SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
_____________________
FORM 10-K
_____________________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2015
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File No. 0-10248
_____________________
FONAR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State of incorporation)
110 Marcus Drive, Melville, New York
(Address of principal executive offices)
11-2464137
(IRS Employer Identification Number)
11747
(Zip Code)
(Registrant's telephone number, including area code (631) 694-2929
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, §
is not contained, and will not be contained, to the best of the registrant
statements incorporated by reference in Part III of this 10-K or any amendment to the Form 10-K. [X]
229.405 of this Chapter,
’s knowledge, in definitive proxy or information
Page
1
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
in
“
Rule 12b-2 of the Exchange Act. (Check one):
smaller reporting company
”
large accelerated filer
accelerated filer and
“,
“
”
Large accelerated filer ____ Accelerated filer
if a smaller reporting company)
__X _
Non-accelerated filer
____
Smaller reporting company
(Do not check
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, 2014 based on the
closing price of $10.40 per share on such date as reported on the NASDAQ System, was approximately $63 million. The
other outstanding classes do not have a readily determinable market value.
As of September 11, 2015, 6,050,840
of Class C Common Stock and 313,438 shares of Class A Non-voting Preferred Stock of the registrant were outstanding.
shares of Common Stock, 146 shares of Class B Common Stock, 382,513 shares
DOCUMENTS INCORPORATED BY REFERENCE
None
FORM 10-K
PART I.
PART II.
PART III.
PART IV.
ITEM
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
’s Discussion and Analysis of Financial Condition and Results of
Market for Registrant
’
s Common Equity, Related Stockholder Matters and
Issuer Purchase of Equity Securities
Selected Consolidated Financial Data
Management
Operations
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
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
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2
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NUMBERS
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88
88
FONAR CORPORATION AND SUBSIDIARIES
PART I
ITEM 1. BUSINESS
GENERAL
Fonar Corporation, sometimes referred to as the
, 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.
Company"
"
Fonar
"or
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
Company of America (
), also called Health Diagnostics Management, LLC. HMCA provides 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. In addition to acting as a
management company, HMCA owns and operates four diagnostic imaging facilities in Florida, where the corporate
practice of medicine is permitted.
HMCA
”
“
We restructured the corporate organization of our physician and diagnostic services management segment of our
business effective July 1, 2015. Imperial Management Services, LLC (“
), a subsidiary which owned the assets
used in the business of its parent, Health Management Corporation of America (which is wholly-owned by Fonar),
transferred those assets to Health Diagnostics Management, LLC (
), which is another subsidiary of Health
Management Corporation of America. As a result, going forward our physician and diagnostic management business will
be conducted entirely through HDM, which is operating under the assumed name Health Management Company of
America.
Imperial”
“HDM”
Fonar is engaged in the business of designing, manufacturing, selling and servicing magnetic resonance imaging
scanners, also referred to as
scanners, which utilize MRI technology for the detection and diagnosis of
human disease, abnormalities, other medical conditions and injuries. Fonar
’
s founders built the first MRI scanner in 1977
and Fonar introduced the first commercial MRI scanner in 1980. Fonar is also the originator of the iron-core
non-superconductive and permanent magnet technology.
"
MRI
"
MR
"
"or
Fonar’s iron frame technology made Fonar the originator of "open
1980. Since that time we have concentrated on further application of our “
Upright
or
™
360 MRI scanner. (The Fonar 360
MRI scanner (also referred to as the “Upright®”
MRI is not presently being marketed).
Multi-Position
™
”
™
®
" MRI scanners. We introduced the first "open" MRI in
open”
MRI, introducing most recently the
“Stand-Up®” MRI scanner) and the Fonar
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 “
Stand-Up®”
” as an alternative to
because of the multiplicity of positions in which the patient may be scanned where the patient is not standing.
Upright
®
®
“
See Note 17 to the Consolidated Financial Statements for separate financial information regarding our medical equipment
and physician and diagnostic management services segments.
Page
3
FORWARD LOOKING STATEMENTS.
FONAR CORPORATION AND SUBSIDIARIES
"
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.
THE UPRIGHT®
MRI SCANNER.
®
MRI (also known as the
The Upright
” 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.
whole-body
Stand-Up
) is a
”MRI
®
“
“
HMCA manages a total of 24 MRI scanning facilities, four of which are owned by subsidiaries of HMCA. Seventeen
facilities are located in New York and seven are located in Florida. (The four facilities owned by HMCA subsidiaries are in
Florida, where the corporate practice of medicine is permitted). Twenty-three facilities are equipped with Upright MRI
scanners. We believe that the utilization of Fonar Upright MRI scanning systems, which are produced under the protection
of our patents, have been a significant factor in the increased patient volume of the scanning facilities.
MEDICAL EQUIPMENT SEGMENT
PRODUCTS
®
MRI is a weight-bearing whole-body open MRI system which enables positional MRI (pMRI
The Fonar Upright
)
®
applications. Operating at a magnetic field strength of 0.6 Tesla, the scanner is a powerful, diagnostically versatile and
cost-effective open MRI that provides a broad range of clinical capabilities and a complete set of imaging protocols.
Patients can be scanned standing, bending, sitting, upright at an intermediate angle and in the conventional recumbent
position. This multi-positional MRI system accommodates an unrestricted range of motion for flexion, extension, lateral
bending, and rotation studies of the cervical (upper)and lumbar (lower) spine. Previously difficult patient scanning positions
can be achieved and compared using the system
’
s MRI-compatible, three-dimensional, motorized patient handling system.
The system
’s lift and tilt functions deliver the targeted anatomical region to the center of the magnet. True image
orientation is assured, regardless of the rotation angle, via computer read-back of the table
’
s position.
There is considerable evidence that the weight-bearing Upright®
other MRI scanner because patient positioning plays a critical role in detecting clinically significant pathology.
MRI provides medical benefits not duplicated by any
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4
FONAR CORPORATION AND SUBSIDIARIES
For instance, the Fonar Upright
® technology has demonstrated its key value on patients with the Arnold-Chiari Syndrome,
cerebellar tonsillar 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
in Chiari Syndrome are the lowest lying structures of the brain, the tonsils of the cerebelium.
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
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.
”
“drop attack,
“entrapped
”
“
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 Tonsillar Ectopia Herniation (CTE) was missed 75% of the time when the patient was
scanned lying down instead of upright. At the current rate of 1,000,000 automobile whiplash injuries in the U.S. per year,
600,000 patients each year would have the pathology responsible for their symptoms go undetected if they were examined
solely in a conventional recumbent-only MRI.
®
The Upright MRI has also demonstrated its value for patients suffering from scoliosis. Scoliosis patients have been
typically subjected to routine x-ray exams for years and must be imaged upright for an adequate evaluation of their
scoliosis. Because the patient must be standing for the exam, an x-ray machine has been the only modality that could
provide that service. The Upright
® MRI is the only MRI scanner that allows the patient to stand during the MRI exam.
Fonar has developed a new RF receiver and scanning protocol that for the first time allows scoliosis patients to obtain
diagnostic pictures of their spines without the risks of x-rays. A study by the National Cancer Institute (2000)of 5,466
women with scoliosis reported a 70% increase in breast cancer resulting from 24.7 chest x-rays these patients received on
the average in the course of their scoliosis treatment.
®
The Upright
s most non-claustrophobic whole-body MRI scanner. Patients can simply walk into the
MRI is also the world
’
s front-open and top-open design provides an
magnet, stand or sit for their scans and then walk out. The magnet’
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 Upright®
contrast-to-noise (C/N) ratios. The technical improvements realized in this scanner
predecessors also include increased image-processing speed and diagnostic flexibility.
MRI is designed to maximize image quality through an optimal combination of signal-to-noise (S/N) and
’
s design over its lower field strength
Page
5
FONAR CORPORATION AND SUBSIDIARIES
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
tuning,
analog-to-digital
bandwidth-optimized pulse sequences, multi-bandwidth sequences, and off-center FOV imaging capability.
ultra-low-noise
pre-amplifier;
miniaturized
high-speed
conversion
automatic
and
a
In addition to the signal-to-noise ratio, however, a major determinant of image quality that must be considered is contrast,
the quality that enables reading physicians to clearly distinguish adjacent, and sometimes minute, anatomical structures
from their surroundings. This quality is measured by contrast-to-noise ratios (C/N). Unlike S/N, which increases with
increasing field strength, relaxometry studies have shown that C/N peaks in the mid-field range and actually falls off
precipitously at higher field strengths. The Upright®
MRI scanners operate squarely in the optimum C/N range.
’
FONAR s scanners 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.
™
During fiscal 2015, sales of our Upright® MRI scanners accounted for approximately 2.3% of our total revenues and
14.1% of our medical equipment revenues, as compared to 1.4% of total revenues and 7.9% of medical equipment
revenues in fiscal 2014, and as compared to 6.5% of our total revenues and 21% of medical equipment revenues in fiscal
2013. These results reflect the volatility in our sales of scanners.
FONAR
’s principal selling, marketing and advertising efforts have been focused on the Upright® MRI, which we believe is
a particularly unique product, being the only MRI scanner which is both open and allows for weight-bearing imaging. We
expect to continue our focus on the Upright
MRI in the immediate future.
®
The materials and components used in the manufacture of our products (circuit boards, computer hardware components,
electrical components, steel and plastic) are generally available at competitive prices. We have not had difficulty acquiring
such materials.
PRODUCT MARKETING
The principal markets for the Company's scanners are private diagnostic imaging centers and hospitals.
’
s representatives for domestic and foreign markets. None of Fonar
We use internal and independent manufacturer
competitors are entitled to make the Fonar Upright
® MRI scanner.
’
s
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).
Page
6
FONAR CORPORATION AND SUBSIDIARIES
During fiscal 2015, sales were made to customers in the United Arab Emirates, Switzerland, Canada and to Medserena in
Germany. CEO Matthais Schulz of Medserena, Fonar
’s principal foreign sales representative and distributor, has said,
“The large number of requests coming from our physicians in Germany are arising because of the special medical need
for FONAR’s unique technology. This is in spite of an intensely active MRI market in Germany, where there are already
many conventional lie-down MRIs installed.” Medserena also has expanded its market to the United Kingdom with the
opening of a Fonar Upright MRI scanner in London.
®
Fonar’s marketing strategy has been designed to reach key purchasing decision makers with information concerning the
MRI scanner and is intended to increase
Upright
Fonar
’s presence in the medical market. Fonar focuses on four target audiences: neurosurgeons, orthopaedic surgeons,
radiologists and physicians in general.
MRI. This has led to many inquiries and to some sales of the Upright
®
®
1) Neurosurgeons and Orthopaedic Surgeons: These are the surgeons who can most benefit from the superior
® MRI with its Multi-Position® diagnostic ability.
diagnostic benefits of the Fonar Upright
2) Radiologists: These physicians can now offer a new modality to their referring physicians.
s need to be aware of the diagnostic
’
All Physicians: The vast number of doctors who send patients for MRI
3)
advantages of the Fonar Upright
® Multi-Position®
MRI.
Our 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,
. 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
®
®
MRI scanner to
them. Another advertisement featured a leading radiologist, telling why he bought 12 Fonar Upright®
MRI scanners and
plans to buy more.
Discover the power of Upright Imaging”
diagnostic benefits of the Fonar Upright
“
Our advertising for HMCA also serves to re-enforce the unique value provided by Fonar MRI scanners. We have
increased internet awareness of our product by driving patient traffic to the Upright
scanning centers we manage by
creating Websites for every location. These websites give prospective customers of Upright® MRI scanners a view of
operating Upright
MRI scanner. The success of
HMCA-managed sites not only increases management fees to HMCA but encourages new sales for Fonar as well.
MRI centers and highlight the benefits of using an Upright
®
®
®
®
To meet the demand for high-field open MRI scanners, Fonar plans to devote its principal efforts to marketing 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.
MRI. The Upright
®
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.
™
®
Page
7
FONAR CORPORATION AND SUBSIDIARIES
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.
During the fiscal year ended June 30, 2015, 3.0% of the Company's revenues were generated by foreign sales, as
compared to 2.5% for fiscal 2014.
SERVICE AND UPGRADES FOR MRI SCANNERS
Our customer base of installed scanners has been and will continue to be an additional source of income, independent of
direct sales.
Income is generated from the installed base in two principal areas, namely, service and upgrades. Service and
maintenance revenues from our external installed base were approximately $9.7 million in fiscal 2015 and $10.2 million in
fiscal 2014. Notwithstanding the decrease in service revenues in fiscal 2015, our objective is to maintain service revenues
at present levels or better 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, 2015, we incurred expenditures of $1,812,398, none of which was capitalized, on
research and development, as compared to $1,760,821, none of which was capitalized, during the fiscal year ended June
30, 2014.
Research and development activities have focused principally on software improvements to the user interface of the MRI
scanner. The Windows-based Sympulse
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.
™ platform controls all of the functions of the UPRIGHT
®
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.
Page
8
BACKLOG
FONAR CORPORATION AND SUBSIDIARIES
Our backlog of unfilled orders at September 10, 2015 was approximately $2.5 million, as compared to $2.9 million at
September 10, 2014. It is expected that the existing backlog of orders will be filled within the 2016 fiscal year.
PATENTS AND LICENSES
We currently have numerous patents in effect which relate to the technology and components of our MRI scanners. We
believe that these patents, and the know-how we have developed, are material to our business.
One of our patents, issued in the name of Dr. Damadian and licensed to Fonar, was United States patent No. 3,789,832,
. The 1974 Patent
"
1974 Patent
"
Apparatus and Method for Detecting Cancer in Tissue, also referred to in this report as the
was the first MRI patent issued by the United States Patent Office. The development of our MRI scanners have 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, 2015, 193 patents had been issued to Fonar, and approximately 22 patents were pending. A number of Fonar’s
existing patents specifically relate to protecting Fonar s position in the Upright MRI market. The patents further enhance
Dr. Damadian's pioneer patent, the 1974 Patent, that initiated the MRI industry and provided the original invention of MRI
scanning. The terms of the patents in Fonar’
s portfolio extend to various times.
"
’
We also have patent cross-licensing agreements with other MRI manufacturers. We have not licensed, however, any
technology relating to Upright
® MRI scanning.
PRODUCT COMPETITION
MRI SCANNERS
MRI takes advantage of the nuclear resonance signal elicited from the body's tissues and the exceptional sensitivity of this
signal for detecting disease discovered by FONAR. Much of the serious disease of the body occurs in the soft tissue of
vital organs. The maximum contrast available by x-ray with which to discriminate disease is 4%. Brain cancers differ from
surrounding healthy brain by only 1.6% while the contrast in the brain by MRI is 25 times greater at 40%. X-ray contrasts
among the body
’
s soft tissues are maximally 4%. Their contrast by MRI is 32.5 times greater (130%).
