have significantly affected our financial
accounting measures or disclosures had they been in effect during 2014 or 2013, and it does not believe
that any of those pronouncements will have a significant impact on our 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.
Page 52
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER
FEES RECEIVABLE
The Company’s customers are concentrated in the healthcare industry.
Accounts Receivable
Credit risk with respect to the Company’s accounts receivable related to product sales and service and
repair fees is limited due to the customer advances received prior to the commencement of work
performed and the billing of amounts to customers as sub-assemblies are completed. Service and repair
fees are billed on a monthly or quarterly basis and the Company does not continue providing these
services if accounts receivable become past due. The Company controls credit risk with respect to
accounts receivable from service and repair fees through its credit evaluation process, credit limits,
monitoring procedures and reasonably short collection terms. The Company performs ongoing credit
authorizations before a product sales contract is entered into or service and repair fees are provided.
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 50% and 41%,
respectively, of the PCs’ 2014 and 2013 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 medical practices accounted for
approximately 11% and 16%, of the consolidated net revenues for the years ended June 30, 2014 and
2013, respectively.
Tallahassee Magnetic Resonance Imaging, PA, Stand Up MRI of Boca Raton, PA and Stand Up MRI &
Diagnostic Center, PA (all related medical practices) entered into a guaranty agreement, pursuant to
which they cross guaranteed all management fees which are payable to the Company, which have arisen
under each individual management agreement.
Page 53
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER
FEES RECEIVABLE (Continued)
Management and Other Fees Receivable (Continued)
The following table sets forth the number of our facilities for the year end June 30, 2014 and 2013.
Total Facilities Owned or Managed (at Beginning of Year)
Facilities Added by:
Acquisition
Internal development
Managed Facilities Closed
Total Facilities Owned or Managed (at End of Year)
For The Year Ended June 30,
2013
2014
11
24
-
1
(1)
24
14
-
(1)
24
NOTE 4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
Information relating to uncompleted contracts as of June 30, 2014 and 2013 is as follows:
Costs incurred on uncompleted contracts
Estimated earnings
Less: Billings to date
As of June 30,
2014
$ 1,884,984
1,745,608
3,630,592
3,013,000
$617,592
2013
$ 1,482,384
1,191,141
2,673,525
2,370,000
$303,525
Included in the accompanying consolidated balance sheets under the following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts
Less: Billings in excess of costs and estimated earnings on
uncompleted contracts
As of June 30,
2014
2013
$ 759,809
$ 445,742
142,217
$617,592
142,217
$303,525
NOTE 5 – INVENTORIES
Inventories included in the accompanying consolidated balance sheets consist of:
Purchased parts, components and supplies
Work-in-process
Page 54
As of June 30,
2014
$ 2,093,671
349,865
$ 2,443,536
2013
$ 1,783,847
293,241
$ 2,077,088
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, less accumulated depreciation and amortization, at June 30, 2014 and
2013, is comprised of:
As of June 30,
Diagnostic equipment under capital leases
Diagnostic equipment
Research, development and demonstration equipment
Machinery and equipment
Furniture and fixtures
Leasehold improvements
Building
Less: Accumulated depreciation and amortization
2014
$ 620,307
17,396,797
3,510,224
2,069,055
2,550,627
5,593,148
939,614
32,679,772
17,650,043
$ 15,029,729
2013
$ 620,307
18,567,787
3,500,902
4,987,159
2,952,449
5,669,338
939,614
37,237,556
19,713,062
$ 17,524,494
Depreciation and amortization of property and equipment for the years ended June 30, 2014 and 2013
was $2,458,113 and $1,554,458, respectively.
Depreciation and amortization of diagnostic equipment under capital leases for the years ended June 30,
2014 and 2013 was $95,026 and $248,123, respectively. Accumulated depreciation and amortization of
diagnostic equipment under capital leases for the years ended June 30, 2014 and 2013 was $620,307
and $525,281, respectively.
During the year ended June 30, 2014, the Company has retired assets that were fully depreciated with a
cost and accumulated depreciation basis of $4,418,903.
NOTE 7 - OTHER INTANGIBLE ASSETS
Other intangible assets, net of accumulated amortization, at June 30, 2014 and 2013 are comprised of:
Capitalized software development costs
Patents and copyrights
Non-competition agreements
Customer relationships
Less: Accumulated amortization
As of June 30,
2014
$ 7,418,436
4,408,011
4,100,000
3,800,000
19,726,447
9,217,604
$10,508,843
2013
$7,668,959
4,193,800
4,100,000
3,800,000
19,762,759
7,858,511
$11,904,248
Information related to the above intangible assets for the years ended June 30, 2014 and 2013 is as
follows:
Balance – Beginning of Year
Amounts capitalized
Abandon software or patents written off
Impairment of management agreement
Amortization
Balance – End of Year
Page 55
As of June 30,
2014
$11,904,248
214,211
(250,523)
-
(1,359,093)
$10,508,843
2013
$3,835,179
9,359,907
(66,619)
(357,500)
(866,719)
$11,904,248
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 7 - OTHER INTANGIBLE ASSETS (Continued)
Amortization of patents and copyrights for the years ended June 30, 2014 and 2013 amounted to
$178,836 and $168,631, respectively.
Amortization of capitalized software development costs for the years ended June 30, 2014 and 2013 was
$407,876 and $335,350, respectively.
Amortization of management agreement for the years ended June 30, 2014 and 2013 amounted to $0
and $100,833, respectively.
Amortization of non-competition agreements for the years ended June 30, 2014 and 2013 amounted to
$585,714 and $195,238, respectively.
Amortization of customer relationships for the years ended June 30, 2014 and 2013 amounted to
$186,667 and $66,667, respectively.
The estimated amortization of other intangible assets for the five years ending June 30, 2019 and
thereafter is as follows:
For the
Years
Ending
June 30,
2015
2016
2017
2018
2019
Thereafter
Total
Patents and
Copyrights
$1,328,315
$189,559
1,347,439
1,368,582
1,329,294
1,043,968
4,091,245
$10,508,843
205,114
220,668
230,647
228,665
1,104,100
$2,178,753
Capitalized
Software
Development
Costs
$363,042
366,611
372,200
322,933
39,589
-
$1,464,375
Non-
competition
$585,714
585,714
585,714
585,714
Customer
Relation-
ships
$190,000
190,000
190,000
190,000
585,714
390,478
$3,319,048
190,000
2,596,667
$3,546,667
The weighted average amortization period for other intangible assets is 11.0 years and they have no
expected residual value.
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 and 146 of such shares outstanding at June 30,
2014 and 2013, respectively.
Page 56
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 8 - CAPITAL STOCK (Continued)
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).
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, 2014, 958,367 shares of common stock of FONAR were available
for future grant under this plan. For the years ended June 30, 2014 and 2013, 46,708 and 67,870 shares
were issued, respectively.
