SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
_____________________
FORM 10-K
_____________________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended June 30, 2019
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the transition period from _____________ to _____________
Commission File No. 0-10248
___________________________
FONAR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State of incorporation)
11-2464137
(IRS Employer Identification Number)
110 Marcus Drive, Melville, New York
(Address of principal executive offices)
11747
(Zip Code)
(631) 694-2929
(Registrant's telephone number, including area code)
____________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.0001 per share
Securities registered pursuant to Section 12(g) of the Act:
None
_________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes ____ No __X__
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Act. Yes ____ No __X__
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FONAR CORPORATION AND SUBSIDIARIES
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ___X___ No _______
Indicate by check mark whether the registrant (1) has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes ___X____ No ______
Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405 of Regulation S-K, §229.405 of
this Chapter, is not contained, and will not be contained, to the best of the registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this 10-K or any amendment to the
Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated
filer and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ____ Accelerated filer __X__. Non-accelerated filer ____
Smaller reporting company ____
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ____ No __X__
The aggregate market value of the shares of Common Stock held by non-affiliates as of December 31, 2018
based on the closing price of $20.24 per share on such date as reported on the NASDAQ System, was
approximately $130 million. The other outstanding classes do not have a readily determinable market value.
As of September 13, 2019, 6,447,463 shares of Common Stock, 146 shares of Class B Common Stock,
382,513 shares of Class C Common Stock and 313,438 shares of Class A Non-voting Preferred Stock of the
registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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FONAR CORPORATION AND SUBSIDIARIES
FORM 10-K ITEMS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchase of Equity Securities
Selected Consolidated Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Disclosure
Item 9A.
Item 9B.
Controls and Procedures
Other Information
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV.
Item 15.
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
Exhibits and Financial Statement Schedules
PART I
ITEM 1. BUSINESS
GENERAL
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Fonar Corporation, sometimes referred to as the "Company" or "Fonar", is a Delaware corporation which was
incorporated on July 17, 1978. Our address is 110 Marcus Drive, Melville, New York 11747 and our telephone
number is 631-694-2929. Fonar also maintains a website at www.fonar.com. Fonar provides copies of its
filings with the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K and amendments to these
reports to stockholders on request.
We conduct our business in two segments. Our medical equipment segment is conducted directly through
Fonar. Our physician management and diagnostic services segment is conducted through our subsidiary
Health Diagnostic Management, LLC (“HMCA”), also called Health Management Company of America. HMCA
provides management services, administrative services, billing and collection services, credentialing services,
contract negotitions, compliance consulting, purchasing, IT services, hiring, conducting interviews and
managing personnel, storage of medical records, office space, equipment, repair, maintenance service, and
clerical and other non-medical personnel to medical providers engaged in diagnostic imaging. In addition to
acting as a management company, HMCA owns and operates four diagnostic imaging facilities in Florida,
where the corporate practice of medicine is permitted.
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FONAR CORPORATION AND SUBSIDIARIES
We restructured the corporate organization of our physician and diagnostic services management segment of
our business effective July 1, 2015. Imperial Management Services, LLC (“Imperial”), a subsidiary which
owned the assets used in the business of its parent, Health Management Corporation of America (which is
wholly-owned by Fonar), transferred those assets to Health Diagnostics Management, LLC (“HDM”), which is
another subsidiary of Health Management Corporation of America. As a result, going forward our physician
and diagnostic management business will be conducted entirely through HDM, which is operating under the
assumed name Health Management Company of America.
Fonar is engaged in the business of designing, manufacturing, selling and servicing magnetic resonance
imaging scanners, also referred to as "MRI" or "MR" scanners, which utilize MRI technology for the detection
and diagnosis of human disease, abnormalities, other medical conditions and injuries. Fonar’s founders built
the first MRI scanner in 1977 and Fonar introduced the first commercial MRI scanner in 1980. Fonar is also
the originator of the iron-core non-superconductive and permanent magnet MRI technology.
Fonar’s iron frame technology made Fonar the originator of "open" MRI scanners. We introduced the first
"open" MRI in 1980. Since that time we have concentrated on further application of our “open” MRI,
introducing most recently the Upright® Multi-Position™” MRI scanner (also referred to as the “Upright®” or
“Stand-Up®” MRI scanner) and the Fonar 360™ MRI scanner. The Fonar 360™ MRI is not presently being
marketed.
See Note 17 to the Consolidated Financial Statements for separate financial information regarding our medical
equipment and physician and diagnostic management services segments.
FORWARD LOOKING STATEMENTS.
Certain statements made in this Annual Report on Form 10-K are "forward-looking statements", within the
meaning of the Private Securities Litigation Reform Act of 1995, regarding the plans and objectives of
Management for future operations. Such statements involve known and unknown risks, uncertainties and other
factors that may cause our actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by such forward-looking statements. These
forward-looking statements are based on current expectations that involve numerous risks and uncertainties.
Our plans and objectives are based, in part, on assumptions involving the expansion of business. These
assumptions involve judgments with respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or impossible to predict accurately and many
of which are beyond our control. Although we believe that our assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no
assurance that the forward-looking statements included in this Annual Report will prove to be accurate. In light
of the significant uncertainties inherent in our forward-looking statements, the inclusion of such information
should not be regarded as a representation by us or any other person that our objectives and plans will be
achieved.
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FONAR CORPORATION AND SUBSIDIARIES
THE UPRIGHT® MRI SCANNER
The Upright® MRI scanner is the product we are presently promoting. The Upright® MRI (also known as the
“Stand-Up® MRI”) is a “whole-body” MRI, meaning it can be used to scan any part of the body. Unlike
conventional recumbent MRI scanners, the Upright® MRI permits MRI scans to be made in the weight-bearing
state. The Upright® MRI allows patients to be scanned while standing, sitting, bending or lying down. This
means that an abnormality or injury, such as a slipped disk, may be scanned in a weight-bearing posture,
which more often than not is the position in which patients experience pain. An adjustable bed allows patients
to stand, sit or lie on their backs, sides or stomachs. The Upright® MRI is by design a non-claustrophobic MRI
scanner. We have introduced the name “Upright®” as an alternative to “Stand-Up®” because of the multiplicity
of positions in which the patient may be scanned where the patient is not standing.
Currently, HMCA manages a total of 25 MRI scanning facilities, four of which are owned by subsidiaries of
Health Management Corporation of America. Eighteen facilities are located in New York and seven are located
in Florida. (The four facilities owned by the HMCA subsidiaries are in Florida, where the corporate practice of
medicine is permitted.) Twenty-three of the currently operating facilities are equipped with Upright® MRI
scanners. We believe that the utilization of Fonar Upright® MRI scanning systems, which are produced under
the protection of our patents, have been a significant factor in the increased patient volume of the scanning
facilities. In addition, a new facility managed by the Company is scheduled to be opened by the end of the
second quarter of fiscal 2020 in Pembroke Pines, Florida and a total of three additional scanners are
scheduled to be added to existing facilities: one in White Plains, New York, one in Islandia, New York and one
in Ormond Beach, Florida.
MEDICAL EQUIPMENT SEGMENT
PRODUCTS
The Fonar Upright® MRI is a weight-bearing whole-body open MRI system which enables positional MRI
(pMRI®) applications. Operating at a magnetic field strength of 0.6 Tesla, the scanner is a powerful,
diagnostically versatile and cost-effective open MRI that provides a broad range of clinical capabilities and a
complete set of imaging protocols. Patients can be scanned standing, bending, sitting, upright at an
intermediate angle and in the conventional recumbent position. This multi-positional MRI system
accommodates an unrestricted range of motion for flexion, extension, lateral bending, and rotation studies of
the cervical (upper) and lumbar (lower) spine. Previously difficult patient scanning positions can be achieved
and compared using the system’s MRI-compatible, three-dimensional, motorized patient handling system. The
system’s lift and tilt functions deliver the targeted anatomical region to the center of the magnet. True image
orientation is assured, regardless of the rotation angle, via computer read-back of the table’s position.
There is considerable evidence that the weight-bearing Upright® MRI provides medical benefits not duplicated
by any other MRI scanner because patient positioning plays a critical role in detecting clinically significant
pathology.
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FONAR CORPORATION AND SUBSIDIARIES
For instance, the Fonar Upright® technology has demonstrated its key value on patients with the Arnold-Chiari
Syndrome, which is believed to affect 200,000 to 500,000 Americans. In this syndrome, brain stem
compression and subsequent severe neurological symptoms occur in these patients, when because of
weakness in the support tissues within the skull, the brain stem descends and is compressed and entrapped at
the base of the skull in the foramen magnum, which is the circular bony opening at the base of the skull where
the spinal cord exits the skull. The brain structures “entrapped” in Chiari Syndrome are the lowest lying
structures of the brain, the tonsils of the cerebellum. The Chiari Syndrome is therefore alternately named
Cerebellar Tonsillar Ectopia (CTE) indicating the displacement (ectopia) of these Cerebellar tonsils in this
syndrome. Classic symptoms of the Chiari Syndrome include the “drop attack,” where the patient unexpectedly
experiences an explosive rush or nervous discharge at the base of the brain which rushes down the body to
the extremities, causing the patient to collapse in a temporary neuromuscular paralysis; this subsides when the
patient is lying down. Conventional lie-down MRI scanners cannot make an adequate evaluation of the
pathology since the patient’s pathology is most visible and the symptoms are most acute when the patient is
scanned in the upright weight-bearing position.
A publication in the Journal “Brain Injury” (Brain Injury 2010, 24 (7-8) 988-994) of 1,200 neck pain patients
reported that the fallen cerebellar tonsils of the brain (CTE) were missed 75% of the time when the patient was
scanned only in the recumbent position. It is critical to have an image of the patient in an upright position so
that the neurosurgeons can fully evaluate the extent of the brain stem and choose the most appropriate
surgical approach for the operative repair.
The study was published by 10 authors from distinguished universities in the United States and around the
world. The study reported that Cerebellar Tonsillar Ectopia Herniation (CTE) was missed 75% of the time
when the patient was scanned lying down instead of upright. At the current rate of 1,000,000 automobile
whiplash injuries in the U.S. per year, 600,000 patients each year would have the pathology responsible for
their symptoms go undetected if they were examined solely in a conventional recumbent-only MRI.
The Upright® MRI has also demonstrated its value for patients suffering from scoliosis. Scoliosis patients have
been typically subjected to routine x-ray exams for years and must be imaged upright for an adequate
evaluation of their scoliosis. Because the patient must be standing for the exam, an x-ray machine has been
the only modality that could provide that service. The Upright® MRI is the only MRI scanner that allows the
patient to stand during the MRI exam. Fonar has developed a new RF receiver and scanning protocol that for
the first time allows scoliosis patients to obtain diagnostic pictures of their spines without the risks of x-rays. A
study by the National Cancer Institute (2000) of 5,466 women with scoliosis reported a 70% increase in breast
cancer resulting from 24.7 chest x-rays these patients received on the average in the course of their scoliosis
treatment.
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FONAR CORPORATION AND SUBSIDIARIES
Other important new applications are Upright® imaging of the pelvic floor and abdomen to image prolapses
and inguinal hernias. Fonar has also developed the first non-invasive method to image the prostate: the
patient simply sits on a flat, seat-like coil.
The Upright® MRI is also the world’s most non-claustrophobic whole-body MRI scanner. Patients can simply
walk into the magnet, stand or sit for their scans and then walk out. The magnet’s front-open and top-open
design provides an unprecedented degree of comfort because there is nothing in front of the patient’s face
except a large (42”) flat-screen TV that is mounted on the wall. The default position for the bed is a tilt back of
six degrees that minimizes patient motion. Special RF receiver coil fixtures, a patient seat, Velcro straps, and
transpolar stabilizing bars are also used to keep the patient comfortable and motionless throughout the
scanning process.
Full-range-of-motion studies of the joints in a multiple of directions are possible, an especially promising
feature for sports injuries. Full range of motion cines, or movies, of the lumbar spine can also be achieved
under full body weight.
Fonar created the high-field open MRI market segment. The Fonar Upright® MRI operates at a significantly
higher magnetic field strength than the 0.2-0.35 Tesla open MRIs that preceded it, and, therefore, benefits
from more of the MRI image-producing signal needed to make high-quality MRI images.
Fonar maximizes image quality through an optimal combination of image signal to noise (S/N) and contrast-to
noise (C/N) ratios. Technical improvements incorporated into the scanner design include increased image
processing speed, high-S/N Organ Specific(TM) RF receiver coils, high performance front-end electronics
featuring high-speed, wide-dynamic-range analog-to-digital conversion and a miniaturized ultra-low-noise
pre-amplifier, high-speed automatic tuning, bandwidth-optimized pulse sequences, multi-bandwidth
sequences, and off-center FOV imaging capability.
In addition to the signal-to-noise ratio, however, a major determinant of image quality that must be considered
is contrast, the quality that enables reading physicians to clearly distinguish adjacent, and sometimes minute,
anatomical structures from their surroundings. This quality is measured by contrast-to-noise ratios (C/N).
Unlike S/N, which increases with increasing field strength, relaxometry studies have shown that C/N peaks in
the mid-field range and actually falls off precipitously at higher field strengths. The Upright® MRI scanners
operate squarely in the optimum C/N range.
FONAR’s scanners are equipped with a variety of software features which enhance versatility and diagnostic
capability. For example, SMART™ scanning allows for same-scan customization of multi-slice scans, each
slice with its own thickness, resolution, angle and position. This is an important feature for scanning parts of
the body that include small-structure sub-regions requiring finer slice parameters. There is also Multi-Angle
Oblique™ (MAO) imaging, and oblique imaging.
During fiscal 2019, sales of our Upright® MRI scanners accounted for approximately 0.8% of our total
revenues and 7.7% of our medical equipment revenues, as compared to 0.9% of total revenues and 6.4% of
medical equipment revenues in fiscal 2018.
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FONAR CORPORATION AND SUBSIDIARIES
FONAR’s principal selling, marketing and advertising efforts have been focused on the Upright® MRI, which
we believe is a particularly unique product, being the only MRI scanner which is both open and allows for
weight-bearing imaging. We expect to continue our focus on the Upright® MRI in the immediate future.
The materials and components used in the manufacture of our products (circuit boards, computer hardware
components, electrical components, steel and plastic) are generally available at competitive prices. We have
not had difficulty acquiring such materials.
PRODUCT MARKETING
The principal markets for the Company's scanners are private diagnostic imaging centers and hospitals.
We use internal and independent manufacturer’s representatives for domestic and foreign markets. None of
Fonar’s competitors are entitled to make the Fonar Upright® MRI scanner.
Fonar’s Website includes interactive product information for interested customers.
During fiscal 2018, foreign sales were made to customers in the United Arab Emirates and the United
Kingdom. CEO Matthias Schulz of Medserena, Fonar’s principal foreign sales representative and distributor,
has said, “The large number of requests coming from our physicians in Germany are arising because of the
special medical need for FONAR’s unique technology. This is in spite of an intensely active MRI market in
Germany, where there are already many conventional lie-down MRIs installed.” Medserena also has further
expanded in the United Kingdom with the opening of a Fonar Upright® MRI scanner in Manchester, England.
Fonar’s marketing strategy has been designed to reach key purchasing decision makers with information
concerning the Upright® MRI. This has led to many inquiries and to some sales of the Upright® MRI scanner
and is intended to increase Fonar’s presence in the medical market. Fonar focuses on four target audiences:
neurosurgeons, orthopaedic surgeons, radiologists and physicians in general.
1) Neurosurgeons and Orthopaedic Surgeons: These are the surgeons who can most benefit from the
superior diagnostic benefits of the Fonar Upright® MRI with its Multi-Position® MRI diagnostic
ability.
2) Radiologists: These physicians can now offer a new Multi-Position®, weight-bearing MRI modality
to their referring physicians.
3) All Physicians: The vast number of doctors who send patients for MRI’s need to be aware of the
diagnostic advantages of the Fonar Upright® Multi-Position™.
Our advertising for Fonar and HMCA re-enforces the unique value provided by Fonar MRI scanners. We have
increased internet awareness of our product by driving patient traffic to the Upright® scanning centers we
manage via the Fonar website (www.fonar.com) as well as by creating Websites for each HMCA location.
These websites give prospective customers of Upright® MRI scanners a view of operating Upright® MRI
centers and highlight the benefits of using an Upright® MRI scanner. The success of HMCA-managed sites
not only increases management fees to HMCA but encourages new sales for Fonar as well. A complete list of
the sites managed by HMCA can be found at HMCA’s website, hmca.com.
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SERVICE AND UPGRADES FOR MRI SCANNERS
FONAR CORPORATION AND SUBSIDIARIES
Our customer base of installed scanners has been and will continue to be an additional source of income,
independent of direct sales.
Income is generated from the installed base in two principal areas, namely, service and upgrades. Service and
maintenance revenues from our external installed base were approximately $9.2 million in fiscal 2018 and $8.3
million in fiscal 2019. Our objective is to maintain service revenues at present levels or better, based on the
longevity of the technology, and the refurbishments and upgrades which keep the scanners competitive with
the latest techniques.
We also anticipate that our scanners will result in upgrades income in future fiscal years. The potential for
upgrades income, originates in the versatility and productivity of the Upright® Imaging technology. New
medical uses for MRI technology are constantly being discovered and are anticipated for the Upright® Imaging
technology as well. New features can often be added to the scanner by the implementation of little more than
versatile new software packages, which when coupled with hardware upgrades can add years of useful life to
the scanner.
RESEARCH AND DEVELOPMENT
During the fiscal year ended June 30, 2019, we incurred expenditures of $1,812,347, none of which were
capitalized, on research and development, as compared to $1,755,747, none of which were capitalized, during
the fiscal year ended June 30, 2018.
Research and development activities have focused principally on software improvements to the user interface
of the MRI scanner. The Windows-based Sympulse™ platform controls all of the functions of the Upright®
scanner except those of the versatile, multi-position patient table. Separate, dedicated, motion-control software
is used to maneuver the Upright® bed, and development of this software is ongoing as well.
While software improvements to the user interface are important in their own right, significant value is added to
the MRI scanner by the modification of existing protocols for examining various parts of the body, and the
development of new protocols that utilize new underlying capabilities of the pulse sequence software. Over
time, FONAR users have become accustomed to the steady improvement in the recommended clinical
protocols that accompany new software releases. More significantly, in recent years we have seen increasing
adoption of FONAR-recommended clinical protocols over those developed on site. This is a testament to the
superior image quality they produce in attractively short scan times.
The development of clinically practical scan protocols and software depends on close contact between
research and development scientists and engineers, and end users. That close contact is facilitated in part by
the relationship with HMCA and the scanning centers. In addition to that collaboration, R&D staff have pursued
a variety of novel and Upright® MRI-specific research projects. It is anticipated that these will ultimately lead to
new applications that are made available to existing customers as upgrade add-ons to their machines. For
example, phase-contrast imaging techniques originally developed for angiography have recently been applied
to cerebro-spinal fluid (CSF) flow. Analysis of CSF flow in upright and recumbent postures may prove to be of
significant value in the evaluation of a variety of disorders.
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BACKLOG
FONAR CORPORATION AND SUBSIDIARIES
Our backlog of unfilled orders at September 10, 2019 was approximately $788,000, as compared to $692,000
at September 5, 2018. It is expected that the existing backlog of orders will be filled within the 2019 fiscal year.
PATENTS AND LICENSE
We currently have numerous patents in effect which relate to the technology and components of our MRI
scanners. We believe that these patents, and the know-how we have developed, are material to our business.
One of our patents, issued in the name of Dr. Damadian and licensed to Fonar, was United States patent No.
3,789,832, Apparatus and Method for Detecting Cancer in Tissue, also referred to in this report as the "1974
Patent". The 1974 Patent was the first MRI patent issued by the United States Patent Office. The development
of our MRI scanners has been based upon the 1974 Patent, and we believe that the 1974 Patent was the first
of its kind to utilize MR to scan the human body and to detect cancer. The 1974 Patent was extended beyond
its original 17-year term and expired in February, 1992.
We have significantly enhanced our patent position within the industry and now possesses a substantial patent
portfolio which provides us, under the aegis of United States patent law, "the exclusive right to make, use and
sell" many of the scanner features which Fonar pioneered and which are now incorporated in most MRI
scanners sold by the industry. As of June 30, 2019, 213 patents had been issued to Fonar, and approximately
18 patents were pending. A number of Fonar’s existing patents specifically relate to protecting Fonar’s position
in the Upright MRI market. The patents further enhance Dr. Damadian's pioneer patent, the 1974 Patent, that
initiated the MRI industry and provided the original invention of MRI scanning. The terms of the patents in
Fonar’s portfolio extend to various times.
We also have patent cross-licensing agreements with other MRI manufacturers. We have not licensed,
however, any technology relating to Upright® MRI scanning.
PRODUCT COMPETITION
MRI SCANNERS
MRI takes advantage of the nuclear magnetic resonance signal elicited from the body's tissues and the
exceptional sensitivity of this signal for detecting disease discovered by Fonar. Much of the serious disease of
the body occurs in the soft tissue of vital organs. The maximum contrast available by x-ray with which to
discriminate disease is 4%. Brain cancers differ from surrounding healthy brain by only 1.6% while the contrast
in the brain by MRI is 25 times greater at 40%. X-ray contrasts among the body’s soft tissues are maximally
4%. Their contrast by MRI is 32.5 times greater (130%).
The soft tissue contrasts with which to distinguish cancers on images by MRI are up to 180%. In the case of
cancer these contrasts can be even more marked making cancers readily visible and detectable anywhere in
the body. This is because the nuclear resonance signals from the body's normal soft tissue vital organs, as
discovered in the original publication that founded MRI, differ so dramatically from each other (e.g. small
intestine 257 milliseconds, brain 595 milliseconds). Liver cancer and healthy liver signals differ by 180% for
example.
A majority of the MRI scanners in use in hospitals and outpatient facilities and at mobile sites in the United
States are based on high field (1.5 - 3.0 Tesla) air core superconducting magnet technology.
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FONAR CORPORATION AND SUBSIDIARIES
The remainder, described as Open MRIs, are recumbent-only machines based on Fonar’s original iron-frame
vertical magnetic field magnet design. These systems have been manufactured and sold by many of our
largest competitors over the years. They generally operate at low field strengths (0.2 - 0.35 Tesla). Their
prevalence in the marketplace has led to the perception of the medical community that Open MRIs are useful
only for anxious and claustrophobic patients, that the Open MRI’s image quality is poor, and that the scan
times are long. Recently our competitors have introduced higher field strength Open MRI products (0.5 – 1.2
Tesla). Significantly better imaging performance (especially at 1.2 T) compared to the low field strength
systems, is beginning to change that perception. However, Fonar continues to maintain its competitive
advantage at 0.6 Tesla due to our front-open non-claustrophobic configuration in which there is nothing in front
of the patient’s face, and our unique ability to scan patients in weight-bearing positions that is sometimes more
consequential than a small increase in the image resolution and decrease in scan time. It is also noteworthy
that our horizontal transaxial magnetic field allows the Upright MRI, in contrast to the recumbent-only Open
MRIs, to use the same flat planar-style radiofrequency receiver coil as the high-field MRI systems to image the
lumbar and thoracic spine.
One of the Upright MRI’s big competitive advantages is that it is dramatically different from the Open MRI in
several important ways:
The Upright MRI does something clinically valuable that the high-field MRI machines cannot do (i.e. positional
imaging, weight-bearing imaging).
Although the patient can extend his arms and possibly see out the sides while recumbent in an Open MRI,
there is still a large intimidating magnet pole very close to and directly in front of the patient’s face. The Upright
MRI allows the patient to look directly out of the scanner and view a large flatscreen TV.
The Upright MRI uses the same configuration RF receiver coil as a high-field MRI system to image the spine.
Open MRIs cannot do this. (This is because of the rule in MRI that the axis of symmetry of the RF receiver coil
should be perpendicular to the direction of the main magnetic field). The upright patient sits comfortably with
his back against a flat (“planar”) RF receiver coil in our horizontal transaxial magnetic field. In contrast, the
vertical magnetic field in the recumbent-only Open MRI precludes the use of this type of receiver coil.
Relative to the high-field systems, the Upright MRI has two major competitive advantages:
Sometimes patient positioning is more consequential than a small increase in the image resolution and
decrease in the scan time. As it is critical for physicians to not “miss” anything in the images, they recognize
that the position-dependent pathology visualized with the Upright MRI will be invisible (“missed”) if their
patients are scanned at a higher field strength.
Image artifacts arising from metal implants such as surgical screws are diminished with the 0.6 Tesla Upright
MRI compared to those from the high-field MRIs. It is well known that such artifacts get smaller as the MRI
magnet’s field strength is reduced, so the anatomy adjacent to implanted hardware will be less obscured with
the Upright MRI. This is particularly valuable for surgeons referring their postoperative patients for diagnostic
imaging studies.
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FONAR CORPORATION AND SUBSIDIARIES
Fonar faces competition within the MRI industry from such firms as General Electric Company, Philips N.V.,
Toshiba Corporation, Hitachi Corporation and Siemens A.G. Most competitors have marketing and financial
resources more substantial than those available to us. They have in the past, and may in the future, heavily
discount the sales price of their scanners. Such competitors sell both high field air core superconducting MRI
scanners and iron frame products. Fonar’s original iron frame design, ultimately imitated by Fonar’s
competitors to duplicate Fonar’s origination of “Open” MRI magnets, gave rise to current patent protected
Upright® MRI technology with the result that Fonar today is the unique and only supplier of the highest field
MRI magnets (0.6 Tesla) that are not superconducting, do not use liquid helium and are not therefore
susceptible to severe consequences and downtime cause by a system quench.
