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, 2020
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__.
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 _____.
FONAR CORPORATION AND SUBSIDIARIES
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 ____; Non-accelerated filer __X__ ;
Smaller reporting company __X__ ; Emerging Growth 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, 2019 based on the
closing price of $19.69 per share on such date as reported on the NASDAQ System, was approximately $123 million. The
other outstanding classes do not have a readily determinable market value.
As of September 15, 2020, 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
FORM 10-K ITEMS
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.
Item 9A.
Item 9B.
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV.
Item 15.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Statements
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors and Executive Officers
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits
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FONAR CORPORATION AND SUBSIDIARIES
PART I
ITEM 1. BUSINESS
GENERAL
Fonar Corporation, sometimes referred to as the "Company" or "Fonar", is a Delaware corporation which was incorporated
on July 17, 1978. Our address is 110 Marcus Drive, Melville, New York 11747 and our telephone number is 631-694-2929.
Fonar also maintains a website at www.fonar.com. Fonar provides copies of its filings with the Securities and Exchange
Commission on Forms 10-K, 10-Q and 8-K and amendments to these reports to stockholders on request.
We conduct our business in two segments. Our medical equipment segment is conducted directly through Fonar. Our
physician management and diagnostic services segment is conducted through our subsidiary Health Diagnostic
Management, LLC (“HMCA”), also called Health Management Company of America. HMCA provides management
services, administrative services, billing and collection services, credentialing services, contract negotiations, 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.
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 16 to the Consolidated Financial Statements for separate financial information regarding our medical equipment
and physician and diagnostic management services segments.
Page 3
FORWARD LOOKING STATEMENTS.
FONAR CORPORATION AND SUBSIDIARIES
Certain statements made in this Annual Report on Form 10-K are "forward-looking statements", within the meaning of the
Private Securities Litigation Reform Act of 1995, regarding the plans and objectives of Management for future operations.
Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results,
performance or achievements to be materially different from any future results, performance or achievements expressed
or implied by such forward-looking statements. These forward-looking statements are based on current expectations that
involve numerous risks and uncertainties. Our plans and objectives are based, in part, on assumptions involving the
expansion of business. These assumptions involve judgments with respect to, among other things, future economic,
competitive and market conditions and future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. Although we believe that our assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no
assurance that the forward-looking statements included in this Annual Report will prove to be accurate. In light of the
significant uncertainties inherent in our forward-looking statements, the inclusion of such information should not be
regarded as a representation by us or any other person that our objectives and plans will be achieved.
Among the risks and assumptions which must now be taken into account is the COVID-19 virus, which adds additional
uncertainties to future expectations. Although the impact will be negative, the severity, duration and potential recurrence of
the virus adds a new and uncharted dimension to the uncertainties facing our business and the world economy in general.
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.
As of June 30, 2020, HMCA manages a total of 35 MRI scanners. Twenty-two (22) MRI scanners are located in New York
and thirteen (13) which are located in Florida. 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 and our ability to begin our recovery from the effects of the COVID-19 pandemic. In addition, a new
facility managed by the Company has been opened the first quarter of fiscal 2021 in Pembroke Pines, Florida and a total of
three additional MRI scanners are to be added in New York.
MEDICAL EQUIPMENT SEGMENT
PRODUCTS
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FONAR CORPORATION AND SUBSIDIARIES
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.
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. Frequently, 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 useful 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
tuning,
analog-to-digital
bandwidth-optimized pulse sequences, multi-bandwidth sequences, and off-center FOV imaging capability.
ultra-low-noise
pre-amplifier,
miniaturized
high-speed
conversion
automatic
and
a
In addition to the signal-to-noise ratio, however, a major determinant of image quality that must be considered is contrast,
the quality that enables reading physicians to clearly distinguish adjacent, and sometimes minute, anatomical structures
from their surroundings. This quality is measured by contrast-to-noise ratios (C/N). Unlike S/N, which increases with
increasing field strength, relaxometry studies have shown that C/N peaks in the mid-field range and actually falls off
precipitously at higher field strengths. The Upright® MRI scanners operate squarely in the optimum C/N range.
FONAR’s scanners 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 2020, sales of our Upright® MRI scanners accounted for approximately 0.1% of our total revenues and 1.1%
of our medical equipment revenues, as compared to 0.8% of total revenues and 7.7% of medical equipment revenues in
fiscal 2019.
FONAR’s principal marketing efforts with respect to its products have been focused on the Upright® MRI, which we
believe is a particularly unique product. It is 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.
Page 6
PRODUCT MARKETING
FONAR CORPORATION AND SUBSIDIARIES
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. A complete list of the sites managed by HMCA can be found at HMCA’s website, hmca.com.
Our marketing efforts, however, have been compromised by the COVID-19 panademic and economic challenges felt
worldwide as a result.
SERVICE AND UPGRADES FOR MRI SCANNERS
Our customer base of installed scanners has been and will continue to be an additional source of income, independent of
direct sales.
Income is generated from the installed base in two principal areas, namely, service and upgrades. Service and
maintenance revenues from our external installed base were approximately $8.3 million in fiscal 2019 and $8.2 million in
fiscal 2020. 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.
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FONAR CORPORATION AND SUBSIDIARIES
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, 2020, we incurred expenditures of $2,025,376, none of which were capitalized, on
research and development, as compared to $1,812.347, none of which were capitalized, during the fiscal year ended June
30, 2019.
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.
BACKLOG
Our backlog of unfilled orders at September 15, 2020 was approximately $457,000, as compared to $788,000 at
September 13, 2019. It is expected that the existing backlog of orders will be filled within the 2021 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.
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FONAR CORPORATION AND SUBSIDIARIES
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 possess 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, 2020, 215 patents had been issued to Fonar, and approximately 14 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.
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.
Page 9
FONAR CORPORATION AND SUBSIDIARIES
One of the Upright MRI’s big competitive advantages is that it is dramatically different from the Open MRI in several
important ways:
The Upright MRI does something clinically valuable that the high-field MRI machines cannot do (i.e. positional imaging,
weight-bearing imaging).
Although the patient can extend his arms and possibly see out the sides while recumbent in an Open MRI, there is still a
large intimidating magnet pole very close to and directly in front of the patient’s face. The Upright MRI allows the patient to
look directly out of the scanner and view a large flatscreen TV.
The Upright MRI uses the same configuration RF receiver coil as a high-field MRI system to image the spine. Open MRIs
cannot do this. (This is because of the rule in MRI that the axis of symmetry of the RF receiver coil should be
perpendicular to the direction of the main magnetic field). The upright patient sits comfortably with his back against a flat
(“planar”) RF receiver coil in our horizontal transaxial magnetic field. In contrast, the vertical magnetic field in the
recumbent-only Open MRI precludes the use of this type of receiver coil.
Relative to the high-field systems, the Upright MRI has two major competitive advantages:
Sometimes patient positioning is more consequential than a small increase in the image resolution and decrease in the
scan time. As it is critical for physicians to not “miss” anything in the images, they recognize that the position-dependent
pathology visualized with the Upright MRI will be invisible (“missed”) if their patients are scanned at a higher field strength.
Image artifacts arising from metal implants such as surgical screws are diminished with the 0.6 Tesla Upright MRI
compared to those from the high-field MRIs. It is well known that such artifacts get smaller as the MRI magnet’s field
strength is reduced, so the anatomy adjacent to implanted hardware will be less obscured with the Upright MRI. This is
particularly valuable for surgeons referring their postoperative patients for diagnostic imaging studies.
Fonar 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.
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OTHER IMAGING MODALITIES
FONAR CORPORATION AND SUBSIDIARIES
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.
4. 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.
5. 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
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FDA Regulation
FONAR CORPORATION AND SUBSIDIARIES
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.
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.
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FONAR CORPORATION AND SUBSIDIARIES
An investigational device exemption, also referred to as IDE, allows the investigational device to be used in a clinical study
pending FDA clearance in order to collect safety and effectiveness data required to support the Premarket Approval, also
referred to as PMA, application or a Premarket Notification pursuant to 510(k), submission to the FDA. Clinical studies are
most often conducted to support a PMA.
For the most part, however, we have not found it necessary to utilize IDE’s. The standard 90 day clearance for our new
MRI scanner products classified as Class II products makes the IDE unnecessary, particularly in view of the time and effort
involved in compiling the information necessary to support an IDE.
Quality System Regulation
The Quality Management System is applicable to the design, manufacture, administration of installation and servicing of
magnetic resonance imaging scanner systems. The FDA has authority to conduct detailed inspections of manufacturing
plants, to establish Good Manufacturing Practices which must be followed in the manufacture of medical devices, to
require periodic reporting of product defects and to prohibit the exportation of medical devices that do not comply with the
law.
Medical Device Reporting Regulation
Manufacturers must report all MDR reportable events to the FDA. Each manufacturer must review and evaluate all
complaints to determine whether the complaint represents an event which is required to be reported to FDA. Section
820.3(b) of the Quality Systems regulation defines a complaint as, "any written, electronic or oral communication that
alleges deficiencies related to the identity, quality, durability, reliability, safety, effectiveness, or performance of a device
after it is released for distribution."
A report is required when a manufacturer becomes aware of information that reasonably suggests that one of their
marketed devices has or may have caused or contributed to a death, serious injury, or has malfunctioned and that the
device or a similar device marketed by the manufacturer would be likely to cause or contribute to a death or serious injury
if the malfunction were to recur.
Malfunctions are not reportable if they are not likely to result in a death, serious injury or other significant adverse event
experience.
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.
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FONAR CORPORATION AND SUBSIDIARIES
FDA Enforcement
FDA may take the following actions to enforce the MDR regulation:
FDA-Initiated or Voluntary Recalls
Recalls are regulatory actions that remove a hazardous, potentially hazardous, or a misbranded product from the
marketplace. Recalls are also used to convey additional information to the user concerning the safe use of the product.
Either FDA or the manufacturer can initiate recalls.
There are three classifications, i.e., I, II, or III, assigned by the Food and Drug Administration to a particular product recall
to indicate the relative degree of health hazard presented by the product being recalled.
Class I
Is a situation in which there is a reasonable probability that the use of, or exposure to, a violative product will cause serious
adverse health consequences or death.
Class II
Is a situation in which use of, or exposure to, a violative product may cause temporary or medically reversible adverse
health consequences or where the probability of serious adverse health consequences is remote.
Class III
Is a situation in which use of, or exposure to, a violative product is not likely to cause adverse health consequences.
Fonar has initiated 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.