Options
The Company has 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.
Page 57
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 8 - CAPITAL STOCK (Continued)
Options (Continued)
FONAR’s 2002 Incentive Stock Option Plan (the “FONAR 2002 Plan”), adopted on July 1, 2002, is
intended to qualify as an incentive stock option plan under Section 422A of the Internal Revenue Code of
1954, as amended. The FONAR 2002 Plan permits the issuance of stock options covering an aggregate
of 100,000 shares of common stock of FONAR. The options have an exercise price equal to the fair
market value of the underlying stock on the date the option is granted, are nontransferable, are
exercisable for a period not exceeding ten years and expire upon the voluntary termination of
employment. The FONAR 2002 Plan terminated on June 30, 2012. During the year ended June 30,
2014, 6,610 options expired, therefore no options remain outstanding.
FONAR’s 2005 Incentive Stock Option Plan (the “FONAR 2005 Plan”), adopted on February 16, 2005,is
intended to qualify as an incentive stock option plan under Section 422A of the Internal Revenue Code of
1954, as amended. The FONAR 2005 Plan permits the issuance of stock options covering an aggregate
of 80,000 shares of common stock of FONAR. The options have an exercise price equal to the fair 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 FONAR
2005 Plan will terminate on February 14, 2015. As of June 30, 2014, 70,000 shares of common stock of
FONAR were available for future grant under this Plan.
Stock option activity and weighted average exercise prices under these plans and grants for the years
ended June 30, 2014 and 2013 were as follows:
Number of
Options
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
Outstanding, June 30, 2012
Granted
Exercised
Forfeited / Expired
Outstanding, June 30, 2013
Granted
Exercised
Forfeited / Expired
Outstanding, June 30, 2014
Exercisable at:
June 30, 2013
June 30, 2014
14,022
-
-
(7,412)
6,610
-
-
(6,610)
-
6,610
-
27.76
-
-
26.65
29.00
-
-
29.00
-
$29.00
$ -
-
-
-
-
-
-
-
-
-
Page 58
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
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 an 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. During March
2013 the Company contributed $20,200,000 to HDM and the group of outside investors contributed
$19,800,000 for its non-controlling membership interest.
To fund its capital contribution the Company borrowed a total of $14,000,000 from a bank in the form of a
term loan aggregating $11,000,000 and a revolving credit loan aggregating $3,000,000. The term loan is
payable in 60 consecutive monthly installments, commencing September 1, 2013. The term loan bears
interest at 4.75% per annum and is payable monthly. The revolving credit loan is due March 5, 2016. The
Company can prepay the loan in whole or in part in multiples of $100,000 at any time without penalty. The
revolving credit note bears interest at a rate of 4% per annum and is payable monthly. All borrowings
under the loan agreements are collateralized by substantially all of the Company’s assets. The loan
agreements also contain certain financial covenants that must be met on a periodic basis.
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
accompanying consolidated financial statements include the operations of HDM from the date of
acquisition. The Company recognizes and measures 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.
The following table summarizes the estimated fair values of the assets and liabilities assumed at the
acquisition date:
Management fee receivable
Medical receivables
Prepaid expenses and other current assets
Property and equipment
Intangible assets
Goodwill
Other assets
Other current liabilities
Long term debt
Net assets acquired
$6,667,259
7,389,953
10,262
14,912,650
9,200,000
1,767,098
332,949
(6,323)
(273,848)
$40,000,000
Page 59
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 9 – CONTROLLING AND NONCONTROLLING INTERESTS (Continued)
The purchase price was allocated to the tangible and intangible assets and liabilities assumed based on
estimates of their respective fair values at the date of acquisition with the remaining unallocated purchase
price recorded as goodwill. Management is responsible for the valuation of net assets acquired and
considered a number of factors, including valuations and appraisals, when estimating the fair values and
estimated useful lives of acquired assets and liabilities. The intangible assets, excluding goodwill, are
being amortized on a straight-line basis over their weighted average lives as follows:
Non compete
Customer relationships
Developed software
Total intangible assets
Fair Value
$ 4,100,000
3,800,000
1,300,000
$ 9,200,000
7 years
20 years
5 years
The following unaudited pro forma results of operations for the twelve months ended June 30, 2013
assumes that the above acquisitions were made at the beginning of the year of acquisition. The
unaudited pro forma information does not purport to be indicative of the results that would have been
obtained if the acquisitions had actually occurred at the beginning of the year prior to acquisition, nor of
the results that may be reported in the future.
Total Revenues - Net
Net Income - Controlling Interests
Net Income Available to Common Stockholders
Net Income Available to Class A Non-Voting Preferred Stockholders
Net Income Available to Class C Common Stockholders
Basic Net Income Per Common Share Available to Common Stockholders
Diluted Net Income Per Common Share Available to Common Stockholders
Basic and Diluted Income Per Share - Common C
Weighted Average Basic Shares Outstanding
Weighted Average Diluted Shares Outstanding
Weighted Average Basic and Diluted Shares Outstanding - Class C Common
Year ended
June 30, 2013
69,723,542
17,442,337
16,294,377
855,597
292,363
2.75
2.69
0.76
5,933,318
6,060,822
382,513
HDM’s total net revenues and income from operations for the period from the acquisition date (March 5,
2013) to June 30, 2013 was $14,834,143 and $1,958,714, respectively.
Amount of each class of members’ equity as of June 30, 2014 and 2013
Opening Members’ Equity
Share of Net Income
Contributions
Distributions
Ending Members’ Equity
June 30, 2014
June 30, 2013
Class A
Members
$19,526,475
2,266,473
-
(4,133,250)
$17,659,698
Class B
Member
$20,763,830
4,566,186
-
(4,216,750)
$21,113,266
Class A
Members
$ -
543,225
19,800,000
(816,750)
$19,526,475
Class B
Member
$ -
1,397,080
20,200,000
(833,250)
$20,763,830
Page 60
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 9 – CONTROLLING AND NONCONTROLLNG INTERESTS (Continued)
On May 2, 2011, the Company completed a private placement of equity and succeeded in raising
$6,000,000. The offering consisted of Preferred Class A membership interests in a newly formed limited
liability company, Imperial Management Services, LLC (“Imperial”). The Class B membership interests in
Imperial, all of which were retained by the Company’s subsidiary, HMCA, hold a 75% equity interest in
Imperial. The Class A membership interests are entitled to receive a dividend of 18% per annum of their
cash capital contribution of $6,000,000. HMCA contributed all of its assets, together with its liabilities, to
Imperial as HMCA’s capital contribution. The Imperial operating agreement provides for the Class A
members to receive priority distributions until their original capital contributions are returned. Dividends
are payable quarterly beginning August 1, 2011. On May 1, 2014 and on May 1, 2013, the Company
returned a portion of the Class A Members capital contribution in the amount of $1,125,100 and
$1,424,900, respectively. As of June 30, 2014, the Company’s subsidiary, HMCA, now owns
approximately 91% interest in Imperial Management Services.