The iron frame, because it controls the magnetic lines of force and places them where wanted and removes
them from where not wanted, provides a more versatile magnet design than is possible with air core magnets.
Air core magnets contain no iron but consist entirely of turns of current carrying wire.
Fonar expects to be the leader in weight-bearing and positional MRI for providing dynamic visualization of
body parts including the spine and extremities.
OTHER IMAGING MODALITIES
Fonar’s MRI scanners also compete with other diagnostic imaging systems, all of which are based upon the
ability of energy waves to penetrate human tissue and to be detected by either photographic film or electronic
devices for presentation of an image on a display monitor. Three different kinds of energy waves - X-ray,
gamma and sound - are used in medical imaging techniques which compete with MRI medical scanning, the
first two of which involve exposing the patient to potentially harmful radiation. These other imaging modalities
compete with MRI products on the basis of specific applications.
X-rays are the most common energy source used in imaging the body and are employed in three imaging
modalities:
1. Conventional X-ray systems, the oldest method of imaging, are typically used to image bones and teeth.
The image resolution of adjacent structures that have high contrast, such as bone adjacent to soft tissue, is
excellent, while the discrimination between soft tissue organs is poor because of the nearly equivalent
penetration of x-rays.
2. Computerized Tomography, also referred to as "CT", systems couple computers to x-ray instruments to
produce cross-sectional images of particular large organs or areas of the body. The CT scanner addresses the
need for images, not available by conventional radiography, that display anatomic relationships spatially.
However, CT images are generally limited to the transverse plane and cannot readily be obtained in the two
other planes, sagittal and coronal. Improved picture resolution is available at the expense of increased
exposure to x-rays from multiple projections. Furthermore, the pictures obtained by this method are computer
reconstructions of a series of projections and, once diseased tissue has been detected, CT scanning cannot
be focused for more detailed pictorial analysis or obtain a chemical analysis.
3. Digital radiography systems add computer image processing capability to conventional x-ray systems.
Digital radiography can be used in a number of diagnostic procedures which provide continuous imaging of a
particular area with enhanced image quality and reduced patient exposure to radiation.
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FONAR CORPORATION AND SUBSIDIARIES
Nuclear medicine systems, which are based upon the detection of gamma radiation generated by radioactive
pharmaceuticals introduced into the body, are used to provide information concerning soft tissue and internal
body organs and particularly to examine organ function over time.
Ultrasound systems emit, detect and process high frequency sound waves reflected from organ boundaries
and tissue interfaces to generate images of soft tissue and internal body organs. Although the images are
substantially less detailed than those obtainable with x-ray methods, ultrasound is generally considered
harmless and therefore has found particular use in imaging the pregnant uterus.
X-ray machines, ultrasound machines, digital radiography systems and nuclear medicine compete with the
MRI scanners by offering significantly lower price and space requirements. However, Fonar believes that the
utility of the images produced by its MRI scanners is generally superior to the utility of the images produced by
those other methodologies.
GOVERNMENT REGULATION
FDA Regulation
The Food and Drug Administration in accordance with Title 21 of the Code of Federal Regulations regulates
the manufacturing and marketing of Fonar’s MRI scanners. The regulations can be classified as either
pre-market or post-market. The pre-market requirements include obtaining marketing clearance, proper device
labeling, establishment registration and device listing. Once the products are on the market, Fonar must
comply with post-market surveillance controls. These requirements include the Quality Systems Regulation, or
“QSR”, also known as Current Good Manufacturing Practices or CGMPs, and Medical Device Reporting, also
referred to as MDR regulations. The QSR is a quality assurance requirement that covers the design,
packaging, labeling and manufacturing of a medical device. The MDR regulation is an adverse event-reporting
program.
Classes of Products
Under the Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetic Act, all medical
devices are classified by the FDA into one of three classes. A Class I device is subject only to general controls,
such as labeling requirements and manufacturing practices; a Class II device must comply with certain
performance standards established by the FDA; and a Class III device must obtain pre-market approval from
the FDA prior to commercial marketing. Fonar’s products are Class II devices. Class II devices are subject to
"General Controls"; General Controls include:
1. Establishment registration of companies which are required to register under 21 CFR Part 807.20, such as
manufacturers, distributors, re-packagers and re-labelers.
2. Medical device listing with FDA of devices to be marketed.
3. Manufacturing devices in accordance with the Current Good Manufacturing Practices Quality System
Regulation in 21 CFR Part 820.
4. Labeling devices in accordance with labeling regulations in 21 CFR Part 801 or 809.
5. Submission of a Premarket Notification, pursuant to 510(k), before marketing a device.
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FONAR CORPORATION AND SUBSIDIARIES
In addition to complying with general controls, Class II devices are also subject to special controls. Special
controls may include special labeling requirements, guidance documents, mandatory performance standards
and post-market surveillance.
On October 3, 2000 Fonar received FDA clearance for the Upright® MRI under the name “Indomitable”.
Premarketing Submission
Each person who wants to market Class I, II and some III devices intended for human use in the U.S. must
submit a 510(k) to FDA at least 90 days before marketing unless the device is exempt from 510(k)
requirements. A 510(k) is a pre-marketing submission made to FDA to demonstrate that the device to be
marketed is as safe and effective, that is, substantially equivalent, SE, to a legally marketed device that is not
subject to pre-market approval, PMA. Applicants must compare their 510(k) device to one or more similar
devices currently on the U.S. market and make and support their substantial equivalency claims.
The FDA is committed to a 90-day clearance after submission of a 510(k), provided the 510(k) is complete and
there is no need to submit additional information or data.
The 510(k) is essentially a brief statement and description of the product. As Fonar’s scanner products are
Class II products, there are no pre-market data requirements.
An investigational device exemption, also referred to as IDE, allows the investigational device to be used in a
clinical study pending FDA clearance in order to collect safety and effectiveness data required to support the
Premarket Approval, also referred to as PMA, application or a Premarket Notification pursuant to 510(k),
submission to the FDA. Clinical studies are most often conducted to support a PMA.
For the most part, however, we have not found it necessary to utilize IDE’s. The standard 90 day clearance for
our new MRI scanner products classified as Class II products makes the IDE unnecessary, particularly in view
of the time and effort involved in compiling the information necessary to support an IDE.
Quality System Regulation
The Quality Management System is applicable to the design, manufacture, administration of installation and
servicing of magnetic resonance imaging scanner systems. The FDA has authority to conduct detailed
inspections of manufacturing plants, to establish Good Manufacturing Practices which must be followed in the
manufacture of medical devices, to require periodic reporting of product defects and to prohibit the exportation
of medical devices that do not comply with the law.
Medical Device Reporting Regulation
Manufacturers must report all MDR reportable events to the FDA. Each manufacturer must review and
evaluate all complaints to determine whether the complaint represents an event which is required to be
reported to FDA. Section 820.3(b) of the Quality Systems regulation defines a complaint as, "any written,
electronic or oral communication that alleges deficiencies related to the identity, quality, durability, reliability,
safety, effectiveness, or performance of a device after it is released for distribution."
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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.
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FONAR CORPORATION AND SUBSIDIARIES
Class I
Is a situation in which there is a reasonable probability that the use of, or exposure to, a violative product will
cause serious adverse health consequences or death.
Class II
Is a situation in which use of, or exposure to, a violative product may cause temporary or medically reversible
adverse health consequences or where the probability of serious adverse health consequences is remote.
Class III
Is a situation in which use of, or exposure to, a violative product is not likely to cause adverse health
consequences.
Fonar has initiated six voluntary recalls. Five of the recalls were Class II and one was Class III. The recalls
involved making minor corrections to the product in the field. Frequently, corrections which are made at the
site of the device are called field corrections as opposed to recalls.
Civil Money Penalties
The FDA, after an appropriate hearing, may impose civil money penalties for violations of the FD&C Act that
relate to medical devices. In determining the amount of a civil penalty, FDA will take into account the nature,
circumstances, extent, and gravity of the violations, the violator's ability to pay, the effect on the violator's
ability to continue to do business, and any history of prior violations.
Warning Letters
FDA issues written communications to a firm, indicating that the firm may incur more severe sanctions if the
violations described in the letter are not corrected. Warning letters are issued to cause prompt correction of
violations that pose a hazard to health or that involve economic deception. The FDA generally issues the
letters before pursuing more severe sanctions.
Seizure
A seizure is a civil court action against a specific quantity of goods which enables the FDA to remove these
goods from commercial channels. After seizure, no one may tamper with the goods except by permission of
the court. The court usually gives the owner or claimant of the seized merchandise approximately 30 days to
decide a course of action. If they take no action, the court will recommend disposal of the goods. If the owner
decides to contest the government's charges, the court will schedule the case for trial. A third option allows the
owner of the goods to request permission of the court to bring the goods into compliance with the law. The
owner of the goods is required to provide a bond or, security deposit, to assure that they will perform the
orders of the court, and the owner must pay for FDA supervision of any activities by the company to bring the
goods into compliance.
Citation
A citation is a formal warning to a firm of intent to prosecute the firm if violations of the FD&C Act are not
corrected. It provides the firm an opportunity to convince FDA not to prosecute.
Injunction
An injunction is a civil action filed by FDA against an individual or company. Usually, FDA files an injunction to
stop a company from continuing to manufacture, package or distribute products that are in violation of the law.
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Prosecution
FONAR CORPORATION AND SUBSIDIARIES
Prosecution is a criminal action filed by FDA against a company or individual charging violation of the law for
past practices.
Foreign and Export Regulation
We obtain approvals as necessary in connection with the sales of our products in foreign countries. In some
cases, FDA approval has been sufficient for foreign sales as well. Our standard practice has been to require
either the distributor or the customer to obtain any such foreign approvals or licenses which may be required.
Legally marketed devices that comply with the requirements of the Food Drug & Cosmetic Act require a
Certificate to Foreign Government issued by the FDA for export. Other devices that do not meet the
requirements of the FD&C Act but comply with the laws of a foreign government require a Certificate of
Exportability issued by the FDA. All products which we sell have FDA clearance and would fall into the first
category.
Foreign governments have differing requirements concerning the import of medical devices into their
respective jurisdictions. The European Union, also referred to as EU, has some essential requirements
described in the EU’s Medical Device Directive, also referred to as MDD. In order to export to one of these
countries, we must meet the essential requirements of the MDD and any additional requirements of the
importing country. The essential requirements are similar to some of the requirements mandated by the FDA.
In addition the MDD requires that we enlist a Notified Body to examine and assess our documentation, a
Technical Construction File, and verify that the product has been manufactured in conformity with the
documentation. The notified body must carry out or arrange for the inspections and tests necessary to verify
that the product complies with the essential requirements of the MDD, including safety performance and
Electromagnetic Compatibility, also referred to as EMC. Also required is a Quality System, ISO-13485,
assessment by the Notified Body. We were approved for ISO 13485 certification for its Quality Management
System in April, 2003.
We received clearance to sell the Upright® MRI scanners in the EU in May, 2002.
Other countries require that their own testing laboratories perform an evaluation of our devices. This requires
that we must bring the foreign agency’s personnel to the USA to perform the evaluation at our expense before
exporting.
Some countries, including many in Latin America and Africa, have very few regulatory requirements, beyond
FDA clearance.
To date, Fonar has been able to comply with all foreign regulatory requirements applicable to its export sales.
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PHYSICIAN AND DIAGNOSTIC SERVICES MANAGEMENT BUSINESS
FONAR CORPORATION AND SUBSIDIARIES
In 2011, Health Management Corporation of America (HMCA) transferred its business and assets to Imperial
management Services, LLC (“Imperial”), a New York limited liability company, in connection with raising capital
from investors. HMCA maintained a majority interest in Imperial. The assets continued to be used in our
business of managing diagnostic imaging centers.
Through an agreement dated March 6, 2013, HMCA acquired another business engaged in the management
and, in the case of four sites located in Florida, the ownership, of diagnostic imaging facilities. The purchase
was made through a new limited liability company, Health Diagnostics Management, LLC (“HDM”), which
raised part of the capital necessary for the acquisition from investors. The investors received in the aggregate
49.5% of the interest in HDM. (HDM did not take over the operation of the four Florida sites until April, 2013.)
On July 1, 2015, the corporate organization was restructured under HDM, with Health Management
Corporation of America owning 45.8%, Imperial owning 24.2%, and investors owning 30% of HDM.
On June 30, 2016, the Company purchased 100% of the equity in Turnkey Services of New York, LLC and
100% of the equity in TK2 Equipment Management, LLC. Turnkey Services of New York, LLC and TK2
Equipment Management, LLC, both by way of several operating leases, had provided the Company with
ancillary diagnostic imaging equipment to our managed (and in the case of four Florida sites, owned) MRI
facilities.
As a result of scheduled re-acquisitions of interest held by investors as of July 1, 2016, HDM now is owned by
Health Management Corporation of America (70%) and investors (30%).
HDM now operates under the assumed name “Health Management Company of America” (“HMCA”).
The combined business (HDM, Imperial and Health Management Corporation of America) will be referred to
as “HMCA” for all periods before and after July 1, 2015, unless otherwise indicated.
HMCA provides comprehensive non-medical management services to diagnostic imaging facilities. These
services include administrative services, billing and collection services, credentialing services, contract
negotiations, compliance consulting, purchasing IT services, hiring, conducting interviews, training, supervision
and management of non-medical personnel, storage of medical records, office space, equipment, repair
maintenance services, accounting, assistance with compliance matters and the development and
implementation of practice growth and marketing strategies.
As of August 1, 2019, HMCA managed a total of 25 MRI centers. For the 2019 fiscal year, the revenues
HMCA recognized from the MRI facilities had increased to $77.2 million, and for the 2018 fiscal year the
revenues were increased to $71.7 million. Four of these facilities in Florida are owned by HMCA subsidiaries.
HMCA GROWTH STRATEGY
HMCA’s growth strategy focuses on upgrading and expanding the existing facilities it manages and expanding
the number of facilities it manages for its clients, including new sites. In connection with improving the
performance of the facilities, we have added high field MRI scanners, extremity scanners and x-ray machines
to the Upright® MRI scanner at certain of the sites where such additional diagnostic imaging modalities are
expected to produce the greatest return.
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PHYSICIAN AND DIAGNOSTIC MANAGEMENT SERVICES
FONAR CORPORATION AND SUBSIDIARIES
HMCA’s services to the facilities it manages encompass substantially all of their business operations. Each
facility is controlled, however, not by HMCA, but by the physician owner, or in the case of the four Florida sites
owned by HMCA subsidiaries, by the medical director, and all medical services are performed by physicians
and other medical personnel under the physician-owner’s supervision. HMCA is the management company
and performs services of a non-medical nature. These services include:
1. Offices and Equipment. HMCA identifies, negotiates leases for and/or provides office space and
equipment to its clients. This includes technologically sophisticated medical equipment. HMCA also provides
improvements to leaseholds, assistance in site selection and advice on improving, updating, expanding and
adapting to new technology.
2. Personnel. HMCA staffs all the non-medical positions of its clients with its own employees,
eliminating the client's need to interview, train and manage non-medical employees. HMCA processes the
necessary tax, insurance and other documentation relating to employees.
3. Administrative. HMCA assists in the scheduling of patient appointments, purchasing of office and
medical supplies and equipment and handling of reporting, accounting, processing and filing systems. It
prepares and files the physician portions of complex applications to enable its clients to participate in managed
care programs and to qualify for insurance reimbursement. HMCA assists the clients to implement programs
and procedures to ensure full and timely regulatory compliance and appropriate cost reimbursement under
no-fault insurance and Workers' Compensation guidelines, as well as compliance with other applicable
governmental requirements and regulations, including HIPAA and other privacy requirements.
4. Billing and Collections. HMCA is responsible for the billing and collection of revenues from third-party
payors including those governed by No-Fault and Workers' Compensation statutes. HMCA is presently using a
third party to perform its billing and collection services for its clients’ No-Fault and Workers’ Compensation
scanning business.
5. Cost Saving Programs. Based on available volume discounts, HMCA seeks to assist in obtaining
favorable pricing for office and medical supplies, medical imaging film, equipment, contrast agents, such as
gadolinuim, and magnavist and other inventory for its clients.
6. Diagnostic Imaging and Ancillary Services. HMCA can offer access to diagnostic imaging equipment
through diagnostic imaging facilities it manages. The Company is expanding the ancillary services offered in
its network to include x-rays, and other MRI equipment such as high-field (1.5 or 3.0 Tesla magnet strength)
MRI scanners and extremity MRI scanners.
7. Marketing Strategies. HMCA is responsible for developing and proposing marketing plans for its
clients.
8. Expansion Plans. HMCA assists the clients in developing expansion plans including the opening of
new or replacement facilities where appropriate.
HMCA’s objective is to free physicians from as many non-medical duties as is practicable, allowing physicians
to spend less time on business and administrative matters and more time practicing medicine.
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FONAR CORPORATION AND SUBSIDIARIES
The exceptions to this general model of operation are four of the facilities acquired by HMCA from Health
Diagnostics, LLC in April, 2013 in Florida. These Florida facilities are owned by limited liability companies
which, as our subsidiaries, conduct their operations directly and bill and collect their fees from the patients and
third party payors.
The facilities enter into contracts with third party payors, including managed care companies. None of HMCA’s
clients, however, participate in any capitated plans or other risk sharing arrangements. Capitated plans are
those HMO programs where the provider is paid a flat monthly fee per patient.
The management fees payable by the facilities to HMCA are flat monthly fees. In fiscal 2018, the aggregate
amount of management fees was $4,195,975 per month. In fiscal 2019, the aggregate amount of
management fees was $4,389,498 per month.
Fees under the management agreements are subject to adjustment by mutual agreement on an annual basis.
Dr. Damadian owns three HMCA-managed MRI facilities in Florida. The fees for these three sites in Florida
owned by Dr. Damadian are flat monthly fees which are subject to adjustment by mutual agreement on an
annual basis. In fiscal 2019, the aggregate monthly amount of management fees payable to HMCA by these
sites was $796,704.
The Florida facilities owned by HMCA subsidiaries directly bill their patients or the patients’ insurance carriers.
Patient fees net of provision for bad debt were $24,207,536 in fiscal 2019.
HMCA contracts with an outside billing company (located in Melville, New York) to perform billing and
collection for their clients’ No-Fault and Workers’ Compensation business. The fixed monthly fees were
$85,000 for HMCA in fiscal 2018 and fiscal 2019. The Company also entered into a one year renewable
agreement to provide IT services to the billing company for a monthly fee of $23,884.
HMCA MARKETING
HMCA's marketing strategy is to expand the business and improve the facilities which it manages. HMCA is
seeking to increase the number of locations of those facilities where market conditions are promising and to
promote growth of our clients' and Florida subsidiaries’ patient volume and revenue.
DIAGNOSTIC IMAGING FACILITIES
Diagnostic imaging facilities managed by HMCA provide diagnostic imaging services to patients referred by
physicians. The facilities are operated in a manner which eliminates the admission and other administrative
inconveniences of in-hospital diagnostic imaging services. Imaging services are performed in an outpatient
setting by trained medical technologists under the direction of physicians. Following diagnostic procedures, the
images are reviewed by the interpreting physicians who prepare reports of these tests and their findings. The
vast majority of reports for the New York facilities are transcribed by HMCA personnel and the remainder are
outsourced to professional transcription services. Reports for the Florida facilities are outsourced to
professional transcription services.
HMCA develops marketing programs and educational programs in an effort to establish and maintain referring
physician relationships for our clients and Florida subsidiaries.
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FONAR CORPORATION AND SUBSIDIARIES
Managed care providers are an important factor in the diagnostic imaging industry. To further its position,
HMCA is seeking to expand the imaging modalities offered at its managed and owned diagnostic imaging
facilities. Three facilities in New York and five facilities in Florida have two or more MRI scanners. One facility
in New York and two in Florida also perform x-rays. A new facility managed by the Company is scheduled to
be opened by the end of the second quarter of fiscal 2020 in Pembroke Pines, Florida, and a total of three
additional scanners are scheduled to be added to the existing facilities, one in White Plains, New York, one in
Islandia, New York and one in Ormond Beach, Florida.
REIMBURSEMENT
HMCA’s clients receive reimbursements for their services through Medicare, Medicaid, managed care, private
commercial insurance, third party administrators, Workers’ Compensation, No-Fault and other insurance.
Medicare
The Medicare program provides reimbursement for hospitalization, physician, diagnostic and certain other
services to eligible persons 65 years of age and over and certain other individuals. Providers are paid by the
federal government in accordance with regulations promulgated by the Department of Health and Human
Services, HSS, and generally accept the payment with nominal deductible and co-insurance amounts required
to be paid by the service recipient, as payment in full. Hospital inpatient services are reimbursed under a
prospective payment system. Hospitals receive a specific prospective payment for inpatient treatment services
based upon the diagnosis of the patient.
Under Medicare’s prospective payment system for hospital outpatient services, or OPPS, a hospital is paid for
outpatient services on a rate per service basis that varies according to the ambulatory payment classification
group, or APC, to which the service is assigned rather than on a hospital’s costs. Each year the Centers for
Medicare and Medicaid Services, or CMS, publishes new APC rates that are determined in accordance with
the promulgated methodology.
Services provided in non-hospital based freestanding facilities are paid under the Medicare Physician Fee
Schedule, or MPFS. All of HMCA’s clients are presently in this category. The MPFS is updated on an annual
basis and sometimes modified more frequently.
Healthcare Reform Legislation
Healthcare reform legislation enacted in the first quarter of 2010 by the Patient Protection and Affordable Care
Act or PPACA, specifically requires the U.S. Department of Health and Human Services, in computing
physician practice expense relative value units, to increase the equipment utilization factor for advanced
diagnostic imaging services (such as MRI, CT and PET) from a presumed utilization rate of 50% to 65% for
2010 through 2012, 70% in 2013, and 75% thereafter. Excluded from the adjustment are low-technology
imaging modalities such as ultrasound, X-ray and fluoroscopy. The Health Care and Education Reconciliation
Act of 2010 (H.R. 4872) or Reconciliation Act, which was approved by the President on March 30, 2010,
amends the provision for higher presumed utilization of advanced diagnostic imaging services to a presumed
rate of 75%. These changes may result in decreased revenue for the services performed by our clients for
Medicare beneficiaries. Other changes in reimbursement for services rendered by Medicare Advantage plans
may also reduce the revenues for services rendered to Medicare Advantage enrollees.
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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, 2019, Medicare
revenues represented approximately 4.0% of the revenues for HMCA’s clients and subsidiaries as compared
to 4.4% for the fiscal year ended June 30, 2018. In January, 2014 additional reductions in Medicare
reimbursement were adopted, and New York State is expected to propose reducing Workers’ Compensation
reimbursements.
Because of the many variables involved, we are unable to predict how the legislative mandates contained in
PPACA will be implemented, in their complete and final form, whether any additional changes to PPACA or
regulations (including interpretations), will occur in the future, or what effect any other future legislation or
regulation would have on our business. Many commercial insurance companies, however, tie their
reimbursement rates to the government reimbursement levels.
Medicaid
The Medicaid program is a jointly-funded federal and state program providing coverage for low-income
persons. In addition to federally-mandated basic services, the services offered and reimbursement methods
vary from state to state. In many states, Medicaid reimbursement is patterned after the Medicare program;
however, an increasing number of states have established or are establishing payment methodologies
intended to provide healthcare services to Medicaid patients through managed care arrangements. In fiscal
2019, approximately 0.13% of the revenues of HMCA’s clients were attributable to Medicaid, as compared to
0.15% in fiscal 2018. Four of the Florida facilities (those owned by HMCA subsidiaries) do not participate in
Medicaid.
Managed Care and Private Insurance.
Health Maintenance Organizations, or HMO’s, Preferred Provider Organizations, or PPOs, and other managed
care organizations attempt to control the cost of healthcare services by a variety of measures, including
imposing lower payment rates, preauthorization requirements, limiting services and mandating less costly
treatment alternatives. Managed care contracting is competitive and reimbursement schedules in many cases
can be at or below Medicare reimbursement levels. Some managed care organizations have reduced or
otherwise limited, and other managed care organizations may reduce or otherwise limit, reimbursement in
response to reductions in government reimbursement. These reductions could have an adverse impact on our
financial condition and results of operations. These reductions have been, and any future reductions may be,
similar to the reimbursement reductions proposed by CMS, Congress and the current federal government
administration.
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FONAR CORPORATION AND SUBSIDIARIES
HMCA COMPETITION
The physician and diagnostic management services field is highly competitive. A number of large hospitals
have acquired medical practices and this trend may continue. HMCA expects that more competition will
develop. Many competitors have greater financial and other resources than HMCA.