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Seizure
FONAR CORPORATION AND SUBSIDIARIES
A seizure is a civil court action against a specific quantity of goods which enables the FDA to remove these goods from
commercial channels. After seizure, no one may tamper with the goods except by permission of the court. The court
usually gives the owner or claimant of the seized merchandise approximately 30 days to decide a course of action. If they
take no action, the court will recommend disposal of the goods. If the owner decides to contest the government's charges,
the court will schedule the case for trial. A third option allows the owner of the goods to request permission of the court to
bring the goods into compliance with the law. The owner of the goods is required to provide a bond or, security deposit, to
assure that they will perform the orders of the court, and the owner must pay for FDA supervision of any activities by the
company to bring the goods into compliance.
Citation
A citation is a formal warning to a firm of intent to prosecute the firm if violations of the FD&C Act are not corrected. It
provides the firm an opportunity to convince FDA not to prosecute.
Injunction
An injunction is a civil action filed by FDA against an individual or company. Usually, FDA files an injunction to stop a
company from continuing to manufacture, package or distribute products that are in violation of the law.
Prosecution
Prosecution is a criminal action filed by FDA against a company or individual charging violation of the law for past
practices.
Foreign and Export Regulation
We obtain approvals as necessary in connection with the sales of our products in foreign countries. In some cases, FDA
approval has been sufficient for foreign sales as well. Our standard practice has been to require either the distributor or the
customer to obtain any such foreign approvals or licenses which may be required.
Legally marketed devices that comply with the requirements of the Food Drug & Cosmetic Act require a Certificate to
Foreign Government issued by the FDA for export. Other devices that do not meet the requirements of the FD&C Act but
comply with the laws of a foreign government require a Certificate of Exportability issued by the FDA. All products which
we sell have FDA clearance and would fall into the first category.
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.
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We received clearance to sell the Upright® MRI scanners in the EU in May, 2002.
FONAR CORPORATION AND SUBSIDIARIES
Other countries require that their own testing laboratories perform an evaluation of our devices. This requires that we must
bring the foreign agency’s personnel to the USA to perform the evaluation at our expense before exporting.
Some countries, including many in Latin America and Africa, have very few regulatory requirements, beyond FDA
clearance.
To date, Fonar has been able to comply with all foreign regulatory requirements applicable to its export sales.
PHYSICIAN AND DIAGNOSTIC SERVICES MANAGEMENT BUSINESS
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.
As a result of scheduled re-acquisitions of interest held by investors as of July 1, 2016, HDM is owned by Health
Management Corporation of America (70%) and investors (30%).
HDM 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 June 30, 2020, HMCA managed a total of 35 MRI scanners of which twenty-two (22) scanners are located in New
York and 13 scanners are located in Florida. For the 2020 fiscal year, the revenues HMCA recognized from the MRI
facilities has remained constant at $77.2 million, for the 2020 and 2019 fiscal years. Four of the facilities in Florida are
owned by HMCA subsidiaries, where the corporate practice of medicine is permitted.
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FONAR CORPORATION AND SUBSIDIARIES
We believe the utilization of FONAR Upright® MRI scanning systems, which are produced under the protection of our
patents, accounts for the historically robust patient volume at the scanning facilities and, most recently, our steady
recovery from the effects of the COVID-19 pandemic. During fiscal 2020, a second MRI scanner was installed in the
second quarter at our Ormond Beach, Florida facility and a new HMCA-owned facility was installed in the first quarter of
2021 in Pembroke Pines, Florida.
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.
PHYSICIAN AND DIAGNOSTIC MANAGEMENT SERVICES
HMCA’s services to the facilities it manages encompass substantially all of their business operations. Each facility is
controlled, however, not by HMCA, but by the physician owner, or in the case of the four Florida sites owned by HMCA
subsidiaries, by the medical director, and all medical services are performed by physicians and other medical personnel
under the physician-owner’s supervision. HMCA is the management company and performs services of a non-medical
nature. These services include:
1. Offices and Equipment. HMCA identifies, negotiates leases for and/or provides office space and equipment to its clients.
This includes technologically sophisticated medical equipment. HMCA also provides improvements to leaseholds,
assistance in site selection and advice on improving, updating, expanding and adapting to new technology.
2. Personnel. HMCA staffs all the non-medical positions of its clients with its own employees, eliminating the client's need
to interview, train and manage non-medical employees. HMCA processes the necessary tax, insurance and other
documentation relating to employees.
3. Administrative. HMCA assists in the scheduling of patient appointments, purchasing of office and medical supplies and
equipment and handling of reporting, accounting, processing and filing systems. It prepares and files the physician portions
of complex applications to enable its clients to participate in managed care programs and to qualify for insurance
reimbursement. HMCA assists the clients to implement programs and procedures to ensure full and timely regulatory
compliance and appropriate cost reimbursement under no-fault insurance and Workers' Compensation guidelines, as well
as compliance with other applicable governmental requirements and regulations, including HIPAA and other privacy
requirements.
4. Billing and Collections. HMCA is responsible for the billing and collection of revenues from third-party payors including
those governed by No-Fault and Workers' Compensation statutes. HMCA is presently using a third party to perform its
billing and collection services for its clients’ No-Fault and Workers’ Compensation scanning business.
5. Cost Saving Programs. Based on available volume discounts, HMCA seeks to assist in obtaining favorable pricing for
office and medical supplies, medical imaging film, equipment, contrast agents, such as gadolinuim, and magnavist and
other inventory for its clients.
6. Diagnostic Imaging and Ancillary Services. HMCA can offer access to diagnostic imaging equipment through diagnostic
imaging facilities it manages. The Company is expanding the ancillary services offered in its network to include x-rays, and
other MRI equipment such as high-field (1.5 or 3.0 Tesla magnet strength) MRI scanners and extremity MRI scanners.
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FONAR CORPORATION AND SUBSIDIARIES
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.
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 2019, the aggregate amount of
management fees was $4,389,498 per month. In fiscal 2020, the aggregate amount of management fees was $4,530,422
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 2020,
the aggregate monthly amount of management fees payable to HMCA by these sites was $897,745
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 $22,495,260 in fiscal 2020.
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 2019 and
fiscal 2020. 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.
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FONAR CORPORATION AND SUBSIDIARIES
HMCA develops marketing programs and educational programs in an effort to establish and maintain referring physician
relationships for our clients and Florida 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 six facilities in Florida have two or more MRI scanners. One facility in New York and two in Florida also
perform X-rays. During Fiscal 2020, a second MRI was installed at our Ormond Beach, Florida facility and a new HMCA
facility became operational in Pembroke Pines, 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.
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.
CMS’ 2010 regulatory changes to the MPFS 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, 2020, Medicare
revenues represented approximately 3.8% of the revenues for HMCA’s clients and subsidiaries as compared to 4.0% for
the fiscal year ended June 30, 2019. In January, 2014 additional reductions in Medicare reimbursement were adopted, and
New York State is expected to propose reducing Workers’ Compensation reimbursements.
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Medicaid
FONAR CORPORATION AND SUBSIDIARIES
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 2020, approximately 0.07% of the revenues of HMCA’s clients were
attributable to Medicaid, as compared to 0.13% in fiscal 2019. 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.
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.
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Federal False Claims Act
FONAR CORPORATION AND SUBSIDIARIES
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.
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
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.
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Anti-kickback Regulation
FONAR CORPORATION AND SUBSIDIARIES
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 2020, approximately 3.8% of the revenues of HMCA’s clients were attributable to Medicare and 0.07% were
attributable to Medicaid. In fiscal 2019, approximately 4.0% of the revenues of HMCA’s clients were attributable to
Medicare and 0.13% were attributable to Medicaid.
Deficit Reduction Act (DRA)
On February 8, 2006, the President signed into law the DRA. Effective January 1, 2007, the DRA provides that Medicare
reimbursement for the technical component for imaging services (excluding diagnostic and screening mammography)
performed in freestanding facilities will be capped. Payment 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.
Page 22
FONAR CORPORATION AND SUBSIDIARIES
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.
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.
Page 23
Patient Protection and Affordable Care Act
FONAR CORPORATION AND SUBSIDIARIES
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. We are unable to predict
the full impact of PPACA at this time primarily due to the present administration’s efforts to repeal and replace the PPACA,
or to utilize executive action to modify the Act’s provisions where possible.
State Regulation
In addition to the federal self-referral law and federal Anti-kickback statute, many States, including those in which HMCA
and its clients operate, have their own versions of self-referral and anti-kickback laws. These laws are not limited in their
applicability, as are the federal laws, to specific programs. HMCA believes that it and its clients are in compliance with
these laws.
Various States prohibit business corporations from practicing medicine. Various States, including New York, also prohibit
the sharing of professional fees or fee splitting. Consequently, in New York HMCA leases space and equipment to clients
and provides clients with a range of non-medical administrative and managerial services for agreed upon fees. Under
Florida law a business entity can bill patients and third party payors directly if that entity is properly licensed through AHCA.
All of the seven facilities in Florida are licensed healthcare clinics through AHCA.
HMCA’s clients and subsidiaries generate revenue from patients covered by no-fault insurance and workers'
compensation programs. For the fiscal year ended June 30, 2020 approximately 56.7% of our clients’ receipts were from
patients covered by no-fault insurance and approximately 9.11% of our client’s receipts were from patients covered by
workers’ compensation programs. For the fiscal year ended June 30, 2019, approximately 57.5.% of HMCA’s clients’
receipts were from patients covered by no-fault insurance and approximately 9.2% 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.
Page 24
EMPLOYEES
FONAR CORPORATION AND SUBSIDIARIES
Fonar and HMCA had approximately 424 employees as of September 15, 2020. 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.
ITEM 1A. RISK FACTORS
An investment in our securities is subject to various risks, the most significant of which are summarized below.
1.
2.
3.
4.
5.
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.
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.
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.
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.
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.
Page 25
6.
7.
8.
9.
FONAR CORPORATION AND SUBSIDIARIES
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.
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.
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. Over the past several years there have been various bills introduced by a number of Florida
legislators to eliminate PIP and instead mandate coverage including some combination of a minimum of bodily
injury and a reduced or no amount of medical payments (Medpay coverage). 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. The recent bills, which were introduced in
2020, gained no traction.
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.
Page 26
FONAR CORPORATION AND SUBSIDIARIES
Information security risks have significantly increased because of the proliferation of new technologies, the use of
the internet and telecommunications technologies to conduct our operations, and the increased sophistication and
activities of organized crime, hackers, terrorists and other external parties, including foreign state agents. Our
operations rely on the secure processing, transmission and storage of confidential, proprietary and other
information in our computer systems and networks.
10.
11.
COVID-19. Although we believe we have taken the proper steps and made a good recovery from the impact of the
COVID-19 virus, the course and severity of the virus in the following months, and the ultimate economic and
medical impact it will have worldwide and at home, have so far eluded more than minimal predictability.
Other 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. There are no material legal proceedings threatened or pending against the Company.