Amount of each class of members’ equity as of June 30, 2014 and 2013
Opening Members’
Equity
Share of Net Income
Contributions
Distributions
Redemption
Ending Members’ Equity
June 30, 2014
Class A
Members
Class B
Member
June 30, 2013
Class A
Members
Class B
Member
$3,599,519
536,913
-
(607,520)
(1,125,100)
$2,403,812
$7,772,781
3,306,536
-
-
-
$11,079,317
$4,918,365
959,254
-
(853,200)
(1,424,900)
$3,599,519
$3,824,945
3,947,836
-
-
-
$7,772,781
On May 1, 2010, the Company purchased a 15.2% interest from an unrelated party of an entity that
provides management services to a diagnostic center in the New York Metropolitan area. On January 1,
2011, the Company purchased an additional 34.8% interest by the issuance of a promissory note of
$400,000. Commencing January 1, 2011, the Company consolidates the activity of this entity. On June 1,
2013, the Company purchased from the noncontrolling members their remaining 50% interest for
$700,000.
The Company also has a 50% controlling interest in an entity which the Company consolidates, that
provides management services to a diagnostic center in the New York Metropolitan area. The center
began operations during January 2012. The noncontrolling interest as of June 30, 2014 and 2013
aggregated $531,474 and $559,221, respectively.
Page 61
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 10 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES
Long-term debt, notes payable and capital leases consist of the following:
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 $652,505 as of June 30, 2014.
The revolving credit note is due by March 5, 2016. 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 4% 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 term loan is payable with interest only for 6 consecutive months
commencing at the inception of the loan followed by 60 consecutive
monthly installments, commencing October 1, 2013. The term loan
bears interest at 4.75% 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.
Note payable requiring 12 consecutive
interest only payments
commencing at the inception of the loan followed by 48 consecutive
monthly payments, commencing May 1, 2014. The note bears interest
at a rate of 4.75% 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.
Other (including capital leases for property and equipment).
Less: Current portion
June 30,
2014
2013
$439,983
$461,648
300,000
2,400,000
9,349,994
11,000,000
660,911
689,646
621,758
11,372,646
2,890,816
$8,481,830
1,221,480
15,772,774
2,885,769
$12,887,005
The maturities of long-term debt over the next five years and thereafter are as follows:
Years Ending June 30,
2015
2016
2017
2018
2019
Thereafter
$2,890,816
2,782,561
2,440,108
2,372,330
580,891
305,940
$11,372,646
Page 62
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
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.
In accordance with ASC topic 740, interest costs related to unrecognized tax benefits are required to be
calculated (if applicable) and would be classified as “Interest expense, net. Penalties if incurred would be
recognized as a component of “Selling, general and administrative” expenses.
The Company files corporate income tax returns in the United States (federal) and in various state and
local jurisdictions. In most instances, the Company is no longer subject to federal, state and local income
tax examinations by tax authorities for years prior to 2009.
The Company netted a deferred tax asset of $5,740,287 and a deferred tax liability of $583,990 as of
June 30, 2014, primarily relating to net operating loss carryforwards of approximately $137,252,000
available to offset future taxable income through 2034. The net operating losses begin to expire in 2019
for federal tax purposes and in 2014 for state income tax purposes.
The ultimate realization of deferred tax assets is dependent on the generation of future taxable income
during the periods in which those temporary differences become deductible. The Company considers
projected future taxable income and tax planning strategies in making this assessment. At present, the
Company does have a sufficient history of income and anticipates profitability in the coming years and
has concluded that it is more-likely-than-not that the Company will be able to realize a portion of its tax
benefits in the near future and therefore a valuation allowance was established for the partial value of the
deferred tax asset.
A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of
the remainder of the valuation. Should the Company continue to remain profitable in future periods with
supportable trends, the valuation allowance will be reversed accordingly.
Components of the current (benefit) provision for income taxes are as follows:
Current:
Federal
State
Deferred taxes
Years Ended June 30,
2014
2013
$ 310,000
24,093
(2,682,405)
$(2,348,312)
$ 125,000
71,001
(2,473,892)
$(2,277,891)
Page 63
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 11 - INCOME TAXES (Continued)
A reconciliation of the federal statutory income tax rate to the Company's effective tax rate as reported is
as follows:
Taxes at federal statutory rate
State and local income taxes (benefit), net of federal benefit
Permanent differences
(Decrease) increase in the valuation allowance and true ups
Effective income tax rate
Years Ended June 30,
2014
(34.0)%
(6.0)%
1.0%
35.6%
(3.4)%
2013
34.0%
6.0%
0.6%
(76.2)%
(35.6%
As of June 30, 2014, the Company has net operating loss (“NOL”) carryforwards of approximately
$137,252,000 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 credit carryforwards
aggregating $3,742,000, which are accounted for under the flow-through method. The Company also has
$578,000 in alternative minimum tax credits.
In addition, for New York State income tax purposes, the Company has tax credit carryforwards,
aggregating approximately $1,133,000, which are accounted for under the flow-through method. The tax
credit carryforwards expire during the years ending June 30, 2014 to June 30, 2029.
Significant components of the Company's deferred tax assets and liabilities at June 30, 2014 and 2013
are as follows:
Deferred tax assets:
Allowance for doubtful accounts
Non-deductible accruals
Net operating carryforwards
Tax credits
Property and equipment and depreciation
Inventory
Valuation allowance
Total deferred tax assets
Deferred tax liabilities: Inventory
Capitalized software development costs
Total deferred tax liabilities
Net deferred tax asset
June 30,
2014
2013
$ 6,777,119
282,375
58,340,738
5,947,954
1,079,407
117,239
72,544,832
(67,025,851)
5,518,981
-
(362,684)
(362,684)
$ 5,156,297
$ 6,139,291
264,062
58,052,831
5,873,204
1,070,291
84,136
71,483,815
(68,548,065)
2,935,750
-
(461,858)
(461,858)
$ 2,473,892
The valuation allowance for deferred tax assets decreased by approximately $6,392,000 during the year
ended June 30, 2014 and decreased by approximately $5,206,000 during the year ended June 30, 2013.