With respect to the diagnostic imaging facilities managed by HMCA, the outpatient diagnostic imaging industry
is highly competitive. Competition focuses primarily on attracting physician referrals at the local market level
and increasing referrals through relationships with managed care organizations, as well as emphasizing to
potential referral sources the advantages of Upright® MRI scanning. HMCA believes that principal competitors
for the diagnostic imaging centers are hospitals and independent or management company-owned imaging
centers. Competitive factors include quality and timeliness of test results, ability to develop and maintain
relationships with managed care organizations and referring physicians, type and quality of equipment, facility
location, convenience of scheduling and availability of patient appointment times. HMCA believes that it will be
able to effectively meet the competition in the outpatient diagnostic imaging industry with the Fonar Upright®
MRI scanners and strategically placed high field MRI scanners at its facilities.
GOVERNMENT REGULATION APPLICABLE TO HMCA
FEDERAL REGULATION
The healthcare industry is highly regulated and changes in laws and regulations can be significant. Changes in
the law or new interpretation of existing laws can have a material effect on our permissible activities, the
relative costs associated with doing business and the amount of reimbursement by government and other
third-party payors.
Federal False Claims Act
The federal False Claims Act and, in particular, the False Claims Act’s “qui tam” or “whistleblower” provisions
allow a private individual to bring actions in the name of the government alleging that a defendant has made
false claims for payment from federal funds. After the individual has initiated the lawsuit the government must
decide whether to intervene in the lawsuit and to become the primary prosecutor. If the government declines to
join the lawsuit, the individual may choose to pursue the case alone, although the government must be kept
apprised of the progress of the lawsuit, and may intervene later. Whether or not the federal government
intervenes in the case, it will receive the majority of any recovery.
When an entity is determined to have violated the federal False Claims Act, it must pay three times the actual
damages sustained by the government, plus mandatory civil penalties for each separate false claim and the
government’s attorneys’ fees. Liability arises when an entity knowingly submits, or causes someone else to
submit, a false claim for reimbursement to the federal government. The False Claims Act defines the term
“knowingly” broadly, though simple negligence will not give rise to liability under the False Claims Act.
Examples of the other actions which may lead to liability under the False Claims Act:
Failure to comply with the many technical billing requirements applicable to our Medicare and Medicaid
business.
Failure to comply with the prohibition against billing for services ordered or supervised by a physician
who is excluded from any federal healthcare program, or the prohibition against employing or
contracting with any person or entity excluded from any federal
healthcare program.
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FONAR CORPORATION AND SUBSIDIARIES
Failure to comply with the Medicare physician supervision requirements for the services we provide, or
the Medicare documentation requirements concerning physician supervision.
The Fraud Enforcement and Recovery Act of 2009 expanded the scope of the False Claims Act by, among
other things, broadening protections for whistleblowers and creating liability for knowingly retaining a
government overpayment, acting in deliberate ignorance of a government overpayment or acting in reckless
disregard of a government overpayment. The recently enacted healthcare reform bills in the form of the
Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act
of 2010 (collectively, “PPACA”) expanded on changes made by the 2009 Fraud Enforcement and Recovery
Act with regard to such “reverse false claims.” Under PPACA, the knowing failure to report and return an
overpayment within 60 days of identifying the overpayment or by the date a corresponding cost report is due,
whichever is later, constitutes a violation of the False Claims Act. HMCA and its clients have never been sued
under the False Claims Act and believe they are in compliance with the law.
Stark Law
Under the federal Self-Referral Law, also referred to as the "Stark Law", which is applicable to Medicare and
Medicaid patients, and the self-referral laws of various States, certain health practitioners, including
physicians, chiropractors and podiatrists, are prohibited from referring their patients for the provision of
designated health services, including diagnostic imaging and physical therapy services, to any entity with
which they or their immediate family members have a financial relationship, unless the referral fits within one
of the specific exceptions in the statutes or regulations. The federal government has taken the position that a
violation of the federal Stark Law is also a violation of the Federal False Claims Act. Statutory exceptions
under the Stark Law include, among others, direct physician services, in-office ancillary services rendered
within a group practice, space and equipment rental and services rendered to enrollees of certain prepaid
health plans. Some of these exceptions are also available under the State self-referral laws. HMCA believes
that it and its clients are in compliance with these laws.
Anti-kickback Regulation
We are subject to federal and state laws which govern financial and other arrangements between healthcare
providers. These include the federal anti-kickback statute which, among other things, prohibits the knowing
and willful solicitation, offer, payment or receipt of any remuneration, direct or indirect, in cash or in kind, in
return for or to induce the referral of patients for items or services covered by Medicare, Medicaid and certain
other governmental health programs. Under PPACA, knowledge of the anti-kickback statute or the specific
intent to violate the law is not required. Violation of the anti-kickback statute may result in civil or criminal
penalties and exclusion from the Medicare, Medicaid and other federal healthcare programs, and according to
PPACA, now provides a basis for liability under the False Claims Act. In addition, it is possible that private
parties may file “qui tam” actions based on claims resulting from relationships that violate the anti-kickback
statute, seeking significant financial rewards. Many states have enacted similar statutes, which are not limited
to items and services paid for under Medicare or a federally funded healthcare program. Neither HMCA nor its
clients engage in this practice.
In fiscal 2019, approximately 4.0% of the revenues of HMCA’s clients were attributable to Medicare and 0.13%
were attributable to Medicaid. In fiscal 2018, approximately 4.4% of the revenues of HMCA’s clients were
attributable to Medicare and 0.15% were attributable to Medicaid.
Page 24
Deficit Reduction Act (DRA)
FONAR CORPORATION AND SUBSIDIARIES
On February 8, 2006, the President signed into law the DRA. Effective January 1, 2007, the DRA provides that
Medicare reimbursement for the technical component for imaging services (excluding diagnostic and
screening mammography) performed in freestanding facilities will be capped. Payment is the lesser of the
Medicare Physician Fee Schedule or the Hospital Outpatient Prospective Payment System (OPPS) rates.
Implementation of these reimbursement reductions contained in the DRA has had an adverse effect on our
business. We have been able to counter this effect by increasing our clients’ scan volumes through our
vigorous marketing efforts and reducing our operating expenses.
The DRA also codified the reduction in reimbursement for multiple images on contiguous body parts previously
announced by CMS, the agency responsible for administering the Medicare program. In November 2005, CMS
announced that it would pay 100% of the technical component of the higher priced imaging procedure and
50% of the technical component of each additional imaging procedure for imaging procedures involving
contiguous body parts within a family of codes when performed in the same session. CMS had indicated that it
would phase in this 50% rate reduction over two years, so that the reduction was 25% for each additional
imaging procedure in 2006 and another 25% reduction in 2007. However, for services furnished on or after
July 1, 2010, the PPACA requires the full 50% reduction to be implemented.
Health Insurance Portability and Accountability Act
Congress enacted the Health Insurance Portability and Accountability Act of 1996, or HIPAA, in part, to
combat healthcare fraud and to protect the privacy and security of patients’ individually identifiable healthcare
information. HIPAA, among other things, amends existing crimes and criminal penalties for Medicare fraud
and enacts new federal healthcare fraud crimes, including actions affecting non-government healthcare benefit
program by means of false or fraudulent representations in connection with the delivery of healthcare services
is subject to a fine or imprisonment, or potentially both. In addition, HIPAA authorizes the imposition of civil
money penalties against entities that employ or enter into contracts with excluded Medicare or Medicaid
program participants if such entities provide services to federal health program beneficiaries. A finding of
liability under HIPAA could have a material adverse effect on our business, financial condition and results of
operations.
Further, HIPAA requires healthcare providers and their business associates to maintain the privacy and
security of individually identifiable protected health information (“PHI”). HIPAA imposes federal standards for
electronic transactions, for the security of electronic health information and for protecting the privacy of PHI.
The Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”), signed into law
on February 17, 2009, dramatically expanded, among other things, (1) the scope of HIPAA to now apply
directly to “business associates,” or independent contractors who receive or obtain PHI in connection with
providing a service to a covered entity, (2) substantive security and privacy obligations, including new federal
security breach notification requirements to affected individuals, DHHS and prominent media outlets, of certain
breaches of unsecured PHI, (3) restrictions on marketing communications and a prohibition on covered entities
or business associates from receiving remuneration in exchange for PHI, and (4) the civil and criminal
penalties that may be imposed for HIPAA violations, increasing the annual cap in penalties from $25,000 to
$1.5 million per occurrence. In 2013 additional legal requirements were adopted to provide further protection
for PHI.
Page 25
FONAR CORPORATION AND SUBSIDIARIES
In addition, many states have enacted comparable privacy and security statues or regulations that, in some
cases, are most stringent than HIPAA requirements. In those cases it may be necessary to modify our
operations and procedures to comply with the more stringent state laws, which may entail significant and
costly changes for us. We believe that we are in compliance with such state laws and regulations. However, if
we fail to comply with applicable state laws and regulations, we could be subject to additional sanctions.
We believe that we are in compliance with the current HIPAA requirements, as amended by HITECH, together
with other legislation and regulations, and comparable state laws, but we anticipate that we may encounter
certain costs associated with future compliance. Moreover, we cannot guarantee that enforcement agencies or
courts will not make interpretations of the HIPAA standards that are inconsistent with ours, or the
interpretations of our contracted radiology practices or their affiliated physicians. A finding of liability under the
HIPAA standards may result in significant criminal and civil penalties. Noncompliance also may result in
exclusion from participation in government programs, including Medicare and Medicaid. These actions could
have a material adverse effect on our business, financial condition, and results of operations.
Civil Money Penalty Law and Other Federal Statutes
The Civil Money Penalty, or CMP, law covers a variety of practices. It provides a means of administrative
enforcement of the anti-kickback statute, and prohibits false claims, claims for medically unnecessary
services, violations of Medicare participating provider or assignment agreements and other practices. The
statute gives the Office of Inspector General of the HHS the power to seek substantial civil fines, exclusion
and other sanctions against providers or others who violate the CMP prohibitions.
In addition, in 1996, Congress created a new federal crime: healthcare fraud and false statements relating to
healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to
defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may
result in fines, imprisonment or exclusion from government sponsored programs such as the Medicare and
Medicaid programs.
Certificates of Need
Some states require hospitals and certain other healthcare facilities and providers to obtain a certificate of
need, or CON, or similar regulatory approval prior to establishing certain healthcare operations or services,
incurring certain capital projects and/or the acquisition of major medical equipment including MRI and PET/CT
systems. We are not operating in any such states.
Patient Protection and Affordable Care Act
On March 23, 2010, President Obama signed into law healthcare reform legislation in the form of PPACA. The
implementation of this law will likely have a profound impact on the healthcare industry. Most of the provisions
of PPACA are being phased in over time and can be conceptualized as a broad framework not only to provide
health insurance coverage to millions of Americans, but to fundamentally change the delivery of care by
bringing together elements of health information technology, evidence-based medicine, chronic disease
management, medical “homes,” care collaboration and shared financial risk in a way that will accelerate
industry adoption and change. There are also many provisions addressing cost containment, reductions of
Medicare and other payments and heightened compliance requirements and additional penalties, which will
create further challenges for providers. We are unable to predict the full impact of PPACA at this time due to
the law’s complexity and current lack of implementing regulations or interpretive guidance. Moving forward, we
believe that the federal government will likely have greater involvement in the healthcare industry than in prior
years.
Page 26
State Regulation
FONAR CORPORATION AND SUBSIDIARIES
In addition to the federal self-referral law and federal Anti-kickback statute, many States, including those in
which HMCA and its clients operate, have their own versions of self-referral and anti-kickback laws. These
laws are not limited in their applicability, as are the federal laws, to specific programs. HMCA believes that it
and its clients are in compliance with these laws.
Various States prohibit business corporations from practicing medicine. Various States, including New York,
also prohibit the sharing of professional fees or fee splitting. Consequently, in New York HMCA leases space
and equipment to clients and provides clients with a range of non-medical administrative and managerial
services for agreed upon fees. Under Florida law a business entity can bill patients and third party payors
directly if that entity is properly licensed through AHCA. All of the seven facilities in Florida are licensed
healthcare clinics through AHCA.
HMCA’s clients and subsidiaries generate revenue from patients covered by no-fault insurance and workers'
compensation programs. For the fiscal year ended June 30, 2019 approximately 57.5% of our clients’ receipts
were from patients covered by no-fault insurance and approximately 9.2% of our client’s receipts were from
patients covered by workers’ compensation programs. For the fiscal year ended June 30, 2018, approximately
56.8% of HMCA’s clients’ receipts were from patients covered by no-fault insurance and approximately 8.3%
of HMCA’s clients’ receipts were from patients covered by workers’ compensation programs. The foregoing
numbers do not include payments from third party administrators. In the event that changes in these laws alter
the fee structures or methods of providing service, or impose additional or different requirements, HMCA could
be required to modify its business practices and services in ways that could be more costly to HMCA or in
ways that decrease the revenues which HMCA receives from its clients.
Compliance Program
We maintain a program to monitor compliance with federal and state laws and regulations applicable to the
healthcare entities. The compliance program includes the adoption of (i) Standards of Conduct for our
employees and affiliates and (ii) a process that specifies how employees, affiliates and others may report
regulatory or ethical concerns. We believe that our compliance program meets the relevant standards provided
by the Office of Inspector General of the Department of Health and Human Services.
An important part of our compliance program consists of conducting periodic audits of various aspects of our
operations and that of the contracted radiology practices. We also assist our clients with educational programs
designed to familiarize them with the regulatory requirements and specific elements of our compliance
program.
HMCA believes that it and its clients are in compliance with applicable Federal, State and local laws. HMCA
does not believe that such laws will have any adverse material effect on its business.
EMPLOYEES
Fonar and HMCA had approximately 500 employees as of September 5, 2019. This total number included
employees engaged in production, customer support, research and development, information technology,
employees engaged in marketing and sales, billing and collection, as well as transcriptionists, Florida
technologists, field service technicians and individuals in various administrative positions. A significant number
of employees were employed at the MRI facilities managed or owned by HMCA, primarily in administrative
positions.
Page 27
FONAR CORPORATION AND SUBSIDIARIES
ITEM 1A. RISK FACTORS
An investment in our securities is subject to various risks, the most significant of which are summarized below.
1. Reduced Reimbursement Rates. Most of our revenues are derived from our scanning center business
conducted by HMCA. We are experiencing lower reimbursement rates from Medicare, other government
programs and private insurance companies. To date, we have been able to counter the impact of these
reductions by increasing our volume of scans and reducing our operating expenses, thereby maintaining
profitability in this business segment. There is, however, no assurance that we will be able to continue to
do so.
2. Demand for MRI Scanners. The reduced reimbursement rates also affects our sales of MRI scanners
negatively. With lower revenue projections, prospective customers would demand lower prices for
scanners. Although the reduced reimbursements may not affect foreign demand, a lower number of sales
in the aggregate could reduce economies of scale and consequently, profit margins.
3.
Manufacturing Competition. Many if not most of our competing scanner manufacturers have significantly
greater financial resources, production capacity, and other resources than we do. Such competitors would
include General Electric, Siemens, Hitachi and Phillips. Although Fonar is the only company which can
manufacture and sell the unique Stand-Up® (Upright®) MRI scanner, potential customers must be
convinced that the purchase of a Fonar scanner is their best choice. We believe that with time, that
objective will be reached, particularly with customers scanning patients having neck, back, knee and
various orthopedic issues who would benefit from being scanned in weight-bearing positions.
4. Dependence on Referrals. HMCA derives substantially all of its revenue, directly or indirectly, from fees
charged for the diagnostic imaging services performed at the facilities. We depend on referrals of patients
from unaffiliated physicians and other third parties to the facilities we manage or own for the services we
perform. If these physicians and other third parties were to reduce the number of patients they refer or
discontinue referring patients, scan volumes could decrease, which would reduce our net revenue and
operating margins.
5. Pressure to Control Healthcare Costs. One of the principal objectives of health maintenance organizations
and preferred provider organizations is to control the cost of healthcare services. Healthcare providers
participating in managed care plans may be required to refer diagnostic imaging tests to certain providers
depending on the plan in which a covered patient is enrolled. In addition, managed care contracting has
become very competitive. The expansion of health maintenance organizations, preferred provider
organizations and other managed care organizations within New York or Florida could have a negative
impact on the utilization and pricing of services performed at the facilities HMCA manages or owns to the
extent these organizations exert control over patients’ access to diagnostic imaging services, selections of
the provider of such services and reimbursement rates for those services.
6. Scanning Facility Competition. The market for diagnostic imaging services is highly competitive. The
facilities we manage or own compete for patients on the basis of reputation, location and the quality of
diagnostic imaging services. Groups of radiologists, established hospitals, clinics and other independent
organizations that own and operate imaging equipment are the principal competitors.
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FONAR CORPORATION AND SUBSIDIARIES
7. Eligibility Changes to Insurance Programs. Due to potential decreased availability of healthcare through
private employers, the number of patients who are uninsured or participate in governmental programs may
increase. Healthcare reform legislation will increase the participation of individuals in the Medicaid program
in states that elect to participate in the expanded Medicaid coverage. A shift in payor mix from managed
care and other private payors to government payors or an increase in the number of uninsured patients
may result in a reduction in the rates of reimbursement or an increase in uncollectible receivables or
uncompensated care, with a corresponding decrease in net revenue. Policies now being offered under
various insurance plans are expected to reduce demand for MRI scans as they become less affordable.
Changes in the eligibility requirements for governmental programs such as the Medicaid program and state
decisions on whether to participate in the expansion of such programs also could increase the number of
patients who participate in such programs and the number of uninsured patients. Even for those patients
who remain in private insurance plans, changes to those plans could increase patient financial
responsibility, resulting in a greater risk of uncollectible receivables. These factors and events could have a
material adverse effect on our business, financial condition, and results of operations.
8, Proposed Reduction of New York Workers’ Compensation Benefits. A proposal was published by the New
York State Workers’ Compensation Board (“NYSWCB”) in 2014 to change the fee schedule for Workers’
Compensation payments. Initially, the fees proposed would be set at approximately 130% of the Medicare
fees. This would reduce fees for the most commonly billed radiology procedures by approximately 60%.
Further, since the Workers’ Compensation fees are coupled with the New York State No Fault Program,
radiology providers would suffer similar reductions for No-Fault fees. We and the HMCA clients wrote to
the NYSWCB to argue against this proposal, and other affected parties commented as well. Since then, no
further action has been taken by the NYSWCB to advance the 2014 proposal. On the contrary, the
NYSWCB has adopted fee increases. There can be no assurance, however, that the NYSWCB will not
modify their present position, or if they elect to do so, the extent to which the NYSWCB would do so. A
significant reduction in Workers’ Compensation and No-Fault fees could have a material adverse impact
on our business.
9. Possible changes in Florida Insurance Law. In early 2019, two senate bills and one house bill in Florida
were introduced, all of them calling for the repeal of PIP and replacing PIP with $25,000 Bodily Injury
Coverage and Property Damage Liability Coverage. Another Florida senate bill was introduced that would
preserve PIP but dramatically cut reimbursement rates. None of the proposed bills ever made it onto the
2019 legislative agenda, but similar efforts in the future might be successful. Currently, drivers and
passengers get car damages and PIP, paid for up to $10,000, no matter who is at fault in an accident.
Drivers have to pay an additional cost to insurance companies to pay for bodily injuries, which covers them
if they are at fault. While PIP is required, coverage for bodily injury is not. The insurance industry is
pushing to scrap PIP and instead mandate all motorists to carry coverage that includes a minimum of
$25,000 bodily injury if they are at fault. Eliminating PIP would mean that the $10,000 drivers now get paid
toward medical costs through their insurers might not be there for them to pay for injured drivers.
Importantly, payments would be reduced by approximately 60% due to claims being paid at commercial
rates or through legal settlements instead of at the presently prevailing PIP fee schedule. This would
negatively impact our seven diagnostic imaging facilities (both those we own and those we manage) with
more unpaid bills, lower reimbursement rates and elongated waiting times.
Page 29
FONAR CORPORATION AND SUBSIDIARIES
10. Federal and state privacy and information security laws. We must comply with numerous federal and state
laws and regulations governing the collection, dissemination, access, use, security and privacy of PHI,
including HIPAA and its implementing privacy and security regulations, as amended by the federal
HITECH Act and collectively referred to as HIPAA. If we fail to comply with applicable privacy and security
laws, regulations and standards, properly maintain the integrity of our data, protect our proprietary rights to
our systems, or defend against cybersecurity attacks, our business, reputation, results of operations,
financial position and cash flows could be materially and adversely affected.
Information security risks have significantly increased in recent years in part because of the proliferation of
new technologies, the use of the internet and telecommunications technologies to conduct our operations,
and the increased sophistication and activities of organized crime, hackers, terrorists and other external
parties, including foreign state agents. Our operations rely on the secure processing, transmission and
storage of confidential, proprietary and other information in our computer systems and networks.
11. Changes in Domestic and Worldwide Economic Conditions. We are subject to risk arising from adverse
changes in general domestic and global economic conditions, including recession or economic slowdown
and disruption of credit markets. Turbulence and uncertainty in the United States and international markets
and economies may adversely affect our liquidity, financial condition, revenues, profitability and business
operations generally.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Fonar and HMCA currently lease approximately 78,000 square feet of office and plant space at its principal
offices in Melville, New York. The term of the lease runs through November, 2026. Management believes that
the premises will be adequate for its current needs. HMCA also maintains office space for the Facilities owned
by its subsidiaries in Florida and for its clients at the clients’ sites in New York and Florida under leases having
various terms. HMCA owns the building for the client’s premises in Tallahassee, Florida. The Company
received approval from the Suffolk County IDA on February 29, 2016 of a 50% property tax abatement, valued
at $440,000, over a 10 year period commencing January, 2017.
ITEM 3. LEGAL PROCEEDINGS
Matt Malek Madison v. Fonar Corporation, United States District Court, Northern District of California, was
commenced by plaintiff on August 27, 2007 to recover a down payment for a scanner in the amount of
$300,000, with interest. The plaintiff sought costs of suit and attorney’s fees as well. Fonar answered the
complaint and sued the plaintiff for breach of contract in the amount of $450,000. The case went to trial before
a judge, and judgment was awarded to the plaintiff. Fonar appealed the trial court’s decision, but on January
31, 2012, the U.S. Court of Appeals for the 9th Circuit affirmed the lower court’s decision awarding the plaintiff
the $300,000 deposit with prejudgment interest from July 1, 2006. After no action being taken by the plaintiff
for several years, on June 30, 2016 Fonar received a letter from plaintiff’s attorney seeking payment of the
judgment. The plaintiff has agreed to accept the sum of $300,000 in full satisfaction of the judgment, which
amount was paid in October, 2016.
ITEM 4. MINE SAFETY DISCLOSURES. Not Applicable
Page 30
PART II
FONAR CORPORATION AND SUBSIDIARIES
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
October
January
Apri
July
October
January
April
July
October
January
March
July
Low
High
Fiscal Quarter
2016 $ 18.27 $ 12.76
- March
2016 $ 21.95 $ 13.65
- June
2016 $ 23.90 $ 19.10
- September
2016 $ 21.01 $ 15.70
- December
2017 $ 20.85 $ 17.30
- March
2017 $ 29.40 $ 17.20
- June
2017 $ 31.90 $ 25.31
- September
2017 $ 33.75 $ 21.10
- December
2018 $ 29.95 $ 22.15
- March
2018 $ 30.10 $ 25.31
- June
2018 $ 28.80 $ 23.70
- September
2018 $ 25.77 $ 19.63
- December
2019 $ 23.85 $ 20.01
- March
2019 $ 23.00 $ 18.85
- June
- September 17 2019 $ 25.25 $ 20.44
On September 19, 2019, we had approximately 1,016 stockholders of record of our Common Stock, 8
stockholders of record of our Class B Common Stock, 3 stockholders of record of our Class C Common Stock
and 1,131 stockholders of record of our Class A Non-voting Preferred Stock.
At the present time, the only class of our securities for which there is a market is the Common Stock.
We currently have a policy of retaining earnings to finance the development and expansion of our business.
We expect to continue this policy for the foreseeable future.
Page 31
FONAR CORPORATION AND SUBSIDIARIES
Performance Graph
The following graph compares the annual change in the Company’s cumulative total shareholder return on its
Common Stock during a period commencing on June 30, 2015 and ending on June 30, 2019 (as measured by
dividing (i) the sum of (A) the cumulative amount of dividends for the measurement period, assuming dividend
reinvestment and (B) the difference between the Company’s share price at the end and the beginning of the
measurement period; by (ii) the share price at the beginning of the measurement period) with the cumulative
total return of each of: (a) the CRSP Composite Total Return Index for Nasdaq (“Nasdaq”)(XCMP); (b) the
CRSP Total Return Index for Nasdaq Medical Equipment Manufacturers (“Nas-MED”)(NQUSB4535T); and (c)
the CRSP Total Return Index for Nasdaq Healthcare companies (“Nas-Hea.”)(NQUSB4533T) during such
period, assuming a $100 investment on June 30, 2015. The stock price performance on the graph below is not
necessarily indicative of future price performance.
Relative Dollar Values
Fonar Common (FONR)
NASDAQ (XCMP)
NAS-Med (NQUSB4535T)
NAS-Hea (NQUSB4533T)
Source: Nasdaq.net
6/30/15
6/30/16
6/30/17
6/29/18
6/28/19
$
$
$
$
100.00 $
100.00 $
100.00 $
100.00 $
192.44 $
98.32 $
116.29 $
94.61 $
262.29 $
126.14 $
138.01 $
113.45 $
250.95 $
155.91 $
159.40 $
140.46 $
203.31
168.04
190.43
144.59
Page 32
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, 2019. This consolidated selected financial data should be read in
conjunction with our consolidated financial statements and the related notes included in Item 8 of this form.