The soft tissue contrasts with which to distinguish cancers on images by MRI are up to 180%. In the case of cancer these
contrasts can be even more marked making cancers readily visible and detectable anywhere in the body. This is because
the nuclear resonance signals from the body's normal soft tissue vital organs, as discovered in the original publication that
founded MRI, differ so dramatically from each other (e.g. small intestine 257 milliseconds, brain 595 milliseconds). Liver
cancer and healthy liver signals differ by 180% for example.
A majority of the MRI scanners in use in hospitals and outpatient facilities and at mobile sites in the United States are
based on high field (1.5-3.0 Tesla) air core superconducting magnet technology.
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 (0.5 –
1.0 Tesla), but the perception of the medical community is still
that Open MRIs are useful only for anxious and claustrophobic patients, and that the Open MRIs
image quality is poor,
and scan times long.
’
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FONAR CORPORATION AND SUBSIDIARIES
One of the Upright MRI
important ways:
’s big competitive advantages is that it is dramatically different from the Open MRI in several
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 his arms and possibly see out the sides while recumbent in an Open MRI, there is still a
large intimidating magnet pole very close to and directly in front of the patient
’s face. The Upright MRI allows the patient to
look directly out of the scanner and watch a 42” TV because there is nothing in front of his face.
The Upright MRI uses the same configuration RF receiver coil as a high-field MRI system to image the spine. Open MRIs
cannot do this. (This is because of the rule in MRI that the axis of symmetry of the RF receiver coil should be
perpendicular to the direction of the main magnetic field. The upright patient sits comfortably with his back against a flat
“(
) 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).
planar
”
Relative to the high-field systems, the Upright MRI
’s 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 (
”) if their patients are scanned at a higher field strengths.
missed
“
”
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
MRI
magnets, gave rise to current patient protected Upright
® MRI technology with the result that Fonar today is the unique and
only supplier of the highest field MRI magnets (0.6 Tesla) that are not superconducting, do not use liquid helium and are
not therefore susceptible to severe consequences and downtime cause by a system quench.
’
s competitors to duplicate Fonar
’
s origination of
Open
”
“
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.
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.
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FONAR CORPORATION AND SUBSIDIARIES
X-rays are the most common energy source used in imaging the body and are employed in three imaging modalities:
1. Conventional X-ray systems, the oldest method of imaging, are typically used to image bones and teeth. The image
resolution of adjacent structures that have high contrast, such as bone adjacent to soft tissue, is excellent, while the
discrimination between soft tissue organs is poor because of the nearly equivalent penetration of x-rays.
2. Computerized Tomography, also referred to as
", 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.
CT
"
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
, 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.
“QSR”
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:
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FONAR CORPORATION AND SUBSIDIARIES
1. Establishment registration of companies which are required to register under 21 CFR Part 807.20, such as
manufacturers, distributors, re-packagers and re-labelers.
2. Medical device listing with FDA of devices to be marketed.
3. Manufacturing devices in accordance with the Current Good Manufacturing Practices Quality System Regulation in 21
CFR Part 820.
4. Labeling devices in accordance with labeling regulations in 21 CFR Part 801 or 809.
5. Submission of a Premarket Notification, pursuant to 510(k), before marketing a device.
In addition to complying with general controls, Class II devices are also subject to special controls. Special controls may
include special labeling requirements, guidance documents, mandatory performance standards and post-market
surveillance.
On October 3, 2000 Fonar received FDA clearance for the Upright® MRI.
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
products, there are no pre-market data requirements.
’
s scanner products are Class II
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."
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FONAR CORPORATION AND SUBSIDIARIES
A report is required when a manufacturer becomes aware of information that reasonably suggests that one of their
marketed devices has or may have caused or contributed to a death, serious injury, or has malfunctioned and that the
device or a similar device marketed by the manufacturer would be likely to cause or contribute to a death or serious injury
if the malfunction were to recur.
Malfunctions are not reportable if they are not likely to result in a death, serious injury or other significant adverse event
experience.
A malfunction which is or can be corrected during routine service or device maintenance still must be reported if the
recurrence of the malfunction is likely to cause or contribute to a death or serious injury if it were to recur.
We have established and maintained written procedures for implementation of the MDR regulation. These procedures
include internal systems that:
provide for timely and effective identification, communication and evaluation of adverse events;
provide a standardized review process and procedures for determining whether or not an event is reportable; and
provide procedures to insure the timely transmission of complete reports.
These procedures also include documentation and record keeping requirements for:
information that was evaluated to determine if an event was reportable;
all medical device reports and information submitted to the FDA;
any information that was evaluated during preparation of annual certification reports; and
systems that ensure access to information that facilitates timely follow up and inspection by FDA.
FDA Enforcement
FDA may take the following actions to enforce the MDR regulation:
FDA-Initiated or Voluntary Recalls
Recalls are regulatory actions that remove a hazardous, potentially hazardous, or a misbranded product from the
marketplace. Recalls are also used to convey additional information to the user concerning the safe use of the product.
Either FDA or the manufacturer can initiate recalls.
There are three classifications, i.e., I, II, or III, assigned by the Food and Drug Administration to a particular product recall
to indicate the relative degree of health hazard presented by the product being recalled.
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.
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FONAR CORPORATION AND SUBSIDIARIES
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.
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.
PHYSICIAN AND DIAGNOSTIC SERVICES MANAGEMENT BUSINESS
Effective July 1, 2015 we restructured the corporate organization of the physician and diagnostic services management
segment of our business. Previously, Health Management Corporation of America our subsidiary, had transferred its
business and assets to Imperial Management Services, LLC (“Imperial”
), a New York limited liability company, in
connection with raising capital from investors. Health Management Corporation of America maintained a majority interest
in Imperial. The assets continued to be used in our business of managing diagnostic imaging facilities.
Subsequently, through an agreement dated March 6, 2013, Health Management Corporation of America acquired another
business engaged in the management and in Florida, the ownership, of diagnostic imaging facilities. The purchase was
made through a new limited liability company, Health Diagnostics Management, LLC (
), which raised part of the
capital necessary for the acquisition from investors. The investors received in the aggregate 49% of the interests in HDM.
HDM
”
“
As a result of scheduled reacquisitions of interests held by the investors, as of July 1, 2015, Health Management
Corporation of America owned a 95% interest in Imperial and a 60.4% interest in HDM immediately prior to the
reorganization.
The reorganization was structured to more completely integrate the operations of Health Management Corporation of
America and HDM. Imperial contributed all of its assets (which were utilized in the business of Health Management
Corporation of America) to HDM and received a 24.2% interest in HDM. Health Management Corporation of America
retained a direct ownership interest of 45.8% in HDM, and the original investors in HDM retained a 30.0% ownership
interest in the newly expanded HDM.
The entire physician and diagnostic services management business segment is now being conducted by HDM. HDM’
s
Florida subsidiaries are directly engaged in the practice of medicine. HDM will operate under the assumed name, Health
Management Company of America”
“HMCA”).
“
(
The combined business (HDM, Imperial and Health Management Corporation of America) will be referred to as “
for all periods before and after July 1, 2015, unless otherwise indicated.
HMCA”
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FONAR CORPORATION AND SUBSIDIARIES
HMCA provides comprehensive non-medical management services to diagnostic imaging facilities. These services include
development, administration, leasing of office space, facilities, 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.
As of August 1, 2015, HMCA managed a total of 24 MRI centers. For the 2014 fiscal year, the revenues HMCA recognized
from the MRI facilities had increased to $56.6 million, and for the 2015 fiscal year 2015 the revenues further increased to
$57.6 million. Four of these facilities in Florida are owned by HMCA subsidiaries.
HMCA GROWTH STRATEGY
HMCA’s growth strategy focuses on upgrading and expanding the existing facilities it manages and expanding the number
of facilities it manages for its clients. In connection with improving the performance of the facilities, we have added high
field MRI scanners, extremities scanners and x-ray machines to the Upright MRI scanner at certain of the sites where such
additional diagnostic imaging modalities are expected to produce the greatest return.
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
Compensation scanning business.
No-Fault and Workers
’
’
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 is expanding the ancillary services offered in its network to include x-rays and
other MRI equipment such as high field MRI scanners and extremity scanners.
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FONAR CORPORATION AND SUBSIDIARIES
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.
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 management fees paid by the facilities to HMCA are flat monthly fees. In fiscal 2014, the aggregate amount of
management fees were $3,483,916 per month. In fiscal 2015, 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 2015, the aggregate amount of management fees paid to HMCA by these sites was $615,144.
The Florida facilities owned by HMCA subsidiaries directly bill their patients. Patient fees net of provision for bad debt were
$15,383,349 in fiscal 2015.
HMCA contracts with Tritech Healthcare Management (Plainview, New York) to perform billing and collection for their
clients
Compensation business. The fixed monthly fees were $30,000 for HMCA in fiscal 2015.
The fees for fiscal 2016 are $30,000 per month.
No-Fault and Workers
’
’
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
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FONAR CORPORATION AND SUBSIDIARIES
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 and educational programs in an effort to establish and maintain referring physician
relationships for our clients and Florida subsidiaries and to maximize reimbursement yields. HMCA also directs its
marketing and educational efforts to 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.
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 and sometimes
modified more frequently.
’
Healthcare Reform Legislation
Healthcare reform legislation enacted in the first quarter of 2010 by the Patient Protection and Affordable Care Act or
PPACA, specifically requires the U.S. Department of Health and Human Services, in computing physician practice
expense relative value units, to increase the equipment utilization factor for advanced diagnostic imaging services (such as
MRI, CT and PET) from a presumed utilization rate of 50% to 65% for 2010 through 2012, 70% in 2013, and 75%
thereafter. Excluded from the adjustment are low-technology imaging modalities such as ultrasound, X-ray and
fluoroscopy. The Health Care and Education Reconciliation Act of 2010 (H.R. 4872) or Reconciliation Act, which was
approved by the President on March 30, 2010, amends the provision for higher presumed utilization of advanced
diagnostic imaging services to a presumed rate of 75%. These changes may result in decreased revenue for the services
performed by our clients for Medicare beneficiaries. Other changes in reimbursement for services rendered by Medicare
Advantage plans may also reduce the revenues for services rendered to Medicare Advantage enrollees.
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FONAR CORPORATION AND SUBSIDIARIES
We have experienced reimbursement reductions for radiology services provided to Medicare beneficiaries, including
reductions pursuant to the Deficit Reduction Act, or DRA.
The DRA, which became effective in 2007, set reimbursement for the technical component for imaging services (excluding
diagnostic and screening mammography) in non-hospital based freestanding facilities at the lesser of OPPS or the MPFS.
In addition to the foregoing changes to the usage assumptions, CMS 2010 regulatory changes to the MPFS also included
a downward adjustment to services primarily involving the technical component rather than the physician work component,
by adjusting downward malpractice payments for these services. These adjustments have been phased in over a four year
period. For our fiscal year ended June
30, 2015, Medicare revenues represented approximately 5.1% of the revenues for
HMCA
’s clients and subsidiaries as compared to 6.5% for the fiscal year ended June 30, 2014. In January, 2014 additional
reductions in Medicare reimbursement were adopted, and New York State is expected to propose reducing workers’
compensation reimbursements.
’
Because of the many variables involved, we are unable to predict how the legislative mandates contained in PPACA will be
implemented, in their complete and final form, whether any additional changes to PPACA or regulations (including
interpretations), will occur in the future, or what effect any other future legislation or regulation would have on our business.
Many commercial insurance companies, however, tie their reimbursement rates to the government reimbursement levels.
Medicaid
The Medicaid program is a jointly-funded federal and state program providing coverage for low-income persons. In
addition to federally-mandated basic services, the services offered and reimbursement methods vary from state to state. In
many states, Medicaid reimbursement is patterned after the Medicare program; however, an increasing number of states
have established or are establishing payment methodologies intended to provide healthcare services to Medicaid patients
through managed care arrangements. In fiscal 2015, approximately 0.52% of the revenues of HMCA’
s clients were
attributable to Medicaid, as compared to 0.25% in fiscal 2014. Four of the Florida facilities (those owned by HMCA
subsidiaries) do not participate in Medicaid.
Managed Care and Private Insurance.
’
Health Maintenance Organizations, or HMO s, Preferred Provider Organizations, or PPOs, and other managed care
organizations attempt to control the cost of healthcare services by a variety of measures, including imposing lower
payment rates, preauthorization requirements, limiting services and mandating less costly treatment alternatives. Managed
care contracting is competitive and reimbursement schedules 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.
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.
Page
19
FONAR CORPORATION AND SUBSIDIARIES
With respect to the diagnostic imaging facilities managed by HMCA, the outpatient diagnostic imaging industry is highly
competitive. Competition focuses primarily on attracting physician referrals at the local market level and increasing
referrals through relationships with managed care organizations, as well as emphasizing to potential referral sources the
advantages of Upright® MRI scanning. HMCA believes that principal competitors for the diagnostic imaging centers are
hospitals and independent or management company-owned imaging centers. Competitive factors include quality and
timeliness of test results, ability to develop and maintain relationships with managed care organizations and referring
physicians, type and quality of equipment, facility location, convenience of scheduling and availability of patient
appointment times. HMCA believes that it will be able to effectively meet the competition in the outpatient diagnostic
imaging industry with the Fonar Upright®
MRI scanners and strategically placed high field MRI scanners at its facilities.
GOVERNMENT REGULATION APPLICABLE TO HMCA
FEDERAL REGULATION
The healthcare industry is highly regulated and changes in laws and regulations can be significant. Changes in the law or
new interpretation of existing laws can have a material effect on our permissible activities, the relative costs associated
with doing business and the amount of reimbursement by government and other third-party payors.
Federal False Claims Act
provisions allow a
The federal False Claims Act and, in particular, the False Claims Act’s
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.
whistleblower
qui tam or
”
“
”
“
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
” 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:
knowingly
“
’
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.
Page 20
FONAR CORPORATION AND SUBSIDIARIES
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
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.
“qui tam
”
Neither HMCA nor its clients engage in this practice.
In fiscal 2015, approximately 5.1% of the revenues of HMCA’s clients were attributable to Medicare and 0.52% were
attributable to Medicaid. In fiscal 2014, approximately 6.5% of the revenues of HMCA s clients were attributable to
Medicare and 0.25% 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.
’
Page
21
FONAR CORPORATION AND SUBSIDIARIES
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 (
), signed into law on February 17, 2009, dramatically expanded,
” or independent contractors who
among other things, (1) the scope of HIPAA to now apply directly to
receive or obtain PHI in connection with providing a service to a covered entity, (2) substantive security and privacy
obligations, including new federal security breach notification requirements to affected individuals, DHHS and prominent
media outlets, of certain breaches of unsecured PHI, (3) restrictions on marketing communications and a prohibition on
covered entities or business associates from receiving remuneration in exchange for PHI, and (4) the civil and criminal
penalties that may be imposed for HIPAA violations, increasing the annual cap in penalties from $25,000 to $1.5 million
per occurrence. In 2013 additional legal requirements were adopted to provide further protection for PHI.
business associates,
”
HITECH
“
“
In addition, many states have enacted comparable privacy and security statues or regulations that, in some cases, are
most stringent than HIPAA requirements. In those cases it may be necessary to modify our operations and procedures to
comply with the more stringent state laws, which may entail significant and costly changes for us. We believe that we are
in compliance with such state laws and regulations. However, if we fail to comply with applicable state laws and
regulations, we could be subject to additional sanctions.