Page 64
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 12 - OTHER CURRENT LIABILITIES
Included in other current liabilities are the following:
Accrued salaries, commissions and payroll taxes
Accrued interest
Litigation accruals
Sales tax payable
Legal and other professional fees
Accounting fees
Purchase scanners
Insurance premiums
Interest and penalty – sales tax
Penalty – 401k plan
Rent
Other
June 30,
2014
$ 834,324
117,480
664,349
2,665,181
438,730
325,139
450,000
306,092
2,374,339
-
-
848,399
$9,024,033
2013
$ 710,897
117,480
809,349
2,858,652
569,049
305,000
-
13,443
2,321,858
250,000
147,665
390,968
$8,494,361
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 December 2022. 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, 2014:
Year Ending
June 30,
2015
2016
2017
2018
2019
Thereafter
Total minimum obligations
Facilities And Equipment
(Operating Lease)
$ 3,753,050
3,042,814
1,295,636
835,680
351,732
894,072
$10,172,984
Rent expense for operating leases approximated $4,571,000 and $4,035,000, for the years ended June
30, 2014 and 2013, respectively. The expense for the year ended June 30, 2013 included an expense for
early termination of a lease of approximately $690,000.
Page 65
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
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, 2014 and 2013. (See Other Matters
below)
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, 2014.
Stipulation Agreements
The Company has entered into stipulation agreements with a number of its creditors that in the aggregate
total $305,916, which is included in other current liabilities and other liabilities on the Company’s balance
sheet as of June 30, 2014. The monthly payments total $19,552.
The amounts to be paid over the next three years are as follows:
Year Ending June 30,
2015
2016
2017
$152,166
96,000
57,750
$305,916
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.
On or about June 30, 2010, one of Fonar’s customers, Golden Triangle Company, commenced an action
against Fonar and certain individual defendants employed or formerly employed by Fonar, in the United
States District Court for the Eastern District of New York based on the alleged wrongful failure of Fonar to
deliver a scanner in Kuwait. The claim alleged various causes of action including breach of contract,
fraud, conspiracy to defraud and conversion.
Golden Triangle Company v. Fonar Corporation et al, CV10-2933. The Plaintiff contracted with Fonar to
purchase a scanner, and paid $1,455,500 in advance. The scanner was never delivered, but Plaintiff
never designed a site for delivery either. Alleging other damages, fraud and deceptive trade practices,
Plaintiff sought up to $5,000,000. Fonar made a motion to dismiss the complaint, the outcome of which
left Plaintiff with only a cause of action for breach of contract. The claims against the individual officers
and employees of Fonar were dismissed. Fonar filed its answer, together with a counterclaim alleging that
the Plaintiff, by attempting to overcharge the end-customer, had damaged Fonar’s reputation and ability
to sell in Kuwait. The case was settled in June 2013 for $480,000 in cash and 30,000 shares of Fonar’s
common stock payable in installments. The Company recorded a gain of $755,500 on the statements of
income for theyear ended June 30, 2013.
Page 66
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
Jack Shapiro v. Fonar Corporation, Supreme Court of the State of New York, Nassau County, was
commenced by plaintiff in July, 2009 to recover $500,000 based on Fonar’s failure to refund a deposit on
an MRI scanner and termination of plaintiff’s sales representative agreement. Plaintiff alleged that the
deposit on the machine was in part consideration for the sales representative agreement. Fonar’s view
was that the sales agreement and sales representative agreement were separate and (1) Fonar was
entitled to keep the deposit on the sale when plaintiff failed to proceed with the transaction and (2)
properly terminated the sales representative agreement in accordance with its terms. During the year
ended June 30, 2013, the case has been settled for $323,000 payable in installments, subject to the
plaintiff obtaining a sale for Fonar and the payment of installments of the purchase price by the customer.
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. Although down
payments are usually expressly non-refundable in Fonar’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; Fonar’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. 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. Fonar 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. Although the case has been concluded, the plaintiff has not taken any steps to
collect the judgment. As of June 30, 2014 and 2013, $300,000 was included in the Company’s accrued
expenses.
Bonutti Research v. Fonar Corporation, Health Management Corporation of America, Health Diagnostics,
LLC et al, was commenced on December 2, 2011. Bonutti Research filed a patent infringement action in
the U.S. District Court for the Eastern District Court of New York, alleging that Fonar’s Upright® MRI
scanners infringe plaintiff’s patent which relates to the moving of a patient into the scanner. Fonar
believes plaintiff’s claims are without merit and further, that the patent is invalid. The parties have settled
the case for $150,000 payable by Fonar in twelve installments and certain licenses and covenants not to
sue. The $150,000 has been recorded in the Company’s consolidated statements of income for the year
ended June 30, 2014.
Bolt MRI Technologies v. Fonar Corporation, Health Management Corporation of America & Health
Diagnostics, LLC, was commenced on July 22, 2013, when Bolt MRI Technologies filed an action against
Fonar Corporation, Health Management Corporation of America and Health Diagnostics, LLC alleging
infringement of the same patent which is the subject of the Bonutti case. Bolt alleged that the patent was
assigned to Bolt. The settlement of the Bonutti case covers this case as well.
Page 67
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
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 $2,665,000 plus
interest and penalties of approximately $2,374,000. The Company is in the process of determining its
regulatory requirements in order to become compliant.
On August 31, 2011 the Company submitted an application to the Internal Revenue Service to voluntarily
correct required reporting and disclosure requirements regarding its 401(k) Employee Benefit Plan. On
December 9, 2011, the Internal Revenue Service issued a favorable determination letter on the tax-
qualified status of the 401K plan document and a favorable compliance statement. During December
2013, the Company submitted an application to the U.S. Department of Labor to voluntarily correct the
late filing of prior Form 5500s (annual returns). The voluntary correction application is still pending. The
Company, however, does not anticipate any additional penalties will be assessed by the U.S. Department
of Labor. The Company has recorded provisions for any potential penalties totaling $250,000, which was
the Company’s best estimate of its possible exposure for penalties at that time. The Company has
engaged outside counsel to assist with the correction process and to obtain compliance with all reporting
and disclosure requirements. The Company’s actions to obtain compliance have concluded successfully
and the $250,000 reserve has been reversed.
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, 2014 and 2013, the Company had approximately
$344,000 and $0, 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 periods covered by this report
NOTE 14 - OTHER (EXPENSE) INCOME
Other (expense) income consists of:
Loss from investment
Litigation settlement
Loss on disposition of equipment
Gain on sale of equipment
Impairment of management agreement
Other expense
For the Years Ended June 30,
2014
$ -
13,586
(657,350)
40,000
-
(4,835)
$(608,599)
2013
$ (48,777)
716,250
-
557,473
(357,500)
(141,958)
$ 725,488
Page 68
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 15 - SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended June 30, 2014 and 2013, the Company paid $668,475 and $389,907 for interest,
respectively.
During the years ended June 30, 2014 and 2013, the Company paid $349,501 and $277,000 for income
taxes, respectively.