As of and For the Periods
Ended June 30,
STATEMENT OF
OPERATIONS
2019
2018
2017
2016
2015
Revenues $ 87,192,887 $ 81,515,994 $78,036,586 $73,368,210 $69,050,996
Cost of revenues $ 43,984,593 $ 41,950,770 $38,052,425 $38,870,898 $38,404,281
Research and
Development Expenses $ 1,812,173 $ 1,755,747 $ 1,480,670 $ 1,631,846 $ 1,812,398
Net Income $ 20,513,674 $ 25,452,185 $23,678,798 $18,795,517 $15,430,383
Basic Net Income per
common share $
2.26 $
3.16 $
2.98 $
2.43 $
Diluted Net Income per
common share $
2.22 $
3.10 $
2.92 $
2.38 $
2.00
1.95
Basic weighted average
number of shares
outstanding
Diluted Weighted average
number of shares
outstanding
BALANCE SHEET DATA
6,354,103
6,287,510
6,161,599
6,050,893
6,050,632
6,481,607
6,415,014
6,289,103
6,178,397
6,178,136
Working capital $ 70,998,783 $ 52,497,840 $39,177,703 $24,946,326 $24,828,161
Total Assets $133,560,210 $118,310,945 $98,762,566 $84,887,606 $76,492,077
Long-term debt and
obligations under capital
336,761 $ 2,059,236 $ 5,699,302
306,035 $
Stockholder’s equity $118,112,103 $102,234,471 $82,909,953 $60,776,307 $50,783,513
273,112 $
leases $
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION.
INTRODUCTION.
Fonar was formed in 1978 to engage in the business of designing, manufacturing and selling MRI scanners.
HMCA, a subsidiary of Fonar, provides management services to diagnostic imaging facilities.
Fonar's principal MRI product is its Stand-Up® MRI (also called Upright® MRI) scanner. The Stand-Up® MRI
allows patients to be scanned for the first time under weight-bearing conditions. The Stand-Up® MRI is the
only MRI capable of producing images in the weight-bearing state.
At 0.6 Tesla field strength, the Upright® MRI is among the highest field open MRI scanners in the industry,
offering non-claustrophobic MRI together with high-field image quality. Fonar’s open MRI scanners were the
first high field strength open MRI scanners in the industry.
Page 33
FONAR CORPORATION AND SUBSIDIARIES
HMCA generates revenues from providing comprehensive management services, including development,
administration, accounting, billing and collection services, together with office space, medical equipment,
supplies and non-medical personnel to its clients. Revenues are in the form of fees which are earned under
contracts with HMCA’s clients except for its three Florida subsidiaries which engage in the practice of
medicine, and bill and collect fees from patients, insurers and other third party payors directly.
For the fiscal years ended June 30, 2019 and June 30, 2018 10.7% and 11.0%, respectively, of total revenues
were derived from contracts with facilities owned by Dr. Raymond V. Damadian, the President and principal
stockholder of Fonar. The agreements with these MRI facilities are for one-year terms which renew
automatically on an annual basis, unless terminated. The fees for these sites, which are located in Florida, are
flat monthly fees.
For services for which Medicare is billed directly, the sites are paid under the Medicare Physician Fee
Schedule, which is updated on an annual basis. Under the Medicare statutory formula, payments under the
Physician Fee Schedule would have decreased for the past several years if Congress failed to intervene.
Many private payors use the Medicare Physician Fee Schedule to determine their own reimbursement rates.
While Congress has repeatedly intervened to mitigate the negative reimbursement impact associated with the
formula, there is no guarantee that Congress will continue to do so in the future. Moreover, the existing
methodology may result in significant yearly fluctuations in the Medicare Physician Fee Schedule amounts,
which may be unrelated to changes in the actual costs of providing physician services.
The 2013 Medicare Physician Fee Schedule expands a reduction in reimbursement for multiple images.
Payment will be made at 75% for the professional component and 50% for the technical component of the
second and subsequent scans furnished by the same physician, to the same patient, in the same session, on
the same day.
In addition, effective January 1, 2014, Medicare made significant reductions in the MRI fee schedule, by nearly
40% for some MRI studies.
Critical Accounting Policies
Our discussion and analysis of financial condition and results of operations are based on our consolidated
financial statements that were prepared in accordance with U.S. generally accepted accounting principles, or
GAAP. Management makes estimates and assumptions when preparing financial statements. These
estimates and assumptions affect various matters, including:
our reported amounts of assets and liabilities in our consolidated balance sheets at the dates of the
financial statements
our disclosure of contingent assets and liabilities at the dates of the financial statements; and
our reported amounts of net revenue and expenses in our consolidated statements of operations
during the reporting periods
These estimates involve judgments with respect to numerous factors that are difficult to predict and are
beyond management’s control. As a result, actual amounts could differ materially from these estimates.
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FONAR CORPORATION AND SUBSIDIARIES
The Securities and Exchange Commission defines critical accounting estimates as those that are both most
important to the portrayal of a company’s financial condition and results of operations and require
management’s most difficult, subjective or complex judgment, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in subsequent periods. In the notes
to our consolidated financial statements, we discuss our significant accounting policies.
We believe the following critical accounting policies affect our more significant judgments and estimates used
in the preparation of our consolidated financial statements. We recognize revenue and related costs of
revenue from sales contracts for our MRI scanners and major upgrades, under the percentage-of-completion
method. Under this method, we recognize revenue and related costs of revenue, as each sub-assembly is
completed. Amounts received in advance of our commencement of production are recorded as customer
advances.
We continuously, qualitatively and quantitatively evaluate the realizability (including both positive and negative
evidence) of the net deferred tax assets and assess the valuation allowance periodically. Our evaluation
considers the financial condition of the Company and both the business conditions and regulatory environment
of the industry. If future taxable income or other factors are not consistent with our expectations, an
adjustment to our allowance for net deferred tax assets may be required. For net deferred tax assets we
consider estimates of future taxable income, including tax planning strategies, in determining whether our net
deferred tax assets are more likely than not to be realized. Our ability to project future taxable income may be
significantly affected by our ability to determine the impact of regulatory changes which could adversely affect
our future profits. As a result, the benefits of our net operating loss carry forwards could expire before they are
utilized.
At June 30, 2018, the net deferred tax asset was valued at $22,450,000. At June 30, 2019, the net deferred
tax asset was valued at $20,694,480.
We depreciate our long-lived assets over their estimated economic useful lives with the exception of leasehold
improvements where we use the shorter of the assets useful lives or the lease term of the facility for which
these assets are associated.
The Company provides for medical receivables that could become uncollectible by establishing an allowance
for doubtful accounts in order to adjust medical receivables to estimated net realizable value. In evaluating the
collectability of medical receivables, the Company considers a number of factors, including the age of the
account, historical collection experiences, payor type, current economic conditions and other relevant factors.
There are various factors that impact collection trends, such as payor mix, changes in the economy, increase
burden on copayments to be made by patients with insurance and business practices related to collection
efforts. These factors continuously change and can have an impact on collection trends and the estimation
process.
We amortize our intangible assets, including patents, and capitalized software development costs, over the
shorter of the contractual/legal life or the estimated economic life. Our amortization life for patents and
capitalized software development costs is 15 to 17 years and 5 years, respectively. Our amortization of the
non-competition agreements entered into with certain individuals in connection with the HDM transaction are
depreciated over seven years, and customer relationships are amortized over 20 years.
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FONAR CORPORATION AND SUBSIDIARIES
Goodwill is recorded as a result of business combinations. Management evaluates goodwill, at a minimum, on
an annual basis and whenever events and changes in circumstances suggest that the carrying amount may
not be recoverable. Impairment of goodwill is tested by comparing the reporting unit’s carrying amount,
including goodwill, to the fair value of the reporting unit. The fair value of a reporting unit is estimated using a
combination of the income or discounted cash flows approach and the market approach, which uses
comparable market data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is
considered impaired and a second step is performed to measure the amount of impairment loss, if any. Based
on our test for goodwill impairment, we noted no impairment related to goodwill. However, if estimates or the
related assumptions change in the future, we may be required to record impairment charges to reduce the
carrying amount of goodwill.
We periodically assess the recoverability of long-lived assets, including property and equipment, intangibles
and management agreements, when there are indications of potential impairment, based on estimates of
undiscounted future cash flows. The amount of impairment is calculated by comparing anticipated discounted
future cash flows with the carrying value of the related asset. In performing this analysis, management
considers such factors as current results, trends, and future prospects, in addition to other economic factors.
RESULTS OF OPERATIONS. FISCAL 2019 COMPARED TO FISCAL 2018
In fiscal 2019, we recognized net income of $20.5 million on revenues of $87.2 million, as compared to net
income of $25.5 million on revenues of $81.5 million for fiscal 2018. This represents an increase in revenues
of 6.5%. Patient fee revenue net of contractual allowances increased by 13.8%. Total costs and expenses
increased by 5.2%. Our consolidated operating results improved by $2.4 million to an operating income of
$22.1 million for fiscal 2019 as compared to operating income of $19.7 million for fiscal 2018.
Discussion of Operating Results of Medical Equipment Segment
Fiscal 2019 Compared to Fiscal 2018
Revenues attributable to our medical equipment segment increased by 1.8% to $10.0 million in fiscal 2019
from $9.8 million in fiscal 2018, with product sales revenues increasing by 190.6% from $603,000 in fiscal
2018 to $1.8 million in fiscal 2019. Service revenue decreased from $9.2 million in fiscal 2018 to $8.3 million in
fiscal 2019.
The Upright® MRI is unique in that it permits MRI scans to be performed on patients upright in the
weight-bearing state and in multiple positions that correlate with symptoms.
Product sales to unrelated parties increased by 190.6% in fiscal 2019 from $603,000 in fiscal 2018 to $1.8
million in fiscal 2019. There were no product sales to related parties in fiscal 2019 or 2018.
We believe that one of our principal challenges in achieving greater market penetration is attributable to the
better name recognition and larger sales forces of our larger competitors such as General Electric, Siemens,
Hitachi, Philips and Toshiba and the ability of some of our competitors to offer attractive financing terms
through affiliates, such as G.E. Capital.
In addition, lower reimbursement rates have reduced the demand for our MRI products, resulting in lower sales
volumes. As a result of fewer sales, service revenues have decreased since as older scanners are taken out
of service, there are fewer new scanners available to sign service contracts.
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FONAR CORPORATION AND SUBSIDIARIES
The operating loss for the medical equipment segment increased from an operating loss of $3.0 million in
fiscal 2018 to an operating loss of $3.4 million in fiscal 2019. The losses are attributable most significantly to
the fact that costs increased by a greater amount than revenues.
We recognized revenues of $779,000 from the sale of our Upright® MRI scanners in fiscal 2019, while in fiscal
2018, we recognized revenues of $43,000 from the sale of Upright® MRI scanners.
Research and development expenses, increased to $1.8 million in fiscal 2019 from $1.75 million in fiscal 2018.
Our expenses for fiscal 2019 represented continued research and development of Fonar’s scanners, Fonar’s
new hardware and software product, Sympulse® and new surface coils to be used with the Upright® MRI
scanner.
Discussion of Operating Results of Physician and Diagnostic Services Management Segment.
Fiscal 2019 Compared to Fiscal 2018
Revenues attributable to the Company's physician and diagnostic services management segment, HMCA,
increased by 7.7% to $77.2 million in fiscal 2019 from $71.7 million in fiscal 2018. The increase in revenues
was due to $2.9 million of patient fees (net of contractual allowances and discounts less provision for bad
debts) from patient and third party payors recognized by four of the facilities in Florida. One of these locations
added additional medical equipment which allowed it to increase volume coupled with an increase in
management and other fees of $2.2 million.
Cost of revenues as a percentage of the related revenues for our physician and diagnostic services
management segment increased from $37.9 million or 52.9% of related revenues for the year ended June 30,
2018 to $40.2 million, or 52.0% of related revenues for the year ended June 30, 2019. The revenues increased
more than the costs relating to these revenues.
Operating results of this segment increased from operating income of $22.7 million in fiscal 2018 to operating
income of $25.6 million in fiscal 2019. We believe that our efforts to expand and improve the operation of our
physician and diagnostic services management segment are directly responsible for the profitability of this
segment and our company as a whole.
Discussion of Certain Consolidated Results of Operations
Fiscal 2019 Compared to Fiscal 2018
Interest and investment income increased in 2019 compared to 2018. We recognized interest income of
$482,573 in 2019 as compared to $262,569 in fiscal 2018, representing an increase of 83.8%.
Interest expense of $98,636 was recognized in fiscal 2019, as compared to interest expense of $160,074 in
fiscal 2018. This was due to additional principal payments being made to retire our debt.
While revenue increased by 7.0%, selling, general and administrative expenses increased by 6.2% to $19.3
million in fiscal 2019 from $18.1 million in fiscal 2018.
The compensatory element of stock issuances increased from $1,954,744 in fiscal 2018 to $1,990,380 in fiscal
2019.
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FONAR CORPORATION AND SUBSIDIARIES
Revenue from service and repair fees decreased from $9.2 million in fiscal 2018 to $8.3 million in fiscal 2019.
Continuing our tradition as the originator of MRI, we remain committed to maintaining our position as the
leading innovator of the industry through investing in research and development. In fiscal 2019 we continued
our investment in the development of our new MRI scanners, together with software and upgrades, with an
investment of $1,812,347 in research and development, none of which was capitalized, as compared to
$1,755,747, none of which was capitalized, in fiscal 2018. The research and development expenditures were
approximately 18.1% of revenues attributable to our medical equipment segment and 2.1% of total revenues in
2019, and 17.8% of medical equipment segment revenues and 2.1% of total revenues in fiscal 2018. This
represented a 3.2% increase in research and development expenditures in fiscal 2019 as compared to fiscal
2018.
For the physician and diagnostic services management segment, HMCA, revenues increased, from $71.7
million in fiscal 2018 to $77.2 million in fiscal 2019. This is primarily attributable to an increase in patient scans
resulting from our marketing efforts.
For the fiscal year 2019 the Company recorded an income tax expense of $2.0 million compared with an
income tax benefit of $5.5 million for 2018. Net income for the year ended June 30, 2018, reflects income tax
benefits associated with the changes to the net deferred income tax assets of $4.9 million and also the
benefits associated with the AMT Carryforward Tax Credit of $1.2 million, available as a cash refund. The
Company has recorded a net deferred tax asset of $20.6 million as of June 30, 2019, primarily relating to the
tax benefits from the net operating loss carry forwards available to offset future taxable income. The utilization
of these tax benefits is dependent on the Company generating future taxable income and other factors. A
partial valuation allowance will be maintained until evidence exists to support that it is no longer needed,
(principally related to research and development credits).
Discussion of Operating Results of Medical Equipment Segment
Fiscal 2018 Compared to Fiscal 2017
In fiscal 2018, we recognized net income of $25.5 million on revenues of $81.5 million, as compared to net
income of $23.7 million on revenues of $78.0 million for fiscal 2017. Our consolidated operating results
improved by $600,000 to an operating income of $19.7 million for fiscal 2018 as compared to an operating
income of $19.1 million for fiscal 2017.
Revenues attributable to our medical equipment segment decreased by 12.3% to $9.8 million in fiscal 2018
from $11.2 million in fiscal 2017, with product sales revenues decreasing by 61.7% from $1.6 million in fiscal
2017 to $603,000 in fiscal 2018. Service revenue decreased from $9.6 million in fiscal 2017 to $9.2 million in
fiscal 2018.
Product sales to unrelated parties decreased by 61.7% in fiscal 2018 from $1.6 million in fiscal 2017 to
$603,000 in fiscal 2018. There were no product sales to related parties in fiscal 2018 or 2017.
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FONAR CORPORATION AND SUBSIDIARIES
The operating loss for the medical equipment segment increased from a loss of $2.3 million in fiscal 2017 to
an operating loss of $3.0 million in fiscal 2018. This decrease was attributable most significantly to the fact that
costs increased and the revenues decreased.
We recognized revenues of $43,000 from the sale of our Upright® MRI scanners in fiscal 2018, while in fiscal
2017, we recognized revenues of $714,000 from the sale of Upright® MRI scanners.
Research and development expenses, increased to $1.8 million in fiscal 2018 from $1.5 million in fiscal 2017.
Our research and development expenses represented continued research and development of our scanners,
our new hardware and software product, Sympulse® and new surface coils to be used with the Upright® MRI
scanner.
Discussion of Operating Results of Physician and Diagnostic Services Management Segment.
Fiscal 2018 Compared to Fiscal 2017
Revenues attributable to the Company's physician and diagnostic services management segment, HMCA,
increased by 7.3% to $71.7 million in fiscal 2018 from $66.8 million in fiscal 2017. The increase in revenues
was primarily due to including $1.0 million of patient fees (net of contractual allowances and discounts less
provision for bad debts) from patient and third party payors recognized by four of the facilities in Florida. One
of these locations added additional medical equipment which allowed it to increase volume coupled with an
increase in management and other fees of $5.0 million.
Cost of revenues as a percentage of the related revenues for our physician and diagnostic services
management segment increased from $34.1 million or 51.0% of related revenues for the year ended June 30,
2017 to $37.9 million, or 52.0% of related revenues for the year ended June 30, 2018.
Operating results of this segment increased from operating income of $21.4 million in fiscal 2017 to operating
income of $22.7 million in fiscal 2018. We believe that our efforts to expand and improve the operation of our
physician and diagnostic services management segment are directly responsible for the profitability of this
segment and our company as a whole.
Discussion of Certain Consolidated Results of Operations
Fiscal 2018 Compared to Fiscal 2017
Interest and investment income increased in 2018 compared to 2017. We recognized interest income of
$262,569 in 2018 as compared to $193,141 in fiscal 2017, representing an increase of 35.9%.
Interest expense of $160,074 was recognized in fiscal 2018, as compared to interest expense recovery
$23,299 in fiscal 2017.
While revenue increased by 4.5%, selling, general and administrative expenses decreased by 6.6% to $18.1
million in fiscal 2018 from $19.4 million in fiscal 2017.
The compensatory element of stock issuances decreased from approximately $2,397,276 in fiscal 2017 to
$1,954,744 in fiscal 2018, reflecting a decrease in Fonar’s use of its stock bonus plans to pay employees and
others.
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FONAR CORPORATION AND SUBSIDIARIES
.
A recovery of bad debts of $614,680 in fiscal 2018 as compared to a provision of bad debts of $477,577 in
fiscal 2017, reflected a increase in reserves for certain indebtedness in fiscal 2018 by our physician and
diagnostic services management segment. In addition in fiscal 2018, the Company recorded a provision for
bad debts for patient fee revenue of $17.9 million for the four MRI facilities in Florida which bill patients and
third party payors directly. The three Florida sites managed by HMCA jointly and severally guaranteed the
payment of their management fees to HMCA, further securing HMCA’s management fee receivables.
For the fiscal year 2018 the Company recorded an income tax benefit of $5.7 million compared with $4.3
million for 2017. The Company recorded a net deferred tax asset of $22.5 million as of June 30, 2018.
Revenue from service and repair fees decreased from $9.6 million in fiscal 2017 to $9.2 million in fiscal 2018.
In fiscal 2018 we continued our investment in the development of our new MRI scanners, together with
software and upgrades, with an investment of $1,755,747 in research and development, none of which was
capitalized, as compared to $1,480,670, none of which was capitalized, in fiscal 2017. The research and
development expenditures were approximately 17.8% of revenues attributable to our medical equipment
segment and 2.1% of total revenues in 2018, and 13.2% of medical equipment segment revenues and 1.9% of
total revenues in fiscal 2017. This represented a 18.6% increase in research and development expenditures in
fiscal 2018 as compared to fiscal 2017.
We have been taking steps to improve HMCA revenues by our marketing efforts, which focus on the unique
capability of our Upright® MRI scanners to scan patients in different positions. We have also been increasing
the number of health insurance plans in which our clients participate.
Our management fees are dependent on collection by our clients of fees from reimbursements from Medicare,
Medicaid, private insurance, no fault and workers’ compensation carriers, self–pay and other third-party
payors. The health care industry is experiencing the effects of the federal and state governments’ trend toward
cost containment, as governments and other third-party payors seek to impose lower reimbursement and
utilization rates and negotiate reduced payment schedules with providers. The cost-containment measures,
consolidated with the increasing influence of managed-care payors and competition for patients, have resulted
in reduced rates of reimbursement for services provided by our clients from time to time. Our future revenues
and results of operations may be adversely impacted by future reductions in reimbursement rates.
Certain third-party payors have proposed and implemented changes in the methods and rates of
reimbursement that have had the effect of substantially decreasing reimbursement for diagnostic imaging
services that HMCA’s clients provide. To the extent reimbursement from third-party payors is reduced, it will
likely have an adverse impact on the rates they pay us, as they would need to reduce the management fees
they pay HMCA to offset such decreased reimbursement rates. Furthermore, many commercial health care
insurance arrangements are changing, so that individuals bear greater financial responsibility through high
deductible plans, co-insurance and higher co-payments, which may result in patients delaying or foregoing
medical procedures. More frequently, however, patients are scanned and we experience difficulty in collecting
deductibles and co-payments. We expect that any further changes to the rates or methods of reimbursement
for services, which reduce the reimbursement per scan of our clients may partially offset the increases in scan
volume we are working to achieve for our clients, and indirectly will result in a decline in our revenues.
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FONAR CORPORATION AND SUBSIDIARIES
On March 23, 2010, President Obama signed into law healthcare reform legislation in the form of the Patient
Protection and Affordable Care Act, or PPACA. Healthcare cost containment, reductions of Medicare and
other payments, and increased regulation will present additional challenges for healthcare providers. We are
unable to predict the full impact of PPACA, or the possible amendment or repeal and replacement of PPACA.
It may, however, adversely affect the revenues or the profitability of either or both our medical equipment
segment and physician and diagnostic services management segment.
In addition, the use of radiology benefit managers, or RBM’s has increased in recent years. It is common
practice for health insurance carriers to contract with RBMs to manage utilization of diagnostic imaging
procedures for their insureds. In many cases, this leads to lower utilization of imaging procedures based on a
determination of medical necessity. The efficacy of RBMs is still a highly controversial topic. We cannot predict
whether the healthcare legislation or the use of RBMs will negatively impact our business, but it is possible that
our financial position and results of operations could be negatively affected.
LIQUIDITY AND CAPITAL RESOURCES
Cash, and cash equivalents and short term investments increased by 47.6% from $19.6 million at June 30,
2018 to $29.0 million at June 30, 2019.
Cash provided by operating activities for fiscal 2019 approximated $19.4 million. Cash provided by operating
activities was attributable to the net income of $20.5 million, depreciation and amortization of $3.8 million,
deferred income tax expense benefit of $1.8 million which was offset by the increase in accounts, medical and
management fee receivables of $6.1 million.
Cash used in investing activities for fiscal 2019 approximated $18.6 million. The use of cash from investing
activities was attributable to purchases of property and equipment of $3.4 million, short term investments of
$15.1 million and costs of patents of $128,000.
Cash used by financing activities for fiscal 2019 approximated $6.6 million. The principal uses of cash in
financing activities included the repayment of loans and capital lease obligations of $30,000, and distributions
to non-controlling interests of $6.6 million.
Total liabilities decreased by 3.9% during fiscal 2019, from approximately $16.1 million at June 30, 2018 to
approximately $15.4 million at June 30, 2019.
As at June 30, 2019, our obligations included approximately $2.7 million in various state sales taxes, inclusive
of penalties and interest. The Company is in the process of negotiating settlements of these obligations.
At June 30, 2019, we had working capital of approximately $71.0 million as compared to working capital of
$52.5 million at June 30, 2018, and stockholders’ equity of $118.1 million at June 30, 2019 as compared to
stockholders’ equity of $102.2 million at June 30, 2018. For the year ended June 30, 2019, we realized a net
income of $20.5 million.
Our principal sources of liquidity are derived from revenues.
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FONAR CORPORATION AND SUBSIDIARIES
Our business plan includes a program for manufacturing and selling our Upright® MRI scanners. In addition,
we are enhancing our revenue by participating in the physician and diagnostic services management business
through our subsidiary, HMCA and have upgraded the facilities which it manages, most significantly by the
replacement of the original MRI scanners with new Upright® MRI scanners. Presently, 24 of the 25 MRI
facilities managed or owned by HMCA, are equipped with Upright® MRI scanners. We have also intensified
our marketing activities through the hiring of additional marketers for HMCA’s clients.
Our business plan also calls for a continuing emphasis on providing our customers with enhanced equipment
service and maintenance capabilities and delivering state-of-the-art, innovative and high quality equipment
upgrades at competitive prices. Fees for on-going service and maintenance from our installed base of
scanners were $9.2 million for the year ended June 30, 2018 and $8.3 million for the year ended June 30,
2019.
In order to promote profitability and to reduce demands on our cash and other liquid reserves, we maintain an
aggressive program of cost cutting. Previously, these measures included consolidating HMCA’s office space
with Fonar’s office space and reducing the size of our workforce, compensation and benefits. We continue to
reduce and contain expenses across the board. The cost reductions are intended to enable us to withstand
periods of low volumes of MRI scanner sales, by keeping expenditures at levels which can be supported by
service revenues and HMCA revenues.