ITEM 4. MINE SAFETY DISCLOSURES. Not Applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded in the Nasdaq SmallCap market under the National Association of Securities Dealers
Automated Quotation System, also referred to as "NASDAQ", under the symbol FONR. The following table sets forth the
high and low trades reported in NASDAQ System for the periods shown.
Fiscal Quarter
January - March
April - June
July - September
October - December
January - March
April - June
July - September
October - December
January - March
March - June
July - September
October - December
January - March
April - June
July - September 15,
2017
2017
2017
2017
2018
2018
2018
2018
2019
2019
2019
2019
2020
2020
2020
High
$ 20.85
$ 29.40
$ 31.90
$ 33.75
$ 29.95
$ 30.10
$ 28.80
$ 25.77
$ 23.85
$ 23.00
$ 25.25
$ 20.94
$ 20.24
$ 25.99
$ 26.49
Low
$ 17.30
$ 17.20
$ 25.31
$ 21.10
$ 22.15
$ 25.31
$ 23.70
$ 19.63
$ 20.01
$ 18.85
$ 20.44
$ 19.07
$ 11.00
$ 13.85
$ 20.31
Page 27
Performance Graph
FONAR CORPORATION AND SUBSIDIARIES
The following graph compares the annual change in the Company’s cumulative total shareholder return on its Common
Stock during a period commencing on June 30, 2016 and ending on June 30, 2020 (as measured by dividing (i) the sum of
(A) the cumulative amount of dividends for the measurement period, assuming dividend reinvestment and (B) the
difference between the Company’s share price at the end and the beginning of the measurement period; by (ii) the share
price at the beginning of the measurement period) with the cumulative total return of each of: (a) the CRSP Composite
Total Return Index for Nasdaq (“Nasdaq”); (b) the CRSP Total Return Index for Nasdaq Medical Equipment Manufacturers
(“Nas-MED”); and (c) the CRSP Total Return Index for Nasdaq Healthcare companies (“Nas-Hea.”) during such period,
assuming a $100 investment on June 30, 2016. The stock price performance on the graph below is not necessarily
indicative of future price performance.
Relative Dollar Values
Fonar Common Stock
NASDAQ
NAS-Med
NAS-Hea
June 30,
2016
$
$
$
$
100.00
100.00
100.00
100.00
June 30,
2017
$
$
$
$
139.10
128.30
118.68
119.91
June 30,
2018
$
$
$
$
133.15
158.57
137.07
148.46
June 29,
2019
$
$
$
$
107.87
170.91
163.75
152.83
June 28,
2020
$
$
$
$
106.37
216.96
173.91
174.53
On September 15, 2020, we had approximately 1,005 stockholders of record of our Common Stock, 10 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 28
ITEM 6. SELECTED FINANCIAL DATA.
FONAR CORPORATION AND SUBSIDIARIES
The following selected consolidated financial data has been extracted from our consolidated financial statements for the
five years ended June 30, 2020. 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.
STATEMENT OF OPERATIONS
Revenues
Cost of revenues
Research and Development
Expenses
Net Income(Loss)
Basic Net Income (Loss)per common
share
Diluted Net Income (Loss) per
common share
Basic Weighted average number of
shares outstanding
Diluted Weighted average number of
shares outstanding
BALANCE SHEET DATA
Working capital
Total Assets
Long-term debt and obligations under
capital leases
Stockholder’s equity
2020
2019
2018
2017
2016
$ 85,690,462 $ 87,192,887 $ 81,515,994 $78,036,586 $73,368,210
$ 43,296,825 $ 43,984,593 $ 41,950,770 $38,052,425 $38,870,898
$ 2,025,376 $ 1,812,347 $ 1,755,747 $ 1,480,670 $ 1,631,846
$ 11,704,733 $ 20,513,674 $ 25,452,185 $23,678,798 $18,795,517
$
$
1.20 $
2.26 $
3.16 $
2.98 $
1.18 $
2.22 $
3.10 $
2.92 $
2.43
2.38
6,443,713
6,354,103
6,287,510
6,161,599
6,050,893
6,571,217
6,481,607
6,415,014
6,289,103
6,178,397
$ 77,226,104 $ 70,998,783 $ 52,497,840 $39,177,703 $24,946,326
$180,259,380 $133,560,210 $118,310,945 $98,762,566 $84,887,606
336,761 $ 2,059,236
$ 2,116,587 $
$126,242,616 $118,112,103 $102,234,471 $82,909,953 $60,776,307
306,035 $
273,112 $
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.
Page 29
FONAR CORPORATION AND SUBSIDIARIES
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.
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, 2020 and June 30, 2019 11.9% and 10.7%, 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.
The most significant adverse impact on on our Company in fiscal 2020 has been the COVID-19 pandemic. Although it had
seemed the worst had passed, events in September, 2020 have shown a spike in new cases. This is by no means a
problem confined to our Company, but regardless of our best efforts, our results of operation and financial condition are
potentially volatible and severe.
During March 2020 the global pandemic of COVID-19 has caused turbulence and uncertainty in the United States and
international markets and economies which have adversely effected our workforce, liquidity, financial conditions, revenues,
profitability and business operations. Generally COVID-19 had caused us to require that much of our workforce work from
home and has restricted the ability of our personnel to travel for marketing purposes or to service our customers. The
Company experienced a sudden drop in scan volume for a short term period and while the Company is not back to
pre-COVID-19 levels, the scan volume has risen. During the fourth quarter of Fiscal 2020, the Company was able to enact
certain decisions to allow the Company to survive during the global pandemic and from further losses or additional
decreases in scan volume. The Company immediately enacted wide scale furloughs, deferment of up to 50% of
management salaries, halted variable compensation plans and rent deferrals were negotiated with nearly all landlords.
Reductions of the salaries of non-controlling interest group members, who are actively involved in the management of the
Company, accounted for most of the payroll savings from cutbacks during the fourth quarter. The Company also received
some government stimulus funds from the Paycheck Protection Program (“PPP) and Medicare advances/stimulus
payments. Although we are unable to predict if there will be additional consequences on our operations from the continuing
global pandemic of COVID-19, the Company believes with the positive cash flows, low debt and cash on hand, it will be
able to continue operations going forward.
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.
Page 30
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, 2019, the net deferred tax asset was valued at $20,937,747. At June 30, 2020, the net deferred tax asset was
valued at $18,809,757.
We depreciate our long-lived assets over their estimated economic useful lives with the exception of leasehold
improvements where we use the shorter of the assets useful lives or the lease term of the facility for which these assets
are associated.
The Company provides for medical receivables that could become uncollectible by establishing an allowance for doubtful
accounts in order to adjust medical receivables to estimated net realizable value. In evaluating the collectability of medical
receivables, the Company considers a number of factors, including the age of the account, historical collection
experiences, payor type, current economic conditions and other relevant factors. There are various factors that impact
collection trends, such as payor mix, changes in the economy, increase burden on copayments to be made by patients
with insurance and business practices related to collection efforts. These factors continuously change and can have an
impact on collection trends and the estimation process.
We amortize our intangible assets, including patents, and capitalized software development costs, over the shorter of the
contractual/legal life or the estimated economic life. Our amortization life for patents and capitalized software development
costs is 15 to 17 years and 5 years, respectively. Our amortization of the non-competition agreements entered into with
certain individuals in connection with the HDM transaction are depreciated over seven years, and customer relationships
are amortized over 20 years.
Page 31
FONAR CORPORATION AND SUBSIDIARIES
Goodwill is recorded as a result of business combinations. Management evaluates goodwill, at a minimum, on an annual
basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable.
Impairment of goodwill is tested by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of
the reporting unit. The fair value of a reporting unit is estimated using a combination of the income or discounted cash
flows approach and the market approach, which uses comparable market data. If the carrying amount of the reporting unit
exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of
impairment loss, if any. Based on our test for goodwill impairment, we noted no impairment related to goodwill. However, if
estimates or the related assumptions change in the future, we may be required to record impairment charges to reduce the
carrying amount of goodwill.
We periodically assess the recoverability of long-lived assets, including property and equipment, intangibles and
management agreements, when there are indications of potential impairment, based on estimates of undiscounted future
cash flows. The amount of impairment is calculated by comparing anticipated discounted future cash flows with the
carrying value of the related asset. In performing this analysis, management considers such factors as current results,
trends, and future prospects, in addition to other economic factors.
RESULTS OF OPERATIONS. FISCAL 2020 COMPARED TO FISCAL 2019
In fiscal 2020, we recognized net income of $11.7 million on revenues of $85.7 million, as compared to net income of
$20.5 million on revenues of $87.2 million for fiscal 2019. This represents a decrease in revenues of 1.7%. Patient fee
revenue net of contractual allowances decreased by 7.1%. Total costs and expenses increased by 10.7%. Our
consolidated operating results decreased by $8.5 million to an operating income of $13.7 million for fiscal 2020 as
compared to operating income of $22.1 million for fiscal 2019.
Discussion of Operating Results of Medical Equipment Segment
Fiscal 2020 Compared to Fiscal 2019
Revenues attributable to our medical equipment segment decreased by 15.5% to $8.5 million in fiscal 2020 from $10.0
million in fiscal 2019, with product sales revenues decreasing by 83.0% from $1.8 million in fiscal 2019 to $298,000 in
fiscal 2020. Service revenue decreased from $8.3 million in fiscal 2019 to $8.2 million in fiscal 2020.
The Upright® MRI is unique in that it permits MRI scans to be performed on patients upright in the weight-bearing state
and in multiple positions that correlate with symptoms.
Product sales to unrelated parties decreased by 83.0% in fiscal 2020 from $1.8 million in fiscal 2019 to $298,000 in fiscal
2020. There were no product sales to related parties in fiscal 2020 or 2019.
We believe that one of our principal challenges in achieving greater market penetration is attributable to the better name
recognition and larger sales forces of our larger competitors such as General Electric, Siemens, Hitachi, Philips and
Toshiba and the ability of some of our competitors to offer attractive financing terms through affiliates, such as G.E.
Capital.
In addition, lower reimbursement rates have reduced the demand for our MRI products, resulting in lower sales volumes.
As a result of fewer sales, service revenues have decreased since as older scanners are taken out of service, there are
fewer new scanners available to sign service contracts.
The operating loss for the medical equipment segment increased from an operating loss of $3.4 million in fiscal 2019 to an
operating loss of $6.4 million in fiscal 2020. The losses are attributable most significantly to the fact that costs increased by
a greater amount than revenues.
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FONAR CORPORATION AND SUBSIDIARIES
We recognized revenues of $96,000 from the sale of our Upright® MRI scanners in fiscal 2020, while in fiscal 2019, we
recognized revenues of $779,000 from the sale of Upright® MRI scanners.
