SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2021
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 ☒ .
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 ☒ .
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 ☒ No ☐ .
FONAR CORPORATION AND SUBSIDIARIES
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 ☒ No ☐
Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405 of Regulation S-K,
§229.405 of this Chapter, is not contained, and will not be contained, to the best of the
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this 10-K or any amendment to the Form 10-K. ☒
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 ☒
Smaller reporting company ☒ 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 ☒ .
The aggregate market value of the shares of Common Stock held by non-affiliates as of
December 31, 2020 based on the closing price of $17.36 per share on such date as reported on
the NASDAQ System, was approximately $110 million. The other outstanding classes do not
have a readily determinable market value.
As of September 15, 2021, 6,554,210 shares of Common Stock, 146 shares of Class B
Common Stock, 382,513 shares of Class C Common Stock and 313,438 shares of Class A
Non-voting Preferred Stock of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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FONAR CORPORATION AND SUBSIDIARIES
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PART I
PART II
FORM 10-K ITEMS
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Item 5.
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
Item 6.
Item 7.
Item 8.
Item 9.
PART III
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors and Executive Officers
Item 11. Executive Compensation
Security Ownership of Certain Beneficial Owners and
Management
Item 12.
Item 13. Certain Relationships and Related Transactions, and Director
Independence
PART IV
Item 14. Principal Accountant Fees and Services
Item 15. 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 17 to the Consolidated Financial Statements for separate financial information
regarding our medical equipment and physician and diagnostic management services
segments.
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FONAR CORPORATION AND SUBSIDIARIES
FORWARD LOOKING STATEMENTS.
Certain statements made in this Annual Report on Form 10-K are “forward-looking statements”,
within the meaning of the Private Securities Litigation Reform Act of 1995, regarding the plans
and objectives of Management for future operations. Such statements involve known and
unknown risks, uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These forward-looking statements
are based on current expectations that involve numerous risks and uncertainties. Our plans and
objectives are based, in part, on assumptions involving the expansion of business. These
assumptions involve judgments with respect to, among other things, future economic,
competitive and market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control. Although we believe
that our assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-
looking statements included in this Annual Report will prove to be accurate. In light of the
significant uncertainties inherent in our forward-looking statements, the inclusion of such
information should not be regarded as a representation by us or any other person that our
objectives and plans will be achieved.
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 recurrence of new strains of the COVID-19 virus such as the Delta
variant adds a new dimension to the difficulties 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, where the patient must lie on his or
her back, the Upright® MRI permits MRI scans to be taken in a weight-bearing state. Patients
can 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, 2021, HMCA manages a total of 39 MRI scanners. Twenty-five (25) MRI
scanners are located in New York and fourteen (14) which are located in Florida. We believe
that the utilization of Fonar UPRIGHT® MRI scanning systems has been a significant factor in
maintaining the patient volume of the scanning facilities and our ability to cope with the effects
of the COVID-19 pandemic. In addition, a new facility managed by the Company has been
opened in Pembroke Pines, Florida and a total of four additional MRI scanners were added in
New York.
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FONAR CORPORATION AND SUBSIDIARIES
MEDICAL EQUIPMENT SEGMENT
PRODUCTS
The Fonar Upright® MRI is a weight-bearing whole-body open MRI system which enables
positional MRI (pMRI®) applications. Operating at a magnetic field strength of 0.6 Tesla, the
scanner is a powerful, diagnostically versatile and cost-effective open MRI that provides a broad
range of clinical capabilities and a complete set of imaging protocols. Patients can be scanned
standing, bending, sitting, upright at an intermediate angle and in the conventional recumbent
position. This multi-positional MRI system accommodates an unrestricted range of motion for
flexion, extension, lateral bending, and rotation studies of the cervical (upper) and lumbar
(lower) spine. Previously difficult patient scanning positions can be achieved and compared
using the system’s MRI-compatible, three-dimensional, motorized patient handling system. The
system’s lift and tilt functions deliver the targeted anatomical region to the center of the magnet.
True image orientation is assured, regardless of the rotation angle, via computer read-back of
the table’s position.
There is considerable evidence that the weight-bearing Upright® MRI provides medical benefits
not duplicated by any other MRI scanner because patient positioning plays a critical role in
accurately 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 at the base of the brain which runs down
the body to the extremities, causing the patient to collapse in a temporary neuromuscular
paralysis. These symptoms subside 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 brain
stem and choose the most appropriate surgical approach for an operative repair.
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FONAR CORPORATION AND SUBSIDIARIES
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, 750,000 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 typically have been 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 average in
the course of their scoliosis treatment.
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 multiple 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.
The Fonar Upright® MRI operates at a significantly higher magnetic field strength than earlier
open MRIs that preceded it, and, therefore, benefits from more of the MRI image-producing
signal needed to make high-quality MRI images.
Fonar maximizes image quality through an optimal combination of image signal to noise (S/N)
and contrast-to noise (C/N) ratios. Technical improvements incorporated into the scanner
design include increased image processing speed, high-S/N Organ Specific(TM) RF receiver
coils, high performance front-end electronics featuring high-speed, wide-dynamic-range analog-
to-digital conversion and a miniaturized ultra-low-noise pre-amplifier, high-speed automatic
tuning, bandwidth-optimized pulse sequences, multi-bandwidth sequences, and off-center FOV
imaging capability.
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FONAR CORPORATION AND SUBSIDIARIES
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 2021, sales of our Upright® MRI scanners accounted for approximately 0.8% of
our total revenues and 10.0% of our medical equipment revenues, as compared to 0.1% of total
revenues and 1.0% of medical equipment revenues in fiscal 2020.
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.
PRODUCT MARKETING
The principal markets for the Company’s scanners are private diagnostic imaging centers and
hospitals.
We use internal personnel and independent manufacturer’s representatives for domestic and
foreign markets. None of Fonar’s competitors are entitled or been licensed to make the Fonar
Upright® MRI scanner.
Fonar’s Website includes interactive product information for interested customers.
During fiscal 2021 and previously sales were made to foreign customers. 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.”
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FONAR CORPORATION AND SUBSIDIARIES
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 $7.7 million in fiscal 2021 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.