Current economic credit conditions have contributed to a slower than optimal business environment. As a
result, our business may suffer, should the credit markets not improve in the near future. The direct impact of
these conditions is not fully known.
Revenues from HMCA have been the principal reason for our profitability, and we have so far been able to
maintain and increase such revenues by increasing the number of scans being performed by the sites we
manage and those we own, notwithstanding reductions in reimbursement rates from third party payors. The
likelihood and effect of any subsequent reductions is not fully known.
Capital expenditures for fiscal 2019 approximated $3.4 million. Capitalized patent costs were approximately
$128,000. Purchases of property and equipment were approximately $3.4 million.
Fonar has not committed to making capital expenditures in the 2020 fiscal year, except for placing additional
scanners at facilities located in Ormond Beach, Florida and Islandia and White Plains, New York. Also, we
signed a lease for a new location for a new facility in Pembroke Pines, Florida.
The Company believes that its business plan has been responsible for the past five consecutive fiscal years of
profitability (fiscal 2019, fiscal 2018, fiscal 2017, fiscal 2016 and fiscal 2015) and that its capital resources will
be adequate to support operations at current levels through June 30, 2020.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company does not have any investments in marketable securities, foreign currencies, mutual funds,
certificates of deposit or other fixed rate instruments. All of our funds are in cash accounts or money market
accounts which are liquid.
All of our revenue, expense and capital purchasing activities are transacted in United States dollars.
See Note 10 to the consolidated Financial Statements for information on long-term debt.
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FONAR CORPORATION AND SUBSIDIARIES
ITEM 8.
FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS
At June 30, 2019 and 2018
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended June 30, 2019, 2018 and 2017
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended June 30, 2019, 2018 and 2017
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 2019, 2018 and 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
44
46
49
50
54
56
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
FONAR Corporation and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of FONAR Corporation and Subsidiaries (the
“Company”) as of June 30, 2019 and 2018, the related consolidated statements of income, stockholders’
equity and cash flows for each of the three years in the period ended June 30, 2019, and the related notes
(collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in
all material respects, the financial position of the Company as of June 30, 2019 and 2018, and the results of its
operations and its cash flows for each of the three years in the period ended June 30, 2019, in conformity with
accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) ("PCAOB"), the Company's internal control over financial reporting as of June 30, 2019, based
on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in 2013, and our report dated September 30, 2019,
expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting
because of the existence of a material weakness.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on the Company's financial statements based on our audits. We are a public accounting
firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the
risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Marcum LLP
Marcum LLP
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Continued)
We have served as the Company’s auditor since 1990, such date takes into account the merger of Tabb,
Conigliaro, McGann, P.C. (“Tabb”) into another firm in approximately 2001 and the former partners of Tabb
joining Marcum LLP in 2002.
New York, New York
September 30, 2019
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FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Current Assets:
Cash and cash equivalents
Short term investments
Accounts receivable – net of allowances for doubtful
accounts of $190,244 at June 30, 2019 and 2018
Medical receivables –net of allowances for doubtful accounts
of $22,727,698 at June 30, 2018
Management and other fees receivable – net of allowances
for doubtful accounts of $9,404,944 and $10,983,022 at
June 30, 2019 and 2018, respectively
Management and other fees receivable – related party
medical practices – net of allowances for doubtful accounts
of $2,310,731 and $1,711,385 at June 30, 2019 and 2018,
respectively
Costs and estimated earnings in excess of billings on
uncompleted contracts
Inventories
Income tax receivable
Prepaid expenses and other current assets
Total Current Assets
Income taxes receivable
Deferred income tax asset
Property and Equipment – Net
Goodwill
Other Intangible Assets – Net
Other Assets
Total Assets
See accompanying notes to consolidated financial statements.
Page 46
June 30,
2019
2018
$ 13,882,013
15,094,816
$ 19,633,742
—
3,736,662
3,813,576
15,728,935
13,350,772
25,709,489
21,863,431
6,500,614
5,535,096
525,110
1,798,166
600,000
1,512,917
85,088,722
600,000
20,937,747
16,985,617
3,985,397
4,755,675
1,207,052
$ 133,560,210
86,638
1,431,380
—
1,349,907
67,064,542
1,200,000
22,689,011
16,492,278
3,985,397
5,601,656
1,278,061
$ 118,310,945
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES
June 30,
2019
2018
$
40,530
1,861,227
7,577,416
3,812,115
798,651
14,089,939
$
38,332
1,300,250
8,177,995
4,191,930
858,195
14,566,702
243,267
92,663
273,112
749,126
1,358,168
15,448,107
239,011
227,543
306,035
737,183
1,509,772
16,076,474
Current Liabilities:
Current portion of long-term debt and capital leases
Accounts payable
Other current liabilities
Unearned revenue on service contracts
Customer deposits
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.
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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, 2019 and 2018,
313,438 issued and outstanding at June 30, 2019 and 2018
Preferred stock $.001 par value; 567,000 shares authorized
at June 30, 2019 and 2018, issued and outstanding – none
Common stock $.0001 par value; 8,500,000 shares
authorized at June 30, 2019 and 2018, 6,369,125 and
6,299,154 issued at June 30, 2019 and 2018, respectively;
6,357,482 and 6,287,511 outstanding at June 30, 2019 and
2018, respectively
Class B convertible common stock (10 votes per share)
$.0001 par value; 227,000 shares authorized at June 30,
2019 and 2018, 146 issued and outstanding at June 30,
2019 and 2018
Class C common stock (25 votes per share) $.0001 par
value; 567,000 shares authorized at June 30, 2019 and
2018, 382,513 issued and outstanding at June 30, 2019
and 2018
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, 2019 and 2018
Total Fonar Corporation’s Stockholders’ Equity
Noncontrolling interests
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
See accompanying notes to consolidated financial statements.
Page 48
June 30,
2019
2018
$
$
31
—
638
—
31
—
630
—
38
181,086,517
(64,455,456)
—
(675,390)
115,956,378
2,155,725
118,112,103
$ 133,560,210
38
179,131,780
(79,772,587)
(9,213)
(675,390)
98,675,289
3,559,182
102,234,471
$ 118,310,945
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Revenues
Patient fee revenue, net of contractual allowances
and discounts
Provision for bad debts for patient fee
Patient fee revenue – net
Product sales – net
Service and repair fees – net
Service and repair fees – related parties – net
Management and other fees – net
Management and other fees – related party
medical practices – 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
$1,990,380, $1,954,744 and $2,397,276 for the
years ended June 30, 2019, 2018 and 2017,
respectively
Total Costs and Expenses
Income from Operations
Other Income and (Expenses):
Interest expense
Investment income
Other income (expense)– net
Income before (provision) benefit for income taxes
and noncontrolling interests
(Provision) benefit for Income Taxes
Net Income
Net Income – Noncontrolling Interests
Net Income – Attributable to FONAR
For the Years Ended June 30,
2018
2019
2017
$ 24,207,536
—
24,207,536
1,751,221
8,152,173
110,000
43,617,093
$ 39,165,413
(17,896,528)
21,268,885
602,541
9,124,728
110,000
41,422,958
$ 36,400,600
(16,171,434)
20,229,166
1,572,148
9,537,040
110,000
38,361,514
9,354,864
87,192,887
8,986,882
81,515,994
8,226,718
78,036,586
778,734
3,009,097
751,221
3,212,527
931,501
2,996,736
40,603
10,789,308
23,419,796
38,728
10,256,951
22,778,202
34,564
8,987,673
20,828,581
5,947,055
1,812,347
4,913,141
1,755,747
4,273,370
1,480,670
19,261,755
65,058,695
22,134,192
18,125,266
61,831,783
19,684,211
19,407,411
58,940,506
19,096,080
(98,636)
482,573
1,065
(160,074)
262,569
(4,271)
28,299
193,141
(1,156)
22,519,194
(2,005,520)
$ 20,513,674
(5,196,543)
$ 15,317,131
19,782,435
5,669,750
$ 25,452,185
(4,221,383)
$ 21,230,802
19,316,364
4,362,434
$ 23,678,798
(4,058,177)
$ 19,620,621
See accompanying notes to consolidated financial statements.
Page 49
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Continued)
Net Income Available to Common Stockholders
Net Income Available to Class A Non-Voting
Preferred Stockholders
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 – Class C
Common
Weighted Average Basic Shares Outstanding –
Common Stockholders
Weighted Average Diluted Shares Outstanding –
Common Stockholders
Weighted Average Basic and Diluted Shares
Outstanding – Class C Common
2019
$ 14,366,798
For the Years Ended June 30,
2018
$ 19,899,823
2017
$ 18,390,586
$
$
$
$
$
708,302
242,031
2.26
2.22
0.63
$
$
$
$
$
992,005
338,974
3.16
3.10
0.89
$
$
$
$
$
916,769
313,266
2.98
2.92
0.82
6,354,103
6,287,510
6,161,599
6,481,607
6,415,014
6,289,103
382,513
382,513
382,513
See accompanying notes to consolidated financial statements.
Page 50
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2019, 2018 AND 2017
Balance - June 30, 2016
Net income
Stock issued to employees under stock
bonus plans
Payments on notes receivable from
employee stockholders
Issuance of stock for acquistion
Stock option exercised
Distributions to noncontrolling interests
Balance - June 30, 2017
Net income
Payments on notes receivable from
employee stockholders
Distributions to noncontrolling interests
Balance - June 30, 2018
Net income
Stock issued to employees under stock
bonus plans
$
$
$
Payments on notes receivable from
employee stockholders
Distributions to noncontrolling interests
Balance - June 30, 2019
$
Class A
Non-Voting
Preferred
31
—
Common
Shares
6,051,166
—
—
193,221
—
—
—
—
31
—
—
—
31
—
—
—
—
31
—
42,884
240
—
6,287,511
—
—
—
6,287,511
—
69,971
—
—
6,357,482
Stock
Amount
607
—
$
19
—
4
—
—
630
—
—
—
630
—
8
—
—
638
$
$
$
$
$
$
$
Class C
Common
Stock
38
—
—
—
—
—
—
38
—
—
—
38
—
—
—
—
38
See accompanying notes to consolidated financial statements.
Page 51
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2019, 2018 AND 2017
Balance - June 30, 2016
Net income
Stock issued to employees under stock bonus
plans
Payments on notes receivable from employee
stockholders
Issuance of stock for acquisition
Stock option exercised
Distributions to noncontrolling interests
Balance - June 30, 2017
Net income
Payments on notes receivable from employee
stockholders
Distributions to noncontrolling interests
Balance - June 30, 2018
Net income
Stock issued to employees under stock bonus
plans
Payments on notes receivable from employee
stockholders
Distributions to noncontrolling interests
Balance - June 30, 2019
Paid-in Capital
in Excess of
Par Value
$173,702,335
—
4,636,559
—
791,206
1,680
—
$179,131,780
—
—
—
$179,131,780
—
Accumulated
Deficit
$(120,624,010)
19,620,621
—
—
—
—
$(101,003,389)
21,230,802
—
—
$ (79,772,587)
15,317,131
1,954,737
—
—
—
$181,086,517
—
—
$ (64,455,456)
Notes
Receivable
From
Employee
Stockholders
(23,879)
$
—
—
7,333
—
—
—
(16,546)
—
7,333
—
(9,213)
—
—
9,213
—
—
$
$
$
See accompanying notes to consolidated financial statements.
Page 52
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2019, 2018 AND 2017
Balance - June 30, 2016
Net income
Stock issued to employees under stock bonus
plans
Payments on notes receivable from employee
stockholders
Issuance of stock for acquisition
Stock option exercised
Distributions to noncontrolling interests
Balance - June 30, 2017
Net income
Payments on notes receivable from employee
stockholders
Distributions to noncontrolling interests
Balance - June 30, 2018
Net income
Stock issued to employees under stock bonus
plans
Payments on notes receivable from employee
stockholders
Distributions to noncontrolling interests
Balance - June 30, 2019
Treasury
Stock
(675,390)
—
$
Noncontrolling
Interests
$ 8,396,575
4,058,177
Total
$ 60,776,307
23,678,798
—
—
4,636,578
—
—
—
—
(675,390)
—
—
(675,390
)
—
—
—
—
(6,981,953)
$ 5,472,799
4,221,383
—
(6,135,000)
$ 3,559,182
5,196,543
7,333
791,210
1,680
(6,981,953)
$ 82,909,953
25,452,185
7,333
(6,135,000)
$102,234,471
20,513,674
—
—
1,954,745
—
—
(675,390)
—
(6,600,000)
$ 2,155,725
9,213
(6,600,000)
$118,112,103
$
$
$
See accompanying notes to consolidated financial statements.
Page 53
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
(Credit) Provision for bad debts
Deferred income tax benefit
Income tax receivable
Compensatory element of stock issuances
Stock issued for costs and expenses
Stock option exercised
(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
NET CASH PROVIDED BY OPERATING
ACTIVITIES
For the Years Ended June 30,
2018
2019
2017
$ 20,513,674
$ 25,452,185
$ 23,678,798
3,836,491
(978,730)
1,755,520
—
—
1,954,745
—
3,899,851
(614,680)
(4,919,750)
(1,200,000)
—
—
—
3,533,564
477,577
(4,969,669)
—
2,397,276
2,239,302
1,680
(6,134,095)
(12,689)
(4,328,239)
(894,665)
(5,899,611)
11,511
(438,472)
(366,786)
(79,641)
329
560,977
(980,394)
(59,544)
—
11,943
(134,880)
649,423
192,882
(1,553)
15,008
(122,967)
525,113
70,311
—
16,404
—
(736,061)
450,038
(513,507)
254,721
168,733
(3,660,895)
(410,855)
(206,623)
8,783
(17,498)
19,448,448
18,739,323
16,807,264
See accompanying notes to consolidated financial statements.
Page 54
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment
Short term investment
Cost of acquisition
Cost of patents
NET CASH USED IN INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING
ACTIVITIES:
Repayment of borrowings and capital lease
obligations
Repayment of notes receivable from employee
stockholders
Distributions to noncontrolling interests
Proceeds received from acquisition -net
NET CASH USED IN FINANCING ACTIVITIES
NET INCREASE IN CASH AND CASH
EQUIVALENTS
CASH AND CASH EQUIVALENTS – BEGINNING
For the Years Ended June 30,
2018
2019
2017
(3,355,456)
(15,094,816)
—
(128,393)
(18,578,665)
(2,777,948)
(2,851,158)
(58,274)
(108,829)
(2,945,051)
(1,312,769)
(155,156)
(4,319,083)
(30,725)
(172,484)
(3,990,078)
9,213
(6,600,000)
—
(6,621,512)
7,333
(6,135,000)
—
(6,300,151)
7,333
(6,981,953)
87,829
(10,876,869)
(5,751,729)
9,494,121
1,611,312
OF YEAR
19,633,742
10,139,621
8,528,309
CASH AND CASH EQUIVALENTS – END OF
YEAR
$ 13,882,013
$ 19,633,742
$ 10,139,621
See accompanying notes to consolidated financial statements.
Page 55
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 1 - DESCRIPTION OF BUSINESS AND LIQUIDITY AND CAPITAL RESOURCES
Description of Business
FONAR Corporation (the “Company” or “FONAR”) is a Delaware corporation, which was incorporated on July
17, 1978. FONAR is engaged in the research, development, production and marketing of medical scanning
equipment, which uses principles of Magnetic Resonance Imaging ("MRI") for the detection and diagnosis of
human diseases. In addition to deriving revenues from the direct sale of MRI equipment, revenue is also
generated from our installed-base of customers through our service and upgrade programs.
FONAR, through its wholly-owned subsidiary Health Management Corporation of America ("HMCA") provides
comprehensive management services to diagnostic imaging facilities. The services provided by the Company
include development, administration, leasing of office space, facilities and medical equipment, provision of
supplies, staffing and supervision of non-medical personnel, legal services, accounting, billing and collection
and the development and implementation of practice growth and marketing strategies.
On July 1, 2015, the Company restructured the corporate organization of the management of diagnostic
imaging centers segment of our business. The reorganization was structured to more completely integrate the
operations of Health Management Corporation of America and HDM. Imperial contributed all of its assets
(which were utilized in the business of Health Management Corporation of America) to HDM and received a
24.2% interest in HDM. Health Management Corporation of America retained a direct ownership interest of
45.8% in HDM, and the original investors in HDM retained a 30.0% ownership interest in the newly expanded
HDM. The entire management of diagnostic imaging centers business segment is now being conducted by
HDM.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of FONAR Corporation, its majority and
wholly-owned subsidiaries and partnerships. The operating activities of subsidiaries are included in the
accompanying consolidated statements from the date of acquisition. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities in the consolidated
financial statements and accompanying notes. The most significant estimates relate to receivable allowances,
intangible assets, income taxes and related tax asset valuation allowances, useful lives of property and
equipment, contingencies, revenue recognition and the assessment of litigation. In addition, healthcare
industry reforms and reimbursement practices will continue to impact the Company's operations and the
determination of contractual and other allowance estimates. Actual results could differ from those estimates.
Page 56
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventories
Inventories consist of purchased parts, components and supplies, as well as work-in-process, and are stated
at the lower of cost, determined on the first-in, first-out method, or market.
Property and Equipment
Property and equipment procured in the normal course of business is stated at cost. Property and equipment
purchased in connection with an acquisition is stated at its estimated fair value, generally based on an
appraisal. Property and equipment is being depreciated for financial accounting purposes using the
straight-line method over their estimated useful lives. Leasehold improvements are being amortized over the
shorter of the useful life or the remaining lease term. Upon retirement or other disposition of these assets, the
cost and related accumulated depreciation of these assets are removed from the accounts and the resulting
gains or losses are reflected in the results of operations. Expenses for maintenance and repairs are charged
to operations. Renewals and betterments are capitalized. Maintenance and repair expenses totaled
approximately $1,557,000, $1,451,000 and $1,116,000 for the years ended June 30, 2019, 2018 and 2017,
respectively. The estimated useful lives in years are generally as follows:
Diagnostic equipment
Research, development and
demonstration equipment
Machinery and equipment
Furniture and fixtures
Leasehold improvements
Building
5–13
3-7
2-7
3-9
2–10
28
Long-Lived Assets
The Company periodically assesses the recoverability of long-lived assets, including property and equipment
and intangibles, other than goodwill, when there are indications of potential impairment, based on estimates of
undiscounted future cash flows. The amount of impairment is calculated by comparing anticipated discounted
future cash flows with the carrying value of the related asset. In performing this analysis, management
considers such factors as current results, trends, and future prospects, in addition to other economic factors.
Deferred Rent
Rent expense is recorded on the straight-line method based on the total minimum rent payments required over
the term of the lease. The cumulative difference between the lease expense recorded under this method and
the contractual lease payment terms is recorded as deferred rent.
Page 57
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Intangible Assets
1) Capitalized Software Development Costs
Capitalization of software development costs begins upon the establishment of technological feasibility.
Technological feasibility for the Company’s computer software is generally based upon achievement of a detail
program design free of high risk development issues and the completion of research and development on the
product hardware in which it is to be used. The establishment of technological feasibility and the ongoing
assessment of recoverability of capitalized computer software development costs require considerable
judgment by management with respect to certain external factors, including, but not limited to, technological
feasibility, anticipated future gross revenue, estimated economic life and changes in software and hardware
technology. Prior to reaching technological feasibility those costs are expensed as incurred and included in
research and development.
Amortization of capitalized software development costs commences when the related products become
available for general release to customers. Amortization is provided on a product by product basis. The annual
amortization is the greater of the amount computed using (a) the ratio that current gross revenue for a product
bears to the total of current and anticipated future gross revenue for that product, or (b) the straight-line
method over the remaining estimated economic life of the product.
The Company periodically performs reviews of the recoverability of such capitalized software development
costs. At the time a determination is made that capitalized amounts are not recoverable, based on the
estimated cash flows to be generated from the applicable software, any remaining capitalized amounts are
written off.
2) Patents and Copyrights
Amortization is calculated on the straight-line basis over 15 years.
3) Non-Competition Agreements
The non-competition agreements are being amortized on the straight line basis over the length of the
agreement (7 years).
4) Customer Relationships
Amortization is calculated on the straight line basis over 20 years.
Goodwill
Generally accepted accounting principles in the United States require the Company to perform a goodwill
impairment test annually and more frequently when negative conditions or a triggering event arises.
Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount,
including goodwill to the fair value of the reporting unit. If the carrying amount of the reporting unit exceeds its
fair value, goodwill is considered potentially impaired and a second step is performed to measure the amount
of impairment loss, if any.
Page 58
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Acquired assets and assumed liabilities
Pursuant to ASC No. 805-10-25, if the initial accounting for a business combination is incomplete by the end of
the reporting period in which the combination occurs, but during the allowed measurement period not to
exceed one year from the acquisition date, the Company adjusts the provisional amounts recognized at the
acquisition date by means of adjusting the amount recognized for goodwill.
Revenue Recognition
Revenue on sales contracts for scanners, included in “product sales” in the accompanying consolidated
statements of operations, is recognized under the percentage-of-completion method in accordance with FASB
ASC 605-35, “Revenue Recognition – Construction-Type and Production-Type Contracts”. The Company
manufactures its scanners under specific contracts that provide for progress payments. Production and
installation take approximately three to six months.
Revenue on scanner service contracts is recognized on the straight-line method over the related contract
period, usually one year.
Revenue from product sales (upgrades and supplies) is recognized upon shipment.
Revenue under management contracts is recognized based upon contractual agreements for management
services rendered by the Company primarily under various long-term agreements with various medical
providers (the "PCs"). As of June 30, 2019, the Company has twenty two management agreements of which
three are with PC’s owned by Raymond V. Damadian, M.D., Chairman of the Board of FONAR (“the Related
medical practices”) and nineteen are with PC’s, which are all located in the state of New York (“the New York
PC’s”), owned by two unrelated radiologists. The contractual fees for services rendered to the PCs consists of
fixed monthly fees per diagnostic imaging facility ranging from approximately $54,000 to $481,000. All fees are
re-negotiable at the anniversary of the agreements and each year thereafter. The Company records a
provision for bad debts for estimated uncollectible fees, which is reflected in other operating expenses on the
Statement of Operations. Revenue under lease contracts is recognized based upon contractual agreements
for the leasing of medical equipment primarily under long term contracts to various unrelated PC’s. All fees are
re-negotiable at the anniversary of the agreements and each year thereafter.
On July 1, 2018, the Company adopted the new revenue recognition accounting standard issued by the
Financial Accounting Standards Board (“FASB”) and codified in the ASC as topic 606 (“ASC 606”). The
revenue recognition standard in ASC 606 outlines a single comprehensive model for recognizing revenue as
performance obligations, defined in a contract with a customer as goods or services transferred to the
customer in exchange for consideration, are satisfied. The standard also requires expanded disclosures
regarding the Company’s revenue recognition policies and significant judgments employed in the
determination of revenue.
Page 59
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (Continued)
The Company applied the modified retrospective approach to all contracts when adopting ASC 606. As a
result, at the adoption of ASC 606 the majority of what was previously classified as the provision for bad debts
in the statement of operations is now reflected as implicit price concessions (as defined in ASC 606) and
therefore included as a reduction to net operating revenues in 2019. For changes in credit issues not assessed
at the date of service, the Company will prospectively recognize those amounts in other operating expenses
on the statement of operations. For periods prior to the adoption of ASC 606, the provision for bad debts has
been presented consistent with the previous revenue recognition standards that required it to be presented
separately as a component of net operating revenues. Additionally, upon adoption of ASC 606 the allowance
for doubtful accounts of approximately $22.7 million as of July 1, 2018 was reclassified as a component of net
patient accounts receivable. Other than these changes in presentation on the condensed consolidated
statement of operations and condensed consolidated balance sheet, the adoption of ASC 606 did not have a
material impact on the consolidated results of operations for the year ended June 30, 2019 and is not
expected to have a material impact on its consolidated results of operations on a prospective basis.
Our revenues generally relate to net patient fees received from various payers and patients themselves under
contracts in which our performance obligations are to provide diagnostic services to the patients. Revenues
are recorded during the period our obligations to provide diagnostic services are satisfied. Our performance
obligations for diagnostic services are generally satisfied over a period of less than one day. The contractual
relationships with patients, in most cases, also involve a third-party payer (Medicare, Medicaid, managed care
health plans and commercial insurance companies, including plans offered through the health insurance
exchanges) and the transaction prices for the services provided are dependent upon the terms provided by
(Medicare and Medicaid) or negotiated with (managed care health plans and commercial insurance
companies) the third-party payers. The payment arrangements with third-party payers for the services we
provide to the related patients typically specify payments at amounts less than our standard charges and
generally provide for payments based upon predetermined rates per diagnostic services or discounted
fee-for-service rates. Management continually reviews the contractual estimation process to consider and
incorporate updates to laws and regulations and the frequent changes in managed care contractual terms
resulting from contract renegotiations and renewals.
The Company’s patient fee revenues, net of contractual allowances and discounts less the provision for bad
debts for the years ended June 30, 2019, 2018 and 2017 are summarized in the following table.