Purchase consideration:
Assets acquired:
Management fee receivable
Medical receivable
Prepaid expenses and other current assets
Property and equipment
Intangible assets
Goodwill
Other assets
Total assets acquired
Less liabilities assumed:
Other current liabilities
Long term debt
Total liabilities assumed
$ 6,667,259
7,389,953
10,262
14,912,650
9,200,000
1,767,098
332,949
$40,280,171
$ 6,323
273,848
$ 280,171
$40,000,000
NOTE 16 – DUE TO RELATED MEDICAL PRACTICES
In June 2009, an entity owned by the Company’s Chairman of the Board, Tallahassee Scanning Services
PA, sold its Upright® MRI scanning system to the Company for $550,000 in exchange for 35 monthly
payments of $18,769 to be made over a three year period, commencing October 18, 2009 including
interest at a rate of 10.41% per annum. The Company used this scanning system to fulfill a sales order
with an unrelated customer. The unpaid balance of as of June 30, 2014 and 2013 was $134,880.
Page 69
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 17 - 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
Equipment
Management
of Diagnostic
Imaging
Centers
Totals
$68,648,192
$1,963,750
$12,302,669
$3,817,205
$223,000
$73,985,310
$837,652
$56,577,629
$ -
$11,833,876
$3,406,477
$ -
$58,696,054
$603,377
$34,250,739
$ -
$7,396,357
$1,879,626
$ -
$58,079,425
$25,170,303
$49,141,814
$1,200,000
$7,535,747
$2,421,177
$415,021
$73,150,650
$25,407,939
Fiscal 2014:
Net revenues from external customers
Intersegment net revenues *
Income from operations
Depreciation and amortization
Compensatory element of stock issuances
Total identifiable assets
Capital expenditures
Fiscal 2013:
Net revenues from external customers
Intersegment net revenues *
Income from operations
Depreciation and amortization
Compensatory element of stock issuances
Total identifiable assets
Capital expenditures
* Amounts eliminated in consolidation
$12,070,563
$1,963,750
$468,793
$410,728
$223,000
$15,289,256
$234,275
$14,891,075
$1,200,000
$139,390
$541,551
$415,021
$15,071,225
$237,636
Page 70
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 17 - 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 42.4% and 3.8% of product sales revenues to third parties for the
years ended June 30, 2014 and 2013, 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,
Abu Dhabi
Switzerland
England
Germany
Libya
2014
29.8%
12.4
-
-
0.2
42.4%
2013
-%
-
3.6
0.1
0.1
3.8%
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 8.8% and 8.2% of consolidated net
service and repair fees for the years ended June 30, 2014 and 2013, respectively. The 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,
Spain
Puerto Rico
Switzerland
Germany
England
Holland
Canada
Australia
2014
1.0%
1.1
1.1
.4
2.6
1.3
.2
1.1
8.8%
2013
0.9%
1.0
1.1
-
2.0
2.2
-
1.0
8.2%
The Company does not have any material assets outside of the United States.
Page 71
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 18 – ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following represents a summary of allowance for doubtful accounts for the years ended June 30,
2014 and 2013, respectively:
Description
Balance
June 30,
2013
Additions
Deductions
Balance June
30, 2014
Accounts receivable
Management and other fees
receivable
Management and other fees
receivable - related medical
practices
Medical receivables
Advance and notes to related
parties
$ 257,362
(1)$-
$ -
$ 257,362
9,095,320
(1)1,806,299
403,047
2,584,669
-
(1)10,333,082
202,379
-
-
-
-
-
10,901,619
403,047
12,917,751
202,379
Description
Accounts receivables
Management and other fees
receivable
Management and other fees
receivable - related medical
practices
Medical receivables
Advance and notes to related
parties
Notes receivable
Balance
June 30,
2012
Additions
Deductions
Balance June
30, 2013
$1,852,987
(1)$(92,454)
$1,503,171
$ 257,362
7,458,345
(1) 950,000
-
9,095,320
403,047
-
239,791
65,000
-
(1)2,584,669
-
-
-
37,412
65,000
403,047
2,584,669
202,379
-
(1) Included in provision for bad debts.
NOTE 19 – SUBSEQUENT EVENTS
The Company evaluates events that have occurred after the balance sheet date, but before the
consolidated financial statements are issued.
During the period from July 1, 2014 through September 29, 2014, the Company has issued 5,000 shares
of common stock to employees and consultants as compensation valued at $53,200 under a stock bonus
plan.
Page 72
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
The Company evaluates events that have occurred after the balance sheet date, but before the
consolidated financial statements are issued.
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”). We also engaged the services of a governance, risk and
compliance consulting firm to assist in our evaluation and remediation. 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 due to
material weaknesses in internal control over financial reporting as discussed and defined in
Management's Report on Internal Control over Financial Reporting referred to below.
Our management has concluded that our consolidated financial statements for the periods covered by
and included in this Annual Report are prepared in accordance with accounting principles generally
accepted in the United States (“GAAP”) and fairly present, in all material respects, our financial position,
results of operations and cash flows for each of the periods presented herein.
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.
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) in 1992. Based on this evaluation, our
management concluded that our internal control over financial reporting was not effective at June 30,
2014 because of the material weaknesses described below.
Page 73
FONAR CORPORATION AND SUBSIDIARIES
Based on the COSO criteria, management identified control deficiencies that constitute material
weaknesses. A “material weakness”, as defined by COSO, is a deficiency, or combination of deficiencies,
in internal control over financial reporting, such that there is more than 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. Management has identified the following material weaknesses in our internal
control over financial reporting:
1) Certain control procedures were not in place while others were unable to be verified due to
performance of the procedure not being sufficiently documented. As an example, some
procedures requiring review of certain reports could not be verified due to there being no written
documentation of such review. Also there is insufficient documentation to verify sufficient
interaction of our internal accountants with our Audit Committee. In certain instances controls
were not documented or put in place.
2) Inadequate design of controls over period end financial reporting and disclosure processes.
3) We did not maintain adequate segregation of duties related to the approval and execution of
certain transactions impacting our financial reporting. Management believes that all transactions
have been duly authorized, however there was a lack of written evidence of such authorization,
review and approval.
Changes in Internal Controls over Financial Reporting
There have been no changes (other than those described below) in our internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the most recent fiscal quarter
ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
Management's Plan to Remediate Material Weaknesses
None of the material weaknesses describe above resulted in audit adjustments to our 2014 annual
financial statements. As a result, Management believes that the material weaknesses described above
did not have an effect on our financial results or reporting of those results for the periods covered by this
Annual Report. We are committed to remediating the material weaknesses described above and have
developed and began implementing plans to do so for fiscal 2015. The following describes our
remediation plans for fiscal 2015:
To the extent reasonably possible, we will continue to utilize the services of a governance, risk and
compliance consulting firm to assist us in our remediation plan and we will utilize internal resources to
implement additional internal controls as deemed necessary. We are taking steps to implement additional
review and approval procedures as applicable to strengthen our controls over the financial reporting and
disclosure process. In addition, we are in the planning phase of creating and implementing new
information technology policies and procedures related to controls over information technology
operations, security and change management. To the extent necessary, we will hire additional staff or
reassign duties of existing staff in connection with our remediation efforts.