Research and development expenses, increased to $2.0 million in fiscal 2020 from $1.8 million in fiscal 2019. Our
expenses for fiscal 2020 represented continued research and development of various upgrades for the Upright® MRI
scanner.
Discussion of Operating Results of Physician and Diagnostic Services Management Segment.
Fiscal 2020 Compared to Fiscal 2019
Revenues attributable to the Company's physician and diagnostic services management segment, HMCA, remained
constant at $77.2 million in fiscal 2020 and in fiscal 2019. The decrease in revenues was due to $1.7 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 $1.7 million.
Cost of revenues as a percentage of the related revenues for our physician and diagnostic services management segment
decreased from $40.2 million or 52.0% of related revenues for the year ended June 30, 2019 to $39.8 million, or 51.5% of
related revenues for the year ended June 30, 2020. The revenues increased more than the costs relating to these
revenues.
Operating results of this segment decreased from operating income of $25.6 million in fiscal 2019 to operating income of
$20.1 million in fiscal 2020. 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 2020 Compared to Fiscal 2019
Interest and investment income increased in 2020 compared to 2019. We recognized interest income of $502,145 in 2020
as compared to $482,573 in fiscal 2019, representing an increase of 4.1%.
Interest expense of $74,321 was recognized in fiscal 2020, as compared to interest expense of $98,636 in fiscal 2019.
This was due to additional principal payments being made to retire our debt.
While revenue decreased by 1.7% selling, general and administrative expenses increased by 38.7% to $26.7 million in
fiscal 2020 from $19.3 million in fiscal 2019. This increase was almost exclusively due to reserves placed on service
contracts and management fees and other receivables resulting from the COVID-19 pandemic. It is too early to know how
much of these reserves will be recovered.
The compensatory element of stock issuances decreased from $1,990,380 in fiscal 2019 to $0 in fiscal 2020.
Revenue from service and repair fees decreased from $8.3 million in fiscal 2019 to $8.2 million in fiscal 2020.
Page 33
FONAR CORPORATION AND SUBSIDIARIES
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 2020 we continued our investment in the
development of various upgrades for the UPRIGHT® MRI, with an investment of $2,025,376 in research and development,
none of which was capitalized, as compared to $1,812,347, none of which was capitalized, in fiscal 2019. The research
and development expenditures were approximately 23.9% of revenues attributable to our medical equipment segment and
2.4% of total revenues in 2020, and 18.1% of medical equipment segment revenues and 2.1% of total revenues in fiscal
2019. This represented a 11.8% increase in research and development expenditures in fiscal 2020 as compared to fiscal
2019.
For the physician and diagnostic services management segment, HMCA, revenues remained constant at $77.2 million in
fiscal 2019 and in fiscal 2020. This is primarily attributable to an increase in patient scans resulting from our marketing
efforts.
For the fiscal year 2020 the Company recorded an income tax expense, net of $2.4 million compared with an income tax
expense of $2.0 million for 2019. The income tax benefits is attributable to the expected tax benefits associated with the
projected realization and utilization of our net operating losses in future periods. The Company has recorded a deferred tax
asset of $18.8 million as of June 30, 2020, 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. Although the Company is projecting to generate taxable income in future periods, they cannot
accurately measure the full impact of the adoption of healthcare regulations, including the impact of continuing changes in
MRI scanning reimbursement rates, which could materially impact operations. A partial valuation allowance will be
maintained until evidence exists to support that it is no longer needed.
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. 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).
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.
The COVID-19 pandemic has had a severe adverse effect on our revenues during the final quarter of 2020. The continuing
impact of this pandemic cannot be predicted for future periods, notwithstanding recent improvements.
On March 23, 2010, President Obama signed into law healthcare reform legislation in the form of the Patient Protection
and Affordable Care Act, or PPACA. The impact of the PPACA is uncertain mostly because of the efforts of the present
administration to repeal and/or replace the Act and executive actions taken to minimize to the extent possible the effects
and requirements of the Act.
Page 34
FONAR CORPORATION AND SUBSIDIARIES
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 increased by 165.1% from $13.9 million at June 30, 2019 to $36.8 million at June 30, 2020.
Cash provided by operating activities for fiscal 2020 approximated $20.4 million. Cash provided by operating activities was
attributable to the net income of $11.7 million, depreciation and amortization of $3.9 million, deferred income tax expense
benefit of $2.1 million which was offset by the increase in accounts, medical and management fee receivables of $10.8
million.
Cash provided by investing activities for fiscal 2020 approximated $7.4 million. The cash provided from investing activities
was attributable to purchases of property and equipment of $7.5 million, proceeds of short term investments of $15.1
million and costs of patents of $118,000.
Cash used by financing activities for fiscal 2020 approximated $4.9 million. The principal uses of cash in financing
activities included the proceeds from loans and capital lease obligations of $5.6 million, and repayment of borrowings and
capital lease obligations of $5.0 million and distributions to non-controlling interests of $5.6 million.
Total liabilities increased by 249.8% during fiscal 2020, from approximately $15.4 million at June 30, 2019 to approximately
$54.0 million at June 30, 2020. This was due mainly to the implementation of a new accounting pronouncement.
As at June 30, 2020, our obligations included approximately $2.2 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, 2020, we had working capital of approximately $77.2 million as compared to working capital of $71.0 million at
June 30, 2019, and stockholders’ equity of $126.2 million at June 30, 2020 as compared to stockholders’ equity of $118.1
million at June 30, 2019. For the year ended June 30, 2020, we realized a net income of 11.7 million.
Our principal sources of liquidity are derived from revenues.
Our business plan includes a program for manufacturing and selling our Upright® MRI scanners. In addition, we are
enhancing our revenue by participating in the physician and diagnostic services management business through our
subsidiary, HMCA and have upgraded the facilities which it manages, most significantly by the replacement of the original
MRI scanners with new Upright® MRI scanners. As of June 30, 2020, HMCA manages a total of 35 MRI scanners of
which 22 MRI scanners are located in New York and 13 are located in Florida. 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 $8.3 million for the year
ended June 30, 2019 and $8.2 million for the year ended June 30, 2020.
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.
Page 35
FONAR CORPORATION AND SUBSIDIARIES
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 2020 approximated $7.6 million. Capitalized patent costs were approximately $118,000.
Purchases of property and equipment were approximately $7.5 million.
In July, 2020, we completed the installation of a new MRI facility in Pembroke Pine, Florida.
Fonar has not committed to making capital expenditures in the 2021 fiscal year, except for placing three (3) additional
scanners at facilities located in New York.
The Company believes that its business plan has been responsible for the past five consecutive fiscal years of profitability
(fiscal 2020, fiscal 2019, fiscal 2018, fiscal 2017 and fiscal 2016) and that its capital resources will be adequate to support
operations at current levels through September 30, 2021.
On April 20, 2020, we entered into a $4,917,325 loan agreement with the Paycheck Protection Program (“PPP”) under the
CARES Act. Due to an abundance of caution, however, on May 1, 2020, we returned the full amount of the loan, since it
became increasingly unclear whether or not a public company would be required to seek other sources of financing.
On June 30, 2020, the Company received loan proceeds in the amount of $700,764 under the Paycheck Protection
Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”),
provides for loans to qualifying businesses for amount up to 2.5 times of the average monthly payroll expenses of the
qualifying business. The Company applied for this additional loan exclusively for the Florida locations during June 2020
due to the fact that the COVID-19 virus was increasing in Florida. The loans and accrued interest are forgivable after 24
weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities,
and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or
reduces salaries during the 24 week period. The Company believes that most if not all of the loan proceeds will be
forgiven, however there is no assurance that it will be forgiven until approval is received.
During September 2020 the Company amended their revolving credit agreement. The terms increase the borrowing limits
from $3,000,000 to $10,000,000 and the agreement was extended to August 2021. The interest rate on borrowings
remains at 4% along with certain financial covenants still applicable.
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.
Page 36
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, 2020 and 2019
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended June 30, 2020 and 2019
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended June 30, 2020 and 2019
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 2020 and 2019
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 37
Page No.
38
40
43
45
46
47
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, 2020 and 2019, the related consolidated statements of income, stockholders’ equity and cash
flows for each of the two years in the period ended June 30, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the two
years in the period ended June 30, 2020, in conformity with accounting principles generally accepted in the United States
of America.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for
leases in 2019 due to the adoption of the guidance in ASC Topic 842, Leases.
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
Public Company Accounting Oversight Board (United States) ("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. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no such opinion.
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 provides a reasonable basis for our opinion.
/s/ Marcum LLP
Marcum LLP
Page 38
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, NY
September 30, 2020
Page 39
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
$514,561 and $190,244 at June 30, 2020 and 2019, respectively
Accounts receivable – related party
Medical receivables - net
Management and other fees receivable – net of allowances for
doubtful accounts of $11,063,233 and $9,404,944 at June 30,
2020 and 2019, respectively
Management and other fees receivable – related party medical
practices – net of allowances for doubtful accounts of $3,322,055
and $2,310,731 at June 30, 2020 and 2019, 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
Accounts receivable – long term
Deferred income tax asset
Property and equipment – net
Right-of-use-asset – operating leases
Right-of-use-asset – financing lease
Goodwill
Other intangible assets – net
Other assets
Total Assets
See accompanying notes to consolidated financial statements.
Page 40
June 30,
2020
2019
$
36,802,342
31,884
$
13,882,013
15,094,816
4,312,999
5,988
16,171,782
3,736,662
—
15,728,935
27,437,768
25,709,489
6,896,482
6,500,614
152,833
1,648,770
671,185
1,757,499
95,889,532
—
2,730,071
18,809,757
21,364,034
31,392,458
1,325,870
3,985,397
4,109,129
653,132
$ 180,259,380
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
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES
Current Liabilities:
Current portion of long-term debt and capital leases
Accounts payable
Other current liabilities
Operating lease liability – current portion
Financing lease liability – current portion
Unearned revenue on service contracts
Customer deposits
Total Current Liabilities
Long-Term Liabilities:
Unearned revenue on service contracts
Deferred income tax liability
Due to related party medical practices
Operating lease liability – net of current portion
Financing lease liability – net of current portion
Long-term debt and capital leases, less current portion
Other liabilities
Total Long-Term Liabilities
Total Liabilities
Commitments, Contingencies and Other Matters
See accompanying notes to consolidated financial statements.