Commercial Insurance/ Managed Care
Medicare/Medicaid
Workers' Compensation/Personal Injury
Other
Patient Fee Revenue, net of contractual
allowances and discounts
Provision for Bad Debts
Net Patient Fee Revenue
2019
$ 5,218,656
1,172,543
16,790,025
1,026,312
For the Year Ended June 30,
2018
$ 4,729,514
1,233,078
25,358,543
7,844,278
2017
$ 4,904,892
1,274,436
23,240,829
6,980,443
24,207,536
—
$ 24,207,536
39,165,413
(17,896,528)
$ 21,268,885
36,400,600
(16,171,434)
$ 20,229,166
Page 60
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Research and Development Costs
Research and development costs are charged to expense as incurred. The costs of equipment that are
acquired or constructed for research and development activities, and have alternative future uses (either in
research and development, marketing or production), are classified as property and equipment and
depreciated over their estimated useful lives.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense approximated $538,000, $607,000 and
$531,000 for the years ended June 30, 2019, 2018 and 2017, respectively.
Shipping Costs
The Company’s shipping and handling costs are included in revenue from product sales and the related
expense included in costs related to product sales is $13,695, $9,370 and $8,224 for the years ended June 30,
2019, 2018 and 2017, respectively.
Income Taxes
Deferred tax assets and liabilities are determined based on the difference between the financial statement
carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse.
Customer Advances
Cash advances and progress payments received on sales orders are reflected as customer advances until
such time as revenue recognition occurs.
Page 61
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the
weighted average number of shares of common stock outstanding during the period. In accordance with ASC
topic 260-10, “Participating Securities and the Two-Class Method”, the Company used the Two-Class method
for calculating basic earnings per share and applied the if converted method in calculating diluted earnings per
share for the years ended June 30, 2019, 2018 and 2017.
Diluted EPS reflects the potential dilution from the exercise or conversion of all dilutive securities into common
stock based on the average market price of common shares outstanding during the period. For the years
ended June 30, 2019, 2018 and 2017, diluted EPS for common shareholders includes 127,504 shares upon
conversion of Class C Common.
Basic
Total
June 30, 2019
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
$ 15,371,131
$ 14,366,798
6,354,103
2.41
$
6,354,103
2.26
$
6,354,103
127,504
6,481,607
2.22
$
$
$
$
242,031
382,513
0.63
382,513
—
382,513
0.63
Page 62
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share (Continued)
Basic
Total
June 30, 2018
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
$ 21,230,802
$ 19,899,823
6,287,510
3.38
$
6,287,510
3.16
$
6,287,510
127,504
6,415,014
3.10
$
June 30, 2017
Common
Stock
Basic
Total
Numerator:
Net income available to common stockholders
Denominator:
Weighted average shares outstanding
Basic income per common share
Diluted
Denominator:
Weighted average shares outstanding
Class C Common Stock
Total Denominator for diluted earnings per share
Diluted income per common share
Cash and Cash Equivalents
$ 19,620,621
$ 18,390,586
6,161,599
3.18
$
6,161,599
2.98
$
6,161,599
127,504
6,289,103
2.92
$
Cash and cash equivalents includes cash on hand, cash in banks, investments in certificates of deposit with
original maturities of 90 days or less, and money market funds.
Short Term Investments
Short term investments include certificates of deposit with original maturities of greater than 90 days.
Page 63
$
$
$
$
$
$
338,974
382,513
0.89
382,513
—
382,513
0.89
Class C
Common
Stock
313,266
382,513
0.82
382,513
—
382,513
0.82
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentration of Credit Risk
Cash: The Company maintains its cash and cash equivalents with various financial institutions, which exceed
federally insured limits throughout the year. At June 30, 2019, the Company had cash on deposit of
approximately $11,842,000 in excess of federally insured limits of $250,000.
Related Parties: Net revenues from related parties accounted for approximately 11%, 11% and 11% of the
consolidated net revenues for the years ended June 30, 2019, 2018 and 2017, respectively. Net management
fee receivables from the related party medical practices accounted for approximately 13%, 12% and 13% of
the consolidated accounts receivable for the years ended June 30, 2019, 2018 and 2017, respectively.
See Note 3 regarding the Company’s concentrations in the healthcare industry.
Fair Value of Financial Instruments
The financial statements include various estimated fair value information at June 30, 2019 and 2018, as
required by ASC topic 820, "Disclosures about Fair Value of Financial Instruments". Such information, which
pertains to the Company's financial instruments, is based on the requirements set forth in that Statement and
does not purport to represent the aggregate net fair value to the Company.
The Company has established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring
and revaluing fair value. These tiers include, Level 1, defined as observable inputs such as quoted prices in
active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or
indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists,
therefore requiring an entity to develop its own assumptions.
The following methods and assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value:
Cash and cash equivalents: The carrying amount approximates fair value because of the short-term maturity
of those instruments.
Short term investments: The carrying amount approximates fair value because of the short-term maturity of
those instruments. Such amounts include Certificates of Deposits with original maturities greater than 90 days.
These securities are classified as Level 1.
Receivable and accounts payable: The carrying amounts approximate fair value because of the short maturity
of those instruments.
Notes receivable: The carrying amount approximates fair value because the discounted present value of the
cash flow generated by the parties approximates the carrying value of the amounts due to the Company.
Long-term debt and notes payable: The carrying amounts of debt and notes payable approximate fair value
due to the length of the maturities, the interest rates being tied to market indices and/or due to the interest
rates not being significantly different from the current market rates available to the Company.
All of the Company's financial instruments are held for purposes other than trading.
Page 64
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, (Topic 606). ASU
2014-09 requires an entity to recognize as revenue the amount that reflects the consideration which it expects
to be entitled in exchange for goods and services as it transfers control to its customers. It also requires more
detailed disclosures to enable users of the financial statements to understand the nature, amount, timing and
uncertainty of revenue and cash flows arising from contracts with customers. The Company earns revenue
from the sale of scanners, maintenance contracts, product upgrades, patient services and management fees.
Under the new guidance, the reporting for patient services revenue will be reported differently. All other
streams of revenue will not be impacted by the new guidance. The primary change for healthcare providers
under the new guidance relates to revenue generated from patient services, with patient responsibility for
payment. Under the new guidance, the Company is required to report an implicit price concession (both initially
and for the subsequent changes in estimates) as a reduction of revenues as opposed to bad debt expense as
a component of operating expenses. The Company will record any changes in expectation of collection
amounts due to patient specific events that suggests that the patient no longer has the ability and intent to pay
the amount due through the bad debt expense, as that is more indicative of a change in the customer’s credit
worthiness as opposed to change in the transaction price.
The new standard supersedes most current revenue guidance, including industry-specific guidance. The
guidance became effective for the Company on July 1, 2018 and as part of adopting the standard, the
Company identified revenue streams of like contracts to allow for ease of implementation. The Company used
primarily a portfolio approach to apply the new model to classes of customers with similar characteristics. The
impact of adopting the new standard on our total revenue; and income from operations is not material. While
the adoption of ASU 2014-09 will impact the presentation of net operating revenues in our Consolidated
Statements of Operations and will impact certain disclosures, it will not materially impact our financial position,
results of operations or cash flows. There was no cumulative effect of a change in accounting principle
recorded related to the adoption of ASU 2014-09 on July 1, 2018.
In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and
Other (Topic 350). The amendments in this update simplify the test for goodwill impairment by eliminating Step
2 from the impairment test, which required the entity to perform procedures to determine the fair value at the
impairment testing date of its assets and liabilities following the procedure that would be required in
determining fair value of assets acquired and liabilities assumed in a business combination. The amendments
in this update are effective for public companies for annual or any interim goodwill impairment tests in fiscal
years beginning after December 15, 2019. We are evaluating the impact of adopting this guidance on our
Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805); Clarifying the Definition
of a Business. The amendments in this update clarify the definition of a business to help companies evaluate
whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The
amendments in this update are effective for public companies for annual periods beginning after December
15, 2017, including interim periods within those periods. The Company has adopted this guidance on our
Consolidated Financial Statements and it has no impact on the Company’s financial statements.
Page 65
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements(Continued)
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) and in July 2018 ASU 2018-11,
Leases (Topic 842): Targeted Improvements. The guidance requires the recognition of lease right-of-use
assets and lease liabilities by lessees for those leases previously classified as operating. This guidance was
issued to increase transparency and comparability among organizations by disclosing key information about
leasing arrangements and requiring the recognition of current and non-current right-of-use assets and lease
liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of
right-of-use assets and lease liabilities by lessees for those leases classified as operating leases. ASU
2016-02 is effective for fiscal years beginning after December 15, 2018. The Company will adopt this guidance
on July 1, 2019, as required, electing to apply retrospectively at the period of adoption. The adoption of this
guidance will have a material impact on the Company’s balance sheet for the present value of its operating
lease liabilities and related right-of-use assets, for which the Company will record approximately $18.8 million
of lease liabilities and right-of-use assets. The Company does not believe that the adoption of this guidance
will have a material effect on its future results of operations, cash flows or debt covenants.
FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards,
updates, and regulations as of June 30, 2019 that will become effective in subsequent periods; however,
management does not believe that any of those updates would have significantly affected our financial
accounting measures or disclosures had they been in effect during 2019 or 2018, and it does not believe that
any of those pronouncements will have a significant impact on our consolidated financial statements at the
time they become effective.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. The
reclassifications did not have any effect on reported net income for any periods presented.
NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES
RECEIVABLE
Accounts Receivable
Credit risk with respect to the Company’s accounts receivable related to product sales and service and repair
fees is limited due to the customer advances received prior to the commencement of work performed and the
billing of amounts to customers as sub-assemblies are completed. Service and repair fees are billed on a
monthly or quarterly basis and the Company does not continue providing these services if accounts receivable
become past due. The Company controls credit risk with respect to accounts receivable from service and
repair fees through its credit evaluation process, credit limits, monitoring procedures and reasonably short
collection terms. The Company performs ongoing credit authorizations before a product sales contract is
entered into or service and repair fees are provided.
Page 66
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES
RECEIVABLE (CONTINUED)
Medical Receivable
Medical receivables are due under fee-for-service contracts from third party payors, such as hospitals,
government sponsored healthcare programs, patient’s legal counsel and directly from patients. Substantially
all the revenue relates to patients residing in Florida. The carrying amount of the medical receivable is reduced
by an allowance that reflects management’s best estimate of the amounts that will not be collected. The
Company continuously monitors collections from its clients and maintains an allowance for bad debts based
upon the Company’s historical collection experience. The Company determines allowances for contractual
adjustments and uncollectible accounts based on specific agings, specific payor collection issues that have
been identified and based on payor classifications and historical experience at each site.
Management and Other Fees Receivable
The Company’s receivables from the related and non-related professional corporations (“PCs”) substantially
consist of fees outstanding under management agreements. Payment of the outstanding fees is dependent on
collection by the PCs of fees from third party medical reimbursement organizations, principally insurance
companies and health management organizations.
Payment of the management fee receivables from the PC’s may be impaired by the inability of the PC’s to
collect in a timely manner their medical fees from the third party payors, particularly insurance carriers
covering automobile no-fault and workers compensation claims due to longer payment cycles and rigorous
informational requirements and certain other disallowed claims. Approximately 67%, 65% and 62%,
respectively, of the PCs’ 2019, 2018 and 2017 net revenues were derived from no-fault and personal injury
protection claims. The Company considers the aging of its accounts receivable in determining the amount of
allowance for doubtful accounts. The Company generally takes all legally available steps to collect its
receivables. Credit losses associated with the receivables are provided for in the consolidated financial
statements and have historically been within management's expectations.
Net revenues from management and other fees charged to the related party medical practices accounted for
approximately 11%, 11% and 11%, of the consolidated net revenues for the years ended June 30, 2019, 2018
and 2017, respectively.
Tallahassee Magnetic Resonance Imaging, PA, Stand Up MRI of Boca Raton, PA and Stand Up MRI &
Diagnostic Center, PA (all related party medical practices) entered into a guaranty agreement, pursuant to
which they cross guaranteed all management fees which are payable to the Company, which have arisen
under each individual management agreement.
Page 67
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES
RECEIVABLE (CONTINUED)
The following table sets forth the number of our facilities for the years ended June 30, 2019, 2018 and 2017.
For The Year Ended June 30,
2019
2017
26
2018
26
25
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)
—
—
—
26
—
—
—
26
1
—
—
26
NOTE 4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information relating to uncompleted contracts as of June 30, 2019 and 2018 is as follows:
Costs incurred on uncompleted contracts
Estimated earnings
Less: Billings to date
As of June 30,
2019
448,437
1,088,675
1,537,112
1,012,002
525,110
$
$
2018
448,437
309,248
757,685
671,047
86,638
$
$
NOTE 5 – INVENTORIES
Inventories included in the accompanying consolidated balance sheets consist of:
Purchased parts, components and supplies
Work-in-process
Page 68
As of June 30,
2019
1,639,777
158,389
1,798,166
$
$
2018
1,312,299
119,081
1,431,380
$
$
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, less accumulated depreciation and amortization, at June 30, 2019 and 2018,
is comprised of:
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,
2019
$ 26,090,218
3,605,906
2,069,055
3,122,102
8,023,292
939,614
43,850,187
26,864,570
$ 16,985,617
2018
$ 24,296,957
2,987,531
2,069,055
3,036,539
7,165,035
939,614
40,494,731
24,002,453
$ 16,492,278
Depreciation and amortization of property and equipment for the years ended June 30, 2019, 2018 and 2017
was $2,862,117, $2,748,174 and $2,303,554, respectively.
NOTE 7 - OTHER INTANGIBLE ASSETS
Other intangible assets, net of accumulated amortization, at June 30, 2019 and 2018 are comprised of:
Capitalized software development costs
Patents and copyrights
Non-competition agreements
Customer relationships
Less: Accumulated amortization
Page 69
As of June 30,
2019
7,004,847
4,964,199
4,100,000
3,800,000
19,869,046
15,113,371
4,755,675
$
$
2018
7,004,847
4,835,806
4,100,000
3,800,000
19,740,653
14,138,997
5,601,656
$
$
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 7 - OTHER INTANGIBLE ASSETS (CONTINUED)
The estimated amortization of other intangible assets for the five years ending June 30, 2024 and thereafter is
as follows:
For the Years
Ending June 30,
2020
2021
2022
2023
2024
Thereafter
$
$
Total
771,830
381,860
380,470
383,929
375,561
2,462,025
4,755,675
$
$
Patents and
Copyrights
Non-
competition
Customer
Relationships
191,353
191,860
190,470
193,929
185,561
815,358
1,768,531
$
$
390,477
—
—
—
—
—
390,477
$
$
190,000
190,000
190,000
190,000
190,000
1,646,667
2,596,667
The weighted average amortization period for other intangible assets is 11.5 years and they have no expected
residual value.
Information related to the above intangible assets for the years ended June 30, 2019, 2018 and 2017 is as
follows:
Balance – Beginning of Year
Amounts capitalized
Software or patents written off
Amortization
Balance – End of Year
2019
$ 5,601,656
128,393
—
(974,374)
$ 4,755,675
As of June 30,
2018
$ 6,644,504
108,829
—
(1,151,677)
$ 5,601,656
2017
$ 7,719,358
155,156
— )
(1,230,010)
$ 6,644,504
Amortization of patents and copyrights for the years ended June 30, 2019, 2018 and 2017 amounted to
$198,660, $202,630 and $194,296, respectively.
Amortization of capitalized software development costs for the years ended June 30, 2019, 2018 and 2017
was $0, $173,333 and $260,000, respectively.
Amortization of non-competition agreements for the years ended June 30, 2019, 2018 and 2017 amounted to
$585,714, $585,714 and $585,714, respectively.
Amortization of customer relationships for the years ended June 30, 2019, 2018 and 2017 amounted to
$190,000, $190,000 and $190,000, respectively.
Page 70
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 8 - CAPITAL STOCK
Common Stock
Cash dividends payable on the common stock shall, in all cases, be on a per share basis, one hundred twenty
percent (120%) of the cash dividend payable on shares of Class B common stock and three hundred sixty
percent (360%) of the cash dividend payable on a share of Class C common stock.
Class B Common Stock
Class B common stock is convertible into shares of common stock on a one-for-one basis. Class B common
stock has 10 votes per share. There were 146 of such shares outstanding at June 30, 2019, 2018 and 2017.
Class C Common Stock
On April 3, 1995, the stockholders ratified a proposal creating a new Class C common stock and authorized
the exchange offering of three shares of Class C common stock for each share of the Company's outstanding
Class B common stock. The Class C common stock has 25 votes per share, as compared to 10 votes per
share for the Class B common stock and one vote per share for the common stock. The Class C common
stock was offered on a three-for-one basis to the holders of the Class B common stock. Although having
greater voting power, each share of Class C common stock has only one-third of the rights of a share of Class
B common stock to dividends and distributions. Class C common stock is convertible into shares of common
stock on a three-for-one basis.
Class A Non-Voting Preferred Stock
On April 3, 1995, the stockholders ratified a proposal consisting of the creation of a new class of Class A
non-voting preferred stock with special dividend rights and the declaration of a stock dividend on the
Company's common stock consisting of one share of Class A non-voting preferred stock for every five shares
of common stock. The stock dividend was payable to holders of common stock on October 20, 1995. Class A
non-voting preferred stock issued pursuant to such stock dividend approximates 313,000 shares.
The Class A non-voting preferred stock is entitled to a special dividend equal to 3-1/4% of first $10 million,
4-1/2% of next $20 million and 5-1/2% on amounts in excess of $30 million of the amount of any cash awards
or settlements received by the Company in connection with the enforcement of five of the Company's patents
in its patent lawsuits, less the revised special dividend payable on the common stock with respect to one of the
Company's patents.
The Class A non-voting preferred stock participates on an equal per share basis with the common stock in any
dividends declared and ranks equally with the common stock on distribution rights, liquidation rights and other
rights and preferences (other than the voting rights).
Page 71
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 8 - CAPITAL STOCK (Continued)
Stock Bonus Plans
On April 23, 2010, the Board approved the 2010 Stock Bonus Plan. The plan entitles the Company to reserve
2,000,000 shares of common stock. On August 10, 2010, the Company filed Form S-8 to register the
2,000,000 shares. As of June 30, 2019, 646,905 shares of common stock of FONAR were available for future
grant under this plan. For the years ended June 30, 2019, 2018 and 2017, 69,971, 0 and 193,461 shares were
issued respectively.
Options
The Company had stock option plans, which provide for the awarding of incentive and non-qualified stock
options to employees, directors and consultants who may contribute to the success of the Company. The
options granted vest either immediately or ratably over a period of time from the date of grant, typically three
or four years, at a price determined by the Board of Directors or a committee of the Board of Directors,
generally the fair value of the Company's common stock at the date of grant. The options must be exercised
within ten years from the date of grant.
NOTE 9 – CONTROLLING AND NONCONTROLLING INTERESTS
On February 13, 2013 the Company entered into an agreement with outside investors to acquire a 50.5%
controlling interest in a newly formed limited liability company, Health Diagnostics Management LLC (HDM).
According to the February 13, 2013 LLC operating agreement of HDM there are two classes of members;
Class A members and one Class B member. The Class A members have an ownership interest of 49.5% of
HDM. The Class B member (HMCA) has an ownership of 50.5% of HDM. On all matters on which members
may vote every member is entitled to cast the percentage of votes equal to their percentage of ownership
interest. Profits and losses on all items of income, gain or loss, deductions or other allocations of the Company
will be allocated among the members in the same proportions as their membership interests in the Company
bear to all the Class A and Class B membership interests of the Company in the aggregate outstanding. All of
the depreciation and amortization of the assets of the Company will be allocated solely to the Class A
members, unless and until their interests have been redeemed by the Company in full pursuant to the
provisions of the operating agreement. The Company contributed $20,200,000 to HDM and the group of
outside investors contributed $19,800,000 for its non-controlling membership interest.
On March 5, 2013 HDM purchased from Health Diagnostics, LLC (“HD”) and certain of its subsidiaries, a
business managing twelve (12) Stand-Up MRI Centers and two (2) other scanning centers located in the
States of New York and Florida for a total purchase price (including consideration of $1.5 million to outside
investors) aggregating $35.9 million. Concurrently with the acquisition, HDM entered into several consulting
and non-competition agreements for a consideration of $4.1 million. The acquisition was accounted for using
the purchase method in accordance with ASC 805, “Business Combinations”. The Company recognized and
measured goodwill as of the acquisition date, as the excess of the fair value of the consideration paid over the
fair value of the identified net assets acquired.
Page 72
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 9 – CONTROLLING AND NONCONTROLLING INTERESTS (Continued)
On January 8, 2015, the Company purchased 20% of the Class A members ownership interest at a cost of
$4,971,094. The Company has a 60.4% ownership interest in HDM after this transaction.
Amount of each class of HDM members’ equity as of June 30, 2019, 2018 and 2017
June 30, 2019
June 30, 2018
June 30, 2017
Class A
Members
Class B
Member Members
Class A
Class B
Member Members
Class A
Class B
Member
Opening Members’
Equity
Share of Net Income
Distributions
Ending Members’
Equity
$ 3,559,182 $ 31,775,922 $ 5,472,799 $ 27,988,982 $ 8,396,575 $ 23,314,842
5,196,543 20,167,864 4,221,383 18,101,940 4,058,177 16,947,624
(6,600,000) (15,400,000) (6,135,000) (14,315,000) (6,981,953) (12,273,484)
$ 2,155,725 $ 36,543,786 $ 3,559,182 $ 31,775,922 $ 5,472,799 $ 27,988,982
NOTE 10 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES
Long-term debt, notes payable and capital leases consist of the following:
Note payable requiring monthly payments of interest at a rate of 7% until
May 2009 followed by 240 monthly payments of $4,472 through
October 2026. The loan is collateralized by a building with a net book
value of $481,666 as of June 30, 2019.
The revolving credit note was extended to August 2020. The Company
can prepay the loan in whole or part in multiples of $100,000 at any
time without penalty. The note bears interest at a rate of 5.25% per
annum and is payable monthly. The loan is collateralized by
substantially all of the Company’s assets. The loan also contains
certain financial covenants that must be met on a periodic basis. The
note was paid in full September 2, 2014. The Company still has the
ability to draw down on the line.
Other (including capital leases for property and equipment).
Less: Current portion
2019
2018
$
306,056 $
336,781
—
7,586
313,642
40,530
273,112 $
—
7,586
344,367
38,332
306,035
$
Page 73
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 10 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
The maturities of long-term debt over the next five years and thereafter are as follows:
Years Ending June 30,
2020
2021
2022
2023
2024
Thereafter
$
$
40,530
35,416
38,013
40,820
43,767
115,096
313,642
NOTE 11 - INCOME TAXES
ASC topic 740 prescribes a recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to be taken in a corporate tax return. For
those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination
by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the
benefit recognized and measured pursuant to the interpretation are referred to as unrecognized benefits. A
liability is recognized (or amount of net operating loss carryforward or amount of tax refundable is reduced) for
an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing
authority for a tax position that was not recognized as a result of applying the provisions of ASC topic 740. The
Company believes there are no uncertain tax positions in prior years tax filings and therefore it has not
recorded a liability for unrecognized tax benefits.
In accordance with ASC topic 740, interest costs related to unrecognized tax benefits are required to be
calculated (if applicable) and would be classified as “Interest expense, net. Penalties if incurred would be
recognized as a component of “Selling, general and administrative” expenses.
The Company files corporate income tax returns in the United States (federal) and in various state and local
jurisdictions. In most instances, the Company is no longer subject to federal, state and local income tax
examinations by tax authorities for years prior to 2015 for federal and 2014 for state.
The Company has recorded a deferred tax asset of $20,937,747 and a deferred tax liability of $243,267 as of
June 30, 2019, primarily relating to its net operating loss carryforwards of approximately $65,792,000 available
to offset future taxable income through 2030. The net operating losses begin to expire in 2023 for federal tax
and state income tax purposes.
Future ownership changes as determined under Section 382 of the Internal Revenue code could further limit
the utilization of net operating loss carryforwards. As of June 30, 2019, no such changes in ownership have
occurred.
Page 74
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 11 - INCOME TAXES (Continued)
The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during
the periods in which temporary differences become deductible or when such net operating losses can be
utilized. The Company considers projected future taxable income, the regulatory environment of the industry,
and tax planning strategies in making this assessment. At present, the Company believes that it is more likely
than not that the benefits from certain deferred tax asset carryforwards, will not all be fully realized. In
recognition of this inherent risk, a valuation allowance was established for the partial value of the deferred tax
asset, (principally related to research and development tax credits).
A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of the
remainder of the valuation.
The valuation allowance for deferred tax assets decreased during the year ended June 30, 2019, by
approximately $2,350,000. The valuation allowance decreased by approximately $27,600,000 during the year
ended June 30, 2018, of which $16,000,000 was the result of the revalued deferred tax assets due to the Tax
Cuts and Jobs Act and the benefits expected to be realized from the usage of net operating losses given the
Company’s current and projected profitable operations.