We believe that we are in compliance with the current HIPAA requirements, as amended by HITECH, together with other
legislation and regulations, and comparable state laws, but we anticipate that we may encounter certain costs associated
with future compliance. Moreover, we cannot guarantee that enforcement agencies or courts will not make interpretations
of the HIPAA standards that are inconsistent with ours, or the interpretations of our contracted radiology practices or their
affiliated physicians. A finding of liability under the HIPAA standards may result in significant criminal and civil penalties.
Noncompliance also may result in exclusion from participation in government programs, including Medicare and Medicaid.
These actions could have a material adverse effect on our business, financial condition, and results of operations.
Civil Money Penalty Law and Other Federal Statutes
Page
22
FONAR CORPORATION AND SUBSIDIARIES
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
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.
homes,
”
“
’
State Regulation
In addition to the federal self-referral law and federal Anti-kickback statute, many States, including those in which HMCA
and its clients operate, have their own versions of self-referral and anti-kickback laws. These laws are not limited in their
applicability, as are the federal laws, to specific programs. HMCA believes that it and its clients are in compliance with
these laws.
Various States prohibit business corporations from practicing medicine. Various States, including New York, also prohibit
the sharing of professional fees or fee splitting. Consequently, in New York HMCA leases space and equipment to clients
and provides clients with a range of non-medical administrative and managerial services for agreed upon fees. Under
Florida law a business entity can bill patients and third party payors directly if that entity is properly licensed through AHCA.
Four of the seven facilities in Florida are licensed healthcare clinics through AHCA.
Page
23
FONAR CORPORATION AND SUBSIDIARIES
’
HMCA
’s clients and subsidiaries generate revenue from patients covered by no-fault insurance and workers'
compensation programs. For the fiscal year ended June 30, 2015 approximately 46.9% of our clients receipts were from
patients covered by no-fault insurance and approximately 6.8% of our client s receipts were from patients covered by
workers
s clients
’
compensation programs. For the fiscal year ended June 30, 2014, approximately 43.4% of HMCA’
receipts were from patients covered by no-fault insurance and approximately 6.3% of HMCA
s clients
’
’ receipts were from
patients covered by workers’ compensation programs. (The foregoing numbers do not include payments from third party
administrators). In the event that changes in these laws alter the fee structures or methods of providing service, or impose
additional or different requirements, HMCA could be required to modify its business practices and services in ways that
could be more costly to HMCA or in ways that decrease the revenues which HMCA receives from its clients.
’
’
Compliance Program
We maintain a program to monitor compliance with federal and state laws and regulations applicable to the healthcare
entities. 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 HMCA had approximately 465 employees as of August 1, 2015. This total number included 15 in production, 30
in customer support, 8 in research and development, 3 in information technology, 48 in marketing and sales, 28
transcriptionists, 37 technologists, 49 in billing and collections, and 247 in various administrative positions. Approximately
260 employees were employed at the MRI facilities managed or owned by HMCA, primarily in administrative positions.
ITEM 1A. RISK FACTORS
An investment in our securities is subject to various risks, the most significant of which are summarized below.
1.
Reduced Reimbursement Rates. Most of our revenues are derived from our scanning center business conducted
by HCMA. We are experiencing lower reimbursement rates from Medicare, other government programs and private
insurance companies. To date, we have been able to counter the impact of these reductions by increasing our volume of
scans, thereby maintaining profitability in this business segment. There is, however, no assurance that we will be able to
continue to do so.
2.
Demand for MRI Scanners. The reduced reimbursement rates also affects our sales of MRI scanners negatively.
With lower revenue projections, fewer prospective customers will be able to operate demand and lower prices for
scanners. Although the reduced reimbursements may not affect foreign demand, a lower number of sales in the aggregate
could reduce economies of scale and consequently, profit margins.
Page
24
FONAR CORPORATION AND SUBSIDIARIES
3.
Manufacturing Competition. Many if not most of our competing scanner manufacturers have significantly greater
financial resources, production capacity, and other resources than we do. Such competitors would include General
Electric, Siemens, Hitachi and Phillips. Although Fonar is the only company which can manufacture and sell the unique
Stand-Up
®) MRI scanner, potential customers must be convinced that the purchase of a Fonar scanner is their
best choice. We believe that with time, that objective will be reached, particularly with customers scanning patients having
neck, back, knee and various orthopedic issues who would benefit from being scanned in weight-bearing positions.
(Upright
®
Dependence on Referrals. HMCA derives substantially all of its revenue, directly or indirectly, from fees charged for
4.
the diagnostic imaging services performed at the facilities. We depend on referrals of patients from unaffiliated physicians
and other third parties to the facilities we manage or own for the services we perform. If these physicians and other third
parties were to reduce the number of patients they refer or discontinue referring patients, scan volumes could decrease,
which would reduce our net revenue and operating margins.
5.
Pressure to Control Healthcare Costs. One of the principal objectives of health maintenance organizations and
preferred provider organizations is to control the cost of healthcare services. Healthcare providers participating in
managed care plans may be required to refer diagnostic imaging tests to certain providers depending on the plan in which
a covered patient is enrolled. In addition, managed care contracting has become very competitive. The expansion of health
maintenance organizations, preferred provider organizations and other managed care organizations within New York or
Florida could have a negative impact on the utilization and pricing of services performed at the facilities HMCA manages or
owns to the extent these organizations exert control over patients’ access to diagnostic imaging services, selections of the
provider of such services and reimbursement rates for those services.
6.
Scanning Facility Competition. The market for diagnostic imaging services is highly competitive. The facilities we
manage or own compete for patients on the basis of reputation, location and the quality of diagnostic imaging services.
Groups of radiologists, established hospitals, clinics and other independent organizations that own and operate imaging
equipment are the principal competitors.
7.
Eligibility Changes to Insurance Programs. Due to potential decreased availability of healthcare through private
employers, the number of patients who are uninsured or participate in governmental programs may increase. Healthcare
reform legislation will increase the participation of individuals in the Medicaid program in states that elect to participate in
the expanded Medicaid coverage. A shift in payor mix from managed care and other private payors to government payors
or an increase in the number of uninsured patients may result in a reduction in the rates of reimbursement or an increase
in uncollectible receivables or uncompensated care, with a corresponding decrease in net revenue. Changes in the
eligibility requirements for governmental programs such as the Medicaid program and state decisions on whether to
participate in the expansion of such programs also could increase the number of patients who participate in such programs
and the number of uninsured patients. Even for those patients who remain in private insurance plans, changes to those
plans could increase patient financial responsibility, resulting in a greater risk of uncollectible receivables. These factors
and events could have a material adverse effect on our business, financial condition, and results of operations.
8.
Proposed Reduction of New York Workers’ Compensation Benefits. A proposal has been published by the New
York State Workers
’ Compensation Board (“NYSWCB”) to change the fee schedule for Workers’ Compensation
payments. In brief, the fees would be set at 130% of the Medicare fees. This would reduce fees for the most commonly
billed radiology procedures by 60%. Further, since the Workers
Compensation fees are coupled with the New York State
No Fault Program, radiology providers will suffer similar reductions for No-Fault fees. Although we and the HMCA clients
have written to the NYSWCB to argue against this proposal, and other affected parties are commenting as well, there can
be no assurance that the NYSWCB will modify this proposal, or if they elect to do so, the extent to which the NYSWCB
would modify their proposal. A significant reduction in Workers’
Compensation and No-Fault fees could have a material
adverse impact on our business.
’
Page
25
FONAR CORPORATION AND SUBSIDIARIES
9.
Federal and state privacy and information security laws. We must comply with numerous federal and state laws
and regulations governing the collection, dissemination, access, use, security and privacy of PHI, including HIPAA and its
implementing privacy and security regulations, as amended by the federal HITECH Act and collectively referred to as
HIPAA. If we fail to comply with applicable privacy and security laws, regulations and standards, properly maintain the
integrity of our data, protect our proprietary rights to our systems, or defend against cybersecurity attacks, our business,
reputation, results of operations, financial position and cash flows could be materially and adversely affected.
Information security risks have significantly increased in recent years in part because of the proliferation of new
technologies, the use of the internet and telecommunications technologies to conduct our operations, and the increased
sophistication and activities of organized crime, hackers, terrorists and other external parties, including foreign state
agents. Our operations rely on the secure processing, transmission and storage of confidential, proprietary and other
information in our computer systems and networks.
10.
Changes in Domestic and Worldwide Economic Conditions. We are subject to risk arising from adverse changes
in general domestic and global economic conditions, including recession or economic slowdown and disruption of credit
markets.
Turbulence and uncertainty in the United States and international markets and economies may adversely affect our
liquidity, financial condition, revenues, profitability and business operations generally.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Fonar an d HMCA currently lease approximately 78,000 square feet of office and plant space at its principal offices in
Melville, New York. The term of the lease runs through November, 2026. Management believes that the premises will be
adequate for its current needs. HMCA also maintains office space for the Facilities owned by its subsidiaries in Florida and
for its clients at the clients
’ sites in New York and Florida under leases having various terms. HMCA owns the building for
the client’
s premises in Tallahassee, Florida.
Page
26
ITEM 3. LEGAL PROCEEDINGS
FONAR CORPORATION AND SUBSIDIARIES
’
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
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.
s decision, but on January 31, 2012, the U.S. Court of Appeals for the 9
’
th
Shapiro v. Fonar Corporation, New York Supreme Court, Suffolk County. Previously, Fonar and Dr. Shapiro had settled an
action commenced in Nassau County under the same name. The amount remaining payable under the settlement
agreement according to Fonar
s records is $258,400, but the payment and timing of the payment was dependent on
’
obtaining an order for an Upright
® MRI Scanner for Fonar and the making of installment payments thereunder by the
customer. Briefly stated, the balance of $258,400 was and is not yet due. Dr. Shapiro claims that Fonar was in breach of
the settlement agreement and seeks payment of no less than $307,000 plus interest and attorneys
’ fees. Fonar believes it
has scrupulously observed the terms of the settlement agreement and that Dr. Shapiro’
s claims are without merit. Fonar
answered the Complaint and the case is now in discovery.
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.
"
January
—
April
—
July
—
January
—
April
—
July
—
January
—
April
—
—July
Fiscal Quarter
March
June
September
March
June
September
March
June
September 11,
High
7.44
7.94
6.70
27.95
18.7
—
—
—
—
—
14.44 —
14.25
—
13.27
—
11.13
—
Low
4.42
5.67
5.12
16.2
11.28
9.32
10.00
10.5
9.1
2013
2013
2013
2014
2014
2014
2015
2015
2015
Page
27
Performance Graph
FONAR CORPORATION AND SUBSIDIARIES
The following graph compares the annual change in the Company s cumulative total shareholder return on its Common
Stock during a period commencing on June 30, 2010 and ending on June 30, 2015 (as measured by dividing (i) the sum of
(A) the cumulative amount of dividends for the measurement period, assuming dividend reinvestment and (B) the
difference between the Company
’
s share price at the end and the beginning of the measurement period; by (ii) the share
price at the beginning of the measurement period) with the cumulative total return of each of: (a) the CRSP Composite
Total Return Index for Nasdaq ( Nasdaq ); (b) the CRSP Total Return Index for Nasdaq Medical Equipment Manufacturers
“Nas-MED
(
”
) during such period,
assuming a $100 investment on June 30, 2010. The stock price performance on the graph below is not necessarily
indicative of future price performance.
); and (c) the CRSP Total Return Index for Nasdaq Healthcare companies (
Nas-Hea.
”
“
”
“
’
Relative Dollar Values
6/30/2010
6/29/2011
6/28/2012
6/30/2013
6/30/2014
6/30/2015
Fonar
Common
Stock
NASDAQ
NAS-Med
NAS-Hea
$
$
$
$
100.00
100.00
100.00
100.00
$
$
$
$
133.33
132.73
122.79
140.86
$
$
$
$
278.90
142.01
120.84
142.04
$
$
$
$
446.24
167.01
149.13
180.16
$
$
$
$
829.90
219.06
194.13
223.46
719.70
$
250.69
$
$
228.86
$ 320.07
On September 11, 2015, we had approximately 1,018 stockholders of record of our Common Stock, 9 stockholders of
record of our Class B Common Stock, 3 stockholders of record of our Class C Common Stock and 1,085 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. Since then, we have
retained and expect to continue to retain earnings to finance the development and expansion of our business for the
foreseeable future.
Page 28
ITEM 6. SELECTED FINANCIAL DATA.
FONAR CORPORATION AND SUBSIDIARIES
The following selected consolidated financial data has been extracted from our consolidated financial statements for the
five years ended June 30, 2015. 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.
2015
As of and For the Periods Ended June 30,
2013
2012
2014
2011
STATEMENT OF OPERATIONS
Revenues
Cost of revenues
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
$
69,050,996
38,404,281
$
$ 1,812,398
$
15,430,383
68,505,477
$
$
37,247,449
$ 1,760,821
13,396,769
$
$
$
$
$
49,141,814
26,121,365
1,438,560
10,256,362
$
$
$
$
39,444,419
21,195,680
1,242,656
6,875,073
$33,136,395
18,479,550
$
1,440,032
$
3,309,019
$
$
$
2.00
1.95
$
$
1.62
1.58
$
$
1.37
1.34
$
$
0.93
0.91
$
$
0.56
0.55
6,050,632
6,009,822
5,933,318
5,778,695
5,264,795
6,178,136
6,137,326
6,060,822
5,906,199
5,392,299
$
$
24,828,161
76,492,077
$
$
21,898,699
76,789,843
$16,748,144
$
73,150,650
$ 4,805,347
$
33,635,002
$ (575,628)
$
31,580,674
$ 5,699,302
$
50,783,513
$
$
8,481,830
45,906,592
$
$
12,887,005
37,799,276
$
$
777,274
11,101,065
$
$
1,746,286
5,865,814
Page
29
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. HMCA, a
subsidiary of Fonar, provides management services to diagnostic imaging facilities.
Fonar's principal MRI product is its Stand-Up
MRI (also called Upright MRI) scanner. The Stand-Up MRI allows
patients to be scanned for the first time under weight-bearing conditions. The Stand-Up MRI is the only MRI capable of
producing images in the weight-bearing state.
®
®
®
®
At 0.6 Tesla field strength, the Upright
™ 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.