Page 74
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
To the Audit Committee of the
Board of Directors and Shareholders of
FONAR Corporation and Subsidiaries
We have audited FONAR Corporation and Subsidiaries (the “Company”) internal control over financial
reporting as of June 30, 2014, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992.
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’s 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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). 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.
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 the degree of compliance
with the policies or procedures may deteriorate.
A material weakness is a control 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's Report on Internal
Control Over financial Reporting”.
1) Certain control procedures were not in place while others were unable to be verified due to
performance of the procedure not being sufficiently documented. As an example, some
procedures requiring review of certain reports could not be verified due to there being no written
documentation of such review. Also there is insufficient documentation to verify sufficient
interaction of our internal accountants with our Audit Committee. In certain instances controls
were not documented or put in place timely.
2)
Inadequate design of controls over period end financial reporting and disclosure processes.
Page 75
3) We did not maintain adequate segregation of duties related to the approval and execution of
certain transactions impacting our financial reporting. Management believes that all transactions
have been duly authorized, however there was a lack of written evidence of such authorization,
review and approval.
These material weaknesses were considered in determining the nature, timing and extent of audit tests
applied in our audit of the Company's fiscal June 30, 2014 consolidated financial statements, and this
report does not affect our report dated September 29, 2014.
In our opinion, because of the effect of the material weaknesses described above on the achievement of
the objectives of the control criteria, the Company has not maintained effective internal control over
financial reporting as of June 30, 2014, based on criteria established in Internal Control-Integrated
Framework issued in 1992 by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets as of June 30, 2014 and 2013 and the related
consolidated statements of income, stockholders' equity, and cash flows for the years ended June 30,
2014, and 2013 of the Company and our report dated September 29, 2014 expressed an unqualified
opinion on those financial statements.
/s/ Marcum LLP
Marcum LLP
New York, New York
September 29, 2014
Page 76
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:
Raymond V.
Damadian, M.D.
78
President, Treasurer,
Claudette J.V. Chan
Robert J. Janoff
Charles N. O'Data
Ronald G. Lehman
76
87
78
38
Chairman of the Board
and a Director
Director and Secretary
Director
Director
Director
Raymond V. Damadian, M.D. has been the Chairman of the Board and President of Fonar since its
inception in 1978 and Treasurer since February, 2001. 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. Dr. Damadian 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. Dr.
Damadian is a 1988 recipient of the National Medal of Technology and in 1989 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 HMCA and a Manager of IMPERIAL.
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FONAR CORPORATION AND SUBSIDIARIES
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.
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 the Hospital Council of Western Pennsylvania, 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, Inc., 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
recently completed several
specializes
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.
in advising healthcare services companies and has
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FONAR CORPORATION AND SUBSIDIARIES
ITEM 11. EXECUTIVE COMPENSATION.
With the exception of the Chief Executive Officer, the compensation of the Company's executive officers
is based on a combination of salary and bonuses based on performance. The Chief Executive Officer's
compensation consists of a salary.
The Chief Executive Officer’s salary varies only slightly and is by his own decision relatively low. It is not
expected to increase materially in the near future. At such time as we become consistently and
sufficiently profitable or there is a reconsideration of our compensation policy, the compensation payable
to the Chief Executive Officer may be reconsidered. As presently existing, the Chief Executive Officer’s
compensation package includes no understandings with respect to bonuses, options or other incentives;
as such, it is not subject to our general policy later discussed.
The Board of Directors does not have a compensation Committee. Dr. Raymond V. Damadian,
President, Chief Executive Officer and 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 participates in the determination of compensation for our officers and management.
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 2014 to our Principal Executive Officer, who also serves as 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 (a)
Raymond V,
Damadian
PEO/PFO
Year (b)
2014
2013
2012
Salary ($) (c)
$36,002.38
$36,111.30
$35,934.76
Bonus ($)
(d)
-
-
-
All Other
Compensation
-
-
-
Total
Compensation
$36,002.38
$36,111.30
$35,934.76
II.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Name
Raymond V. Damadian, PEO/PFO
Option Exercise
Option
Price ($)
Expiration Date
(b)
(c)
0
N/A
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable (a)
0
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FONAR CORPORATION AND SUBSIDIARIES
III.
DIRECTOR COMPENSATION
Name
Raymond V.Damadian
Claudette J.V.Chan
Robert J.Janoff
Charles N. O’Data
Ronald G. Lehman
Fees Earned or
Paid in Cash ($)
0
$19,999.98
$20,000.24
$20,000.24
$19,999.98
Total ($)
0
$19,999.98
$20,000.24
$20,000.24
$19,999.98
EMPLOYEE COMPENSATION PLANS
Equity Compensation Plan Information as of June 30, 2012
(a)
Number of
securities to
be issued
upon exercise
of outstanding
options,
warrants and
rights
(b)
(c)
Weighted-
average
exercise price
of outstanding
options,
warrants and
rights
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a)
14,022
-
14,022
$27.76
N/A
27.76
130,943
-
130,943
Plan category
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
Fonar’s 2002 Incentive Stock Option Plan, adopted on July 1, 2002, was intended to qualify as an
incentive stock option plan under Section 422A of the Internal Revenue Code of 1954, as amended. The
2002 Incentive Stock Option Plan permitted the issuance of stock options covering an aggregate of
100,000 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 was granted, are nontransferable, are
exercisable for a period not exceeding ten years and expire upon the voluntary termination of
employment. The 2002 Stock Option Plan terminated on June 30, 2012, and the remaining 6,610 options
granted under this plan expired during the year ended June 30, 2014.
Fonar’s 2005 Incentive Stock Option Plan, adopted on February 15, 2005, is 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 will terminate on February 14,
2015. As of June 30, 2014, 70,000 shares of common stock of Fonar were available for future grant
under this plan.
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,
2014, 960,033 shares were available for issuance.
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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 5, 2014.
Name and Address of
Beneficial Owner (1)
Raymond V. Damadian, M.D.
c/o Fonar Corporation
Melville, New York
Director, President, Treasurer
CEO, 5% + Stockholder
Common Stock
Class C Stock
Class A Preferred
Claudette Chan
Director and Secretary
Common Stock
Class A Preferred
Robert J. Janoff
Director
Common Stock
Class A Preferred
Charles N. O'Data
Director
Common Stock
Ronald G. Lehman
Director
Common Stock
All Officers and Directors as a Group
(5 persons)
Common Stock
Class C Stock
Class A Preferred
Shares
Beneficially Owned
Percent
of Class
112,952
382,447
19,093
106
32
2,000
79
528
0
115,936
382,447
19,204
1.87%
99.98%
6.09%
*
*
*
*
*
*
1.92%
99.98%
6.13%
___________________________
* Less than one percent
1. Address provided for each beneficial owner owning more than five percent of the voting securities of
Fonar.