Page 41
June 30,
2020
2019
$
108,379
1,965,259
8,185,098
3,370,149
74,699
4,105,265
854,579
18,663,428
2,655,605
234,106
92,663
30,104,464
1,251,171
865,416
150,311
35,353,736
54,017,164
$
40,530
1,861,227
7,577,416
—
—
3,812,115
798,651
14,089,939
—
243,267
92,663
—
—
273,112
749,126
1,358,168
15,448,107
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, 2020 and 2019, 313,438 issued and
outstanding at June 30, 2020 and 2019
Preferred stock $.001 par value; 567,000 shares authorized at June
30, 2020 and 2019, issued and outstanding – none
Common stock $.0001 par value; 8,500,000 shares authorized at
June 30, 2020 and 2019, 6,459,106 and 6,369,125 issued at June
30, 2020 and 2019, respectively; 6,447,463 and 6,357,482
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, 2020 and 2019, 146
issued and outstanding at June 30, 2020 and 2019
Class C common stock (25 votes per share) $.0001 par value;
567,000 shares authorized at June 30, 2020 and 2019, 382,513
issued and outstanding at June 30, 2020 and 2019
Paid-in capital in excess of par value
Accumulated deficit
Treasury stock, at cost – 11,643 shares of common stock at June
30, 2020 and 2019
Total Fonar Corporation’s Stockholders’ Equity
Noncontrolling interests
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
See accompanying notes to consolidated financial statements.
Page 42
June 30,
2020
2019
$
$
31
—
647
—
31
—
638
—
38
183,076,888
(56,215,251)
(675,390)
126,186,963
55,253
126,242,216
$ 180,259,380
38
181,086,517
(64,455,456)
(675,390)
115,956,378
2,155,725
118,112,103
$ 133,560,210
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Revenues
Patient fee revenue, net of contractual allowances and discounts
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 $0 and $1,990,380 for the years
ended June 30, 2020 and 2019 respectively
Total Costs and Expenses
Income from Operations
Other Income and (Expenses):
Interest expense
Investment income
Other income (expense)– net
Income before provision for income taxes and noncontrolling
interests
Provision for Income Taxes
Net Income
Net Income – Noncontrolling Interests
Net Income – Attributable to FONAR
See accompanying notes to consolidated financial statements.
Page 43
For the Years Ended June 30,
2019
2020
$
22,495,260
297,613
8,055,490
110,000
44,565,405
10,166,694
85,690,462
745,375
2,731,397
37,298
10,880,265
22,951,301
5,951,189
2,025,376
26,717,345
72,039,546
13,650,916
(74,321)
502,145
70,771
$
24,207,536
1,751,221
8,152,173
110,000
43,617,093
9,354,864
87,192,887
778,734
3,009,097
40,603
10,789,308
23,419,796
5,947,055
1,812,347
19,261,755
65,058,695
22,134,192
(98,636)
482,573
1,065
14,149,511
(2,444,778)
11,704,733
(3,464,528)
8,240,205
$
$
22,519,194
(2,005,520)
20,513,674
(5,196,543)
15,317,131
$
$
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
See accompanying notes to consolidated financial statements.
Page 44
2020
7,735,650
376,055
128,500
1.20
1.18
0.34
$
$
$
$
$
$
2019
14,366,798
708,302
242,031
2.26
2.22
0.63
$
$
$
$
$
$
6,443,713
6,354,103
6,571,217
6,481,607
382,513
382,513
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2020 AND 2019
Balance - July 1, 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
Net income
Stock issued to employees under stock bonus
plans
Distributions to noncontrolling interests
Balance - June 30, 2020
$
$
$
Class A
Non-Voting
Preferred
31
—
—
—
—
31
—
—
—
31
Common
Shares
6,287,511
—
69,971
—
—
6,357,482
—
89,981
—
6,447,463
Class C
Stock Amount Common Stock
38
$
—
630
—
$
8
—
—
638
—
9
—
647
$
$
$
$
—
—
—
38
—
—
—
38
Balance - July 1, 2018
Net income
Stock issued to employees under stock bonus plans
Distributions to noncontrolling interests
Payments on notes receivable from employee
stockholders
Balance - June 30, 2019
Net income
Stock issued to employees under stock bonus plans
Distributions to noncontrolling interests
Balance - June 30, 2020
Balance - July 1, 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
Net income
Stock issued to employees under stock bonus plans
Distributions to noncontrolling interests
Balance - June 30, 2020
Paid-in Capital
in Excess of
Par Value
$ 179,131,780
—
1,954,737
—
—
$ 181,086,517
—
1,990,371
—
$ 183,076,888
Treasury Stock
(675,390)
$
—
—
—
—
(675,390)
—
—
—
(675,390)
$
$
Accumulated
Deficit
$ (79,772,587)
15,317,131
—
—
—
$ (64,455,456)
8,240,205
—
—
$ (56,215,251)
Noncontrolling
Interests
$
$
$
3,559,182
5,196,543
—
—
(6,600,000)
2,155,725
3,464,528
—
(5,565,000)
55,253
Notes
Receivable
From Employee
Stockholders
$
$
$
(9,213)
—
—
—
9,213
—
—
—
—
—
Total
$ 102,234,471
20,513,674
1,954,745
9,213
(6,600,000)
$ 118,112,103
11,704,733
1,990,380
(5,565,000)
$ 126,242,216
See accompanying notes to consolidated financial statements.
Page 45
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
Provision (Recovery) for bad debts
Deferred income tax - net
Income tax receivable
Amortization on right-of-use assets
Stock issued for costs and expenses
(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
Operating lease liabilities
Other liabilities
Due to related party medical practices
NET CASH PROVIDED BY OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment
Proceeds of Short term investment
Purchase of Short term investment
Cost of patents
NET CASH USED IN INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of borrowings and capital lease obligations
Proceeds from debt
Repayment of notes receivable from employee stockholders
Distributions to noncontrolling interests
NET CASH USED IN FINANCING ACTIVITIES
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
CASH AND CASH EQUIVALENTS – BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS – END OF YEAR
See accompanying notes to consolidated financial statements.
Page 46
For the Years Ended June 30,
2019
2020
$
11,704,733
$
20,513,674
3,908,648
5,695,420
2,118,829
528,815
1,005,560
1,990,380
(10,797,456)
28,889
372,277
149,396
(133,287)
(161,350)
104,032
3,556,437
55,928
159,657
115,855
—
20,402,763
(7,522,997)
15,062,932
—
(117,522)
7,422,413
(4,957,936)
5,618,089
—
(5,565,000)
(4,904,847)
3,836,491
(978,730)
1,755,520
—
—
1,954,745
(6,134,095)
(12,689)
(438,472)
(366,786)
(79,641)
329
560,977
(980,394)
(59,544)
—
11,943
(134,880)
19,448,448
(3,355,456)
—
(15,094,816)
(128,393)
(18,578,665)
(30,725)
—
9,213
(6,600,000)
(6,621,512)
22,920,329
13,882,013
36,802,342
$
(5,751,729)
19,633,742
13,882,013
$
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
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.
During March 2020 the global pandemic of COVID-19 has caused turbulence and uncertainty in the United States and
international markets and economies which has adversely effected our workforce, liquidity, financial conditions, revenues,
profitability and business operations. Generally COVID-19 had caused us to require that much of our workforce work from
home and has restricted the ability of our personnel to travel for marketing purposes or to service our customers. The
Company experienced a sudden drop in scan volume for a short term period and while the Company is not back to
pre-COVID-19 levels, the volume has risen. During the 4th quarter of fiscal 2020, the Company was able to enact certain
decisions to allow the Company to survive during the global pandemic and from further losses or additional decreases in
scan volume. The Company immediately enacted wide scale furloughs, deferment of up to 50% of management salaries,
halted variable compensation plans and rent deferrals were negotiated with the majority of all landlords. The Company also
received some government stimulus funds from the Paycheck Protection Program (‘PPP’) program and Medicare
advances/stimulus payments. Although we are unable to predict if there will be additional consequences on our operations
from the continuing global pandemic of COVID-19, the Company believes with the positive cash flows, low debt and cash
on hand, it will be able to continue operations going forward.
Page 47
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of FONAR Corporation, its majority and wholly-owned
subsidiaries and partnerships. The operating activities of subsidiaries are included in the accompanying consolidated
statements from the date of acquisition. All significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities in the consolidated financial statements and accompanying
notes. The most significant estimates relate to receivable allowances, intangible assets, income taxes and related tax
asset valuation allowances, useful lives of property and equipment, contingencies, revenue recognition and the
assessment of litigation. In addition, healthcare industry reforms and reimbursement practices will continue to impact the
Company's operations and the determination of contractual and other allowance estimates. Actual results could differ from
those estimates.
Inventories
Inventories consist of purchased parts, components and supplies, as well as work-in-process, and are stated at the lower
of cost, determined on the first-in, first-out method, or market.
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 $1,870,000 and $1,557,000 for the years ended June 30, 2020 and 2019 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
Page 48
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Other Intangible Assets
1) Patents and Copyrights
Amortization is calculated on the straight-line basis over 15 years.
2) Non-Competition Agreements
The non-competition agreements are being amortized on the straight line basis over the length of the agreement (7 years).
3) Customer Relationships
Amortization is calculated on the straight line basis over 20 years.
Goodwill
Generally accepted accounting principles in the United States require the Company to perform a goodwill impairment test
annually and more frequently when negative conditions or a triggering event arises. Impairment of goodwill is tested at the
reporting unit level by comparing the reporting unit’s carrying amount, including goodwill to the fair value of the reporting
unit. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered potentially impaired and a
second step is performed to measure the amount of impairment loss, if any.
Acquired assets and assumed liabilities
Pursuant to ASC No. 805-10-25, if the initial accounting for a business combination is incomplete by the end of the
reporting period in which the combination occurs, but during the allowed measurement period not to exceed one year from
the acquisition date, the Company adjusts the provisional amounts recognized at the acquisition date by means of
adjusting the amount recognized for goodwill.
Page 49
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 2020, the Company has twenty one 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 eighteen 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
$77,000 to $522,000. 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. 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.
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, 2018 and did not have a material
impact on its consolidated results of operations on a prospective basis.
Page 50
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (Continued)
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, 2020 and 2019 are summarized in the following table.
Commercial Insurance/ Managed Care
Medicare/Medicaid
Workers' Compensation/Personal Injury
Other
Net Patient Fee Revenue
Research and Development Costs
For the Years Ended June 30
2019
2020
$
$
4,545,987 $
1,038,288
16,028,737
882,248
22,495,260 $
5,218,656
1,172,543
16,790,025
1,026,312
24,207,536
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 $566,000 and $538,000 and for the years
ended June 30, 2020 and 2019, 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 $12,056 and $13,695 for the years ended June 30, 2020 and 2019 respectively.
Page 51
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
Deferred tax assets and liabilities are determined based on the difference between the financial statement carrying
amounts and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are
expected to reverse.
Customer Advances
Cash advances and progress payments received on sales orders are reflected as customer advances until such time as
revenue recognition occurs.
Earnings Per Share
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, 2020 and 2019.
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, 2020 and
2019, diluted EPS for common shareholders includes 127,504 shares upon conversion of Class C Common.