Components of the provision (benefit) for income taxes are as follows:
Current:
Federal
State
Deferred:
Federal deferred taxes
State deferred taxes
AMT Credits
2019
Years Ended June 30,
2018
2017
$
—
$
250,000
250,000
185,000
265,000
450,000
$
250,000
357,235
607,235
Subtotal
1,685,299
70,221
—
1,755,520
$ 2,005,520
(4,132,590)
(787,160)
(1,200,000)
(6,119,750)
$ (5,669,750)
(4,552,702)
(416,967)
—
(4,969,669)
$ (4,362,434)
Subtotal
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
Non Controlling interest
Permanent differences
Tax Cuts and Jobs Act Rate Change
Decrease in the valuation allowance
AMT Credits
Other
Effective income tax rate
Years Ended June 30,
2018
27.7%
4.0%
(6.8)%
0.1%
(26.9)%
(18.5)%
(6.4)%
(1.8)%
(28.6)%
2019
21.0%
4.0%
(5.8)%
(3.5)%
0%
(2.6)%
0%
(4.2)%
8.9%
Page 75
2017
35.0%
4.0%
(8.2)%
0.1%
0%
(55.7)%
0%
2.2%
(22.6)%
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 11 - INCOME TAXES (Continued)
The Tax Cuts and Jobs Act was signed into law on December 22, 2017 and makes numerous changes to the
Internal Revenue Code. Among other changes, the Act reduces the US corporate income tax rate to 21%
effective January 1, 2018. Because the Act became effective mid-way through the Company’s tax year, the
Company had a US statutory income tax rate of 27.7% for the fiscal 2018 and will have a 21% statutory
income tax rate for fiscal years thereafter.
Under ASC740, Accounting for Income Taxes, the enactment of the Tax Act also requires companies, to
recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive
effects of changes in tax laws in the period in which the new legislation is enacted. The Company’s gross
deferred tax assets and liabilities were revalued from 35% to 21%.
As of June 30, 2019, the Company has net operating loss (“NOL”) carryforwards of approximately $65,792,000
that will be available to offset future taxable income. The utilization of certain of the NOLs is limited by
separate return limitation year rules pursuant to Section 1502 of the Internal Revenue Code.
The Company has, for federal income tax purposes, research and development tax credits and investments
tax credits carryforwards aggregating $4,602,000. However, the realization of these credits may be limited as
a result of expiring prior to their utilization. These credits can only be applied after all net operating losses have
been used, which expire through 2030. As such, the Company has established a valuation reserve for
anticipated unused credits of $3,902,000.
As of June 30, 2019, the Company has $1,200,000 in alternative minimum tax credits. In connection with tax
reform, these credits have been eliminated. Tax reform allows for corporations to carryover such unused tax
credits to offset regular tax or apply for a cash refund. As of June 30, 2018, the Company recorded an income
tax receivable for expected cash refunds. The Company anticipates receiving its first installment of
reimbursement of $600,000 with the filiing of its June 30, 2019 income tax return to be filed in fiscal 2020.
In addition, for New York State income tax purposes, the Company has tax credit carryforwards aggregating
approximately $250,000 which, are accounted for under the flow-through method. The utilization of these
credits is also expected to be limited.
The Company is also under audit with New York State for income tax and does not expect any material
adjustments.
Page 76
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 11 - INCOME TAXES (Continued)
Significant components of the Company's deferred tax assets and liabilities at June 30, 2019 and 2018 are as
follows:
Deferred tax assets:
Allowance for doubtful accounts
Non-deductible accruals
Net operating carryforwards
Tax credits
Inventory
Property and equipment and depreciation
Valuation allowance
Total deferred tax assets
Intangibles
Total deferred tax liabilities
Net deferred tax asset
NOTE 12 - OTHER CURRENT LIABILITIES
Included in other current liabilities are the following:
Accrued salaries, commissions and payroll taxes
Litigation accruals
Sales tax payable
Legal and other professional fees
Accounting fees
Self-funded health insurance reserve
Accrued interest and penalty
Other
Page 77
June 30,
2019
2018
$
3,011,480
861,345
16,448,054
4,601,801
65,081
192,133
25,179,894
(4,242,147)
20,937,747
(243,267)
(243,267)
$ 20,694,480
$
3,262,504
752,595
20,665,597
4,330,769
55,514
213,781
29,280,760
(6,591,749)
22,689,011
(239,011)
(239,011)
$ 22,450,000
June 30,
2019
3,897,833
145,029
1,671,488
125,567
105,000
67,825
1,054,134
510,540
7,577,416
$
$
2018
3,438,087
145,029
2,092,403
119,262
125,000
79,129
1,497,429
681,656
8,177,995
$
$
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Leases
The Company rents its operating facilities and certain equipment, pursuant to operating lease agreements
expiring at various dates through June 2028. The leases for certain facilities contain escalation clauses
relating to increases in real property taxes as well as certain maintenance costs.
Future minimum operating lease commitments consisted of the following at June 30, 2019:
Year Ending June 30,
Facilities And Equipment
(Operating Lease)
2020
2021
2022
2023
2024
Thereafter
Total minimum obligations
$
$
4,655,396
4,323,037
3,396,273
2,778,617
2,350,193
5,081,636
22,585,152
Rent expense for operating leases approximated $4,688,000, $4,762,000 and $4,505,000, for the years ended
June 30, 2019, 2018 and 2017, respectively.
The Company received approval from the Suffolk County IDA on February 29, 2016 of a 50% property tax
abatement, valued at $440,000, over a 10 year period commencing January 2017.
Employee Benefit Plans
The Company has a non-contributory 401(k) Plan (the “401(k) Plan”). The 401(k) Plan covers all non-union
employees who are at least 21 years of age with no minimum service requirements. There were no employer
contributions to the Plan for the years ended June 30, 2019, 2018 and 2017.
The stockholders of the Company approved the 2000 Employee Stock Purchase Plan (“ESPP”) at the
Company’s annual stockholders’ meeting in April 2000. The ESPP provides for eligible employees to acquire
common stock of the Company at a discount, not to exceed 15%. This plan has not been put into effect as of
June 30, 2019.
Stipulation Agreements
The Company has entered into stipulation agreements with a number of its creditors that in the aggregate total
$142,299, which is included in other current liabilities and other liabilities on the Company’s balance sheet as
of June 30, 2019. The monthly payments total $15,859.
Page 78
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation
The Company is subject to legal proceedings and claims arising from the ordinary course of its business,
including personal injury, customer contract and employment claims. In the opinion of management, the
aggregate liability, if any, with respect to such actions, will not have a material adverse effect on the
consolidated financial position or results of operations of the Company.
Matt Malek Madison v. Fonar Corporation, United States District Court, Northern District of California, was
commenced by plaintiff on August 27, 2007 to recover a down payment for a scanner in the amount of
$300,000, with interest. The plaintiff sought costs of suit and attorney’s fees as well. The Company answered
the complaint and sued the plaintiff for breach of contract in the amount of $450,000. Although down payments
are usually expressly non-refundable in the Company’s quotations and agreements, in this case, the quotation
contemplated the sale of four scanners, and provided that the deposit would be refundable with interest, if the
customer were unable to find suitable locations in the San Francisco Bay area. The issue was whether the
customer made a good faith effort to find locations; the Company’s position was that the customer did not. The
case went to trial before a judge; the parties submitted post-trial briefs, and judgment was awarded to the
plaintiff. The Company appealed the trial court’s decision, but on January 31, 2012, the U.S. Court of Appeals
for the 9th Circuit affirmed the lower court’s decision awarding the plaintiff the $300,000 deposit with
prejudgment interest from July 1, 2006. The Company sought to have the Court of Appeals reconsider the
decision en banc, (by all or a larger number of the judges on the Circuit Court of Appeals), but this was not
granted. During October 2016, the Company settled with the plaintiff for $300,000.
Other Matters
The Company is also delinquent in filing sales tax returns for certain states, for which the Company has
transacted business. The Company has recorded tax obligations of approximately $1,671,000 plus interest
and penalties of approximately $1,054,000. The Company is in the process of determining its regulatory
requirements in order to become compliant.
The Company maintains a self-funded health insurance program with a stop-loss umbrella policy with a third
party insurer to limit the maximum potential liability for individual claims to $100,000 per person and for a
maximum potential claim liability based on member enrollment. With respect to this program, the Company
considers historical and projected medical utilization data when estimating its health insurance program liability
and related expense. As of June 30, 2019 and 2018, the Company had approximately $68,000 and $79,000,
respectively, in reserve for its self-funded health insurance programs. The reserves are included in “Other
current liabilities” in the consolidated balance sheets.
The Company regularly analyzes its reserves for incurred but not reported claims, and for reported but not
paid claims related to its reinsurance and self-funded insurance programs. The Company believes its reserves
are adequate. However, significant judgment is involved in assessing these reserves such as assessing
historical paid claims, average lags between the claims’ incurred date, reported dates and paid dates, and the
frequency and severity of claims. There may be differences between actual settlement amounts and recorded
reserves and any resulting adjustments are included in expense once a probable amount is known. There
were no significant adjustments recorded in the years covered by this report.
Page 79
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 14 - SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended June 30, 2019, 2018 and 2017, the Company paid $165,172, $44,767 and $162,022
for interest, respectively.
During the years ended June 30, 2019, 2018 and 2017, the Company paid $304,575, $345,000 and $739,889
for income taxes, respectively.
During the years ended June 30, 2019, 2018 and 2017, the Company issued 69,971, 0 and 106,600 shares of
common stock for costs and expenses totaling $1,954,744, $0 and $2,239,292, respectively.
NOTE 15 – RELATED PARTY TRANSACTIONS
The CEO and President of the Company is a minority owner of a billing company, which performs billing and
collection services with respect to No-Fault and Workers’ Compensation claims of the Company’s clients. The
monthly fee charged to the Company is $85,000. On June 1, 2017, the Company also entered into a one year
renewable agreement to provide IT services to the billing company for a monthly fee of $23,884. The
agreement was renewed on June 1, 2019 for another year.
Bensonhurst MRI Limited Partnership, in which the CEO and President of the Company holds an interest, is
party to an agreement with the Company for the service and maintenance of its Upright MRI Scanner for a
price of $110,000 per annum.
A limited liability company of which the CEO and President of the Company is an owner also had a 1.375%
interest in Yonkers Diagnostic Management, LLC, a 4.5% interest in Turnkey Services of New York, LLC and a
4.3% interest in TK2 Equipment Management, LLC. Entities in which the Executive Vice President and COO
and his family had an interest had a 0.75% in Yonkers and a 5.9% in TK2 Equipment Management . The
Company acquired these entities, or the portion thereof not already owned by the Company, through a series
of merger transactions for $1,780,000 in the case of Yonkers, $1,147,715 in the case of Turnkey Services and
$3,075,852 in the case of TK2 Equipment Management.
A company of which the CEO and President of the Company is an owner and a company in which the
Executive Vice President and COO has an interest also hold a 1.7% and 2.8% interest, respectively, in
Turnkey Management of Great Neck, LLC, an entity for which the Company performed management services.
The Company acquired this through a merger transaction for $1,312,766.
Page 80
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 16 - SEGMENT AND RELATED INFORMATION
The Company provides segment data in accordance with the provisions of ASC topic 280, “Disclosures about
Segments of an Enterprise and Related Information”.
The Company operates in two industry segments - manufacturing and the servicing of medical equipment and
management of diagnostic imaging centers.
The accounting policies of the segments are the same as those described in the summary of significant
accounting policies. All intersegment sales are market-based. The Company evaluates performance based on
income or loss from operations.
Summarized financial information concerning the Company’s reportable segments is shown in the following
table:
Fiscal 2019:
Net revenues from external customers
Intersegment net revenues *
(Loss) Income from operations
Depreciation and amortization
Compensatory element of stock issuances
Total identifiable assets
Capital expenditures
Fiscal 2018:
Net revenues from external customers
Intersegment net revenues *
(Loss) Income from operations
Depreciation and amortization
Compensatory element of stock issuances
Total identifiable assets
Capital expenditures
Fiscal 2017:
Net revenues from external customers
Intersegment net revenues *
(Loss) Income from operations
Depreciation and amortization
Compensatory element of stock issuances
Total identifiable assets
Capital expenditures
* Amounts eliminated in consolidation
Manufacturing
and Servicing
of Medical
Equipment
$ 10,013,394
$
907,084
$ (3,419,944)
$
370,001
$ 1,990,380
$ 25,065,808
746,768
$
$ 9,837,269
$
901,250
$ (2,982,778)
$
353,307
$ 1,954,744
$ 32,364,298
346,608
$
$ 11,219,188
$ 1,200,000
$ (2,292,312)
$
324,550
$ 2,397,276
$ 29,103,809
212,983
$
Management
of Diagnostic
Imaging
Center
$ 77,179,493
$
—
$ 25,554,136
$ 3,466,490
$
—
$105,198,093
$ 2,737,081
$ 71,678,725
$
—
$ 22,666,989
$ 3,546,544
$
—
$ 85,946,647
$ 2,540,169
$ 66,817,398
$
—
$ 21,388,392
$ 3,209,014
$
—
$ 69,658,676
$ 2,793,331
Totals
$ 87,192,887
$
907,084
$ 22,134,192
$ 3,836,491
$ 1,990,380
$130,263,901
$ 3,483,849
$ 81,515,994
$
901,250
$ 19,684,211
$ 3,899,851
$ 1,954,744
$118,310,945
$ 2,886,777
$ 78,036,586
$ 1,200,000
$ 19,096,080
$ 3,533,564
$ 2,397,276
$ 98,762,566
$ 3,006,314
Page 81
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 16 - SEGMENT AND RELATED INFORMATION (Continued)
Export Product Sales
The Company’s areas of operations are principally in the United States. The Company had export sales of
medical equipment amounting to 5.3%, 41.5% and 55.9% of product sales revenues to third parties for the
years ended June 30, 2019, 2018 and 2017, respectively.
The foreign product sales, as a percentage of product sales to unrelated parties, were made to customers in
the following countries:
United Arab Emirates
Canada
England
Germany
Puerto Rico
For the Years Ended June 30,
2017
2019
45.4%
— %
2018
7.1%
.3
.3
—
4.7
5.3%
—
29.9
4.5
—
41.5%
—
4.8
—
5.7
55.9%
Foreign Service and Repair Fees
The Company’s areas of service and repair are principally in the United States. The Company had foreign
revenues of service and repair of medical equipment amounting to 5.9%, 5.0% and 4.6% of consolidated net
service and repair fees for the years ended June 30, 2019, 2018 and 2017, respectively. Foreign service and
repair fees, as a percentage of total service and repair fees, were provided principally to the following
countries:
Puerto Rico
Switzerland
Germany
England
United Arab Emirates
Canada
Greece
Australia
For the Years Ended June 30,
2019
2017
1.6%
0.3
1.4
0.6
0.3
0.4
0.3
1.0
5.9%
2018
1.5%
0.2
1.3
0.6
0.3
—
0.2
0.9
5.0%
1.2%
0.2
1.4
0.5
—
0.1
0.2
1.0
4.6%
The Company does not have any material assets outside of the United States.
Page 82
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 17 – ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following represents a summary of allowance for doubtful accounts for the years ended June 30, 2019,
2018 and 2017, respectively:
Description
Accounts receivable
Management and other fees receivable
Management and other fees receivable -
related medical practices
Medical receivables
Balance
June 30,
2018
$
190,244
10,983,022
Additions (1)
$
—
(1,578,078)
$
Deductions
—
—
Balance
June 30,
2019
$
190,244
9,404,944
1,711,385
22,727,698
599,346
—
—
22,727,698
2,310,731
—
Description
Accounts receivables
Management and other fees receivable
Management and other fees receivable -
related medical practices
Medical receivables
Balance
June 30,
2017
190,244
$
12,859,750
Additions
—
$
(1,744,064)
Deductions
—
$
132,664
Balance
June 30,
2018
190,244
$
10,983,022
582,001
19,853,318
1,129,384
17,896,528
—
15,022,148
1,711,385
22,727,698
Description
Accounts receivables
Management and other fees receivable
Management and other fees receivable -
related medical practices
Medical receivables
(1) Included in provision for bad debts.
Balance
June 30,
2016
284,279
$
13,553,005
Additions
—
$
(104,424
Deductions
94,035
$
588,831
Balance
June 30,
2017
190,244
$
12,859,750
392,505
17,451,782
582,001
16,171,434
392,505
12,547,160
582,001
19,853,318
Page 83
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)
(000’s omitted, except per share data)
September
30, 2018
December
31, 2018
Total Revenues – Net
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
Total Revenues – Net
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
$
20,705 $
15,163
4,492
21,225 $
15,245
4,864
March 31,
2019
22,779 $
16,171
5,201
June 30,
2019
22,484 $
18,480
2,665
Total
87,193
65,059
17,222
$
0.49 $
0.52 $
0.57 $
0.20 $
1.78
$
0.48 $
0.51 $
0.56 $
0.19 $
1.74
September
30, 2017
December
31, 2017
31, 2018
March
June 30,
$
19,334 $
14,549
4,601
20,168 $
14,358
5,240
20,979 $
16,577
4,262
2018
21,035 $
16,348
11,349
Total
81,516
61,832
25,452
$
0.55 $
0.62 $
0.52 $
1.47 $
3.16
$
0.54 $
0.61 $
0.51 $
1.44 $
3.10
Page 84
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
NOTE 19 – BUSINESS COMBINATIONS
Acquisitions
On June 15, 2017, the Company purchased 100% interest in Turnkey Equipment Management of Great Neck,
LLC. The consideration and net assets acquired is as follows:
Cash Paid
Security deposit
Total Consideration
Net assets at Fair Value
Goodwill
$1,312,769
23,775
1,336,544
731,582
$ 604,962
On March 20, 2017, the Company purchased 100% interest in Radwell Leasing LLC and Radwell LLC. The
net assets acquired and consideration is as follows:
Diagnostic Equipment
Leasehold Improvements
Total Net Assets Acquired
Stock issued as consideration
Less cash received - Net
Total Consideration
$ 544,375
126,237
$ 670,612
$ 791,210
(120,598)
$ 670,612
Pro forma Results
The results of operations of Radwell Leasing LLC, Radwell LLC and Turnkey Equipment of Great Neck LLC
were diminutive and did not affect the proforma results of operations.
NOTE 20 - REVISION
The Company is restating its previously issued Consolidated balance sheets and Consolidated statements of
cash flows as of and for the nine month interim periods of fiscal 2019 ended March 31, 2019 to reflect a
revision in presentation of short term investments within current assets. In the aforementioned financial
statements, the Company presented certain Certificates of Deposit with financial institutions (“CDs”) with
maturities greater than three months as Cash and cash equivalents, when they should have been presented
as Short-term investments. This misclassification did not impact Revenue, Operating income, Net income,
Total assets or Total current assets.
Page 85
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019, 2018 and 2017
The following tables summarizes the impact of these misclassifications on the consolidated balance sheets
and statements of cash flows for the interim periods of fiscal 2019 (amount in thousands):
Financial Statement Captions Revised
Cash and cash equivalents
Short-term investments
As Previously Reported
24,780
0
$
$
Adjustment
$
$
(15,000)
15,000
As Restated
9,780
15,000
$
$
As of March 31, 2019 (Unaudited)
Statement of Cash Flows Captions Revised
Cash Flows from Investing Activities
Cash and cash equivalents - end of period
$
$
(3,157)
24,780
$
$
(15,000)
(15,000)
$
$
(18,157)
9,780
For the Nine Months ended March 31, 2019 (Unaudited)
As Previously Reported
Adjustment
As Restated
NOTE 21 – SUBSEQUENT EVENTS
The Company evaluates events that have occurred after the balance sheet date, but before the consolidated
financial statements are issued.
Subsequent to June 30, 2019, the Company issued 89,981 shares of common stock as payment of
approximately $2.0 million in other current liabilities.
Page 86
FONAR CORPORATION AND SUBSIDIARIES
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
There have been no disagreements with our independent registered public accounting firm or other matters
requiring disclosure under Regulation S-K, Item 304(b).
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, we performed an evaluation under
the supervision of and with the participation of management, including our Principal Executive Officer and our
Acting Principal Financial Officer, of the design and effectiveness of our disclosure controls and procedures(as
defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 as amended (the
“Exchange Act”). Based upon that evaluation, our Principal Executive Officer and Acting Principal Financial
Officer concluded, as of the end of the period covered by this Annual Report that our disclosure controls and
procedures were not effective.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as is defined in the Exchange Act. Internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial
statements for external reporting purposes in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim
financial statements would not be prevented or detected on a timely basis.
The material weakness in our internal control over financial reporting as of June 30, 2019 was related to
our short-term investments whereby we did not maintain effective controls over the accounting for short term
investments and their classifications in the financial statements.
This material weakness resulted from the need to record a significant adjustment at year end, whereby the
Company was required to segregate $15 million of short term investments from cash and cash equivalents in
the financial statements. As a result, the company’s misclassification also effected the statement of cash flow
at June 30, 2019. Short term investments with an original maturity of three months or more cannot be
classified as cash and cash equivalents. The Company also misclassified these instruments in its March 31,
2019 10-Q.
Page 87
FONAR CORPORATION AND SUBSIDIARIES
ITEM 9A. CONTROLS AND PROCEDURES (Continued)
Evaluation of Disclosure Controls and Procedures
Remediation Efforts
We are in the process of developing certain remediation steps to address the previously disclosed material
weakness discussed above and to improve our internal control over financial reporting. The Company and the
Board take the control and integrity of the Company’s financial statements seriously and believe that the
remediation plan we implement is essential to maintaining a strong internal control environment.
We are committed to maintaining a strong internal control environment, and believe that out remediation
actions will represent significant improvements in our controls. However, the identified material weakness in
internal control over financial reporting will not be considered remediated until controls have been designed
and/or controls are in operation for a sufficient period of time for our management to conclude that the material
weakness has been remediated. Additional remediation measures may be required, which may require
additional implementation time. We will continue to assess the effectiveness of our remediation efforts in
connection with our evaluations of internal control over financial reporting.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO-2013). Based on this evaluation, our management
concluded that our internal control over financial reporting was not effective at June 30, 2019.
Marcum LLP, the independent registered public accounting firm that audited our consolidated financial
statements included in this annual report, has issued an adverse attestation report on the effectiveness of our
internal control over financial reporting as of June 30, 2019. Their report on the audit of internal control over
financial reporting appears below.
Changes in Internal Controls over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) during the most recent fiscal quarter and year ended June 30, 2019 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting
Page 88
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
To the Board of Directors and Stockholders of
FONAR Corporation and Subsidiaries
Opinion on Internal Control over Financial Reporting
We have audited FONAR Corporation and Subsidiaries’ (the “Company”) internal control over financial
reporting as of June 30, 2019, based on criteria established in Internal Control-Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because
of the effect of the material weakness described below, the Company did not maintain, in all material respects,
effective internal control over financial reporting as of June 30, 2019, based on criteria established in Internal
Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting
such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim
financial statements will not be prevented or detected on a timely basis. The following material weakness has
been identified and included in “Management Annual Report On Internal Control Over Financial Reporting”.
Management has identified a material weakness in controls related to the company’s classification of certain
financial instruments as cash and cash equivalents and short-term investments. As a result, the company’s
misclassification also effected the statement of cash flows at June 30, 2019.
This material weakness was considered in determining the nature, timing, and extent of audit tests applied in
our audit of the 2019 financial statements, and this report does not affect our report dated September 30,
2019, on those consolidated financial statements.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (“PCAOB”), the consolidated balance sheets as of June 30, 2019 and 2018 and the related
consolidated statements of income, stockholders’ equity, and cash flows and the related notes for each of the
three years in the period ended June 30, 2019 of the Company, and our report dated September 30, 2019
expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying “Management Annual Report on Internal Control over Financial Reporting”. Our responsibility is
to express an opinion on the Company's internal control over financial reporting based on our audit. We are a
public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
Page 89
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
(CONTINUED)
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that degree of compliance with the
policies or procedures may deteriorate.
/s/ Marcum LLP
Marcum LLP
New York, New York
September 30, 2019
Page 90
FONAR CORPORATION AND SUBSIDIARIES
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors serve from the date of their election until the next annual meeting of stockholders and until their
successors are elected and qualify. With the exception of Dr. Raymond V. Damadian, who does not receive
any fees for serving as a director, each director receives $20,000 per annum for his or her service as a
director. Officers serve at the discretion of the Board of Directors.
A majority of our board of directors is composed of independent directors: Robert J. Janoff, Charles N. O’Data
and Ronald G. Lehman. The outside directors also serve as the members of the audit committee, which is a
standing committee of the board of directors having a charter describing its responsibilities. Mr. O’Data has
been designated as the audit committee financial expert. His relevant experience is described in his
biographical information.
We have adopted a code of ethics applicable to, among other personnel, our principal executive officer,
principal financial officer, controllers and persons performing similar functions. The code is designed to deter
wrongdoing and to promote: 1. honest and ethical conduct, including the ethical handling of actual or apparent
conflicts of interest between personal and professional relationships; 2. full, fair, accurate, timely and
understandable disclosure in reports and documents that we file or submit to the Securities and Exchange
Commission and in other public communications we make; 3. compliance with applicable governmental laws,
rules and regulations; 4. the prompt internal reporting of violations of the code to an appropriate person or
persons identified in the code and 5. accountability for adherence to the code. We will provide a copy of the
code to any person who requests a copy. A person may request a copy by writing to Fonar Corporation, 110
Marcus Drive, Melville, New York 11747, to the attention of the Legal Department or Investor Relations.