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.
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FONAR CORPORATION AND SUBSIDIARIES
RESEARCH AND DEVELOPMENT
During the fiscal year ended June 30, 2021, we incurred expenditures of $1,635,979, none of
which were capitalized, on research and development, as compared to $2,025,376, none of
which were capitalized, during the fiscal year ended June 30, 2020.
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, 2021 was approximately $62,000, as compared
to $457,000 at September 15, 2020. It is expected that the existing backlog of orders will be
filled within the 2022 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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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, 2021,
220 patents had been issued to Fonar, and approximately 11 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, differ so dramatically from each other (e.g. small intestine
257 milliseconds, brain 595 milliseconds). Liver cancer and healthy liver signals differ by 180%
for example.
A majority of the MRI scanners in use in hospitals and outpatient facilities and at mobile sites in
the United States are based on high field (1.5 - 3.0 Tesla) air core superconducting magnet
technology.
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Open MRIs manufactured by Fonar’s competitors, 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 in 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. 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.
The Upright MRI uses the same configuration RF receiver coil as a high-field MRI system to
image the spine other 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.
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FONAR CORPORATION AND SUBSIDIARIES
The iron frame, because it controls the magnetic lines of force and places them where wanted
and removes them from where not wanted, provides a more versatile magnet design than is
possible with air core magnets. Air core magnets contain no iron but consist entirely of turns of
current carrying wire.
Fonar expects to be the leader in weight-bearing and positional MRI for providing dynamic
visualization of body parts including the spine and extremities.
OTHER IMAGING MODALITIES
Fonar’s MRI scanners also compete with other diagnostic imaging systems, all of which are
based upon the ability of energy waves to penetrate human tissue and to be detected by either
photographic film or electronic devices for presentation of an image on a display monitor. Three
different kinds of energy waves - X-ray, gamma and sound - are used in medical imaging
techniques which compete with MRI medical scanning, the first two of which involve exposing
the patient to potentially harmful radiation. These other imaging modalities compete with MRI
products on the basis of specific applications.
X-rays are the most common energy source used in imaging the body and are employed in
three imaging modalities:
1. Conventional X-ray systems, the oldest method of imaging, are typically used to image
bones and teeth. The image resolution of adjacent structures that have high contrast, such
as bone adjacent to soft tissue, is excellent, while the discrimination between soft tissue
organs is poor because of the nearly equivalent penetration of x-rays.
2. Computerized Tomography, also referred to as “CT”, systems couple computers to x-ray
instruments to produce cross-sectional images of particular large organs or areas of the
body. The CT scanner addresses the need for images, not available by conventional
radiography, that display anatomic relationships spatially. However, CT images are generally
limited to the transverse plane and cannot readily be obtained in the two other planes,
sagittal and coronal. Improved picture resolution is available at the expense of increased
exposure to x-rays from multiple projections. Furthermore, the pictures obtained by this
method are computer reconstructions of a series of projections and, once diseased tissue
has been detected, CT scanning cannot be focused for more detailed pictorial analysis or
obtain a chemical analysis.
3. Digital radiography systems add computer image processing capability to conventional x-ray
systems. Digital radiography can be used in a number of diagnostic procedures which
provide continuous imaging of a particular area with enhanced image quality and reduced
patient exposure to radiation.
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.
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FONAR CORPORATION AND SUBSIDIARIES
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
FDA Regulation
The Food and Drug Administration in accordance with Title 21 of the Code of Federal
Regulations regulates the manufacturing and marketing of Fonar’s MRI scanners. The
regulations can be classified as either pre-market or post-market. The pre-market requirements
include obtaining marketing clearance, proper device labeling, establishment registration and
device listing. Once the products are on the market, Fonar must comply with post-market
surveillance controls. These requirements include the Quality Systems Regulation, or “QSR”,
also known as Current Good Manufacturing Practices or CGMPs, and Medical Device
Reporting, also referred to as MDR regulations. The QSR is a quality assurance requirement
that covers the design, packaging, labeling and manufacturing of a medical device. The MDR
regulation is an adverse event-reporting program.
Classes of Products
Under the Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetic Act,
all medical devices are classified by the FDA into one of three classes. A Class I device is
subject only to general controls, such as labeling requirements and manufacturing practices; a
Class II device must comply with certain performance standards established by the FDA; and a
Class III device must obtain pre-market approval from the FDA prior to commercial marketing.
Fonar’s products are Class II devices. Class II devices are subject to “General Controls”;
General Controls include:
1. Establishment registration of companies which are required to register under 21 CFR Part
807.20, such as manufacturers, distributors, re-packagers and re-labelers.
2. Medical device listing with FDA of devices to be marketed.
3. Manufacturing devices in accordance with the Current Good Manufacturing Practices Quality
System Regulation in 21 CFR Part 820.
4. Labeling devices in accordance with labeling regulations in 21 CFR Part 801 or 809.
5. Submission of a Premarket Notification, pursuant to 510(k), before marketing a device.
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FONAR CORPORATION AND SUBSIDIARIES
In addition to complying with general controls, Class II devices are also subject to special
controls. Special controls may include special labeling requirements, guidance documents,
mandatory performance standards and post-market surveillance.
On October 3, 2000 Fonar received FDA clearance for the Upright® MRI under the name
“Indomitable”.
Premarketing Submission
Each person who wants to market Class I, II and some III devices intended for human use in the
U.S. must submit a 510(k) to FDA at least 90 days before marketing unless the device is
exempt from 510(k) requirements. A 510(k) is a pre-marketing submission made to FDA to
demonstrate that the device to be marketed is as safe and effective, that is, substantially
equivalent, SE, to a legally marketed device that is not subject to pre-market approval, PMA.
Applicants must compare their 510(k) device to one or more similar devices currently on the
U.S. market and make and support their substantial equivalency claims.
The FDA is committed to a 90-day clearance after submission of a 510(k), provided the 510(k)
is complete and there is no need to submit additional information or data.
The 510(k) is essentially a brief statement and description of the product. As Fonar’s scanner
products are Class II products, there are no pre-market data requirements.