® MRI and Fonar 360
HMCA generates revenues from providing comprehensive management services, including development, administration,
accounting, billing and collection services, together with office space, medical equipment, supplies and non-medical
personnel to its clients. Revenues are in the form of fees which are earned under contracts with HMCA s clients except for
its three Florida subsidiaries which engage in the practice of medicine, and bill and collect fees from patients, insurers and
other third party payors directly.
’
For the fiscal years ended June 30, 2015 and June 30, 2014, 10.7% and 11.1%, respectively, of total revenues were
derived from contracts with facilities owned by Dr. Raymond V. Damadian, the President and principal stockholder of
Fonar. The agreements with these MRI facilities are for one-year terms which renew automatically on an annual basis,
unless terminated. The fees for these sites, which are located in Florida, are flat monthly fees.
For services for which Medicare is billed directly, the sites are paid under the Medicare Physician Fee Schedule, which is
updated on an annual basis. Under the Medicare statutory formula, payments under the Physician Fee Schedule would
have decreased for the past several years if Congress failed to intervene.
Many private payors use the Medicare Physician Fee Schedule to determine their own reimbursement rates.
While Congress has repeatedly intervened to mitigate the negative reimbursement impact associated with the formula,
there is no guarantee that Congress will continue to do so in the future. Moreover, the existing methodology may result in
significant yearly fluctuations in the Medicare Physician Fee Schedule amounts, which may be unrelated to changes in the
actual costs of providing physician services.
The 2013 Medicare Physician Fee Schedule 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.
In addition, effective January 1, 2014, Medicare made significant reductions in the MRI fee schedule, by nearly 40% for
some MRI studies.
Critical Accounting Policies
Our discussion and analysis of financial condition and results of operations are based on our consolidated financial
statements that were prepared in accordance with U.S. generally accepted accounting principles, or GAAP.
Management
makes estimates and assumptions when preparing financial statements.
These estimates and assumptions affect various
matters, including:
Page
30
FONAR CORPORATION AND SUBSIDIARIES
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.
At June 30, 2014, the deferred tax asset was valued at $5,740,287. At June 30, 2015, the deferred tax asset was valued at
$8,423,306.
We depreciate our long-lived assets over their estimated economic useful lives with the exception of leasehold
improvements where we use the shorter of the assets useful lives or the lease term of the facility for which these assets
are associated.
The Company provides for medical receivables that could become uncollectible by establishing an allowance for doubtful
accounts in order to adjust medical receivables to estimated net realizable value. In evaluating the collectability of medical
receivables, the Company considers a number of factors, including the age of the account, historical collection
experiences, payor type, current economic conditions and other relevant factors. There are various factors that impact
collection trends, such as payor mix, changes in the economy, increase burden on copayments to be made by patients
with insurance and business practices related to collection efforts. These factors continuously change and can have an
impact on collection trends and the estimation process.
We amortize our intangible assets, including patents, and capitalized software development costs, over the shorter of the
contractual/legal life or the estimated economic life. Our amortization life for patents and capitalized software development
costs is 15 to 17 years and 5 years, respectively. Our amortization of the non-competition agreements entered into with
certain individuals in connection with the HDM transaction are depreciated over seven years, and customer relationships
are amortized over 20 years.
Page
31
FONAR CORPORATION AND SUBSIDIARIES
Goodwill is recorded as a result of business combinations. Management evaluates goodwill, at a minimum, on an annual
basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable.
Impairment of goodwill is tested by comparing the reporting unit
’
s carrying amount, including goodwill, to the fair value of
the reporting unit. The fair value of a reporting unit is estimated using a combination of the income or discounted cash
flows approach and the market approach, which uses comparable market data. If the carrying amount of the reporting unit
exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of
impairment loss, if any. Based on our test for goodwill impairment, we noted no impairment related to goodwill. However, if
estimates or the related assumptions change in the future, we may be required to record impairment charges to reduce the
carrying amount of goodwill.
We periodically assess the recoverability of long-lived assets, including property and equipment, intangibles and
management agreements, when there are indications of potential impairment, based on estimates of undiscounted future
cash flows. The amount of impairment is calculated by comparing anticipated discounted future cash flows with the
carrying value of the related asset. In performing this analysis, management considers such factors as current results,
trends, and future prospects, in addition to other economic factors.
RESULTS OF OPERATIONS. FISCAL 2015 COMPARED TO FISCAL 2014
In fiscal 2015, we recognized net income of $15.4 million on revenues of $69.1 million, as compared to net income of
$13.4 million on revenues of $68.5 million for fiscal 2014. This represents an increase in revenues of 0.8%. Patient fee
revenue net of contractual allowances increased by 10.1%. Total costs and expenses decreased by 0.1%. Our
consolidated operating results improved by $600,000 to an operating income of $12.9 million for fiscal 2015 as compared
to an operating income of $12.3 million for fiscal 2014.
Discussion of Operating Results of Medical Equipment Segment
Fiscal 2015 Compared to Fiscal 2014
Revenues attributable to our medical equipment segment decreased by 4.9% to $11.5 million in fiscal 2015 from $12.1
million in fiscal 2014, with product sales revenues decreasing by 3.0% from $1.9 million in fiscal 2014 to $1.8 million in
fiscal 2015. Service revenue decreased from $10.2 million in fiscal 2014 to $9.7 million in fiscal 2015.
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 3.0% in fiscal 2015 from $1.9 million in fiscal 2014 to $1.8 million in fiscal
2015. There were no product sales to related parties in fiscal 2015 or 2014.
We believe that one of our principal challenges in achieving greater market penetration is attributable to the better name
recognition and larger sales forces of our larger competitors such as General Electric, Siemens, Hitachi, Philips and
Toshiba and the ability of some of our competitors to offer attractive financing terms through affiliates, such as G.E.
Capital.
In addition, lower reimbursement rates have reduced the demand for our MRI products, resulting in lower sales volumes.
As a result of fewer sales, service revenues have decreased since as older scanners are taken out of service, there are
fewer new scanners available to sign service contracts.
The operating results for the medical equipment segment increased from income of $469,000 in fiscal 2014 to income of
$505,000 in fiscal 2015. This increase is attributable most significantly to the fact that costs decreased by a greater
amount than the revenues decreased.
We recognized revenues of $1,662,000 from the sale of our Upright
recognized revenues of $957,000 from the sale of Upright®
MRI scanners.
®
MRI scanners in fiscal 2015, while in fiscal 2014, we
Page
32
FONAR CORPORATION AND SUBSIDIARIES
Research and development expenses, remained constant at $1.8 million in fiscal 2015 and 2014. Our expenses for fiscal
2015 represented continued research and development of Fonar
’
s new hardware and software product,
Sympulse
and new surface coils to be used with the Upright MRI scanner.
s scanners, Fonar
’
®
®
Discussion of Operating Results of Physician and Diagnostic Services Management Segment.
Fiscal 2015 Compared to Fiscal 2014
Revenues attributable to the Company's physician and diagnostic services management segment, HMCA, increased by
2.0% to $57.6 million in fiscal 2015 from $56.5 million in fiscal 2014. The increase in revenues was primarily due to
including $15.4 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 $33.7 million or 59.6%
of related revenues for the year ended June 30, 2014 to $34.3 million, or 59.6% of
related revenue for the year ended June 30, 2015.
Operating results of this segment increased from operating income of $11.8 million in fiscal 2014 to operating income of
$12.4 million in fiscal 2015. We believe that our efforts to expand and improve the operation of our physician and
diagnostic services management segment are directly responsible for the profitability of this segment and our company as
a whole.
Discussion of Certain Consolidated Results of Operations
Fiscal 2015 Compared to Fiscal 2014
Interest and investment income decreased in 2015 compared to 2014. We recognized interest income of $225,270 in 2015
as compared to $238,928 in fiscal 2014, representing a decrease of 5.7%.
Interest expense of $702,095 was recognized in fiscal 2015, as compared to $884,541 in fiscal 2014, representing a
decrease of 20.6%.
While revenue increased by 0.8%, selling, general and administrative expenses decreased by 12.5% to $13.5 million in
fiscal 2015 from $15.4 million in fiscal 2014.
The compensatory element of stock issuances decreased from approximately $223,000 in fiscal 2014 to $53,200 in fiscal
2015, reflecting a decrease in Fonar
’
s use of its stock bonus plans.
The higher provision for bad debts of $2.5 million in fiscal 2015 as compared to $1.8 million in fiscal 2014, reflected an
increase in reserves for certain indebtedness in fiscal 2015 by our physician and diagnostic services management
segment. In addition in fiscal 2015, the Company recorded a provision for bad debts for patient fee revenue of $12.8
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 $10.2 million in fiscal 2014 to $9.7 million in fiscal 2015.
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 2015 we continued our investment in the
development of our new MRI scanners, together with software and upgrades, with an investment of $1,812,398 in
research and development, none of which was capitalized, as compared to $1,760,821, none of which was capitalized, in
fiscal 2014. The research and development expenditures were approximately 15.8% of revenues attributable to our
medical equipment segment and 2.6% of total revenues in 2015, and 14.6% of medical equipment segment revenues and
2.9% of total revenues in fiscal 2014. This represented a 2.9% increase in research and development expenditures in
fiscal 2015 as compared to fiscal 2014.
Page 33
FONAR CORPORATION AND SUBSIDIARIES
The physician and diagnostic services management segment, HMCA, revenues increased, from $56.5 million in fiscal
2014 to $57.6 million in fiscal 2015. This is primarily attributable to an increase in patient scans resulting from our
marketing efforts.
For the fiscal year 2015 the Company recorded an income tax benefit of $2.6 million compared with $2.3 million for 2014.
The Income tax benefit is attributable to the income tax benefits associated with the increase in the deferred tax asset for
the years then ended. The Company has recorded a deferred tax asset of $8.4 million as of June 30, 2015, relating to the
tax benefits primarily related to net operating loss carry forwards available to offset future taxable income. The utilization of
these tax benefits is dependent on the Company generating future taxable income. The Company is projecting taxable
income for 2016-2018, but does not have sufficient history of income, nor can they anticipate the impact of the adoption of
proposed healthcare regulation including the impact of rate decreases of MRI scanning reimbursement rates, which could
materially impact operations, to eliminate a valuation allowance in its entirety. A partial valuation allowance will be
maintained until positive evidence exists to support that the reversal of any allowance.
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 represented an increase in revenues of 39.5%. The
increased revenue for fiscal 2014 resulted primarily from the inclusion of the revenues of an acquired company 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.
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.
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 was 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.
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.
Page
34
Discussion of Operating Results of Physician and Diagnostic Services Management Segment.
FONAR CORPORATION AND SUBSIDIARIES
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 14
additional scanning facilities acquired in March, 2013, which resulted in the recognition of $35.9 million in revenues from
the acquired company, 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.
’
For the fiscal year 2014 the Company recorded an income tax benefit of $2.3 million compared with $2.2 million for 2013.
The Income tax benefit is attributable to the income tax benefits associated with the increase in the deferred tax asset for
the years then ended. The Company has recorded a deferred tax asset of $5.7 million as of June 30, 2014 relating to the
tax benefits primarily related to net operating loss carry forwards available to be offset in the future.
Revenue from service and repair fees decreased from $11.0 million in fiscal 2013 to $10.2
million in fiscal 2014.
Page
35
FONAR CORPORATION AND SUBSIDIARIES
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.
We have been taking steps to improve HMCA revenues by our marketing efforts, which focus on the unique capability of
our Upright® MRI scanners to scan patients in different positions. We have also been increasing the number of health
insurance plans in which our clients participate.
Our management fees are dependent on collection by our clients of fees from reimbursements from Medicare, Medicaid,
private insurance, no fault and workers’
compensation carriers, self pay and other third-party payors. The health care
industry is experiencing the effects of the federal and state governments trend toward cost containment, as governments
and other third-party payors seek to impose lower reimbursement and utilization rates and negotiate reduced payment
schedules with providers. The cost-containment measures, consolidated with the increasing influence of managed-care
payors and competition for patients, have resulted in reduced rates of reimbursement for services provided by our clients
from time to time. Our future revenues and results of operations may be adversely impacted by future reductions in
reimbursement rates.
–
’
Certain third-party payors have proposed and implemented changes in the methods and rates of reimbursement that have
had the effect of substantially decreasing reimbursement for diagnostic imaging services that HMCA
’s clients provide. To
the extent reimbursement from third-party payors is reduced, it will likely have an adverse impact on the rates they pay us,
as they would need to reduce the management fees they pay HMCA to offset such decreased reimbursement rates.
Furthermore, many commercial health care insurance arrangements are changing, so that individuals bear greater
financial responsibility through high deductible plans, co-insurance and higher co-payments, which may result in patients
delaying or foregoing medical procedures. More frequently, however, patients are scanned and we experience difficulty in
collecting deductibles and co-payments. We expect that any further changes to the rates or methods of reimbursement for
services, which reduce the reimbursement per scan of our clients may partially offset the increases in scan volume we are
working to achieve for our clients, and indirectly will result in a decline in our revenues.
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, and cash equivalents decreased by 5% from $10.0 million at June 30, 2014 to $9.4 million at June 30, 2015.
Page
36
FONAR CORPORATION AND SUBSIDIARIES
Cash provided by operating activities for fiscal 2015 approximated $13.3 million. Cash provided by operating activities was
attributable to the net income of $15.4 million, depreciation and amortization of $3.5 million, which was offset by the
deferred income tax benefit of $2.8 million and the increase in accounts, medical and management fee receivables of $4.3
million.
Cash used in investing activities for fiscal 2015 approximated $271,000. The use of cash from investing activities was
attributable to purchases of property and equipment of $131,000, and costs of patents of $140,000.
Cash used by financing activities for fiscal 2015 approximated $13.5 million. The principal uses of cash in financing
activities included the repayment of loans and capital lease obligations of $2.8 million, distributions to non-controlling
interests of $4.6 million, a buyout of non-controlling interest of $5.0 million and a redemption of non-controlling interests of
$1.1 million.
Total liabilities decreased by 16.8% during fiscal 2015, from approximately $30.9 million at June 30, 2014 to approximately
$25.7 million at June 30, 2015.
As at June 30, 2015, 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, 2015, we had working capital of approximately $24.8 million as compared to working capital of $21.9 million at
June 30, 2014, and stockholders
equity of $50.8 million at June 30, 2015 as compared to stockholders’ equity of $45.9
million at June 30, 2014. For the year ended June 30, 2015, we realized a net income of $15.4 million.
’
Our principal sources of liquidity are derived from revenues.
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 $10.2 million for the year
ended June 30, 2014 and $9.7 million for the year ended June 30, 2015.
In order to promote profitability and to reduce demands on our cash and other liquid reserves, we maintain an aggressive
program of cost cutting. Previously, these measures included consolidating HMCA
s office space
’
and reducing the size of our workforce, compensation and benefits. We continue to reduce and contain expenses across
the board. The cost reductions are intended to enable us to withstand periods of low volumes of MRI scanner sales, by
keeping expenditures at levels which can be supported by service revenues and HMCA revenues.
s office space with Fonar
’
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 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 2015 approximated $271,000. Capitalized patent costs were approximately $140,000.