The officers and directors of the Company are set forth below:
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Raymond V. Damadian
83
Timothy R. Damadian
Luciano B. Bonanni
Claudette J.V. Chan
Robert J. Janoff
Charles N. O'Data
Ronald G. Lehman
55
64
81
92
83
43
Chairman of the Board of Directors, Director, Principal Financial
Officer, Treasurer
President, Chief Executive Officer
Executive Vice President and Chief Operating Officer
Director
Director
Director
Director
Page 91
FONAR CORPORATION AND SUBSIDIARIES
Raymond V. Damadian, M.D. has been the Chairman of the Board since its inception in 1978 and Treasurer
since February, 2001. Up until February 11, 2016, Dr. Damadian also served as the President and Chief
Executive Officer of Fonar. Dr. Damadian was employed by the State University of New York, Downstate
Medical Center, New York, as an Associate Professor of Biophysics and Associate Professor of Internal
Medicine from 1967 until September 1979. He received an M.D. degree in 1960 from Albert Einstein College
of Medicine, New York, and a B.S. degree in mathematics from the University of Wisconsin in 1956. In
addition, Dr. Damadian conducted post-graduate work at Harvard University, where he studied extensively in
the fields of physics, mathematics and electronics. Dr. Damadian is the author of numerous articles and books
on the nuclear magnetic resonance effect in human tissue, which is the theoretical basis for the Fonar MRI
scanners. He is a 1988 recipient of the National Medal of Technology. In 1989 he was inducted into the
National Inventors Hall of Fame, for his contributions in conceiving and developing the application of magnetic
resonance technology to medical applications including whole body scanning and diagnostic imaging. Dr.
Damadian is the President, Treasurer and director of Health Management Corporation of America (“HMCA”), a
Manager of Imperial Management Services, LLC (“Imperial”) and a Manager of Health Diagnostics
Management, LLC (“HDM”) which three entities are subsidiaries of Fonar.
Timothy Damadian has been the President and Chief Executive Officer of Fonar since February 11, 2016.
From 2010 to 2016 he served as an independent consultant, with a focus on the Company’s MRI facility
management business. Timothy Damadian began his career at Fonar in 1985, installing MRI scanners and
components for Fonar customers. Over the course of the following 16 years, he held positions of increasing
authority, eventually becoming Vice President of Operations. In 1997, Timothy Damadian was appointed
President of the newly formed Health Management Corporation of America (HMCA), a wholly-owned
subsidiary of Fonar that was formed to manage medical and diagnostic imaging offices. In 2001, Timothy
Damadian left Fonar to form Integrity Healthcare Management, Inc., a diagnostic imaging management
company that would eventually manage 11 MRI scanning centers in New York and Florida. The company was
a success and was sold to Health Diagnostics, LLC in 2007. Mr. Damadian returned to Fonar as a consultant
in 2010. He also serves as a Manager of Imperial Management Services, LLC and a Manager of Health
Diagnostics Management, LLC, which are subsidiaries of HMCA.
Luciano B. Bonanni has served as Chief Operating Officer (COO) and Executive Vice President (EVP) for
Fonar Corporation since June 27, 2016. Prior to his appointment as COO, Mr. Bonanni had served the
Company as Vice President since 1989, during which time he oversaw general operations, research and
development, manufacturing, service, sales, finance, accounting and regulatory compliance. Prior to 1989, Mr.
Bonanni held the title of Vice President of Production and Engineering from the time of Fonar’s initial public
offering in 1981. Mr. Bonanni joined the Company as an electrical engineer in 1978. He holds a Bachelor of
Electrical Engineering degree from Manhattan College.
Claudette J.V. Chan has been a Director of Fonar since October 1987 and Secretary of Fonar since January
2008. Mrs. Chan was employed from 1992 through 1997 by Raymond V. Damadian, M.D. MR Scanning
Centers Management Company and since 1997 by HMCA, as "site inspector," in which capacity she is
responsible for supervising and implementing standard procedures and policies for MRI scanning centers.
From 1989 to 1994 Mrs. Chan was employed by St. Matthew's and St. Timothy's Neighborhood Center, Inc.,
as the director of volunteers in the "Meals on Wheels" program, a program which cares for the elderly. From
approximately 1983 to 1989, Mrs. Chan was President of the Claudette Penot Collection, a retail mail-order
business specializing in women's apparel and gifts. Mrs. Chan practiced and taught in the field of nursing until
1973, when her son was born. She received a bachelor of science degree in nursing from Cornell University in
1960. Mrs. Chan is the sister of Raymond V. Damadian.
Page 92
FONAR CORPORATION AND SUBSIDIARIES
Robert J. Janoff has been a Director of Fonar since February 1989. Mr. Janoff has been a self-employed New
York State licensed private investigator for more than thirty-five years and was a Senior Adjustor in Empire
Insurance Group for more than 15 years until retiring from that position on July 1, 1997. Mr. Janoff also
served, from June 1985 to June 1991, as President of Action Data Management Strategies, Ltd., a supplier of
computer programs for use by insurance companies. Mr. Janoff was a member of the Board of Directors of
Harmony Heights of Oyster Bay, New York for over 25 years, which is a nonprofit residential school for girls
with learning disabilities.
Charles N. O'Data has been a Director of Fonar since February 1998. From 1961 to 1997, Mr. O'Data was the
Vice President for Development for Geneva College, a liberal arts college located in western Pennsylvania. In
that capacity, he acted as the College's chief investment officer. His responsibilities included management of
the College's endowment fund and fund raising. In July 1997, Mr. O'Data retired from Geneva College after 36
years of service to assume a position of National Sales Executive for SC Johnson Company's Professional
Markets Group, a unit of SC Johnson Wax, and specialized in healthcare and education sales, a position he
held until the spring of 1999. In his capacity with SC Johnson he was responsible for sales to the nation’s three
largest Group Purchasing Organizations which included some 4,000 hospitals. Mr. O'Data presently acts as an
independent financial consultant to various entities. Mr. O'Data served on the board of The Medical Center,
Beaver, Pennsylvania, now a part of Heritage Valley Health System, a 500 bed acute care facility, for 26 years,
three as its Chair. Mr. O’Data also served on the board of Amerinet, a shared-services and group purchasing
organization covering seven states. He founded The Beaver County Foundation, a Community Foundation, in
1992, and serves as its President. Mr. O'Data is listed as a finance associate in the Middle States Association,
Commission on Higher Education. The commission is the formal accrediting body for higher education in the
eastern region of the country. In this capacity he evaluates the financial aspects of educational organizations.
Mr. O’Data is a graduate of Geneva College, where he received a B.S. degree in Economics in 1958.
Ronald G. Lehman has been a Director of Fonar since April, 2012, when he was unanimously appointed by
the remaining four Directors to fill the vacancy resulting from the death of former Director Robert Djerejian.
From October, 2009 to the present, Mr. Lehman has served as Managing Director of Investment Banking with
Bruderman Brothers, LLC, a private New York-based broker-dealer registered with the Securities and
Exchange Commission and which is a member of the Financial Industry Regulatory Authority (FINRA) and the
Securities Investor Protection Corporation (SIPC). Mr. Lehman directly manages all facets of the firm’s
transaction processes, from deal origination, to sourcing capital, to negotiating deal structures, through
documentation and closing. The firm provides buy and sell-side advisory, capital raising, and consulting
services to lower middle-market companies. Mr. Lehman specializes in advising healthcare services
companies and has recently completed several recapitalizations in the industry. He also participates in the
firm’s merchant banking investments and oversees many of these assignments. From May, 2008 to October,
2009, Mr. Lehman served as Senior Vice President of Acquisitions at Health Diagnostics, LLC, where he
managed the company’s acquisition and corporate finance activities. From March, 2000 to May, 2008, Mr.
Lehman worked for various Bruderman entities as a buy and sell-side advisor and as a principal in several
private equity transactions. From September, 1998 to March, 2000, Mr. Lehman worked at Deutsche Bank
Securities, Inc. and last held the position of Associate in their Global Custody Group. Mr. Lehman graduated
from Columbia University with a B.A. in 1998.
Page 93
ITEM 11. EXECUTIVE COMPENSATION.
FONAR CORPORATION AND SUBSIDIARIES
With the exception of the Chief Executive Officer and the Chairman of the Board of Directors, the
compensation of the Company's executive officers is based on a combination of salary and bonuses based on
performance. The Chairman of the Board’s compensation consists of a salary. The Chief Executive Officer
and the Chairman of the Board have no understandings with the Company with respect to bonuses, options or
other incentives; they are not subject to our general policy later discussed.
The Board of Directors does not have a compensation Committee. Dr. Raymond V. Damadian, Chairman of
the Board, controls over 50% of the voting power of our capital stock. Dr. Damadian is both an executive
officer and a member of the Board of Directors. Dr. Damadian, the Chief Executive Officer and the Chief
Operating Officer, participate in the determination of compensation for the Company’s management and other
employees.
The Board of Directors has established an audit committee. The members of the committee are Robert J.
Janoff, Charles N. O'Data and Ronald G. Lehman.
Our compensation policy includes a combination of salary, commissions, bonuses, stock bonuses and stock
options, designed to incentivize our employees. There is no universal plan applicable to all of our employees.
The fixed and variable components of our employees’ compensation tend to be individualized, based on a
combination of the employees’ performance, responsibilities and position, our assessment of how best to
motivate a person in such a position and the needs and preferences of the particular employees, as negotiated
between employees and their supervisors or management.
There is set forth in the following Summary Compensation Table the compensation provided by us during
fiscal 2019, 2018 and 2017 to our Principal Executive Officer, and our acting Principal Financial Officer. There
is set forth in the following Outstanding Equity Awards Table and Director Compensation Table the required
information.
I. SUMMARY COMPENSATION TABLE
Name and All Other
Principal Position
(a)
Year
(b)
Timothy R. Damadian
President, Principal
Executive Officer
Raymond V. Damadian
Chairman of the Board,
PFO
Salary ($)
(c)
2019 $
2018 $
2017 $
Stock
Awards
($)
(e)
Cash
Bonuses
($)
(d)
0 $ 155,800 $
0 $ 155,800 $
0 $
0 $
0 $
0 $ 305,800 $
2019 $ 153,095 $ 305,800 $
2018 $ 153,095 $ 305,800 $
2017 $ 158,983 $
0 $
0 $
0 $ 305,800 $
Luciano Bonanni
Chief Operating Officer and
Executive Vice President
2019 $ 145,825 $
2018 $ 145,672 $
2017 $ 149,378 $
0 $ 159,740 $
0 $ 152,900 $
0 $ 305,800 $
Page 94
Total
Compensation
(f)
155,800
155,800
305,800
458,895
458,895
464,783
305,565
298,572
455,178
II. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
FONAR CORPORATION AND SUBSIDIARIES
Number Of Securities
Underlying Unexercised
Options (#) Exercisable
(a)
Option Exercise
Price ($)
(b)
Option Exercise
Expiration Date
(c)
Name
Timothy R. Damadian,
President and Principal
Executive Officer
Raymond V.
Damadian, Chairman
of the Board,
Treasurer and
Principal Financial
Officer
Luciano Bonanni,
Chief Operating
Officer and Executive
Vice President
III. DIRECTOR COMPENSATION
Name
Raymond V. Damadian
Claudette J.V. Chan
Robert J. Janoff
Charles N. O’Data
Ronald G. Lehman
EMPLOYEE COMPENSATION PLANS
0
0
0
0
0
0
N/A
N/A
N/A
Fees Earned or
Paid in Cash
($)
$
$
$
$
$
0
20,000
20,000
20,000
20,000
Total
($)
0
20,000
20,000
20,000
20,000
$
$
$
$
$
Fonar’s 2005 Incentive Stock Option Plan, adopted on February 15, 2005, was intended to qualify as an
incentive stock option plan under Section 422A of the Internal Revenue code of 1954, as amended. The Plan
permits the issuance of stock options covering an aggregate of 80,000 shares of common stock of Fonar. The
options issued have an exercise price equal to the fair market value of the underlying stock on the date the
option is granted, are non-transferable, are exercisable for a period not exceeding ten years, and expire upon
the voluntary termination of employment. The Plan terminated on February 14, 2015.
Fonar adopted its 2010 Stock Bonus Plan, on June 28, 2010. This Plan permits Fonar to issue an aggregate
of 2,000,000 shares of common stock of Fonar as bonus or compensation. As of June 30, 2019, 646,905
shares were available for issuance. The Company has approved the issuance of 69,971 shares under the
Plan.
Page 95
FONAR CORPORATION AND SUBSIDIARIES
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the number and percentage of shares of Fonar’s securities held by each director,
by each person known by us to own in excess of five percent of Fonar’s voting securities and by all officers
and directors as a group as of September 10, 2019.
Name and Address of Beneficial Owner (1)
Raymond V. Damadian, M.D.
c/o Fonar Corporation, Melville, New York
Director and Treasurer
5% + Stockholder
Common Stock
Class C Stock
lass A Preferred
Timothy R. Damadian,
President and Chief Executive Officer
Common Stock
Class A Preferred
Luciano B. Bonanni,
Executive Vice President
And Chief Operating Officer
Common 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 (7 persons)
Common Stock
Class C Stock
Class A Preferred
Shares
Beneficially
Owned
Percent of
Class
121,402
382,447
19,093
38,000
800
41,660
1,285
106
32
0
0
658
1,213
202,039
382,368
21,210
1.88%
99.98%
6.09%
*
*
*
*
*
*
*
*
*
*
3.15%
99.98%
6.79%
___________________________
* Less than one percent
_______________________
1. Address provided for each beneficial owner owning more than five percent of the voting securities of Fonar.
Page 96
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
FONAR CORPORATION AND SUBSIDIARIES
Pursuant to HMCA’s management agreements with its clients, HMCA provides comprehensive non-medical
management and administrative services, including billing and collection of accounts, payroll and accounts
payable processing, office facilities, supplies and utilities. Under the management agreements, HMCA also
provides service for the Fonar Upright® MRI scanners through Fonar. In total, as of September 5, 2019, 22 of
our clients had management agreements with HMCA. Four sites in Florida are owned and operated directly by
HMCA subsidiaries.
The fees charged under the management agreements are flat fees charged on a monthly basis. These fees
ranged from $54,000 to $481,000 per month in fiscal 2019.
Dr. Raymond Damadian, the Chairman of the Board and principal stockholder of the Company, owns three of
the imaging facilities in Florida managed by HMCA. The facilities owned by Dr. Damadian in Florida paid
HMCA flat rate monthly fees ranging from $222,200 to $322,636 per month during fiscal 2019. These fees are
renegotiable on an annual basis.
During the fiscal years ended June 30, 2019, June 30, 2018 and June 30, 2017, the net revenues received by
HMCA from the imaging facilities owned by Dr. Damadian were approximately $9.4 million, $9.0 million and
$8.2 million respectively.
Dr. Damadian owns a .75% interest in Health Management Company of America’s Class A membership
interests. Dr. Damadian is also a Manager of Health Management Company of America.
Timothy Damadian, the President and Chief Executive Officer of Fonar, is one of the owners of a billing
company, which performs billing and collection services for HMCA with respect to No-Fault and Workers’
Compensation claims of HMCA’s clients. The monthly fee charged to HMCA is $85,000. On June 1, 2017, the
Company also entered into a one year renewable agreement to provide IT services to the billing company for a
monthly fee of $23,884. Timothy Damadian is also a Manager of Health Management Company of America.
The agreement was renewed on June 1, 2018 and June 1, 2019.
A limited liability company of which Timothy Damadian is an owner also had a 1.375% interest in Yonkers
Diagnostic Management, LLC, a 4.5% interest in Turnkey Services of New York, LLC and a 4.3% interest in
TK2 Equipment Management, LLC. Entities in which Mr. Bonanni and his family had an interest had a 0.75%
in Yonkers and a 5.9% in TK2 Equipment Management. During fiscal 2017 HMCA acquired these entities, or
the portion thereof not already owned by HMCA, through a series of merger transactions for $1,780,000 in the
case of Yonkers, $1,147,715 in the case of Turnkey Services and $3,075,852 in the case of TK2 Equipment
Management.
A company of which Timothy Damdian is an owner and a company in which Mr. Bonanni has an interest also
held a 1.7% and 2.8% interest, respectively, in Turnkey Management of Great Neck, LLC, a company for
which HMCA performed services. During Fiscal 2017, Turnkey Management of Great Neck, LLC was acquired
by the Company through a merger transaction for $1,312,766.
Ronald Lehman, a Director of Fonar, holds a .0378% interest in Health Management Company of America’s
Class A membership interests.
Claudette J.V. Chan, a Director and the Secretary of Fonar, owns a .0378% interest in Health Management
Company of America’s Class A Membership interests.
Page 97
FONAR CORPORATION AND SUBSIDIARIES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Audit Fees
The aggregate fees billed by Marcum LLP for the audit of our annual consolidated financial statements for the
fiscal year ended June 30, 2019 and the reviews of the financial statements included in our Forms 10-Q for the
fiscal year ended June 30, 2019 were $420,000.
The aggregate fees billed by Marcum LLP for the audit of our annual financial statements for the fiscal year
ended June 30, 2018 and the reviews of the financial statements included in our Forms 10-Q for the fiscal year
ended June 30, 2018 were $421,000.
Audit Related Fees
No fees were billed by Marcum LLP for the fiscal years ended June 30, 2019 or June 30, 2018 for services
related to the Audit or review of our financial statements that are not included under the caption “Audit Fees”.
No fees were billed by Marcum LLP for the fiscal years ended June 30, 2018 or June 30, 2017 for designing,
operating, supervising or implementing any of our financial information systems or any hardware or software
systems for our financial information.
Tax Fees
No fees were billed by Marcum LLP for tax compliance, tax advice and tax planning in the fiscal year ended
June 30, 2019.
No fees billed by Marcum LLP for tax compliance, tax advice and tax planning in the fiscal year ended June
30, 2018.
All Other Fees
No fees were billed by Marcum LLP for any other services during the fiscal years ended June 30, 2019 and
June 30, 2018.
Since January 1, 2003, the audit committee has adopted policies and procedures for pre-approving all
non-audit work performed by the auditors. Specifically, the committee must pre-approve the use of the
auditors for all such services. The audit committee has pre-approved all non-audit work since that time and in
making its determination has considered whether the provision of such services was compatible with the
independence of the auditors.
Our audit committee believes that the provision by Marcum LLP of services in addition to audit services in
previous years were compatible with maintaining their independence.
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FONAR CORPORATION AND SUBSIDIARIES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a) FINANCIAL STATEMENTS AND SCHEDULES
The following consolidated financial statements are included in Part II, Item 8.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as at June 30, 2019 and 2018.
Consolidated Statements of Income for the Years Ended June 30, 2019, 2018 and 2017.
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2019, 2018 and 2017.
Consolidated Statements of Cash Flows for the Years Ended June 30, 2019, 2018 and 2017.
Notes to Consolidated Financial Statements.
Information required by schedules called for under Regulation S-X is either not applicable or is included in the
consolidated financial statements or notes to the financial statements.
b) REPORTS ON FORM 8-K
1. Registrant’s Report on Form 8-K containing the Company’s Earnings Report for Fiscal Year 2019,
September 16, 2019. Commission File No. 0-10248.
2. Registrant’s Report on Form 8-K reporting the results of the election of directors and selection of auditors at
the annual meeting of stockholders, May 21, 2019. Commission File No. 0-10248.
c) EXHIBITS
3.1 Certificate of Incorporation, as amended, of the Registrant incorporated by reference to Exhibit 3.1 to the
Registrant's registration statement on Form S-1,Commission File No. 33-13365. October 28, 1981.
3.2 Article Fourth of the Certificate of Incorporation, as amended, of the Registrant incorporated by reference
to Exhibit 4.1 to the Registrant's registration statement on Form S-8, Commission File No. 33-62099.
3.3 Section A of Article Fourth of the Certificate of Incorporation, as amended, of the Registrant incorporated
by reference to Exhibit 4.3 to the Registrant’s registration statement on Form S-3, Commission File No.
333-63782.
3.4 Section A of Article Fourth of the Certificate of Incorporation, as amended, of the Registrant incorporated
by reference to Exhibit 3.3 of the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30,
2003, Commission File No. 0-10248.
3.5 By-Laws, as amended, of the Registrant incorporated by reference to Exhibit 3.2 to the Registrant's
registration statement on Form S-1, Commission File No. 33-13365. October 28, 1981.
4.1 Specimen Common Stock Certificate incorporated by reference to Exhibit 4.1 to the Registrant's
registration statement on Form S-1, Commission File No. 33-13365. October 28, 1981.
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FONAR CORPORATION AND SUBSIDIARIES
4.2 Specimen Class B Common Stock Certificate incorporated by reference to Exhibit 4.2 to the Registrant's
registration statement on Form S-1, Commission File No. 33-13365. October 28, 1981.
10.1 License Agreement between the Registrant and Raymond V. Damadian incorporated by reference to
Exhibit 10 (e) to Form 10-K for the fiscal year ended June 30, 1983, Commission File No. 0-10248.
10.2 Stock Purchase Agreement, dated July 31, 1997, by and between U.S. Health Management Corporation,
Raymond V. Damadian, M.D. MR Scanning Centers Management Company and Raymond V. Damadian,
incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K, July 31, 1997, commission File No:
0-10248.
10.3 Merger Agreement and Supplemental Agreement dated June 17, 1997 and Letter of Amendment dated
June 27, 1997 by and among U.S. Health Management Corporation and Affordable Diagnostics Inc. et al.,
incorporated by reference to Exhibit 2.1 to the Registrant's 8-K, June 30, 1997, Commission File No: 0-10248.
10.4 Stock Purchase Agreement dated March 20, 1998 by and among Health Management Corporation of
America, Fonar Corporation, Giovanni Marciano, Glenn Muraca et al., incorporated by reference to Exhibit 2.1
to the Registrant's 8-K, March 20, 1998, Commission File No: 0-10248.
10.5 Stock Purchase Agreement dated August 20, 1998 by and among Health Management Corporation of
America, Fonar Corporation, Stuart Blumberg and Steven Jonas, incorporated by reference to Exhibit 2 to the
Registrant's 8-K, September 3, 1998, Commission File No. 0-10248.
10.6 2002 Incentive Stock Option Plan incorporated by reference to Exhibit 99.1 to the Registrant’s registration
statement on Form S-8, Commission File No.: 333-96557.
10.7 Asset Purchase Agreement dated July 28, 2005 among Health Plus Management Services, L.L.C.,
Health Management Corporation of America, Dynamic Healthcare Management, Inc. and Fonar Corporation,
incorporated by reference to Exhibit 2 to the Registrant’s Form 8-K, August 2, 2005, Commission File No.
0-10248.
10.8 Partnership Interest Purchase Agreement dated September 29, 2008 by and between Diagnostic
Management, LLC and Raymond V. Damadian, M.D. MR Scanning Centers Management Company,
incorporated by reference to Exhibit 10.35 to Form 10-K for the fiscal year ended June 30, 2008. Commission
File No. 0-10248.
10.9 2010 Stock Bonus Plan, incorporated by reference to Exhibit 99.1 to the Registrant’s registration
statement on Form S-8, Commission File No. 333-168771.
10.10 Operating Agreement for Imperial Management Services, LLC, incorporated by reference to Exhibit
10.37 to Form 10-K for the fiscal year ended June 30, 2011. Commission File No. 0-10248.
10.11 Operating Agreement for Health Diagnostics Management, LLC, incorporated by reference to Exhibit
10.38 to Form 10-K for the fiscal year ended June 30, 2013. Commission File No. 0-10248.
10.12 Modification to Operating Agreement for Health Diagnostics Management, LLC., incorporated by
reference to Exhibit 10.38 to Form 10-K for the fiscal year ended June 30, 2013. Commission File No.
0-10248.
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FONAR CORPORATION AND SUBSIDIARIES
10.13 Purchase Agreement dated March 5, 2013 among Health Diagnostics Management, LLC, Health
Diagnostics, LLC and others. Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed
March 11, 2013. Commission File No. 0-10248.
14.1 Code of Ethics, incorporated by reference to Exhibit 14.1 of Registrant’s Form 10-K for the fiscal year
ended June 30, 2004, Commission File No.: 0-10248.
21.1 Subsidiaries of the Registrant. See Exhibits.
23.1 Independent Registered Public Accounting Firm’s Report. See Exhibits.
31.1 Section 302 Certification. See Exhibits.
32.1 Section 906 Certification. See Exhibits.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: September 30, 2019
FONAR CORPORATION
By: /s/ Timothy R. Damadian
Timothy R. Damadian,
President and Principal Executive Officer
By:/s/ Raymond V. Damadian
Raymond V. Damadian,
Principal Financial Officer,
Chairman of the Board and Treasurer
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
Chairman of the Board of Directors, Director,
Principal Financial Officer, Treasurer
September 30, 2019
/s/ Claudette J.V. Chan Claudette
J.V. Chan
Director
/s/ Robert J. Janoff
Robert J. Janoff
/s/ Charles N. O'Data
Charles N. O'Data
/s/ Ronald G. Lehman
Ronald G. Lehman
Director
Director
Director
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September 30, 2019
September 30, 2019
September 30, 2019
September 30, 2019