An investigational device exemption, also referred to as IDE, allows the investigational device to
be used in a clinical study pending FDA clearance in order to collect safety and effectiveness
data required to support the Premarket Approval, also referred to as PMA, application or a
Premarket Notification pursuant to 510(k), submission to the FDA. Clinical studies are most
often conducted to support a PMA.
For the most part, however, we have not found it necessary to utilize IDE’s. The standard 90
day clearance for our new MRI scanner products classified as Class II products makes the IDE
unnecessary, particularly in view of the time and effort involved in compiling the information
necessary to support an IDE.
Quality System Regulation
The Quality Management System is applicable to the design, manufacture, administration of
installation and servicing of magnetic resonance imaging scanner systems. The FDA has
to establish Good
authority
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.
inspections of manufacturing plants,
to conduct detailed
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FONAR CORPORATION AND SUBSIDIARIES
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.
FDA Enforcement
FDA may take the following actions to enforce the MDR regulation:
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FONAR CORPORATION AND SUBSIDIARIES
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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FONAR CORPORATION AND SUBSIDIARIES
Seizure
A seizure is a civil court action against a specific quantity of goods which enables the FDA to
remove these goods from commercial channels. After seizure, no one may tamper with the
goods except by permission of the court. The court usually gives the owner or claimant of the
seized merchandise approximately 30 days to decide a course of action. If they take no action,
the court will recommend disposal of the goods. If the owner decides to contest the
government’s charges, the court will schedule the case for trial. A third option allows the owner
of the goods to request permission of the court to bring the goods into compliance with the law.
The owner of the goods is required to provide a bond or, security deposit, to assure that they
will perform the orders of the court, and the owner must pay for FDA supervision of any
activities by the company to bring the goods into compliance.
Citation
A citation is a formal warning to a firm of intent to prosecute the firm if violations of the FD&C
Act are not corrected. It provides the firm an opportunity to convince FDA not to prosecute.
Injunction
An injunction is a civil action filed by FDA against an individual or company. Usually, FDA files
an injunction to stop a company from continuing to manufacture, package or distribute products
that are in violation of the law.
Prosecution
Prosecution is a criminal action filed by FDA against a company or individual charging violation
of the law for past practices.
Foreign and Export Regulation
We obtain approvals as necessary in connection with the sales of our products in foreign
countries. In some cases, FDA approval has been sufficient for foreign sales as well. Our
standard practice has been to require either the distributor or the customer to obtain any such
foreign approvals or licenses which may be required.
Legally marketed devices that comply with the requirements of the Food Drug & Cosmetic Act
require a Certificate to Foreign Government issued by the FDA for export. Other devices that do
not meet the requirements of the FD&C Act but comply with the laws of a foreign government
require a Certificate of Exportability issued by the FDA. All products which we sell have FDA
clearance and would fall into the first category.
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FONAR CORPORATION AND SUBSIDIARIES
Foreign governments have differing requirements concerning the import of medical devices into
their respective jurisdictions. The European Union, also referred to as EU, has some essential
requirements described in the EU’s Medical Device Directive, also referred to as MDD. In order
to export to one of these countries, we must meet the essential requirements of the MDD and
any additional requirements of the importing country. The essential requirements are similar to
some of the requirements mandated by the FDA. In addition the MDD requires that we enlist a
Notified Body to examine and assess our documentation, a Technical Construction File, and
verify that the product has been manufactured in conformity with the documentation. The
notified body must carry out or arrange for the inspections and tests necessary to verify that the
product complies with the essential requirements of the MDD, including safety performance and
Electromagnetic Compatibility, also referred to as EMC. Also required is a Quality System, ISO-
13485, assessment by the Notified Body. We were approved for ISO 13485 certification for its
Quality Management System in April, 2003.
We received clearance to sell the Upright® MRI scanners in the EU in May, 2002.
Other countries require that their own testing laboratories perform an evaluation of our devices.
This requires that we must bring the foreign agency’s personnel to the USA to perform the
evaluation at our expense before exporting.
Some countries, including many in Latin America and Africa, have very few regulatory
requirements, beyond FDA clearance.
To date, Fonar has been able to comply with all foreign regulatory requirements applicable to its
export sales.
PHYSICIAN AND DIAGNOSTIC SERVICES MANAGEMENT BUSINESS
Health Diagnostics Management, LLC (HDM) is owned by Health Management Corporation of
America (70%) and investors (30%). Health Management Corporation of America is owned
100% by Fonar Corporation.
HDM operates under the assumed name “Health Management Company of America” (“HMCA”).
The combined business (HDM 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.
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FONAR CORPORATION AND SUBSIDIARIES
As of June 30, 2021, HMCA managed a total of 39 MRI scanners of which twenty-five (25)
scanners are located in New York and 14 scanners are located in Florida. For the 2021 fiscal
year, the revenues HMCA recognized from the MRI facilities has increased to $80.9 million from
$77.2 million in fiscal 2020. Five of the facilities in Florida are owned by HMCA subsidiaries,
where the corporate practice of medicine is permitted.
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 2021, second MRI scanners were installed at our facilities in Islandia,
New York and White Plains, New York and a new facility was installed in Pembroke Pines,
Florida. The Company also acquired an existing facility in West Yonkers, NY in March 2021.
HMCA GROWTH STRATEGY
HMCA’s growth strategy focuses on upgrading and expanding the existing facilities it manages
and expanding the number of facilities it either owns or 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 scanners at certain
of the sites where such additional diagnostic imaging modalities are expected to produce the
greatest return. In addition we plan to install three new facilities in fiscal 2022: one in New York
and two in Florida.
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. 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.
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FONAR CORPORATION AND SUBSIDIARIES
3. Administrative. HMCA assists in the scheduling of patient appointments, purchasing of office
and medical supplies and equipment and handling of reporting, accounting, processing and
filing systems. It prepares and files the physician portions of complex applications to enable its
clients to participate in managed care programs and to qualify for insurance reimbursement.
HMCA assists the clients to implement programs and procedures to ensure full and timely
regulatory compliance and appropriate cost reimbursement under no-fault insurance and
Workers’ Compensation guidelines, as well as compliance with other applicable governmental
requirements and regulations, including HIPAA and other privacy requirements.