Purchases of property and equipment were approximately $131,000.
Page 37
Fonar has not committed to making capital expenditures in the 2016 fiscal year.
FONAR CORPORATION AND SUBSIDIARIES
The Company believes that its business plan has been responsible for the past three consecutive fiscal years of
profitability (fiscal 2015, fiscal 2014 and fiscal 2013) and that its capital resources will be adequate to support operations at
current levels through June 30, 2016.
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
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS
At June 30, 2015 and 2014
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended June 30, 2015, 2014 and 2013
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
For the Years Ended June 30, 2015, 2014 and 2013
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 2015, 2014 and 2013
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Page
38
Page No.
39
40
43
45
48
50
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, 2015 and 2014, and the related consolidated statements of income, stockholders equity and
“
cash flows for each of the three years in the period ended June 30, 2015. 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 audits 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, 2015 and 2014, and the
consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2015 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, 2015, 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, 2015 expressed an adverse opinion on the
effectiveness of the Company’s internal control over financial reporting because of the existence of material weaknesses.
/s/ Marcum LLP
Marcum LLP
New York, New York
September 29, 2015
Page
39
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Current Assets:
Cash and cash equivalents
Accounts receivable
–
net of allowances for doubtful accounts of $362,362
and $257,362 at June 30, 2015 and 2014, respectively
Medical receivables net of allowances for doubtful accounts of $15,459,156
–
and $14,032,067 at June 30, 2015 and 2014, respectively
Management and other fees receivable net of allowances for doubtful
–
accounts of $13,271,651 and $10,901,619 at June 30, 2015 and 2014,
respectively
Management and other fees receivable – related party medical practices net
of allowances for doubtful accounts of $403,047 at June 30, 2015 and 2014
Costs and estimated earnings in excess of billings on uncompleted contracts
Inventories
Prepaid expenses and other current assets
–
Total Current Assets
Deferred income tax asset
Property and Equipment – Net
Goodwill
Other Intangible Assets
Other Assets
Total Assets
– Net
See accompanying notes to consolidated financial statements.
Page
40
June 30,
2015
2014
$
9,448,798
$
9,951,736
3,790,981
4,450,125
9,082,319
8,807,856
14,057,962
11,970,388
3,507,204
681,660
2,191,849
860,040
43,620,813
8,423,306
12,901,195
1,767,098
8,950,160
829,505
76,492,077
$
3,426,982
759,809
2,443,536
1,011,358
42,821,790
5,740,287
15,029,729
1,767,098
10,508,843
922,096
76,789,843
$
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES
Current Liabilities:
Current portion of long-term debt and capital leases
Accounts payable
Other current liabilities
Unearned revenue on service contracts
Customer deposits
Billings in excess of costs and estimated earnings on uncompleted contracts
Total Current Liabilities
Long-Term Liabilities:
Deferred income tax liability
Due to related party medical practices
Long-term debt and capital leases, less current portion
Other liabilities
Total Long-Term Liabilities
Total Liabilities
Commitments, Contingencies and Other Matters
See accompanying notes to consolidated financial statements.
Page
41
June 30,
2015
2014
$
2,490,146
1,782,442
8,252,633
4,187,401
1,937,813
142,217
18,792,652
510,492
236,920
5,699,302
469,198
6,915,912
25,708,564
$
2,890,816
2,481,997
8,750,286
4,730,962
1,926,813
142,217
20,923,091
583,990
234,581
8,481,830
659,759
9,960,160
30,883,251
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
STOCKHOLDERS' EQUITY
Stockholders' Equity:
Class A non-voting preferred stock $.0001 par value; 453,000 shares
authorized at June 30, 2015 and 2014, 313,438 issued and outstanding at
June 30, 2015 and 2014
Preferred stock $.001 par value; 567,000 shares authorized at June 30, 2015
and 2014, issued and outstanding
– none
Common stock $.0001 par value; 8,500,000 shares authorized at June 30,
2015 and 2014, 6,062,483 and 6,057,483 issued at June 30, 2015 and
2014, respectively; 6,050,840 and 6,045,840 outstanding at June 30, 2015
and 2014, respectively
Class B convertible common stock (10 votes per share) $.0001 par value;
227,000 shares authorized at June 30, 2015 and 2014, 146 issued and
outstanding at June 30, 2015 and 2014
Class C common stock (25 votes per share) $.0001 par value; 567,000
shares authorized at June 30, 2015 and 2014, 382,513 issued and
outstanding at June 30, 2015 and 2014
Paid-in capital in excess of par value
Accumulated deficit
Notes receivable from employee stockholders
Treasury stock, at cost
– 11,643 shares of common stock at
June 30, 2015
and 2014
Total Fonar Corporation s Stockholders’ Equity
’
Noncontrolling interests
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
See accompanying notes to consolidated financial statements.
Page 42
June 30,
2015
2014
$
31
$
—
607
—
31
—
606
—
38
175,447,586
(136,348,635
)
(31,495)
38
175,284,437
(149,259,286)
(38,828)
(675,390
)
38,392,742
12,390,771
50,783,513
76,492,077
$
(675,390
)
25,311,608
20,594,984
45,906,592
76,789,843
$
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
–
Revenues
Product sales
Service and repair fees
Service and repair fees
Patient fee revenue, net of contractual allowances and
net
related parties
net
net
–
–
–
For the Years Ended June 30,
2014
2015
2013
$
1,820,979
9,549,316
110,000
$
1,877,932
10,082,631
110,000
$
3,939,140
10,841,935
110,000
discounts
Provision for bad debts for patient fee
Management and other fees
– net
Management and other fees – related party medical practices –
28,153,598
(12,770,249)
34,805,627
24,307,192
(10,333,082)
34,839,969
7,381,725
69,050,996
1,882,230
2,189,373
25,220
7,939,524
20,970,116
5,397,818
1,812,398
13,459,408
2,475,032
56,151,119
12,899,877
(702,095
)
225,270
394,810
7,620,835
68,505,477
1,067,120
2,496,985
27,242
7,670,484
20,851,065
5,134,553
1,760,821
15,388,239
1,806,299
56,202,808
12,302,669
(884,541
)
238,928
(608,599)
7,481,865
(2,584,669)
21,493,599
7,859,944
49,141,814
3,656,635
3,213,420
32,603
2,704,758
12,998,243
3,515,706
1,438,560
12,501,621
1,544,521
41,606,067
7,535,747
(500,362
)
217,598
725,488
12,817,862
2,612,521
15,430,383
(2,519,732
)
12,910,651
$
$
11,048,457
2,348,312
13,396,769
(3,000,639
)
10,396,130
$
$
7,978,471
2,277,891
10,256,362
(1,577,820
)
8,678,542
$
$
net
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
Costs related to patient fee revenue
Costs related to management and other fees
Costs related to management and other fees
–
related party
medical practices
Research and development
Selling, general and administrative, inclusive of compensatory
element of stock issuances of $53,200, $223,000 and
$415,021 for the years ended June 30, 2015, 2014 and 2013,
respectively
Provision for bad debts
Total Costs and Expenses
Income from Operations
Other Income and (Expenses):
Interest expense
Investment income
Other income (expense) – net
Income before benefit for income taxes and noncontrolling
interests
Benefit for Income Taxes
Net Income before noncontrolling interests
Net Income
Net Income Attributable to FONAR
Noncontrolling Interests
–
–
See accompanying notes to consolidated financial statements.
Page 43
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Continued)
Net Income Available to Common
Net Income Available to Class A Non-Voting Preferred
Stockholders
Stockholders
Net Income Available to Class C Common
Basic Net Income Per Common Share Available to Common
Stockholders
Stockholders
Diluted Net Income Per Common Share Available to Common
Stockholders
Basic and Diluted Income Per Share – Common C
Weighted Average Basic Shares Outstanding
– Common
Stockholders
Weighted Average Diluted Shares Outstanding Common
–
Stockholders
Weighted Average Basic and Diluted Shares Outstanding
–
Class C Common
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
Page
44
2015
12,071,670
For the Years Ended June 30,
2014
9,720,030
$
$
625,309
213,672
2.00
1.95
0.56
$
$
$
$
$
503,911
172,189
1.62
1.58
0.45
$
$
$
$
$
2013
8,107,367
425,708
145,467
1.37
1.34
0.38
6,050,632
6,009,822
5,933,318
6,178,136
6,137,326
6,060,822
382,513
382,513
382,513
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2015, 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
Payments on notes receivable from employee
stockholders
Issuance of stock for goods and services
Redemption of noncontrolling interests
Distributions to noncontrolling interests
Stock option exercised
Balance - June 30, 2014
Net income
Stock issued to employees under stock bonus
plans
Payments on notes receivable from employee
stockholders
Issuance of stock for goods and services
Redemption of noncontrolling interests
Buyout of noncontrolling interests
Distributions to noncontrolling interests
Balance - June 30, 2015
$
$
$
$
Class A
Non-Voting
Preferred
31
—
—
—
—
—
—
—
31
—
—
—
—
—
—
—
31
—
—
—
—
—
—
—
31
See accompanying notes to consolidated financial statements.
Page
45
Common
Shares
5,901,262
—
Stock Amount
590
$
—
Class C
Common Stock
$
38
—
67,870
—
—
—
—
—
5,969,132
—
21,443
—
45,265
—
—
10,000
6,045,840
—
5,000
—
—
—
—
—
6,050,840
$
$
$
8
—
—
—
—
—
598
—
2
—
5
—
—
1
606
—
1
—
—
—
—
—
607
$
$
$
—
—
—
—
—
—
38
—
—
—
—
—
—
—
38
—
—
—
—
—
—
—
38
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2015, 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
Payments on notes receivable from employee stockholders
Issuance of stock for goods and services
Redemption of noncontrolling interests
Distributions to noncontrolling interests
Stock option exercised
Balance - June 30, 2014
Net income
Stock issued to employees under stock bonus plans
Payments on notes receivable from employee stockholders
Issuance of stock for goods and services
Redemption of noncontrolling interests
Buyout of noncontrolling interests
Distributions to noncontrolling interests
Balance - June 30, 2015
See accompanying notes to consolidated financial statements.
Page
46
Paid-in Capital
in Excess of
Par Value
174,084,007
—
415,013
$
—
—
—
—
—
$ 174,499,020
—
222,998
—
531,820
—
—
30,599
175,284,437
—
53,199
—
109,950
$
—
—
—
175,447,586
$
Accumulated
Deficit
)
(168,333,958
8,678,542
$
—
—
—
—
—
—
$
$
(159,655,416)
10,396,130
—
—
—
—
—
—
(149,259,286
)
12,910,651
—
—
—
—
—
(136,348,635
)
$
$
$
Notes
Receivable
From Employee
Stockholders
(70,813
)
—
—
15,993
—
—
—
—
(54,820)
—
—
15,992
—
—
—
—
(38,828
)
$
$
—
—
7,333
—
—
—
—
(31,495
)
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2015, 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
Payments on notes receivable from employee stockholders
Issuance of stock for goods and services
Redemption of noncontrolling interests
Distributions to noncontrolling interests
Stock option exercised
Balance - June 30, 2014
Net income
Stock issued to employees under stock bonus plans
Payments on notes receivable from employee stockholders
Issuance of stock for goods and services
Redemption of noncontrolling interests
Buyout of noncontrolling interests
Distributions to noncontrolling interests
Balance - June 30, 2015
See accompanying notes to consolidated financial statements.
Page
47
Treasury Stock
)
$
(675,390
—
—
—
—
—
—
—
(675,390
)
$
$
—
—
—
—
—
—
—
(675,390
)
—
—
—
—
—
—
$
(675,390)
$
Noncontrolling
Interests
$
$
6,096,560
1,577,820
—
—
(564,315)
(1,424,900)
(1,799,950
)
19,800,000
23,685,215
3,000,639
—
—
(1,125,100
)
(4,965,770
)
—
$
20,594,984
2,519,732
—
—
—
(1,125,000
)
(4,971,094)
(4,627,851
)
12,390,771
Total
11,101,065
10,256,362
415,021
15,993
(564,315)
(1,424,900)
(1,799,950
)
19,800,000
37,799,276
13,396,769
223,000
15,992
531,825
(1,125,100)
(4,965,770
)
30,600
45,906,592
15,430,383
53,200
7,333
109,950
(1,125,000
)
(4,971,094)
(4,627,851
)
50,783,513
$
$
$
$
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
2014
2015
2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
15,430,383
Adjustments to reconcile net income to net cash provided by operating activities:
3,544,470
413,589
2,475,032
(2,756,517
)
$
– net
Depreciation and amortization
Abandoned patents or software written off
Provision for bad debts
Deferred income tax benefit
Gain on sale of equipment
Loss on disposition of equipment
Gain on litigation settlement
Impairment on management agreement
Compensatory element of stock issuances
Gain on extinguishment of debt
Stock issued for costs and expenses
Stock option exercised
$ 13,396,769
$
10,256,362
3,817,205
250,523
1,806,299
(2,682,405)
—
657,350
—
—
223,000
—
531,825
30,600
2,421,177
66,619
1,544,521
(2,473,892
)
(557,473
)
—
(755,500
)
357,500
415,021
—
—
—
—
—
—
—
53,200
)
(394,797
109,950
—
(Increase) decrease in operating assets, net:
Accounts, medical and management fee receivables
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 party medical practices
Income tax payable
NET CASH PROVIDED BY OPERATING ACTIVITIES
(4,258,147)
135,592
)
(4,044,002
95,623
(3,717,440
)
120,976
78,149
251,687
67,192
41,125
)
(699,555
)
(1,041,214
11,000
—
(190,561
)
2,339
—
13,272,917
)
(314,067
(366,448
)
46,967
131,811
(270,482
)
295,219
68,943
—
)
(268,261
3,955
(19,501
)
13,390,923
682,854
117,861
(698,284)
(204,037
)
628,033
)
(414,402
)
(567,914
142,217
253,559
1,885
(80,499
)
7,539,144
See accompanying notes to consolidated financial statements.
Page
48
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM INVESTING ACTIVITIES:
INVESTING ACTIVITIES
Purchases of property and equipment
Cost of acquisition
Cost of patents
NET CASH USED IN
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt
Proceeds from sale of equipment
Proceeds from noncontrolling interests
Repayment of borrowings and capital lease obligations
Repayment of notes receivable from employee stockholders
Distributions to noncontrolling interests
Redemption of noncontrolling interests
Buyout of
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS
CASH AND CASH EQUIVALENTS –
CASH AND CASH EQUIVALENTS –
BEGINNING OF YEAR
END OF YEAR
noncontrolling interest
See accompanying notes to consolidated financial statements.