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FONAR CORPORATION AND SUBSIDIARIES
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Background.
Between 1990 and 1996, Raymond V. Damadian, M.D. MRI Scanning Centers Management Company,
also referred to as “RVDC”, a Delaware corporation of which Dr. Damadian was the sole stockholder,
director and President, purchased and leased scanners from Fonar to establish a network of professional
corporations operating MRI scanning centers, also referred to as the "Centers", in New York, Florida,
Georgia and other locations. Dr. Raymond V. Damadian is the Chairman, President and principal
stockholder of Fonar and was also the owner, director and President of each of these professional
corporations. RVDC provided the necessary management and the scanners to the Centers, although in
certain situations, a Center would acquire the scanner directly from Fonar.
ACQUISITION OF RVDC.
Effective June 30, 1997, Fonar’s wholly-owned subsidiary, Health Management Corporation of America,
also referred to as "HMCA", formerly known as U.S. Health Management Corporation, acquired RVDC by
purchasing all of the issued and outstanding shares of RVDC from Dr. Damadian for 400 shares of the
Common Stock of Fonar. The transactions can be rescinded by Dr. Damadian, however, in the event of a
change of control in Fonar or the bankruptcy of Fonar. There is no time limit on the right to rescind. In
connection with the transaction, Fonar granted RVDC a nonexclusive royalty free license to Fonar’s
patents and software. These licenses may be terminated by Fonar in the event of the bankruptcy of
RVDC or a change in control of RVDC.
OTHER AGREEMENTS.
Pursuant to HMCA’s management agreements with the Centers, HMCA provides to the Centers
comprehensive 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 provides service for the scanners at the Centers through Fonar. In total, as of
September 5, 2014, 24 MRI Centers had management agreements with HMCA.
The fees charged to the Centers under the management agreements are flat fees charged on a monthly
basis. These fees ranged from $100,000 to $242,340 per month in fiscal 2014.
Dr. Damadian owns three of the Centers in Florida. The Centers owned by Dr. Damadian in Florida pay
flat rate monthly fees ranging from $194,050 to $221,266 to HMCA per month. These fees are
renegotiable on an annual basis.
During the fiscal years ended June 30, 2014 and June 30, 2013 the net revenues received by HMCA from
the MRI Centers owned by Dr. Damadian were approximately $9.3 million and $7.9 million respectively.
Dr. Damadian owns a 1.667% interest in Imperial’s Class A membership interests and a 1.25% interest in
HDM’s Class A membership interests. Dr. Damadian is also a Manager of HDM.
Timothy Damadian, a son of Dr. Damadian, is one of the owners of Tritech Healthcare Management,
which performs billing and collection services with respect to No-Fault and Workers’ Compensation claims
of HMCA’s (and HDM’s) clients. The monthly fee charged to HMCA is $30,000 and the monthly charge to
HDM is $55,000.
Bensonhurst MRI Limited Partnership, in which Timothy Damadian holds an interest, was party to an
agreement with Fonar for the service and maintenance of its Upright MRI® Scanner for a price of
$110,000 per annum. Bensonhurst continues to be party to a service agreement with Fonar for $110,000
per annum.
Integrity Healthcare Management Holdings, LLC, of which Timothy Damadian is an owner, has a 12%
interest in Watchtower Entrepreneurs LLC. During fiscal 2014, Watchtower agreed to sell equipment and
components to Fonar for a total of $700,000.
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FONAR CORPORATION AND SUBSIDIARIES
Integrity Healthcare Management Holdings, LLC, also has a 14.967% interest in Imperial’s Class A
membership interests and a 10.000% interest in HDM’s Class A membership interests.
Ronald Lehman, a Director of Fonar, holds a .0625% interest in HDM’s Class A membership interests. In
addition, RGL Industries, Inc., a company of which he is an owner, holds a .417% interest in Imperial’s
Class A membership interests.
Claudette J.V. Chan, a Director and the Secretary of Fonar, owns a .0625% interest in HDM’s
membership interests.
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, 2014 and the reviews of the financial statements included in our Forms 10-
Q for the fiscal year ended June 30, 2014 were $628,772.
The aggregate fees billed by Marcum LLP for the audit of our annual financial statements for the fiscal
year ended June 30, 2013 and the reviews of the financial statements included in our Forms 10-Q for the
fiscal year ended June 30, 2013 were $542,692.
Audit Related Fees
No fees were billed by Marcum LLP for the fiscal years ended June 30, 2014 or June 30, 2013 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, 2014 or June 30, 2013 for
designing, operating, supervising or implementing any of our financial information systems or any
hardware or software systems for our financial information.
Tax Fees
The aggregate fees billed by Marcum LLP for tax compliance, tax advice and tax planning in the fiscal
year ended June 30, 2014 were $66,580.
The aggregate fees billed by Marcum LLP for tax compliance, tax advice and tax planning in the fiscal
year ended June 30, 2013 were $147,979.
All Other Fees
The aggregate fees billed by Marcum LLP for all other services rendered by them during the fiscal years
ended June 30, 2014 and June 30, 2013 were $0 and $95,929, respectively. In fiscal 2013 these
services included services in connection with the registration of securities, employee benefit plan audits
and reviews and procedures that we requested Marcum LLP to undertake to provide assurances on
matters not required by laws or regulations.
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
fiscal 2013 and 2012 were compatible with maintaining their independence.
Page 83
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, 2014 and 2013.
Consolidated Statements of Income for the Years Ended June 30, 2014 and 2013.
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2014 and 2013.
Consolidated Statements of Cash Flows for the Years Ended June 30, 2014 and 2013.
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 the first nine
months of Fiscal 2014. May 15, 2014. 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. June 24, 2014. 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.
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.
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.
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.
4.3 Form of 4% Convertible Debentures due June 30, 2002 incorporated by reference to Exhibit 4.1 of
the Registrant’s current report on Form 8-K filed on June 11, 2001. Commission File No. 0-10248.
4.4 Form of Purchase Warrants incorporated by reference to Exhibit 4.2 of the Registrant’s current report
on Form 8-K filed on June 11, 2001. Commission File No. 0-10248.
4.5 Form of Callable Warrants incorporated by reference to Exhibit 4.3 of the Registrant’s current report
on Form 8-K filed on June 11, 2001. Commission File No. 0-10248.
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FONAR CORPORATION AND SUBSIDIARIES
4.6 Form of Replacement Callable Warrants incorporated by reference to Exhibit 4.7 of the Registrant’s
registration statement on Form S-3, Commission File No. 333-10677.
4.7 Form of Amended and Restated Purchase Warrant for The Tail Wind Fund, Ltd. incorporated by
reference to Exhibit 4.7 of the Registrants registration statement on Form S-3, Commission File No. 333-
116908.