4. Billing and Collections. HMCA is responsible for the billing and collection of revenues from
third-party payors including those governed by No-Fault and Workers’ Compensation statutes.
HMCA is presently using a third party to perform its billing and collection services for its clients’
No-Fault and Workers’ Compensation scanning business.
5. Cost Saving Programs. Based on available volume discounts, HMCA seeks to assist in
obtaining favorable pricing for office and medical supplies, medical imaging film, equipment,
contrast agents, such as gadolinuim, and magnavist and other inventory for its clients.
6. Diagnostic Imaging and Ancillary Services. HMCA can offer access to diagnostic imaging
equipment through diagnostic imaging facilities it manages. The Company is expanding the
ancillary services offered in its network to include x-rays, and other MRI equipment such as
high-field (1.5 or 3.0 Tesla magnet strength) MRI scanners and extremity MRI scanners.
7. Marketing Strategies. HMCA is responsible for developing and proposing marketing plans for
its clients.
8. Expansion Plans. HMCA assists the clients in developing expansion plans including the
opening of new or replacement facilities where appropriate.
HMCA’s objective is to free physicians from as many non-medical duties as is practicable,
allowing physicians to spend less time on business and administrative matters and more time
practicing medicine.
The exceptions to this general model of operation are five of the facilities located 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 2020,
the aggregate amount of management fees was $4,530,422 per month. In fiscal 2021, the
aggregate amount of management fees was $4,897,720 per month.
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FONAR CORPORATION AND SUBSIDIARIES
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 2021, the aggregate monthly amount of
management fees payable to HMCA by these sites was $931,561 as compared to $897,745 in
fiscal 2020.
The Florida facilities owned by HMCA subsidiaries directly bill their patients or the patients’
insurance carriers. Patient fees net of provision for bad debts were $23,307,389 in fiscal 2021
as compared to $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 2020 and part of fiscal 2021. This contract was
terminated as of January 1, 2021. The Company also entered into a one year renewable
agreement to provide IT services to the billing company for a monthly fee of $23,884.
HMCA MARKETING
HMCA’s marketing strategy is to expand the business and improve the facilities which it
manages. HMCA is seeking to increase the number of locations of those facilities where market
conditions are promising and to promote growth of our clients’ and Florida subsidiaries’ patient
volume and revenue.
DIAGNOSTIC IMAGING FACILITIES
Diagnostic imaging facilities managed by HMCA provide diagnostic imaging services to patients
referred by physicians. The facilities are operated in a manner which eliminates the admission
and other administrative inconveniences of in-hospital diagnostic imaging services. Imaging
services are performed in an outpatient setting by trained medical technologists under the
direction of physicians. Following diagnostic procedures, the images are reviewed by the
interpreting physicians who prepare reports of these tests and their findings. The vast majority
of reports for the New York facilities are transcribed by HMCA personnel and the remainder are
outsourced to professional transcription services. Reports for the Florida facilities are
outsourced to professional transcription services.
HMCA develops marketing programs and educational programs in an effort to establish and
maintain referring physician relationships for our clients and Florida subsidiaries.
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.
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FONAR CORPORATION AND SUBSIDIARIES
REIMBURSEMENT
HMCA’s clients receive reimbursements for their services through Medicare, Medicaid,
managed care, private commercial
third party administrators, Workers’
insurance,
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.
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, 2021, Medicare revenues
represented approximately 3.4% of the revenues for HMCA’s clients and subsidiaries as
compared to 3.8% for the fiscal year ended June 30, 2020.
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FONAR CORPORATION AND SUBSIDIARIES
Medicaid
The Medicaid program is a jointly-funded federal and state program providing coverage for low-
income persons. In addition to federally-mandated basic services, the services offered and
reimbursement methods vary from state to state. In many states, Medicaid reimbursement is
patterned after the Medicare program; however, an increasing number of states have
established or are establishing payment methodologies intended to provide healthcare services
to Medicaid patients through managed care arrangements. In fiscal 2021, approximately 0.09%
of the revenues of HMCA’s clients were attributable to Medicaid, as compared to 0.07% in fiscal
2020. 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 previously proposed.
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.
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FONAR CORPORATION AND SUBSIDIARIES
GOVERNMENT REGULATION APPLICABLE TO HMCA
FEDERAL REGULATION
The healthcare industry is highly regulated and changes in laws and regulations can be
significant. Changes in the law or new interpretation of existing laws can have a material effect
on our permissible activities, the relative costs associated with doing business and the amount
of reimbursement by government and other third-party payors.
Federal False Claims Act
The federal False Claims Act and, in particular, the False Claims Act’s “qui tam” or
“whistleblower” provisions allow a private individual to bring actions in the name of the
government alleging that a defendant has made false claims for payment from federal funds.
After the individual has initiated the lawsuit the government must decide whether to intervene in
the lawsuit and to become the primary prosecutor. If the government declines to join the lawsuit,
the individual may choose to pursue the case alone, although the government must be kept
apprised of the progress of the lawsuit, and may intervene later. Whether or not the federal
government intervenes in the case, it will receive the majority of any recovery.
When an entity is determined to have violated the federal False Claims Act, it must pay three
times the actual damages sustained by the government, plus mandatory civil penalties for each
separate false claim and the government’s attorneys’ fees. Liability arises when an entity
knowingly submits, or causes someone else to submit, a false claim for reimbursement to the
federal government. The False Claims Act defines the term “knowingly” broadly, though simple
negligence will not give rise to liability under the False Claims Act. Examples of the other
actions which may lead to liability under the False Claims Act are set forth below:
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.
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FONAR CORPORATION AND SUBSIDIARIES
The Fraud Enforcement and Recovery Act of 2009 expanded the scope of the False Claims Act
by, among other things, broadening protections for whistleblowers and creating liability for
knowingly retaining a government overpayment, acting in deliberate ignorance of a government
overpayment or acting in reckless disregard of a government overpayment. The healthcare
reform bills in the form of the Patient Protection and Affordable Care Act, as amended by the
Health Care and Education Reconciliation Act of 2010 (collectively, “PPACA”) expanded on
changes made by the 2009 Fraud Enforcement and Recovery Act with regard to such “reverse
false claims.” Under PPACA, the knowing failure to report and return an overpayment within 60
days of identifying the overpayment or by the date a corresponding cost report is due,
whichever is later, constitutes a violation of the False Claims Act. HMCA and its clients have
never been sued under the False Claims Act and believe they are in compliance with the law.