Page 49
For the Years Ended June 30,
2014
(620,697
)
—
(214,211
)
(834,908
)
—
2013
(1,135,382
)
(40,000,000
)
(159,907
)
(41,295,289
)
2015
(131,308
)
(139,534
)
(270,842
)
—
—
—
(2,788,401)
7,333
(4,627,851)
(1,125,000)
(4,971,094
)
—
—
—
(4,400,128)
15,992
(4,965,770)
(1,125,100)
—
14,689,646
700,000
19,800,000
(1,821,617)
15,993
(1,799,950)
)
(1,424,900
)
(564,315
(13,505,013)
(10,475,006)
29,594,857
(502,938)
9,951,736
9,448,798
2,081,009
7,870,727
9,951,736
$
$
(4,161,288
)
12,032,015
7,870,727
$
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 2014 and 2013
NOTE 1 - DESCRIPTION OF BUSINESS AND LIQUIDITY AND CAPITAL RESOURCES
Description of Business
“
Company
”
FONAR Corporation (the
) 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.
”
or “FONAR
FONAR, through its wholly-owned subsidiary Health Management Corporation of America (
) 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.
"HMCA"
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, 2015, 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
50
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 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 $1,200,000, $1,037,000 and $598,000 for the years ended June 30, 2015, 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
–5
2.5
13
3-7
2-7
3-9
10–
28
2
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.
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.
Page
51
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 2014 and 2013
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Intangible Assets (Continued)
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) Non-Competition Agreements
The non-competition agreements are being amortized on the straight line basis over the length of the agreement (7 years).
4) Customer Relationships
Amortization is calculated on the straight line basis over 20 years.
Goodwill
Generally accepted accounting principles in the United States require the Company to perform a goodwill impairment test
annually and more frequently when negative conditions or a triggering event arises. Impairment of goodwill is tested at the
reporting unit level by comparing the reporting unit s carrying amount, including goodwill to the fair value of the reporting
unit. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered potentially impaired and a
second step is performed to measure the amount of impairment loss, if any.
’
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 “
operations, is recognized under the percentage-of-completion method in accordance with FASB ASC 605-35,
Recognition
specific contracts that provide for progress payments. Production and installation take approximately three to six months.
in the accompanying consolidated statements of
“Revenue
. The Company manufactures its scanners under
Construction-Type and Production-Type Contracts
product sales
–
”
”
Revenue on scanner service contracts is recognized on the straight-line method over the related contract period, usually
one year.
Page
52
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 2014 and 2013
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
(Continued)
Revenue from sales of other items is recognized upon shipment.
Revenue under management contracts is recognized based upon contractual agreements for management services
rendered by the Company primarily under various long-term agreements with various medical providers (the "PCs ). As of
June 30, 2015, 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 $100,000 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 fee for the medical equipment consists
of a fixed monthly fee of $2,000. 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 revenues, net of contractual allowances and discounts less the provision for bad debts for the
years ended June 30, 2015, 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
$
2015
4,398,589
1,187,690
15,978,243
6,589,076
For the Year Ended June 30,
2014
4,217,088
1,443,020
13,369,956
5,277,128
$
$
2013
1,360,536
541,602
3,597,416
1,982,311
discounts
Provision for Bad Debts
Net Patient Fee for Revenue
28,153,598
(12,770,249
)
15,383,349
$
24,307,192
(10,333,082
)
13,974,110
$
7,481,865
(2,584,669)
4,897,196
$
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.
Page 53
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 2014 and 2013
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Research and Development Costs
Research and development costs are charged to expense as incurred. The costs of equipment that are acquired or
constructed for research and development activities, and have alternative future uses (either in research and development,
marketing or production), are classified as property and equipment and depreciated over their estimated useful lives.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense approximated $894,000, $889,000 and $835,000 for the
years ended June 30, 2015, 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 $9,293, $1,885 and $5,838 for the years ended June 30, 2015, 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 occurs.
Earnings Per Share
”
EPS“
Basic earnings per share (
) is computed by dividing net income available to common stockholders by the weighted
average number of shares of common stock outstanding during the period. In accordance with ASC topic 260-10,
Participating Securities and the Two-Class Method
, the Company used the Two-Class method for calculating basic
“
earnings per share and applied the if converted method in calculating diluted earnings per share for the years ended June
30, 2015, 2014 and 2013.
”
Diluted EPS reflects the potential dilution from the exercise or conversion of all dilutive securities into common stock based
on the average market price of common shares outstanding during the period. For the years ended June 30, 2015, 2014
and 2013, diluted EPS for common shareholders includes 127,504 shares upon conversion of Class C Common.
Page
54
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 2014 and 2013
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share (Continued)
Basic
Total
June 30, 2015
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
$
12,910,651
$
12,071,670
6,050,632
2.13
$
6,050,632
2.00
$
$
$
6,050,632
127,504
6,178,136
$
1.95
$
213,672
382,513
0.56
382,513
—
382,513
0.56
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
6,009,822
1.73
$
6,009,822
1.62
6,009,822
127,504
6,137,326
1.58
$
$
$
$
$
172,189
382,513
0.45
382,513
—
382,513
0.45
Page
55
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 2014 and 2013
NOTE 2
– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share (Continued)
Basic
Total
June 30, 2013
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
Cash and Cash Equivalents
$
$
8,678,542
$
8,107,367
5,933,318
1.46
5,933,318
1.37
5,933,318
127,504
6,060,822
1.34
$
$
$
$
$
145,467
382,513
0.38
382,513
—
382,513
0.38
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, 2015, the Company had cash on deposit of approximately $7,038,000 in
excess of federally insured limits of $250,000.
Related Parties: Net revenues from related parties accounted for approximately 11%, 11% and 16% of the consolidated
net revenues for the years ended June 30, 2015, 2014 and 2013, respectively. Net management fee receivables from the
related party medical practices accounted for approximately 12%, 12% and 9% of the consolidated accounts receivable for
the years ended June 30, 2015, 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, 2015 and 2014, 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:
Page
56
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 2014 and 2013
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
(Continued)
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 and notes payable: The carrying amounts of debt and notes payable approximate fair value due to the
length of the maturities, the interest rates being tied to market indices and/or due to the interest rates not being significantly
different from the current market rates available to the Company.
All of the Company's financial instruments are held for purposes other than trading.
Recent Accounting Pronouncements
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 for annual reporting periods beginning after
December 15, 2016, including interim periods within the reporting period 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
”
ASU 2015-11
In July 2015, the FASB issued Accounting Standards Update No. 2015-11, “Simplifying the Measurement of Inventory”
(
). ASU 2015-11 requires an entity to measure inventory at the lower of cost and net realizable value. Net
“
realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of
completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using last-in,
) or the retail inventory method. It is effective for annual reporting periods beginning after December 15,
first-out (
2016. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim
or annual reporting period. The adoption of this standard is not expected to have a material impact on the Company s’
consolidated financial position and results of operations.
LIFO
“
”
FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and
regulations as of June 30, 2015 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 2015 or 2014, 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
57
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 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 (
) 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.
PCs
“
”
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 54%, 50% and 41%, respectively, of the PCs
’ 2015, 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 party medical practices accounted for
approximately 11%, 11% and 16%, of the consolidated net revenues for the years ended June 30, 2015, 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 party medical practices) entered into a guaranty agreement, pursuant to which they cross guaranteed all
management fees which are payable to the Company, which have arisen under each individual management agreement.
&
Page
58
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 2014 and 2013
NOTE 3 –
(Continued)
ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE
Management and Other Fees Receivable (Continued)
The following table sets forth the number of our facilities for the years ended June 30, 2015, 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)
2015
For The Year Ended June 30,
2014
2013
24
—
—
—
24
24
—
1
)(1
24
11
14
—
)
(1
24
NOTE 4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information relating to uncompleted contracts as of June 30, 2015 and 2014 is as follows:
Costs incurred on uncompleted contracts
Estimated earnings
Less: Billings to date
As of June 30,
2015
1,861,350
1,371,093
3,232,443
2,693,000
539,443
$
$
2014
1,884,984
1,745,608
3,630,592
3,013,000
617,592
$
$
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,
2015
2014
$
681,660
$
759,809
142,217
$ 539,443
142,217
$ 617,592
NOTE 5 INVENTORIES
–
Inventories included in the accompanying consolidated balance sheets consist of:
Purchased parts, components and supplies
Work-in-process
As of June 30,
2015
2,043,411
148,438
2,191,849
$
$
2014
2,093,671
349,865
2,443,536
$
$
Page 59
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 2014 and 2013
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, less accumulated depreciation and amortization, at June 30, 2015 and 2014, is
comprised of:
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
As of June 30,
2015
620,307
17,396,797
3,580,224
2,069,055
2,550,627
4,502,915
939,614
31,659,539
18,758,344
12,901,195
$
$
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
$
$
Depreciation and amortization of property and equipment for the years ended June 30, 2015, 2014 and 2013 was
$2,259,842, $2,458,113 and $1,554,458, respectively.
Depreciation and amortization of diagnostic equipment under capital leases for the years ended June 30, 2015, 2014 and
2013 was $0, $95,026 and $248,123, respectively. Accumulated depreciation and amortization of diagnostic equipment
under capital leases was $620,307, $620,307 and $525,281 for the years ended June 30, 2015, 2014 and 2013,
respectively.
During the year ended June 30, 2015, the Company has retired assets that were fully depreciated with a cost and
accumulated depreciation basis of $1,151,541.
NOTE 7 - OTHER INTANGIBLE ASSETS
Other intangible assets, net of accumulated amortization, at June 30, 2015 and 2014 are comprised of:
Capitalized software development costs
Patents and copyrights
Non-competition agreements
Customer relationships
Less: Accumulated amortization
As of June 30,
2015
$ 7,004,847
4,547,545
4,100,000
3,800,000
19,452,392
10,502,232
8,950,160
$
$
2014
7,418,436
4,408,011
4,100,000
3,800,000
19,726,447
9,217,604
$ 10,508,843
Information related to the above intangible assets for the years ended June 30, 2015, 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
–
2015
$10,508,843
139,534
(413,589)
—
(1,284,628
)
8,950,160
$
$
As of June 30,
2014
11,904,248
214,211
(250,523
)
—
(1,359,093
)
$10,508,843
Page
60
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, 2015, 2014 and 2013
NOTE 7 - OTHER INTANGIBLE ASSETS (Continued)
Amortization of patents and copyrights for the years ended June 30, 2015, 2014 and 2013 amounted to $183,272,
$178,836 and $168,631, respectively.
Amortization of capitalized software development costs for the years ended June 30, 2015, 2014 and 2013 was $325,642,
$407,876 and $335,350, respectively.
Amortization of management agreement for the years ended June 30, 2015, 2014 and 2013 amounted to $0, $0 and
$100,833, respectively.
Amortization of non-competition agreements for the years ended June 30, 2015, 2014 and 2013 amounted to $585,714,
$585,714 and $195,238, respectively.
Amortization of customer relationships for the years ended June 30, 2015, 2014 and 2013 amounted to $190,000,
$186,667 and $66,667, respectively.
The estimated amortization of other intangible assets for the five years ending June 30, 2020 and thereafter is as follows:
For the Years
Ending June 30,
2016
2017
2018
2019
2020
Thereafter
Total
1,262,929
1,246,672
1,169,983
1,002,736
797,458
3,470,382
8,950,160
$
$
$
$
Patents and
Copyrights
195,404
210,958
220,936
227,022
216,981
1,063,715
2,135,016
$
$
Capitalized
Software
Development
Costs
291,811
260,000
173,333
—
—
—
725,144
$
Non-
competition
$
585,714
585,714
585,714
585,714
390,477
—
$
2,733,333
$
Customer
Relation-ships
190,000
190,000
190,000
190,000
190,000
2,406,667
3,356,667
The weighted average amortization period for other intangible assets is 10.9 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, 146 and 146 of such shares outstanding at June 30, 2015, 2014 and 2013, respectively.
Page
61
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 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, 2015, 953,367 shares of common stock of FONAR were available for future grant under this plan. For the years ended
June 30, 2015, 2014 and 2013, 5,000, 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
62
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 2014 and 2013
NOTE 8 - CAPITAL STOCK (Continued)
Options
(Continued)
FONAR
”), adopted on July 1, 2002, is intended to qualify as
’
s 2002 Incentive Stock Option Plan (the
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 2002 Plan
“
FONAR
’
s 2005 Incentive Stock Option Plan (the
), 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 terminated on February 14, 2015 and no options remain outstanding.
”
FONAR 2005 Plan
“
Stock option activity and weighted average exercise prices under these plans and grants for the year ended June 30,
2015, 2014 and 2013 was as follows:
Outstanding, June 30, 2012
Granted
Exercised
Forfeited / Expired
Outstanding, June 30, 2013
Granted
Exercised
Forfeited / Expired
Outstanding, June 30, 2014
Outstanding, June 30, 2015
Exercisable at:
June 30, 2013
June 30, 2014
June 30, 2015
Number
of
Options
14,022
—
—
(7,412)
6,610
—
—
(6,610
)
—
—
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
—
—
—
—
—
—
—
—
—
27.76
—
—
26.65
29.00
—
—
29.00
—
—
29.00
—
—
6,610
—
—
$
$
$
Page
63
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 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 on all items of income, gain or loss, deductions
or other allocations of the Company will be allocated among the members in the same proportions as their membership
interests in the Company bear to all the Class A and Class B membership interests of the Company in the aggregate
outstanding. All of the depreciation and amortization of the assets of the Company will be allocated solely to the Class A
members, unless and until their interests have been redeemed by the Company in full pursuant to the provisions of the
operating agreement. 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.
On March 5, 2013 HDM purchased from Health Diagnostics, LLC ( HD”) and certain of its subsidiaries, a business
managing twelve (12) Stand-Up MRI Centers and two (2) other scanning centers located in the States of New York and
Florida for a total purchase price (including consideration of $1.5 million to outside investors) aggregating $35.9 million.
Concurrently with the acquisition, HDM entered into several consulting and non-competition agreements for a
consideration of $4.1 million. The acquisition was accounted for using the purchase method in accordance with ASC 805,
Business Combinations
“
. The Company recognized and measured goodwill as of the acquisition date, as the excess of
the fair value of the consideration paid over the fair value of the identified net assets acquired.
”
“
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
$
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
Page
64
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 2014 and 2013
NOTE 9 – CONTROLLING AND NONCONTROLLING INTERESTS (Continued)
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.
Net
Total Revenues
–
Net Income - Controlling Interests
Net Income Available to Common Stockholders
Net Income Available to Class A Non-Voting
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
Preferred Stockholders
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
’s total net revenues and income from operations for the period from the acquisition date (March 5, 2013) to June 30,
HDM
2013 was $14,834,143 and $1,958,714, respectively.
On January 8, 2015, the Company purchased 20% of the Class A members ownership interest at a cost of $4,971,094.
The Company has a 60.4% ownership interest in HDM after this transaction.