Basic
Total
Common Stock
June 30, 2020
Numerator:
Net income available to common stockholders
Denominator:
Weighted average shares outstanding
Basic income per common share
Diluted
Denominator:
Weighted average shares outstanding
Class C Common Stock
Total Denominator for diluted earnings per share
Diluted income per common share
$
8,240,205
$
7,735,650
6,443,713
1.28
$
6,443,713
1.20
6,443,713
127,504
6,571,217
1.18
$
$
Page 52
Class C
Common Stock
$
$
$
128,500
382,513
0.34
382,513
—
382,513
0.34
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share (Continued)
Basic
Total
Common Stock
June 30, 2019
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
$ 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
$
$
Class C
Common Stock
$
$
$
242,031
382,513
0.63
382,513
—
382,513
0.63
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.
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, 2020, the Company had cash on deposit of approximately $33,444,000 in
excess of federally insured limits of $250,000.
Related Parties: Net revenues from related parties accounted for approximately 12% and 11% of the consolidated net
revenues for the years ended June 30, 2020 and 2019, respectively. Net management fee receivables from the related
party medical practices accounted for approximately 13% and 13% of the consolidated accounts receivable for the years
ended June 30, 2020 and 2019, respectively.
See Note 3 regarding the Company’s concentrations in the healthcare industry.
Page 53
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
The financial statements include various estimated fair value information at June 30, 2020 and 2019, 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.
Recent Accounting Pronouncements
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. The Company adopted
the Standard on July 1, 2020 and the impact of adopting this guidance will have no material impact on our Consolidated
Financial Statements.
Page 54
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
During February 2016, FAS issued ASU 2016-02, Leases (Topic 842). The new standard requires lessees to apply a dual
approach, classifying leases as either finance or operating leases based upon the principle of whether or not the lease is
effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized
based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to
record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their
classification. Lease with a term of 12 months or less will be accounted for similar to existing guidance for operating
leases. The standard was effective for us beginning July 1, 2019. We have elected the optional transition method to apply
the standard as of the effective date and therefore, we will not apply the standard to the comparative periods presented in
the consolidated financial statements. We have also elected the transition package of thee practical expedients permitted
within the standard which eliminates the requirements to reassess prior conclusions about lease identification, lease
classification and indirect costs. The adoption of this guidance had a material impact on the Company’s balance sheet by
virtue of including the present value of its future operating lease payments as a liability of $33.3 million and related
right-to-use lease assets as of July 1, 2019. At the time of adoption of this guidance we had no significant financing leases.
The Company accounts for its various operating leases in accordance with Accounting Standards Codification (‘ASC’) 842
– Lease, as updated by ASU 2016-02. At the inception of a lease, the Company recognizes right-of-use lease assets and
related lease liabilities measured at present value of future lease payments on its balance sheet. Lease expense is
recognized on a straight-line basis over the term of the lease. Our most common initial term varies in length from 2 to 10
years. Including renewal options negotiated with the landlord, we have a total span of 2 to 16 years at the facilities we
lease. The Company reviewed its contracts with vendors and customers, determining that its right-to-use lease assets
consisted of only office space operating leases. In determining the right-to-use lease assets and liabilities, the Company
did recognize lease extension options which the Company feels would be reasonably exercised. Also included in other
current assets is a $202,268 receivable from a landlord for tenant improvements. Our incremental borrowing rate (“IBR”)
used to discount the stream of operating lease payments is closely related to the interest rates available to the Company.
A reconciliation of operating and financing lease payments undiscounted cash flows to lease liabilities recognized as of
June 30, 2020 is as follows:
Year Ending June 30,
2021
2022
2023
2024
2025
Thereafter
Present value
discount
Total lease
liability
Operating Lease Payments
Financing Lease Payments
$
5,078,892
4,826,934
4,787,845
4,501,027
4,445,344
19,607,295
(9,772,724
)
$
122,172
244,343
244,343
244,343
244,343
407,240
(180,914
)
$
33,474,613
$
1,325,870
Page 55
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
Recent Accounting Pronouncements (Continued)
Weighted Average Remaining Lease Term
Operating leases - years
Finance lease - years
Weighted Average Discount Rate
Operating leases
Finance lease
The components of lease expense were as follows:
Operating lease cost
Finance lease cost:
Depreciation of leased equipment
Interest on lease liabilities
Total finance lease cost
10.4
6.6
5.5%
3.6%
For year ended
June 30, 2020
5,135,604
$
$
$
—
—
—
Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Financing cash flows from financing leases
Right-of-use & equipment assets obtained in exchange for lease obligations:
Operating leases(1)
Financing leases
For year ended
June 30, 2020
$
4,170,977
—
34,786,611
1,325,871
(1) Amounts for the year ended June 30, 2020 include the transition adjustment for the adoption of topic 842 of
$31,651,110.
FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and
regulations as of June 30, 2020 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 2020 or 2019, and it does not believe that any of those pronouncements will have a significant impact
on our consolidated financial statements at the time they become effective.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. The reclassifications did not
have any effect on reported net income for any periods presented.
Page 56
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
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.
Long Term Accounts Receivable
The Company will generate revenue from long-term, non-cancellable contracts to provide service and repair services.
Future revenue to be recognized over the following four years at June 30, 2020 are as follows:
2022
2023
2024
2025
Total
$
821,535
744,660
744,660
344,750
$ 2,655,605
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 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.
Page 57
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE
(Continued)
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 66% and 67%, respectively, of the PCs’ 2020 and 2019 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 12% and 11%, of the consolidated net revenues for the years ended June 30, 2020 and 2019, 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.
The following table sets forth the number of our facilities for the years ended June 30, 2020 and 2019.
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)
Page 58
For the Year Ended June 30,
2020
2019
26
—
—
(1)
25
26
—
—
—
26
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
NOTE 4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information relating to uncompleted contracts as of June 30, 2020 and 2019 is as follows:
Costs incurred on uncompleted contracts
Estimated earnings
Less: Billings to date
As of June 30,
2020
448,437 $
309,248
757,685
604,852
152,833 $
2019
448,437
1,088,675
1,537,112
1,012,002
525,110
$
$
NOTE 5 – INVENTORIES
Inventories included in the accompanying consolidated balance sheets consist of:
Purchased parts, components and supplies
Work-in-process
As of June 30,
2020
1,544,036 $
104,734
1,648,770 $
2019
1,639,777
158,389
1,798,166
$
$
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, less accumulated depreciation and amortization, at June 30, 2020 and 2019, 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,
2020
28,434,063 $
5,901,961
2,069,055
3,291,666
10,736,825
939,614
51,373,184
30,009,150
21,364,034 $
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
$
$
Depreciation and amortization of property and equipment for the years ended June 30, 2020 and 2019 was $3,144,580
and $2,862,117, respectively.
Page 59
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
NOTE 7 - OTHER INTANGIBLE ASSETS
Other intangible assets, net of accumulated amortization, at June 30, 2020 and 2019 are comprised of:
Capitalized software development costs
Patents and copyrights
Non-competition agreements
Customer relationships
Less: Accumulated amortization
As of June 30,
2020
7,004,847
5,081,721
4,100,000
3,800,000
19,986,568
15,877,439
4,109,129
$
$
2019
7,004,847
4,964,199
4,100,000
3,800,000
19,869,046
15,113,371
4,755,675
$
$
The estimated amortization of other intangible assets for the five years ending June 30, 2025 and thereafter is as follows:
For the Years Ending
June 30,
Total
Patents and
Copyrights
Non-
competition
Customer
Relationships
2021
2022
2023
2024
2025
Thereafter
$
$
370,631
369,241
372,700
372,399
359,378
2,264,780
4,109,129
$
$
180,631
179,241
182,700
182,399
169,378
808,113
1,702,462
$
$
—
—
—
—
—
—
—
$
$
190,000
190,000
190,000
190,000
190,000
1,456,667
2,406,667
The weighted average amortization period for other intangible assets is 12.0 years and they have no expected residual
value.
Information related to the above intangible assets for the years ended June 30, 2020 and 2019 is as follows:
Balance – Beginning of Year
Amounts capitalized
Software or patents written off
Amortization
Balance – End of Year
As of June 30,
2020
4,755,675
117,522
—
(764,068)
4,109,129
$
$
2019
5,601,656
128,393
—
(974,374)
4,755,675
$
$
Page 60
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
NOTE 7 - OTHER INTANGIBLE ASSETS (Continued)
Amortization of patents and copyrights for the years ended June 30, 2020 and 2019 amounted to $183,592 and $198,660,
respectively.
Capitalized software development costs were fully amortized as of June 30, 2018.
Amortization of non-competition agreements for the years ended June 30, 2020 and 2019 amounted to $390,476 and
$585,714, respectively.
Amortization of customer relationships for the years ended June 30, 2020 and 2019 amounted to $190,000 and $190,000,
respectively.
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, 2020 and 2019.
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.
Page 61
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
NOTE 8 - CAPITAL STOCK (Continued)
Class A Non-Voting Preferred Stock
On April 3, 1995, the stockholders ratified a proposal consisting of the creation of a new class of Class A non-voting
preferred stock with special dividend rights and the declaration of a stock dividend on the Company's common stock
consisting of one share of Class A non-voting preferred stock for every five shares of common stock. The stock dividend
was payable to holders of common stock on October 20, 1995. Class A non-voting preferred stock issued pursuant to such
stock dividend approximates 313,000 shares.
The Class A non-voting preferred stock is entitled to a special dividend equal to 3-1/4% of first $10 million, 4-1/2% of next
$20 million and 5-1/2% on amounts in excess of $30 million of the amount of any cash awards or settlements received by
the Company in connection with the enforcement of five of the Company's patents in its patent lawsuits, less the revised
special dividend payable on the common stock with respect to one of the Company's patents.
The Class A non-voting preferred stock participates on an equal per share basis with the common stock in any dividends
declared and ranks equally with the common stock on distribution rights, liquidation rights and other rights and preferences
(other than the voting rights).
Stock Bonus Plans
On April 23, 2010, the Board approved the 2010 Stock Bonus Plan. The plan entitles the Company to reserve 2,000,000
shares of common stock. On August 10, 2010, the Company filed Form S-8 to register the 2,000,000 shares. As of June
30, 2020, 556,924 shares of common stock of FONAR were available for future grant under this plan. For the years ended
June 30, 2020 and 2019, 89,981 and 69,971 shares were issued respectively, of which $0 and $1,990,380 were expensed
and included in selling, general and administrative expenses for the years ended June 30, 2020 and 2019, 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.
Page 62
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
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 has 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.