4.8 Form of Amended and Restated Purchase Warrant for Placement Agent and Designees incorporated
by reference to Exhibit 4.8 of the Registrant’s registration statement on Form S-3, Commission File No.
333-116908.
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 1983 Nonstatutory Stock Option Plan incorporated by reference to Exhibit 10 (a) to Form 10-K for
the fiscal year ended June 30, 1983, Commission File No. 0-10248, and amendments thereto dated as of
March 7, 1984 and dated August 22, 1984, incorporated by referenced to Exhibit 28 (a) to Form 10-K for
the year ended June 30, 1984, Commission File No. 0-10248.
10.3 1984 Incentive Stock Option Plan incorporated by reference to Exhibit 28 (c) to Form 10-K for the
year ended June 30, 1984, Commission File No. 0-10248.
10.4 1986 Nonstatutory Stock Option Plan incorporated by reference to Exhibit 10.7 to Form 10-K for the
fiscal year ended June 30, 1986, Commission File No. 0-10248.
10.5 1986 Stock Bonus Plan incorporated by reference to Exhibit 10.8 to Form 10-K for the fiscal year
ended June 30, 1986, Commission File No. 0-10248.
10.6 1986 Incentive Stock Option Plan incorporated by reference to Exhibit 10.9 to Form 10-K for the
fiscal year ended June 30, 1986, Commission File No. 0-10248.
10.7 Lease Agreement, dated as of August 18, 1987, between the Registrant and Reckson Associates
incorporated by reference to Exhibit 10.26 to Form 10-K for the fiscal year ended June 30, 1987,
Commission File No. 0-10248.
10.8 1993 Incentive Stock Option Plan incorporated by reference to Exhibit 28.1 to the Registrant's
registration statement on Form S-8, Commission File No. 33-60154.
10.9 1993 Non-Statutory Stock Option Plan incorporated by reference to Exhibit 28.2 to the Registrant's
registration statement on Form S-8, Commission File No. 33-60154.
10.10 1993 Stock Bonus Plan incorporated by reference to Exhibit 28.3 to the Registrant's registration
statement on Form S-8, Commission File No. 33-60154.
10.11 1994 Non-Statutory Stock Option Plan incorporated by reference to Exhibit 28.1 to the Registrant's
registration statement on Form S-8, Commission File No. 33-81638.
10.12 1994 Stock Bonus Plan incorporated by reference to Exhibit 28.2 to the Registrant's registration
statement on Form S-8, Commission File No. 33-81638.
10.13 1995 Non-Statutory Stock Option Plan incorporated by reference to Exhibit 28.1 to the Registrant's
registration statement on Form S-8, Commission File No. 33-62099.
10.14 1995 Stock Bonus Plan incorporated by reference to Exhibit 28.2 to the Registrant's registration
statement on Form S-8, Commission File No. 33-62099.
10.15 1997 Non-Statutory Stock Option Plan incorporated by reference to Exhibit 28.1 to the Registrant's
registration statement on Form S-8, Commission File No.: 333-27411.
10.16 1997 Stock Bonus Plan incorporated by reference to Exhibit 28.2 to the Registrant's registration
statement on Form S-8, Commission File No: 333-27411.
10.17 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.
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FONAR CORPORATION AND SUBSIDIARIES
10.18 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.
10.19 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.
10.20 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.
10.21 2000 Stock Bonus Plan incorporated by reference to Exhibit 99.1 to the Registrant’s registration
Statement on Form S-8, Commission File No.: 333-66760.
10.22 2002 Stock Bonus Plan incorporated by reference to Exhibit 99.1 to the Registrant’s registration
statement on Form S-8, Commission File No.: 333-89578.
10.23 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.
10.24 2003 Stock Bonus Plan incorporated by reference to Exhibit 99.1 to the Registrant’s registration
statement on Form S-8, Commission File No: 333-106626.
10.25 2003 Supplemental Stock Bonus Plan incorporated by reference to Exhibit 99.1 to the Registrant’s
registration statement on Form S-8, Commission File No: 333-106626.
10.26 2004 Stock Bonus Plan incorporated by reference to Exhibit 99.1 to the Registrant’s registration
statement on Form S-8, Commission File No. 333-112577.
10.27 2005 Stock Bonus Plan incorporated by reference to Exhibit 99.1 to the Registrant’s registration
statement on Form S-8, Commission File No. 333-122859.
10.28 2005 Supplemental Stock Bonus Plan incorporated by reference to Exhibit 99.1 to the Registrant’s
registration statement on Form S-8, Commission File No. 333-126658.
10.29 Purchase Agreement dated May 24, 2001 by and between the Registrant and The Tail Wind Fund
Ltd. incorporated by reference to Exhibit 10.1 to the Registrant’s current report on Form 8-K filed June 11,
2001. Commission File No. 0-10248.
10.30 Registration Rights Agreement dated May 24, 2001 by and among the Registrant, The Tail Wind
Fund Ltd. and Roan Meyers, Inc. incorporated herein by reference to Exhibit 10.2 to the Registrant’s
current report on Form 8-K filed June 11, 2001. Commission File No. 0-10248.
10.31 Amendment to Callable Warrant dated April 28, 2004 by and between The Tail Wind Fund, Ltd.
and the Registrant incorporated by reference to Exhibit 10.17 to the Registrant’s registration statement on
Form S-3, Commission File No. 333-116908.
10.32 First Amendment to Purchase Warrant dated April 28, 2004 by and between The Tail Wind Fund,
Ltd. and the Registrant incorporated by reference to Exhibit 10.18 to the Registrant’s registration
statement on Form S-3, Commission File No. 333-116908.
10.33 Form of First Amendment to Purchase Warrant dated June 1, 2004 by and between each of
Roan/Meyers Associates, L.P. and its designees and the Registrant, incorporated by reference to Exhibit
10.19 to the Registrant’s registration statement on Form S-3, Commission File No. 333-116908.
10.34 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.
10.35 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.
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FONAR CORPORATION AND SUBSIDIARIES
10.36 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.
10.37 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.
10.38 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.
10.39 Modification to Operating Agreement for Health Diagnostics Management, LLC. See Exhibits.
10.40 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.
Dated: September 29, 2014
By: /s/Raymond V. Damadian
Raymond V. Damadian, President
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
/s/Raymond V. Damadian
Raymond V. Damadian,
/s/Claudette J.V. Chan
Claudette J.V. Chan
/s/ Robert J. Janoff
Robert J. Janoff
/s/ Charles N. O'Data
Charles N. O'Data
/s/Ronald G. Lehman
Ronald G. Lehman
Title
Chairman of the Board of Directors,
President, Director Principal Executive
Officer and Acting Principal Financial Officer
Director
Director
Director
Director
Date
September 29, 2014
September 29, 2014
September 29, 2014
September 29, 2014
September 29, 2014
Page 87