Amount of each class of HDM members equity as of June 30, 2015, 2014 and 2013
’
Opening Members’ Equity
Share of Net Income
Contributions
Buyout
Distributions
Ending Members
Equity
’
June 30, 2015
June 30, 2014
June 30, 2013
Class A
Members
17,659,698
1,988,915
—
(4,971,094
(3,925,350
10,752,169
)
)
$
$
Class B
Member
21,113,266
5,704,999
—
—
(4,774,644
22,043,621
$
$
)
Class A
Members
19,526,475
2,266,473
—
—
(4,133,250
17,659,698
$
$
)
Class B
Member
20,763,830
4,566,186
$
—
—
Class A
Members
—
$
543,225
19,800,000
—
Class B
Member
—
$
1,397,080
20,200,000
—
(4,216,750)
21,113,266
$
(816,750
19,526,475
)
$
(833,250
$20,763,830
)
Page
65
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 2014 and 2013
NOTE 9
–
CONTROLLING AND NONCONTROLLNG INTERESTS (Continued)
). The Class B membership interests in Imperial, all of which were retained by the Company
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”
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, 2015, May 1, 2014 and on May 1, 2013, the Company returned a portion of
the Class A Members capital contribution in the amount of $1,125,000, $1,125,100 and $1,424,900, respectively. As of
June 30, 2015, the Company
’s subsidiary, HMCA, now owns approximately 96% interest in Imperial Management
Services.
Amount of each class of Imperial members’ equity as of June 30, 2015, 2014 and 2013
June 30, 2015
Class A
Members
Class B
Member
June 30, 2014
Class A
Members
Class B
Member
June 30, 2013
Class A
Members
Class B
Member
Opening
Members’
Equity
Share of Net
Income
Contributions
Distributions
Redemption
Ending
Members’
Equity
$
2,403,812
$ 11,079,317
$
3,599,519
$
7,772,781
$
4,918,365
$3,824,945
405,634
—
(405,000)
(1,125,000)
3,921,129
—
—
—
536,913
—
(607,520)
(1,125,100
)
3,306,536
—
—
—
959,254
—
(853,200
)
(1,424,900)
3,947,836
—
—
—
$
1,279,446
$
15,000,446
$
2,403,812 $ 11,079,317
$ 3,599,519
$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, 2015, 2014 and 2013 aggregated $359,157, $531,474 and $559,221, respectively.
Page
66
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 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 $618,337 as of June
30, 2015.
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
note was paid in full September 2, 2014. The Company still has the ability to
draw down on the line.
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
2015
2014
$
416,844
$
439,983
—
300,000
7,149,986
9,349,994
488,499
134,119
8,189,448
2,490,146
5,699,302
660,911
621,758
11,372,646
2,890,816
8,481,830
$
$
The maturities of long-term debt over the next five years and thereafter are as follows:
Years Ending
June 30,
2016
2017
2018
2019
2020
Thereafter
$
$
2,490,146
2,440,108
2,372,514
580,708
32,944
273,028
8,189,448
Page
67
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 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 has recorded a deferred tax asset of $8,423,306 and a deferred tax liability of $510,492 as of June 30,
2015, primarily relating to net operating loss carryforwards of approximately $122,926,000 available to offset future taxable
income through 2034. The net operating losses begin to expire in 2019 for federal tax purposes and in 2015 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 for income taxes are as follows:
Years Ended June 30,
2014
2015
2013
Current:
Federal
State
Federal deferred taxes
State deferred taxes
$
$
114,683
29,313
(2,353,124
)
(403,393
)
)
(2,612,521
Page
68
$
$
310,000
24,093
)
(2,280,044
(402,361
)
)
(2,348,312
$
$
125,000
71,001
(2,336,454)
(137,438
)
(2,277,891
)
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 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
True ups
Effective income tax rate
2015
35.0
%
(65.4
6.0
%
0.2%
)%
(3.2)%
)%
(27.4
Years Ended June 30,
2014
2013
34.0
%
6.0%
)%(0.9
)%
(65.5
(2.8
)%
(29.2)%
34.0
%
6.0
0.6
(73.2
(3.0
(35.6
%
%
)%
)%
)%
As of June 30, 2015, the Company has net operating loss (
”) carryforwards of approximately $122,926,000 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.
“NOL
The Company has, for federal income tax purposes, research and development tax credit carryforwards aggregating
$4,510,000. The Company also has $1,109,000 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, 2015 to June 30, 2034.
Significant components of the Company's deferred tax assets and liabilities at June 30, 2015 and 2014 are as follows:
June 30,
2015
2014
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
Capitalized software development costs
Total deferred tax liabilities
Net deferred tax asset
$
$
6,607,107
115,346
49,170,420
6,751,692
111,190
1,093,401
63,849,156
(55,425,850
)
8,423,306
(510,492
)
(510,492)
7,912,814
$ 6,961,016
65,108
54,900,136
5,644,097
195,408
130,822
67,896,587
(62,156,300)
5,740,287
(583,990)
(583,990
)
5,156,297
$
The valuation allowance for deferred tax assets decreased by approximately $6,730,000 during the year ended June 30,
2015 and decreased by approximately $6,392,000 during the year ended June 30, 2014.
Page
69
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 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
Self-funded health insurance reserve
Interest and penalty –
Other
sales tax
June 30,
2015
$ 991,603
117,480
521,149
2,538,340
344,060
235,000
—
510,150
2,508,840
486,011
8,252,633
$
2014
$ 834,324
117,480
664,349
2,665,181
438,730
325,139
450,000
298,004
2,374,339
582,740
8,750,286
$
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 November 2026. 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, 2015:
Year Ending
June 30,
2016
2017
2018
2019
2020
Thereafter
Total minimum obligations
$
$
Facilities And Equipment
(Operating Lease)*
3,717,939
3,191,082
2,722,882
2,129,428
1,866,277
8,094,188
21,721,796
*Includes new lease for the Company
’
s principal office in Melville, see subsequent events Note 20.
Rent expense for operating leases approximated $4,266,000, $4,571,000 and $4,035,000, for the years ended June 30,
2015, 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.
The Company has received preliminary approval from the Suffolk County IDA on August 27, 2015 of a 50% property tax
abatement, valued at $440,000, over a 10 year period commencing January 2017. Final approval from the IDA may come
as soon as their next meeting on September 22, 2015.
Page 70
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 2014 and 2013
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
Employee Benefit Plans
The Company has a non-contributory 401(k) Plan (the
). 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, 2015, 2014 and 2013.
”
401(k) Plan
“
The stockholders of the Company approved the 2000 Employee Stock Purchase Plan ( ESPP”
stockholders
at a discount, not to exceed 15%. This plan has not been put into effect as of June 30, 2015.
) at the Company
s annual
’
’ meeting in April 2000. The ESPP provides for eligible employees to acquire common stock of the Company
“
Stipulation Agreements
The Company has entered into stipulation agreements with a number of its creditors that in the aggregate total $83,966,
which is included in other current liabilities on the Company s balance sheet as of June 30, 2015. The monthly payments
’
total $19,552.
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.
Golden Triangle Company v. Fonar Corporation et al, CV10-2933. The Plaintiff contracted with the Company 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. The Company 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 the Company were dismissed. The Company filed its answer,
together with a counterclaim alleging that the Plaintiff, by attempting to overcharge the end-customer, had damaged the
Company
’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 the Company’
s common stock payable in installments. The Company recorded a gain of $755,500 on the
statements of income for the year ended June 30, 2013.
’
Matt Malek Madison v. Fonar Corporation, United States District Court, Northern District of California, was commenced by
plaintiff on August 27, 2007 to recover a down payment for a scanner in the amount of $300,000, with interest. The plaintiff
sought costs of suit and attorney s fees as well. The Company answered the complaint and sued the plaintiff for breach of
contract in the amount of $450,000. Although down payments are usually expressly non-refundable in the Company s’
quotations and agreements, in this case, the quotation contemplated the sale of four scanners, and provided that the
deposit would be refundable with interest, if the customer were unable to find suitable locations in the San Francisco Bay
area. The issue was whether the customer made a good faith effort to find locations; the Company’
s position was that the
customer did not. The case went to trial before a judge; the parties submitted post-trial briefs, and judgment was awarded
to the plaintiff. The Company appealed the trial court
’s decision, but on January 31, 2012, the U.S. Court of Appeals for the
9th Circuit affirmed the lower court’
s decision awarding the plaintiff the $300,000 deposit with prejudgment interest from
July 1, 2006. The Company sought to have the Court of Appeals reconsider the decision en banc, (by all or a larger
number of the judges on the Circuit Court of Appeals), but this was not granted. Although the case has been concluded,
the plaintiff has not taken any steps to collect the judgment. As of June 30, 2015 and 2014, $300,000 was included in the
Company
’
s accrued expenses.
Page
71
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 2014 and 2013
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
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
’
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. As of June 30, 2015, the Company has paid the $150,000.
MRI scanners infringe plaintiff
®
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.
Shapiro v. Fonar Corporation, New York Supreme Court, Suffolk County. Previously, The Company and Dr. Shapiro had
settled an action commenced in Nassau County under the same name. The amount remaining payable under the
settlement agreement according to The Company
’
s records is $258,400, but the payment and timing of the payment was
dependent on obtaining an order for an Upright
® MRI Scanner for the Company and the making of installment payments
thereunder by the customer. Briefly stated, the balance of $258,400 was and is not yet due. Dr. Shapiro claims that the
Company was in breach of the settlement agreement and seeks payment of no less than $307,000 plus interest and
attorneys’ fees. The Company believes it has scrupulously observed the terms of the settlement agreement and that Dr.
Shapiro s claims are without merit. The Company answered the Complaint and the one is now in discovery.
’
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 $2,538,000 plus interest and penalties of
approximately $2,509,000. The Company is in the process of determining its regulatory requirements in order to become
compliant.
The Company maintains a self-funded health insurance program with a stop-loss umbrella policy with a third party insurer
to limit the maximum potential liability for individual claims to $100,000 per person and for a maximum potential claim
liability based on member enrollment. With respect to this program, the Company considers historical and projected
medical utilization data when estimating its health insurance program liability and related expense. As of June 30, 2015
and 2014, the Company had approximately $510,000 and $298,000, respectively, in reserve for its self-funded health
“Other current liabilities
insurance programs. The reserves are included in
in the consolidated balance sheets.
”
The Company regularly analyzes its reserves for incurred but not reported claims, and for reported but not paid claims
related to its reinsurance and self-funded insurance programs. The Company believes its reserves are adequate.
However, significant judgment is involved in assessing these reserves such as assessing historical paid claims, average
lags between the claims
incurred date, reported dates and paid dates, and the frequency and severity of claims. There
may be differences between actual settlement amounts and recorded reserves and any resulting adjustments are included
in expense once a probable amount is known. There were no significant adjustments recorded in the years covered by this
report.
’
Page
72
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 2014 and 2013
NOTE 14 - OTHER INCOME (EXPENSE)
Other income (expense) consists of:
Loss on disposition of equipment
Loss from investment
Litigation settlement
Gain on extinguishment of debt
Impairment of management agreement
Gain on sale of equipment
Other income (expense)
$
$
2015
$
$
—
—
—
For the Years Ended June 30,
2014
(657,350)
—
13,586
—
—
40,000
)
(4,835
$ (608,599
)
$
394,797
—
—
13
394,810
2013
—
(48,777
)
716,250
—
(357,500
)
557,473
(141,958)
725,488
NOTE 15 - SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended June 30, 2015, 2014 and 2013, the Company paid $516,385, $668,475 and $389,907 for interest,
respectively.
During the years ended June 30, 2015, 2014 and 2013, the Company paid $143,996, $349,501 and $277,000 for income
taxes, respectively.
NOTE 16
–
DUE TO RELATED PARTY 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, 2015
and 2014 was $134,880.
Other Related Party Transactions
A son of the Company s Chairman of the Board is one of the minority owners of Tritech Healthcare Management, which
performs billing and collection services with respect to No-Fault and Workers
’s
clients. The monthly fee charged to the Company is $85,000.
Compensation claims of the Company
’
’
Bensonhurst MRI Limited Partnership, in which a son of the Company
’s Chairman of the Board holds an interest, is party
to an agreement with the Company for the service and maintenance of its Upright MRI Scanner for a price of $110,000 per
annum.
Integrity Healthcare Management Holdings, LLC, of which a son of the Company
’
s Chairman of the Board is an owner, has
a 12% interest in Watchtower Entrepreneurs LLC. During fiscal 2015, Watchtower agreed to sell equipment and
components to the Company for a total of $700,000.
Page
73
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 2014 and 2013
NOTE 17 - SEGMENT AND RELATED INFORMATION
The Company provides segment data in accordance with the provisions of ASC topic 280,
an Enterprise and Related Information
”.
“
Disclosures about Segments of
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
Fiscal 2015:
Net revenues from external customers
Intersegment net revenues *
Income from operations
Depreciation and amortization
Compensatory element of stock issuances
Total identifiable assets
Capital expenditures
11,480,295
$
$ 2,005,000
$
504,895
306,183
$
$
53,200
$ 18,997,142
209,534
$
57,570,701
$
$
—
$12,394,982
3,238,287
$
$
—
57,494,935
$
61,308
$
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
customers
Fiscal 2013:
Net revenues from external
Intersegment net revenues *
Income from operations
Depreciation and amortization
Compensatory element of stock
Total identifiable assets
Capital expenditures
issuances
$
$
$
$
$
$
$
12,070,563
1,963,750
468,793
410,728
223,000
18,093,789
234,275
14,891,075
$
$ 1,200,000
139,390
$
541,551
$
415,021
$
$
15,071,225
$
237,636
$56,434,914
$
—
11,833,876
$
$ 3,406,477
$
$
$
58,696,054
600,633
—
$34,250,739
—
$
$
7,396,357
$ 1,879,626
$
58,079,425
$
$25,170,303
—
Totals
69,050,996
$
2,005,000
$
$
12,899,877
$ 3,544,470
$
53,200
76,492,077
$
270,842
$
68,505,477
$
$
1,963,750
$12,302,669
$ 3,817,205
223,000
$
$
76,789,843
$
834,908
49,141,814
$
1,200,000
$
7,535,747
$
2,421,177
$
415,021
$
$
73,150,650
$25,407,939
* Amounts eliminated in consolidation
Page
74
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 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 74.2%, 42.4% and 3.8% of product sales revenues to third parties for the years ended June 30,
2015, 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:
United Arab Emirates
Switzerland
Canada
England
Germany
Libya
For the Years Ended June 30,
2015
2014
2013
-%
29.8%
-%
—
12.4
2.2
—
0.1
—
3.6
—
—
0.1
—
71.9
—
0.2
0.1
%74.2
42.4%
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 7.4%, 8.8% and 8.2% of consolidated net service and repair fees for
the years ended June 30, 2015, 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:
Spain
Puerto Rico
Switzerland
Germany
England
Holland
Canada
Greece
Australia
%
%
%
For the Years Ended June 30,
2014
2015
2013
1.0
1.0
0.9
1.1
1.0
1.2
0.7
1.1
1.1
—
0.4
0.7
2.0
1.7
2.6
2.2
0.6
1.3
—
0.2
0.1
0.2
—
—
1.2
1.1
1.0
%7.4
8.8
8.2
%
%
The Company does not have any material assets outside of the United States.