Stark Law
Under the federal Self-Referral Law, also referred to as the “Stark Law”, which is applicable to
Medicare and Medicaid patients, and the self-referral laws of various States, certain health
practitioners, including physicians, chiropractors and podiatrists, are prohibited from referring
their patients for the provision of designated health services, including diagnostic imaging and
physical therapy services, to any entity with which they or their immediate family members have
a financial relationship, unless the referral fits within one of the specific exceptions in the
statutes or regulations. The federal government has taken the position that a violation of the
federal Stark Law is also a violation of the Federal False Claims Act. Statutory exceptions under
the Stark Law include, among others, direct physician services, in-office ancillary services
rendered within a group practice, space and equipment rental and services rendered to
enrollees of certain prepaid health plans. Some of these exceptions are also available under the
State self-referral laws. HMCA believes that it and its clients are in compliance with these laws.
Anti-kickback Regulation
We are subject to federal and state laws which govern financial and other arrangements
between healthcare providers. These include the federal anti-kickback statute which, among
other things, prohibits the knowing and willful solicitation, offer, payment or receipt of any
remuneration, direct or indirect, in cash or in kind, in return for or to induce the referral of
patients for items or services covered by Medicare, Medicaid and certain other governmental
health programs. Under PPACA, knowledge of the anti-kickback statute or the specific intent to
violate the law is not required. Violation of the anti-kickback statute may result in civil or criminal
penalties and exclusion from the Medicare, Medicaid and other federal healthcare programs,
and according to PPACA, now provides a basis for liability under the False Claims Act. In
addition, it is possible that private parties may file “qui tam” actions based on claims resulting
from relationships that violate the anti-kickback statute, seeking significant financial rewards.
Many states have enacted similar statutes, which are not limited to items and services paid for
under Medicare or a federally funded healthcare program. Neither HMCA nor its clients engage
in this practice.
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FONAR CORPORATION AND SUBSIDIARIES
In fiscal 2021, approximately 3.4% of the revenues of HMCA’s clients were attributable to
Medicare and 0.09% were attributable to Medicaid. In fiscal 2020, approximately 3.8% of the
revenues of HMCA’s clients were attributable to Medicare and 0.07% 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-governmental healthcare benefit programs 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 27
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 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.
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FONAR CORPORATION AND SUBSIDIARIES
Certificates of Need
Some states require hospitals and certain other healthcare facilities and providers to obtain a
certificate of need, or CON, or similar regulatory approval prior to establishing certain healthcare
operations or services, incurring certain capital projects and/or the acquisition of major medical
equipment including MRI and PET/CT systems. We are not operating in any such states.
Patient Protection and Affordable Care Act
On March 23, 2010, President Obama signed into law healthcare reform legislation in the form
of PPACA. The implementation of this law has had a significant 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 previous 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 eight 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, 2021 approximately
55.5% of our clients’ receipts were from patients covered by no-fault insurance and
approximately 9.4% of our client’s receipts were from patients covered by workers’
compensation programs. For the fiscal year ended June 30, 2020, approximately 56.7.% of
HMCA’s clients’ receipts were from patients covered by no-fault insurance and approximately
9.11% 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.
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FONAR CORPORATION AND SUBSIDIARIES
Compliance Program
We maintain a program to monitor compliance with federal and state laws and regulations
applicable to the healthcare entities. The compliance program includes the adoption of (i)
Standards of Conduct for our employees and affiliates and (ii) a process that specifies how
employees, affiliates and others may report regulatory or ethical concerns. We believe that our
compliance program meets the relevant standards provided by the Office of Inspector General
of the Department of Health and Human Services.
An important part of our compliance program consists of conducting periodic audits of various
aspects of our operations and that of the contracted radiology practices. We also assist our
clients with educational programs designed to familiarize them with the regulatory requirements
and specific elements of our compliance program.
HMCA believes that it and its clients are in compliance with applicable Federal, State and local
laws. HMCA does not believe that such laws will have any adverse material effect on its
business.
EMPLOYEES
included employees engaged
Fonar and HMCA had approximately 495 employees as of September 24, 2021. This total
number
in production, customer support, research and
development, information technology, employees engaged in marketing and sales, billing and
collection, legal and compliance matters, 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.
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 notwithstanding the Covid-19 pandemic, 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.
Page 30
2.
3.
4.
5.
6.
FONAR CORPORATION AND SUBSIDIARIES
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.
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.
Page 31
7.
8.
FONAR CORPORATION AND SUBSIDIARIES
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 made it onto the 2019 legislative
agenda. During Fonar’s fiscal 2021, the Florida house and senate reached an agreement
and passed similar legislation. It was, however, vetoed by the Governor. We cannot
predict whether such efforts by the Florida legislature will continue or 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. To date proponents of these changes
have been unsuccessful.
Page 32
FONAR CORPORATION AND SUBSIDIARIES
9.
Federal and state privacy and information security laws. We must comply with numerous
federal and state laws and regulations governing the collection, dissemination, access,
use, security and privacy of PHI, including HIPAA and its implementing privacy and
security regulations, as amended by the federal HITECH Act. If we fail to comply with
applicable privacy and security laws, regulations and standards, properly maintain the
integrity of our data, protect our proprietary rights to our systems, or defend against
cybersecurity attacks, our business, reputation, results of operations, financial position
and cash flows could be materially and adversely affected.
Information security risks have significantly increased 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. COVID-19. Although we believe we have taken the proper steps and made a good
recovery from the impact of the first wave of the COVID-19 virus, new strains of the
disease have developed and future variants may continue to develop. 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.
11. 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.