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, 2020 and 2019
Opening Members’ Equity
Share of Net Income
Distributions
Ending Members’ Equity
June 30, 2020
June 30, 2019
Class A
Members
$ 2,155,725
3,464,528
(5,565,000)
55,253
$
Class B
Member
$ 36,543,786
16,291,633
(12,985,000)
$ 39,850,419
Class A
Members
$ 3,559,182
5,196,543
(6,600,000)
$ 2,155,725
Class B
Member
$ 31,775,922
20,167,864
(15,400,000)
$ 36,543,786
Page 63
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
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 $447,448 as of June 30, 2020.
$
2020
2019
273,031
$
306,056
Note payable received under the Paycheck Protection Program (‘PPP’)
which was established as part of the Coronavirus Aid, Relief and
Economic Security Act (“Cares Act’) that provides for loans to qualifying
businesses for amounts up to 2.5 times of the average monthly payroll
expenses. The loans and accrued interest are forgivable after 24
weeks as long as the proceeds are used for eligible purposes, including
payroll, benefits, rent and utilities and maintains certain payroll levels.
The unforgiven portion of the PPP loan is payable over five years at an
interest rate of 1%, with a deferral of payments for the first six months.
The proceeds from the note payable were received on June 30, 2020.
The revolving credit note was extended to August 2021. The Company
can borrow up to $10,000,000 and prepay the loan in whole or part in
multiples of $100,000 at any time without penalty. The note bears
interest at a rate of 4.0% 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 Company still has the ability to draw down on the line. See
Note 19.
Other (including capital leases for property and equipment).
Less: Current portion
$
The maturities of debt over the next five years and thereafter are as follows:
Years Ending June 30,
700,764
—
—
—
973,795
108,379
865,416
$
—
7,586
313,642
40,530
273,112
2021
2022
2023
2024
2025
Thereafter
$ 108,379
178,166
180,972
183,919
187,154
135,205
$ 973,795
Page 64
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
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 2016 for federal and 2015 for state.
The Company has recorded a deferred tax asset of $18,809,757 and a deferred tax liability of $234,106 as of June 30,
2020, primarily relating to its net operating loss carryforwards of approximately $54,883,000 available to offset future
taxable income through 2030. The net operating losses begin to expire in 2025 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, 2020, no such changes in ownership have occurred.
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, which 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 increased during the year ended June 30, 2020, by approximately
$195,000. The valuation allowance decreased by approximately $2,350,000 during the year ended June 30, 2019.
Page 65
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
NOTE 11 - INCOME TAXES (Continued)
On March 27, 2020 Congress enacted the CARES Act (Coronavirus Aid, Relief and Economic Security Act). The Act
provides numerous tax provisions and other stimulus measures, including temporary changes regarding prior and future
operation losses, temporary changes to prior and future limitations on interest deductions, temporary suspension of certain
payment requirements for the employer portion of Social Security taxes, technical corrections to prior tax legislation for tax
depreciation of certain qualified improvement property and enhanced recoverability of AMT tax credits.
At the present time, the only impact of the CARES Act to the Company is allowing a full reimbursement of $1,342,370 of
tax credits relating to the alternative minimum tax credits. The Company received the first half payment in June 2020. The
balance of alternative minimum tax credits of $671,185 was received in July 2020. Previously, these credits were to be
refunded over a 3 year period.
As we continue to monitor tax implications of the CARES Act and other state and federal stimulus tax legislation, we may
make adjustments to our estimates and record additional amounts for tax assets and liabilities.
Components of the provision (benefit) for income taxes are as follows:
Current:
Federal
State
Deferred:
Federal deferred taxes
State deferred taxes
Years Ended June 30
2020
(187,255)
513,204
325,949
1,953,349
165,480
2,118,829
2,444,778
$
$
2019
—
250,000
250,000
1,685,299
70,221
1,755,520
2,005,520
$
$
Subtotal
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
Change in the valuation allowance
Other
Effective income tax rate
Page 66
Years Ended June 30,
2020
2019
21.0%
4.0%
(6.1)%
0.2%
0.3%
(2.1)%
17.3%
21.0%
4.0%
(5.8)%
(3.5)%
(2.6)%
(4.2)%
8.9%
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
NOTE 11 - INCOME TAXES (Continued)
As of June 30, 2020, the Company has net operating loss (“NOL”) carryforwards of approximately $54,883,000 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 $4,440,000. 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 $4,437,000.
In addition, for New York State income tax purposes, the Company has tax credit carryforwards aggregating approximately
$208,000 which, are accounted for under the flow-through method.
The Company is also under audit with New York State for income tax and does not expect any material adjustments.
Significant components of the Company's deferred tax assets and liabilities at June 30, 2020 and 2019 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
Page 67
June 30,
2020
2019
$
$
3,946,801
693,833
13,720,637
4,647,217
69,940
168,371
23,246,799
(4,437,042)
18,809,757
(234,106)
(234,106)
18,575,651
$
$
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
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
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
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Leases
June 30,
2020
4,491,941
442,802
1,353,200
112,867
120,000
86,504
877,787
699,997
8,185,098
$
$
2019
3,897,833
145,029
1,671,488
125,567
105,000
67,825
1,054,134
510,540
7,577,416
$
$
The Company rents its operating facilities and certain equipment, pursuant to operating lease agreements expiring at
various dates through March 2030. The leases for certain facilities contain escalation clauses relating to increases in real
property taxes as well as certain maintenance costs.
Rent expense for operating leases approximated $5,136,000 and $4,688,000, for the years ended June 30, 2020 and
2019, 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, 2020 and 2019.
Page 68
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
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, 2020.
Stipulation Agreements
The Company has entered into stipulation agreements with a number of its creditors that in the aggregate total $90,619,
which is included in other current liabilities on the Company’s balance sheet as of June 30, 2020. The monthly payments
total $15,859.
Litigation
In September 2020, the Company entered into a settlement agreement with an unrelated third party for a claim made
during March 2018 which was scheduled for arbitration. The settlement was for $1.2 million of which $900,000 was paid by
the Company’s insurance on September 15, 2020 with the remaining $315,000 to be paid by the Company on September
28, 2020. The $315,000 is included in other current liabilities as of June 30, 2020.
The Company is subject to other legal proceedings and claims arising from the ordinary course of its business, including
personal injury, customer contract and employment claims besides the claim above. In the opinion of management, and
with consultation with legal council, 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.
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 $1,353,000 plus interest and penalties of
approximately $832,000. 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 $110,000 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, 2020
and 2019, the Company had approximately $87,000 and $68,000, 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.
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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
NOTE 14 - SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended June 30, 2020 and 2019 the Company paid $137,200 and $165,172 for interest, respectively.
During the years ended June 30, 2020 and 2019 the Company paid $228,204 and $304,575 for income taxes,
respectively.
During the years ended June 30, 2020 and 2019, the Company issued 89,981 and 69,971 shares of common stock for
costs and expenses totaling $1,990,380 and $1,954,744, respectively.
During the year ended June 30, 2020 the Company entered into a capital lease for the purchase of equipment in the
amount of $1,350,000.
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, 2020 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.
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.
Page 70
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
NOTE 16 - SEGMENT AND RELATED INFORMATION (Continued)
Summarized financial information concerning the Company’s reportable segments is shown in the following table:
Fiscal 2020:
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 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
* Amounts eliminated in consolidation
Export Product Sales
Manufacturing
and Servicing
of Medical
Equipment
8,463,103
$
875,000
$
(6,425,411)
$
368,498
$
$
—
$ 30,492,757
2,440,640
$
$ 10,013,394
907,084
$
(3,419,944)
$
370,001
$
$
1,990,380
$ 25,065,808
746,768
$
Management of
Diagnostic
Imaging
Center
$ 77,227,359
—
$
$ 20,076,327
3,540,150
$
$
—
$ 149,790,753
4,981,773
$
$ 77,179,493
$
—
$ 25,554,136
3,466,490
$
$
—
$ 108,494,402
2,737,081
$
Totals
$ 85,690,462
875,000
$
$ 13,650,916
3,908,648
$
$
—
$ 180,283,510
7,422,413
$
$ 87,192,887
$
907,084
$ 22,134,192
3,836,491
$
$
1,990,380
$ 133,560,210
3,483,849
$
The Company’s areas of operations are principally in the United States. The Company had export sales of medical
equipment amounting to 20.2% and 5.3% of product sales revenues to third parties for the years ended June 30, 2020 and
2019, respectively.
The foreign product sales, as a percentage of product sales to unrelated parties, were made to customers in the following
countries:
Canada
England
Germany
Puerto Rico
For the Years Ended
June 30
2020
2019
—
—
20.2%
—
20.2%
.3%
.3
—
4.7
5.3%
Page 71
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
NOTE 16 - SEGMENT AND RELATED INFORMATION (Continued)
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 5.6% and 5.9% of consolidated net service and repair fees for the
years ended June 30, 2020 and 2019 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,
2020
1.6%
0.3
1.5
0.7
—
0.3
0.2
1.0
5.6%
2019
1.6%
0.3
1.4
0.6
0.3
0.4
0.3
1.0
5.9%
The Company does not have any material assets outside of the United States.
NOTE 17 – ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following represents a summary of allowance for doubtful accounts for the years ended June 30, 2020 and 2019
respectively:
Description
Accounts receivable
Management and other fees receivable
Management and other fees receivable - related
medical practices
Notes receivable
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, 2019
190,244
$
9,404,944
2,310,731
—
Balance
June 30,
2018
190,244
$
10,983,022
Additions (1)
380,000
$
3,526,742
$
Deductions
55,683
(1,868,453)
1,011,324
777,354
—
—
$
Additions
—
(1,578,078)
Deductions
—
$
—
$
Balance
June 30, 2020
$
514,561
11,063,233
3,322,055
777,354
Balance
June 30,
2019
190,244
9,404,944
1,711,385
22,727,698
599,346
—
—
22,727,698
2,310,731
—
Page 72
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 and 2019
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)
(000’s omitted, except per share data)
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
$
$
$
September
30, 2019
December
30, 2019
March 31,
2020
June 30,
2020
21,747 $
16,261
4,506
21,451 $
16,430
4,209
21,686 $
19,071
1,914
20,806 $
20,278
1,076
0.48 $
0.45 $
0.18 $
0.09 $
0.47 $
0.44 $
0.18 $
0.09 $
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
$
$
$
September
30, 2018
December
30, 2018
March 31,
2019
June 30,
2019
20,705 $
15,163
4,492
21,225 $
15,245
4,864
22,779 $
16,171
5,201
22,484 $
18,480
2,665
0.49 $
0.52 $
0.57 $
0.20 $
0.48 $
0.51 $
0.56 $
1.44 $
Total
85,690
72,040
11,705
1.20
1.18
Total
87,193
65,059
17,222
1.78
1.74
NOTE 19 – SUBSEQUENT EVENTS
The Company evaluates events that have occurred after the balance sheet date, but before the consolidated financial
statements are issued.
Amendment of Revolving Credit Agreement.