Page 75
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 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, 2015, 2014 and
2013, respectively:
Description
Accounts receivable
Management and other fees receivable
Management and other fees receivable - related
medical practices
Medical receivables
Advance and notes to related
parties
Balance June
30, 2014
$
257,362
10,901,619
Additions
$
105,000
2,370,032
(1)
(1)
$
Deductions
—
—
Balance June
30, 2015
$
362,362
13,271,651
403,047
14,032,067
202,379
—
(1) 12,770,249
—
—
11,343,160
202,379
403,047
15,459,156
—
Description
Accounts receivables
Management and other fees receivable
Management and other fees receivable - related
medical practices
Medical receivables
Advance and notes to related parties
Balance
June 30,
2013
257,362
9,095,320
$
Additions
$
(1)
—
(1) 1,806,299
$
Deductions
—
—
Balance June
30, 2014
$
257,362
10,901,619
403,047
2,584,669
202,379
—
(1) 10,333,082
—
—
)
(1,114,316
—
403,047
14,032,067
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
(1) Included in provision for bad debts.
Balance
June 30,
2012
1,852,987
7,458,345
$
Additions
(1)
)
(92,454
(1) 1,636,975
Deductions
$ 1,503,171
—
403,047
—
239,791
65,000
(1)
—
2,584,669
—
—
—
37,412
65,000
Balance
June 30,
2013
257,362
9,095,320
$
403,047
2,584,669
202,379
—
Page
76
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015, 2014 and 2013
NOTE 19 - QUARTERLY FINANCIAL DATA (UNAUDITED)
(000 s omitted, except per share data)
’
–
Net
Revenues
Total
Total Costs and Expenses
Net Income
Basic Net Income Per Common Share
Available to Common Stockholders
Diluted Net Income Per Common Share
Available to Common Stockholders
Net
Revenues –
Total
Total Costs and Expenses
Net Income
Basic Net Income Per Common Share
Available to Common Stockholders
Diluted Net Income Per Common Share
Available to Common Stockholders
September
30, 2014
December
31, 2014
March 31,
2015
June 30,
2015
$
$
$
17,985
14,547
3,256
0.39
0.39
$
September
30, 2013
16,831
12,778
3,620
$
$
0.38
0.37
$
$
$
$
$
$
17,092
13,494
3,455
0.41
0.40
December
31, 2013
17,609
14,314
3,048
0.33
0.33
$
$
$
$
$
$
17,096
14,430
2,519
0.31
0.31
March 31,
2014
17,040
14,721
2,147
0.27
0.26
$
$
$
$
$
$
16,878
13,680
6,200
0.89
0.86
June 30,
2014
17,025
14,390
4,582
0.64
0.62
Total
69,051
56,151
15,430
2.00
1.95
Total
68,505
56,203
13,397
1.62
1.58
$
$
$
$
$
$
NOTE 20 – SUBSEQUENT EVENTS
The Company evaluates events that have occurred after the balance sheet date, but before the consolidated financial
statements are issued.
Effective July 1, 2015, the Company restructured the corporate organization of the management of diagnostic imaging
centers segment of our business. The reorganization was structured to more completely integrate the operations of Health
Management Corporation of America and HDM. Imperial contributed all of its assets (which were utilized in the business of
Health Management Corporation of America) to HDM and received a 24.2% interest in HDM. Health Management
Corporation of America retained a direct ownership interest of 45.8% in HDM, and the original investors in HDM retained a
30.0% ownership interest in the newly expanded HDM. The entire management of diagnostic imaging centers business
segment is now being conducted by HDM.
During August 2015, the Company entered into a new lease for its principal office in Melville, New York. The lease
commences on August 1, 2015 and expires on November 30, 2026.
Page
77
FONAR CORPORATION AND SUBSIDIARIES
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
There have been no disagreements with our independent registered public accounting firm or other matters requiring
disclosure under Regulation S-K, Item 304(b).
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, we performed an evaluation under the
supervision of and with the participation of management, including our Principal Executive Officer and our Acting Principal
Financial Officer, of the design and effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e)
or 15d-15(e) under the Securities Exchange Act of 1934 as amended (the
”). 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.
Exchange Act
“
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, 2015 because of the material weaknesses described below.
Page
78
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.
2) Inadequate design of controls over period end financial reporting and disclosure processes.
3) The Company 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, 2015 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management's Plan to Remediate Material Weaknesses
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 remediation efforts during 2015, and will continue to do so
for fiscal 2016. During the fiscal year ended June 30, 2015, the Company
’s remediation efforts included the following:
•
•
•
Performing more extensive reviews of critical estimates, journal entries and complex calculations.
Realigning certain roles to provide better segregation of duties and implementing stronger user access controls.
Engaging third party service providers to assist with the preparation of Company tax returns and quarterly and
year-end tax provision calculations.
During fiscal 2016 our remediation efforts are expected to continue. 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 have and will continue to take
the necessary steps to implement additional review and approval procedures as applicable to strengthen our controls over
the financial reporting and disclosure process. In addition, we continue to create and implement new information
technology policies and procedures related to controls over information technology operations, security and change
management. To the extent necessary, we may hire additional staff or reassign duties of existing staff in connection with
our remediation efforts.
Page 79
Marcum LLP
New York, New York
September 29, 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
To the Audit Committee of the
Board of Directors and Stockholders of
FONAR Corporation and Subsidiaries
We have audited FONAR Corporation and Subsidiaries’
) internal control over financial reporting as of
(the
June 30, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining
effective internal control over financial reporting, included in the accompanying
’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.
“Management
Company”
”
“
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 weaknesses have 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 interactions of our internal accountants with our Audit Committee.
Page
80
Marcum LLP
2)
Inadequate design of controls over period end financial reporting and disclosure processes.
3) The Company 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, 2015 consolidated financial statements, and this report does not affect our report dated
September 29, 2015.
In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of
the control criteria, FONAR Corporation and subsidiaries have not maintained effective internal control over financial
reporting as of June 30, 2015, 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, 2015 and 2014 and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2015 of the
Company and our report dated September 29, 2015 expressed an unqualified opinion on those financial statements.
/s/ Marcum LLP
Marcum LLP
New York, New York
September 29, 2015
Page
81
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.
Claudette J.V. Chan
Robert J. Janoff
Charles N. O'Data
Ronald G. Lehman
79
77
88
79
39
Chairman of
President, Treasurer,
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.
Page
82
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, LLC, a private
New York-based broker-dealer registered with the Securities and Exchange Commission and which is a member of the
Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC). Mr. Lehman
directly manages all facets of the firm
’s transaction processes, from deal origination, to sourcing capital, to negotiating deal
structures, through documentation and closing. The firm provides buy and sell-side advisory, capital raising, and consulting
services to lower middle-market companies. Mr. Lehman specializes in advising healthcare services companies and has
recently completed several recapitalizations in the industry. He also participates in the firm
’
s merchant banking
investments and oversees many of these assignments. From May, 2008 to October, 2009, Mr. Lehman served as Senior
Vice President of Acquisitions at Health Diagnostics, LLC, where he managed the company
’s acquisition and corporate
finance activities. From March, 2000 to May, 2008, Mr. Lehman worked for various Bruderman entities as a buy and
sell-side advisor and as a principal in several private equity transactions. From September, 1998 to March, 2000, Mr.
Lehman worked at Deutsche Bank Securities, Inc. and last held the position of Associate in their Global Custody Group.
Mr. Lehman graduated from Columbia University with a B.A. in 1998.
Page
83
ITEM 11. EXECUTIVE COMPENSATION.
FONAR CORPORATION AND SUBSIDIARIES
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)
2015
2014
2013
Salary ($) (c)
$
35,935.12
$
36,002.38
$ 36,111.30
Bonus ($) (d)
All Other
Compensation
—
—
—
—
—
—
Total
Compensation
$
35,935.12
$
36,002.38
$
36,111.30
II. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Name
Number of Securities
Underlying Unexercised
Options (#) Exercisable
Option Exercise Price
($)
Option Expiration Date
Raymond V. Damadian,
PEO/PFO
(a)
(b)
(c)
0
Page
84
0
N/A
FONAR CORPORATION AND SUBSIDIARIES
III. DIRECTOR COMPENSATION
Name
Raymond V.Damadian
Claudette J.V.Chan
Robert J.Janoff
Charles N. O
’
Data
Ronald G. Lehman
EMPLOYEE COMPENSATION PLANS
Fees
Earned or
Paid in
Cash ($)
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
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, was intended to qualify as an incentive stock
option plan under Section 422A of the Internal Revenue code of 1954, as amended. The Plan permits the issuance of
stock options covering an aggregate of 80,000 shares of common stock of Fonar. The options issued have an exercise
price equal to the fair market value of the underlying stock on the date the option is granted, are non-transferable, are
exercisable for a period not exceeding ten years, and expire upon the voluntary termination of employment. The Plan
terminated on February 14, 2015.
Fonar adopted its 2010 Stock Bonus Plan, on June 28, 2010. This Plan permits Fonar to issue an aggregate of 2,000,000
shares of common stock of Fonar as bonus or compensation. As of June 30, 2015, 955,033 shares were available for
issuance.
Page 85
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 11, 2015.
’
Name and Address of Beneficial Owner (1)
Raymond V. Damadian, M.D. c/o Fonar Corporation
York
Director, President, Treasurer CEO, 5% + Stockholder
Melville, New
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
___________________________
* Less than one percent
Shares
Beneficially
Owned
Percent of Class
108,402
382,447
19,093
106
32
2,000
79
528
0
111,036
382,447
19,204
%1.79
%
%
99.98
6.09
*
*
*
*
*
*
1.84%
%
%
99.98
6.13
1. Address provided for each beneficial owner owning more than five percent of the voting securities of Fonar.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to HMCA
’s management agreements with its clients, HMCA provides comprehensive non-medical management
and administrative services, including billing and collection of accounts, payroll and accounts payable processing, office
facilities, supplies and utilities. Under the management agreements, HMCA also provides service for the Fonar Upright
MRI scanners through Fonar. In total, as of September 2, 2015, 20 of our clients had management agreements with
HMCA.
The fees charged 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 2015.
Page
86
FONAR CORPORATION AND SUBSIDIARIES
Dr. Damadian owns three of the imaging facilities in Florida managed by HMCA. The facilities 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, 2015, June 30, 2014 and June 30, 2013, the net revenues received by HMCA from
the imaging facilities owned by Dr. Damadian were approximately $7.4 million, $7.6 million and $7.9 respectively.
Dr. Damadian owns a 0.834% interest in Imperial s Class A membership interests and a 0.758% interest in Health
Management Company of America
’s Class A membership interests. Dr. Damadian is also a Manager of Health
Management Company of America (
“
HCA
)”
’
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
’s clients. The monthly
fee charged to HMCA is $85,000 in the aggregate. Timothy Damadian is also a Manager of HCA.
Compensation claims of HMCA
’
Bensonhurst MRI Limited Partnership, in which Timothy Damadian holds an interest, is party to an agreement with Fonar
for the service and maintenance of its Upright MRI®
Scanner for a price of $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 2015, Watchtower agreed to sell equipment and components to Fonar for a
total of $700,000.
Integrity Healthcare Management Holdings, LLC, also has a 7.484% interest in Imperial s Class A membership interests
and a 6.06% interest in HCA s Class A membership interests.
’
’
Ronald Lehman, a Director of Fonar, holds a 0.0379% interest in HCA
’
s Class A membership interests. In addition, RGL
Industries, Inc., a company of which Mr. Lehman is an owner, holds a 0.208% interest in Imperial’s Class A membership
interests.
Claudette J.V. Chan, a Director and the Secretary of Fonar, owns a 0.0379% interest in HCA
interests.
’s Class A membership
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, 2015 and the reviews of the financial statements included in our Forms 10-Q for the fiscal year ended
June 30, 2015 were $364,136.
The aggregate fees billed by Marcum LLP for the audit of our annual 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 $657,544.
Audit Related Fees
No fees were billed by Marcum LLP for the fiscal years ended June 30, 2015 or June 30, 2014 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, 2015 or June 30, 2014 for designing, operating,
supervising or implementing any of our financial information systems or any hardware or software systems for our financial
information.
Page
87
Tax Fees
FONAR CORPORATION AND SUBSIDIARIES
The aggregate fees billed by Marcum LLP for tax compliance, tax advice and tax planning in the fiscal year ended June 30,
2015 were $14,123.
The aggregate fees billed by Marcum LLP for tax compliance, tax advice and tax planning in the fiscal year ended June 30,
2014 were $23,680.
All Other Fees
No fees were billed by Marcum LLP for any other services during the fiscal years ended June 30, 2015 and June 30, 2014.
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 2015 and
2014 were compatible with maintaining their independence.
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, 2015 and 2014.
Consolidated Statements of Income for the Years Ended June 30, 2015, 2014 and 2013.
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2015, 2014 and 2013.
Consolidated Statements of Cash Flows for the Years Ended June 30, 2015, 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
2015. May 15, 2015. 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, 2015. Commission File No. 0-10248.
Page
88
c) EXHIBITS
FONAR CORPORATION AND SUBSIDIARIES
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.
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.
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89
FONAR CORPORATION AND SUBSIDIARIES
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.
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.
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90
FONAR CORPORATION AND SUBSIDIARIES
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
’s current report on Form 8-K filed June 11, 2001. Commission File No.
by reference to Exhibit 10.1 to the Registrant
0-10248.
10.30 Registration Rights Agreement dated May 24, 2001 by and among the Registrant, The Tail Wind Fund Ltd. and
’s current report on Form 8-K filed
Roan Meyers, Inc. incorporated herein by reference to Exhibit 10.2 to the Registrant
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
’s
Associates, L.P. and its designees and the Registrant, incorporated by reference to Exhibit 10.19 to the Registrant
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.
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.
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91
FONAR CORPORATION AND SUBSIDIARIES
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
’s Form 8-K filed March 11, 2013. Commission
and others. Incorporated by reference to Exhibit 10.1 to the Registrant
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 Consent
’
See Exhibits.
31.1 Section 302 Certification. See Exhibits.
32.1 Section 906 Certification. See Exhibits.
SIGNATURES
FONAR CORPORATION AND SUBSIDIARIES
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, 2015
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
Title
Date
/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
Chairman of the Board of Directors,
President, Director Principal Executive
Officer and Acting Principal Financial
Officer
Director
Director
Director
Director
Page
92
September 29, 2015
September 29, 2015
September 29, 2015
September 29, 2015
September 29, 2015