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FONAR CORPORATION AND SUBSIDIARIES
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
High
Low
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
October- December
January- March
April- June
July- September 24
2017
2017
2017
2017
2018
2018
2018
2018
2019
2019
2019
2019
2020
2020
2020
2020
2021
2021
2021
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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
22.49
20.40
19.18
18.04
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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
16.74
17.31
16.58
16.51
Performance Graph
The following graph compares the annual change in the Company’s cumulative total
shareholder return on its Common Stock during a period commencing on June 30, 2017 and
ending on June 30, 2021 (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”); and (b)
the CRSP Total Return Index for Nasdaq Healthcare companies (“Nas-Hea.”) during such
period, assuming a $100 investment on June 30, 2017. The stock price performance on the
graph below is not necessarily indicative of future price performance.
Page 34
FONAR CORPORATION AND SUBSIDIARIES
Relative Dollar Values
Fonar Common Stock
NASDAQ
NAS-Hea
June 29,
2018
June 30,
2017
June 28,
2019
$ 100.00 $ 95.68 $ 77.52 $ 77.02 $ 61.63
$ 100.00 $ 122.31 130.39 $ 168.82 $ 243.43
$ 100.00 $ 110.82 $ 113.60 $ 140.03 $ 175.00
June 30,
2020
June 30,
2021
On September 30, 2021, we had approximately 993 stockholders of record of our Common
Stock, 12 stockholders of record of our Class B Common Stock, 3 stockholders of record of our
Class C Common Stock and 1,155 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.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data has been extracted from our consolidated
financial statements for the five years ended June 30, 2021. 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.
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FONAR CORPORATION AND SUBSIDIARIES
$
2020
2018
2017
2021
1.20 $
1.47 $
$ 1,635,979 $ 2,025,376 $ 1,812,347 $ 1,755,747 $ 1,480,670
$ 13,673,811 $ 11,704,733 $ 20,513,674 $ 25,452,185 $ 23,678,798
2019
$ 89,929,765 $ 85,690,462 $ 87,192,887 $ 81,515,994 $ 78,036,586
$ 46,456,127 $ 43,296,825 $ 43,984,593 $ 41,950,770 $ 38,052,425
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
336,761
capital leases
Stockholder’s equity $ 135,370,125 $ 126,242,616 $ 118,112,103 $ 102,234,471 $ 82,909,953
$ 88,534,063 $ 77,226,104 $ 70,998,783 $ 52,497,840 $ 39,177,703
$ 189,506,195 $ 180,259,380 $ 133,560,210 $ 118,310,945 $ 98,762,566
$ 1,808,685 $ 2,116,587 $
6,415,014 6,289,103
6,287,510 6,161,599
6,505,283
6,632,787
6,571,217
6,354,103
6,481,607
6,443,713
273,112 $
306,035 $
3.16 $
2.26 $
1.18 $
3.10 $
2.22 $
1.45 $
2.98
2.92
$
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 Upright® MRI (also called Stand-Up® MRI) scanner. The
Upright® MRI allows patients to be scanned for the first time under weight-bearing conditions.
The Stand-Up® MRI is the only MRI capable of producing images in the weight-bearing state.
At 0.6 Tesla field strength, the Upright® MRI is among the highest field open MRI scanners in
the industry, offering non-claustrophobic MRI together with high-field image quality. Fonar’s
open MRI scanners were the first high field strength open MRI scanners in the industry.
Page 36
FONAR CORPORATION AND SUBSIDIARIES
HMCA generates revenues from providing comprehensive management services, including
development, administration, accounting, billing and collection services, together with office
space, medical equipment, supplies and non-medical personnel to its clients. Revenues are in
the form of fees which are earned under contracts with HMCA’s clients except for its three
Florida subsidiaries which engage in the practice of medicine, and bill and collect fees from
patients, insurers and other third party payors directly.
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 have shown a spike in new
cases due primarily to the new Delta strain in the viruses. 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.
Since March, 2020 the global pandemic of COVID-19 has caused turbulence and uncertainty in
the United States and international economies which have adversely affected our 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 we are 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 measures to allow the Company to survive during the global pandemic and to prevent
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. Rent deferrals were negotiated with nearly all landlords. Reductions of the salaries of
non-controlling interest group members, who were actively involved in the management of the
Company, accounted for most of the payroll savings. 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. One of the concerns we have are the increased strictness in
enforcement of COVID-19 mandates, such as the requirement that employees in healthcare
facilities be vaccinated or frequently test. We are in fact facing some of these challenges now.
So far we have been able to navigate through these requirements and avoid any significant
disruption to our business.
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
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FONAR CORPORATION AND SUBSIDIARIES
our disclosure of contingent assets and liabilities at the dates of the financial statements;
and
our reported amounts of net revenue and expenses in our consolidated statements of
operations during the reporting periods
These estimates involve judgments with respect to numerous factors that are difficult to predict
and are beyond management’s control. As a result, actual amounts could differ materially from
these estimates.
The Securities and Exchange Commission defines critical accounting estimates as those that
are both most important to the portrayal of a company’s financial condition and results of
operations and require management’s most difficult, subjective or complex judgment, often as a
result of the need to make estimates about the effect of matters that are inherently uncertain
and may change in subsequent periods. In the notes to our consolidated financial statements,
we discuss our significant accounting policies.
We believe the following critical accounting policies affect our more significant judgments and
estimates used in the preparation of our consolidated financial statements. We recognize
revenue and related costs of revenue from sales contracts for our MRI scanners 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, 2020, the net deferred tax asset was valued at $18,809,757. At June 30, 2021, the
net deferred tax asset was valued at $15,958,961.
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.
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FONAR CORPORATION AND SUBSIDIARIES
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.
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 2021 COMPARED TO FISCAL 2020
In fiscal 2021, we recognized net income of $13.7 million on revenues of $89.9 million, as
compared to net income of $11.7 million on revenues of $85.7 million for fiscal 2020. This
represents an increase in revenues of 4.9%. Patient fee revenue net of contractual allowances
increased by 3.6%. Total costs and expenses increased by 1.1%. Our consolidated operating
results increased by $3.4 million to an operating income of $17.1 million for fiscal 2021 as
compared to operating income of $13.7 million for fiscal 2020.