During September 2020 the Company amended their revolving credit agreement. The terms increase the borrowing limits
from $3,000,000 to $10,000,000 and the agreement was extended to August 2021. The interest rate on borrowings
remains at 4% along with certain financial covenants.
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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 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.
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 effective at June 30, 2020.
Based on the COSO criteria, management concluded that our internal controls were effective to prevent material
misstatements of the Company's annual or interim financial statements.
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, 2020 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
Page 74
FONAR CORPORATION AND SUBSIDIARIES
Item 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
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: Charles N. O’Data, Ronald G. Lehman and
Richard E. Turk. 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
Timothy R. Damadian
Luciano B. Bonanni
Claudette J.V. Chan
Charles N. O’Data
Ronald J. Lehman
Richard E. Turk
84
56
65
82
84
44
36
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 75
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 76
FONAR CORPORATION AND SUBSIDIARIES
Robert J. Janoff, now deceased, had served as a Director of Fonar since February 1989. Mr. Janoff had been a
self-employed New York State licensed private investigator for more than thirty-five years and had been 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.
Richard E. Turk has been a Director of Fonar since June, 2020, when he was appointed to fill the vacancies on the Board
of Directors and Audit Committee of the Board of Directors resulting from the death of his predecessor, Robert J. Janoff.
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FONAR CORPORATION AND SUBSIDIARIES
Mr. Turk is the Chief Development Officer of PRISM Vision Group, a private equity-backed, multi-location, outpatient
comprehensive eye care practice headquartered in Union, New Jersey. Since joining PRISM in November, 2018, Mr. Turk
has helped source, analyze, and complete 12 acquisitions. He spearheaded growth efforts that helped PRISM expand
from a single-speciality (retina) provider with 17 locations and 21 physicians to a comprehensive, vertically-integrated,
multi-specialty, eye care organization with approximately 90 physicians and more than 50 locations across New Jersey,
Pennsylvania, Delaware and Maryland.
Prior to his tenure at PRISM, Mr. Turk was employed by Professional Physical Therapy, a private equity-backed outpatient
physical and occupational therapy company headquartered in Uniondale, New Jersey with more than 180 locations across
New York, New Jersey, Connecticut, Massachusetts and New Hampshire. During his four years at Professional Physical
Therapy, Mr. Turk sourced, analyzed, and completed 32 acquisitions comprised of 116 clinics, expanding the company’s
services and adding three states.
From 2007 to 2014, Mr. Turk was employed by Bruderman Brothers, a broker dealer involved in investment banking,
merchant banking, investment advisory, and consulting for lower middle market companies ($10M-$250M of enterprise
value) in a variety of industries, including healthcare. Mr. Turk was Vice President of Bruderman Brothers from 2011 to
2014.
Mr. Turk graduated from Columbia University with a B.A. in American History in 2007.
ITEM 11. EXECUTIVE COMPENSATION.
With the exception of the Chief Executive Officer and the Chairman of the Board of Directors, the compensation of the
Company's executive officers is based on a combination of salary and bonuses based on performance. The Chairman of
the Board’s compensation consists of a salary. The Chief Executive Officer and the Chairman of the Board have no
understandings with the Company with respect to bonuses, options or other incentives; they are not subject to our general
policy later discussed.
The Board of Directors does not have a compensation Committee. Dr. Raymond V. Damadian, Chairman of the Board,
controls over 50% of the voting power of our capital stock. Dr. Damadian is both an executive officer and a member of the
Board of Directors. Dr. Damadian, the Chief Executive Officer and the Chief Operating Officer, participate in the
determination of compensation for the Company’s management and other employees.
The Board of Directors has established an audit committee. The members of the committee are Charles N. O'Data,
Ronald G. Lehman and Richard E. Turk.
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 2020,
2019 and 2018 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.
Page 78
FONAR CORPORATION AND SUBSIDIARIES
I. SUMMARY COMPENSATION TABLE
Name and All Other Principal Position
(a)
Timothy R. Damadian
President, Principal
Executive Officer
Raymond V. Damadian
Chairman of the Board,
PFO
Luciano Bonanni
Chief Operating Officer and
Executive Vice President
Stock Awards Compensation
Total
Cash
Bonuses
($)
(d)
Salary ($)
(c)
Year
(b)
2020 $
2019 $
2018 $
0 $
0 $
0 $155,800 $
0 $155,800 $
2020 $ 153,098 $
0 $
2019 $ 153,095 $305,800 $
2018 $ 153,095 $305,800 $
($)
(e)
0 $
0 $
0 $
0 $
0 $
0 $
2020 $ 146,496 $
2019 $ 145,672 $
2018 $ 145,672 $
0 $
0 $
0 $
152,902 $
159,740 $
152,900 $
($)
(f)
0
155,800
155,800
153,098
458,895
458,895
299,398
305,565
298,572
II. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Number Of Securities
Underlying Unexercised
Options (#) Exercisable
(a)
0
Option Exercise Price
($)
(b)
0
Option Exercise
Expiration Date
(c)
N/A
0
0
0
0
N/A
N/A
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
Vice
Executive
President
III. DIRECTOR COMPENSATION
Name
Raymond V. Damadian
Claudette J.V. Chan
Robert J. Janoff (deceased)
Charles N. O’Data
Ronald G. Lehman
Richard E. Turk
Fees Earned or
Paid in Cash ($)
$
$
$
$
$
$
0
20,000
20,000
20,000
20,000
20,000
Total
($)
0
20,000
20,000
20,000
20,000
20,000
$
$
$
$
$
$
Page 79
EMPLOYEE COMPENSATION PLANS
FONAR CORPORATION AND SUBSIDIARIES
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, 2020, 556,924 shares were available for
issuance. The Company has approved the issuance of 89,981 shares issued on July 17, 2019 under the Plan.
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, 2018.
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
Class A Preferred
Kayne Anderson Rudnick
Investment Management LLC (2)
1800 Avenue of the Stars, 2nd Floor
Los Angeles, CA 90067
Common Stock
Renaissance Technologies LLC
Renaissance Technologies Holding
Corporation (2)
800 Third Avenue
New York, New York 10022
Common Stock
Dimensional Fund Advisors LP (2) (3)
Building One
6300 Bee Cave Road
Austin, Texas 78746
Common Stock
Page 80
Shares
Beneficially
Owned
Percent of Class
121,402
382,447
19,093
1.88%
99.98%
6.09%
645,283
10.01%
544,716
8.45%
374,623
5.81%
Continued:
Name and Address of Beneficial Owner (1)
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
Richard E. Turk
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
38,000
800
41,660
1,285
106
32
0
0
658
1,701
0
203,527
382,447
21,210
*
*
*
*
*
*
*
*
*
*
*
3.16%
99.98%
6.77%
* Less than one percent
___________________________
1. Address provided for each beneficial owner owning more than five percent of the voting securities of Fonar.
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FONAR CORPORATION AND SUBSIDIARIES
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
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, 2020, 21 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
$77,000 to $522,000 per month in fiscal 2020.
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 $251,868 to $322,636 per month during fiscal 2020. These fees are renegotiable on an annual basis.
During the fiscal years ended June 30, 2020, June 30, 2019 and June 30, 2018, the net revenues received by HMCA from
the imaging facilities owned by Dr. Damadian were approximately $10.2 million, $10.2 million and $9.0 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.
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.
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, 2020 and the reviews of the financial statements included in our Forms 10-Q for the fiscal year ended
June 30, 2020 were $409,000.
The aggregate fees billed by Marcum LLP for the audit of our annual 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 $459,856.
Audit Related Fees
No fees were billed by Marcum LLP for the fiscal years ended June 30, 2020 or June 30, 2019 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, 2019 or June 30, 2018 for designing, operating,
supervising or implementing any of our financial information systems or any hardware or software systems for our financial
information
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Tax Fees
FONAR CORPORATION AND SUBSIDIARIES
No fees were billed by Marcum LLP for tax compliance, tax advice and tax planning in the fiscal year ended June 30, 2020.
No fees billed by Marcum LLP for tax compliance, tax advice and tax planning in the fiscal year ended June 30, 2019.
All Other Fees
No fees were billed by Marcum LLP for any other services during the fiscal years ended June 30, 2020 and June 30, 2019.
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.
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, 2020 and 2019.
Consolidated Statements of Income for the Years Ended June 30, 2020 and 2019.
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2020 and 2019..
Consolidated Statements of Cash Flows for the Years Ended June 30, 2020 and 2019 .
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 14, 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. June 22, 2020. Commission File No. 0-10248.
c) EXHIBITS
3.1 Certificate of Incorporation, as amended, of the Registrant incorporated by reference to Exhibit 3.1 to the Registrant's
registration statement on Form S-1,Commission File No. 33-13365.
3.2 Article Fourth of the Certificate of Incorporation, as amended, of the Registrant incorporated by reference to Exhibit 4.1
to the Registrant's registration statement on Form S-8, Commission File No. 33-62099.
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FONAR CORPORATION AND SUBSIDIARIES
3.3 Section A of Article Fourth of the Certificate of Incorporation, as amended, of the Registrant incorporated by reference
to Exhibit 4.3 to the Registrant’s registration statement on Form S-3, Commission File No. 333-63782.
3.4 Section A of Article Fourth of the Certificate of Incorporation, as amended, of the Registrant incorporated by reference
to Exhibit 3.3 of the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2003, Commission File
No. 0-10248.
3.5 By-Laws, as amended, of the Registrant incorporated by reference to Exhibit 3.2 to the Registrant's registration
statement on Form S-1, Commission File No. 33-13365.
4.1 Specimen Common Stock Certificate incorporated by reference to Exhibit 4.1 to the Registrant's registration statement
on Form S-1, Commission File No. 33-13365.
4.2 Specimen Class B Common Stock Certificate incorporated by reference to Exhibit 4.2 to the Registrant's registration
statement on Form S-1, Commission File No. 33-13365.
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.
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FONAR CORPORATION AND SUBSIDIARIES
10.12 Modification to Operating Agreement for Health Diagnostics Management, LLC., See Exhibits. incorporated by
reference to Exhibit 10.38 to Form 10-K for the fiscal year ended June 30, 2013. Commission File No. 0-10248.
10.13 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 Firms 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, 2020
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
/s/Raymond V. Damadian
Raymond V. Damadian
/s/Claudette J.V. Chan
Claudette J.V. Chan
/s/ Charles N. O'Data
Charles N. O'Data
/s/ Ronald G. Lehman
Ronald G. Lehman
/s/Richard E. Turk
Richard E. Turk
Title
Date
Chairman of the Board of Directors, Director,
Principal Financial Officer, Treasurer
September 30, 2020
Director
Director
Director
Director
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September 30, 2020
September 30, 2020
September 30, 2020
September 30, 2020