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FONAR CORPORATION AND SUBSIDIARIES
Discussion of Operating Results of Medical Equipment Segment
Fiscal 2021 Compared to Fiscal 2020
Revenues attributable to our medical equipment segment increased by 6.8% to $9.0 million in
fiscal 2021 from $8.5 million in fiscal 2020, with product sales revenues increasing by 332.9%
from $298,000 in fiscal 2020 to $1.3 million in fiscal 2021. Service revenue decreased from $8.2
million in fiscal 2020 to $7.7 million in fiscal 2021.
The Upright® MRI is unique in that it permits MRI scans to be performed on patients upright in
the weight-bearing state and in multiple positions that correlate with symptoms.
Product sales to unrelated parties increased by 332.9% in fiscal 2021 from $298,000 in fiscal
2020 to $1.3 million in fiscal 2021. There were no product sales to related parties in fiscal 2021
or 2020.
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 decreased from an operating loss of
$6.4 million in fiscal 2020 to an operating loss of $3.4 million in fiscal 2021. The losses are
attributable most significantly to the fact that costs increased by a greater amount than
revenues. The increase in costs was primarily due to the increase in business activity which
resulted in our increased revenues.
We recognized revenues of $733,000 from the sale of our Upright® MRI scanners in fiscal
2021, while in fiscal 2020, we recognized revenues of $96,000 from the sale of Upright® MRI
scanners.
Research and development expenses decreased to $1.6 million in fiscal 2021 from $2.0 million
in fiscal 2020. Our expenses for fiscal 2021 represented continued research and development
of various upgrades for the Upright® MRI scanner. The reason for the decrease in research and
development was due mainly to supply chain related delays due to the COVID-19 pandemic.
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FONAR CORPORATION AND SUBSIDIARIES
Discussion of Operating Results of Physician and Diagnostic Services Management Segment.
Fiscal 2021 Compared to Fiscal 2020
Revenues attributable to the Company’s physician and diagnostic services management
segment, HMCA, increased to $80.9 million in fiscal 2021 as compared to $77.2 million in fiscal
2020. The increase in revenues was due to $812,000 of patient fees (net of contractual
allowances and discounts less provision for bad debts) from patient and third party payors
recognized by five of the facilities in Florida. Also management and other fees increased by $2.9
million due to two additional scanners being installed in existing facilities.
Cost of revenues as a percentage of the related revenues for our physician and diagnostic
services management segment increased from $39.8 million or 51.5% of related revenues for
the year ended June 30, 2020 to $42.6 million, or 52.7% of related revenues for the year ended
June 30, 2021. The revenues increased more than the costs relating to these revenues.
Operating results of this segment increased from operating income of $20.1 million in fiscal
2020 to operating income of $20.5 million in fiscal 2021. 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.
For the fiscal years ended June 30, 2021 and June 30, 2020 12.2% and 11.9%, respectively, of
total revenues were derived from contracts with facilities owned by Dr. Raymond V. Damadian,
the Chairman of the Board 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.
Discussion of Certain Consolidated Results of Operations
Fiscal 2021 Compared to Fiscal 2020
Interest and investment income decreased in 2021 compared to 2020. We recognized interest
income of $311,931 in 2021 as compared to $502,145 in fiscal 2020, representing a decrease of
37.8%.
Interest expense of $248,665 was recognized in fiscal 2021, as compared to interest expense of
$74,321 in fiscal 2020. The increase in interest expense is attributable to an assessment of
additional taxes and interest in connection with a state income tax audit.
The 30% noncontrolling interest allocations of $3,466,000 and $3,465,000 for fiscal 2021 and
fiscal 2020 respectively, have been calculated by Income from operations, and adding
depreciation and amortization net of miscellaneous losses and other income from the Physician
and Diagnostic Service Management segment (See Note 17).
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FONAR CORPORATION AND SUBSIDIARIES
While revenue increased by 4.9% selling, general and administrative expenses decreased by
7.4% to $24.7 million in fiscal 2021 from $26.7 million in fiscal 2020. 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. Also Fonar resolved certain sales tax liabilities during the year and
was able to reverse accrued interest and penalties of $602,000 which was recorded under
selling, general and administrative expenses.
The compensatory element of stock issuances increased from $0 in fiscal 2020 to $83,277 in
fiscal 2021.
Revenue from service and repair fees decreased from $8.2 million in fiscal 2020 to $7.7 million
in fiscal 2021.
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 2021 we continued our investment in the development of various upgrades for the
UPRIGHT® MRI, with an investment of $1,635,979 in research and development, none of which
was capitalized, as compared to $2,025,376, none of which was capitalized, in fiscal 2020. The
research and development expenditures were approximately 18.1% of revenues attributable to
our medical equipment segment and 1.8% of total revenues in 2021, and 23.9% of medical
equipment segment revenues and 2.4% of total revenues in fiscal 2020. This represented a
19.2% decrease in research and development expenditures in fiscal 2021 as compared to fiscal
2020.
For the physician and diagnostic services management segment, HMCA, revenues increased to
$80.9 million in fiscal 2021 as compared to $77.2 million in fiscal 2020. This is primarily
attributable to an increase in patient scans resulting from our marketing efforts.
For the fiscal year 2021 the Company recorded an income tax expense of $4.0 million
compared with an income tax expense of $2.4 million for 2020. The income tax benefits are
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
$16.0 million as of June 30, 2021, 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
expecting 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, and the severity and the duration of the COVID-19 virus,
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).
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FONAR CORPORATION AND SUBSIDIARIES
Our management fees are dependent on collection by our clients of fees from reimbursements
from Medicare, Medicaid, private insurance, no fault and workers’ compensation carriers, self–
pay and other third-party payors. The health care industry is experiencing the effects of the
federal and state governments’ trend toward cost containment, as governments and other third-
party payors seek to impose lower reimbursement and utilization rates and negotiate reduced
payment schedules with providers. The cost-containment measures, consolidated with the
increasing influence of managed-care payors and competition for patients, have resulted in
reduced rates of reimbursement for services provided by our clients from time to time. Our
future revenues and results of operations may be adversely impacted by future reductions in
reimbursement rates.
Certain third-party payors have proposed and implemented changes in the methods and rates
of reimbursement that have had the effect of substantially decreasing reimbursement for
diagnostic imaging services that HMCA’s clients provide. To the extent reimbursement from
third-party payors is reduced, it will likely have an adverse impact on the rates they pay us, as
they would need to reduce the management fees they pay HMCA to offset such decreased
reimbursement rates. Furthermore, many commercial health care insurance arrangements are
changing, so that individuals bear greater financial responsibility through high deductible plans,
co-insurance and higher co-payments, which may result in patients delaying or foregoing
medical procedures. More frequently, however, patients are scanned and we experience
difficulty in collecting deductibles and co-payments. We expect that any further changes to the
rates or methods of reimbursement for services, which reduce the reimbursement per scan of
our clients may partially offset the increases in scan volume we are working to achieve for our
clients, and indirectly will result in a decline in our revenues.
On March 23, 2010, President Obama signed into law healthcare reform legislation in the form
of the Patient Protection and Affordable Care Act, or PPACA. The ultimate impact of the PPACA
is uncertain but to date has reduced our revenues from what they otherwise would have been.
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 20.8% from $36.8 million at June 30, 2020 to $44.5
million at June 30, 2021.
Cash provided by operating activities for fiscal 2021 approximated $19.1 million. Cash provided
by operating activities was attributable to the net income of $13.7 million, depreciation and
amortization of $4.1 million, deferred income tax expense benefit of $2.9 million which was
offset by the increase in accounts, and medical and management fee receivables of $12.1
million.
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FONAR CORPORATION AND SUBSIDIARIES
Cash used in investing activities for fiscal 2021 approximated $4.8 million. The cash used in
investing activities was attributable to purchases of property and equipment of $3.5 million, the
purchase of an imaging center for $1.1 million and costs of patents of $164,000.
Cash used in financing activities for fiscal 2021 approximated $6.6 million. The principal uses of
cash used in financing activities included the proceeds from loans and capital lease obligations
of $63,000, and repayment of borrowings and capital lease obligations of $103,000, and
distributions to non-controlling interests of $6.6 million.
Total liabilities increased slightly by 0.2% during fiscal 2021, from approximately $54.0 million at
June 30, 2020 to approximately $54.1 million at June 30, 2021.
As at June 30, 2021, our obligations included approximately $877,000 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, 2021, we had working capital of approximately $88.5 million as compared to
working capital of $77.2 million at June 30, 2020, and stockholders’ equity of $135.4 million at
June 30, 2021 as compared to stockholders’ equity of $126.2 million at June 30, 2020. For the
year ended June 30, 2021, we realized a net income of $13.7 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, 2021, HMCA manages a total of 39
MRI scanners of which 25 MRI scanners are located in New York and 14 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 $8.2 million for the year ended June
30, 2020 and $7.7 million for the year ended June 30, 2021.
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.
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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 2021 approximated $3.7 million. Capitalized patent costs were
approximately $164,000. Purchases of property and equipment were approximately $3.5 million.
In July, 2020, we completed the installation of a new MRI facility in Pembroke Pine, Florida.
In March 2021, we acquired a facility by purchase of all of its assets in Yonkers, NY. HMCA will
provide the use of the facility and provide non-medical services to Comprehensive MRI of New
York, P.C., a medical practice for which we provide equipment, supplies and non-medical
services at other facilities as well.
Fonar is committed to making capital expenditures in the 2021 fiscal year, for placing three
additional scanners at facilities located in Florida and New York. One of the facilities in Florida
will be a new stand-alone facility and another will be the addition of an additional machine in
Florida. The location in New York will also be a new stand-alone facility. The current estimated
costs of these capital expenditures is approximately $3.0 million.
The Company believes that its business plan has been responsible for the past five consecutive
fiscal years of profitability (fiscal 2021, fiscal 2020, fiscal 2019, fiscal 2018 and fiscal 2017) and
that its capital resources will be adequate to support operations at current levels through
September 30, 2022.
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. This loan was forgiven during August 2021.
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FONAR CORPORATION AND SUBSIDIARIES
During August 2021 the Company renewed their revolving credit agreement. The terms include
borrowing limits of up to $10,000,000 and the agreement was extended to August 2022. The
interest rate on unpaid principal 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 11 to the consolidated Financial Statements for information on long-term debt.
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FONAR CORPORATION AND SUBSIDIARIES
ITEM 8.
FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS
At June 30, 2021 and 2020
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended June 30, 2021 and 2020
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended June 30, 2021 and 2020
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 2021 and 2020
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE.
48
51
54
56
58
59
Page 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, 2021 and 2020, the related consolidated
statements of income, stockholders’ equity and cash flows for each of the two years in the
period ended June 30, 2021, 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, 2021 and 2020, and the results of its
operations and its cash flows for each of the two years in the period ended June 30, 2021, in
conformity with accounting principles generally accepted in the United States of America.
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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit
of the financial statements that were communicated or required to be communicated to the audit
committee and that: (1) relate to accounts or disclosures that are material to the financial
statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the financial
statements, taken as a whole, and we are not, by communicating the critical audit matters
below, providing separate opinions on the critical audit matters or on the accounts or
disclosures to which they relate.
Page 48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Continued)
Patient Accounts Receivable Reserve – Refer to Note 3 to the financial statements
Critical Audit Matter Description
Patient accounts receivable is recorded at net realizable value based on the estimated amounts
the Company expects to receive from patients and third-party payers. Estimates of contractual
allowances under managed care, commercial, and governmental insurance plans are based
upon the payment terms specified in the related contractual agreements or as mandated under
government payer programs. Management continually reviews the contractual allowance
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. Receivables related to uninsured patients and uninsured copayment and deductible
amounts for patients who have health insurance coverage may have discounts applied. The
Company also records estimated implicit price concessions (based on historical experience)
related to accounts to record the accounts receivable at the amount the Company expects to
collect from patients and third-party payers. This implied concession requires extensive
judgment and subjective assumptions. Implicit price concessions relate primarily to amounts
due directly from patients and are based upon management’s assessment of historical write-offs
and expected net collections, business and economic conditions, trends in federal, state, and
private employer health care coverage, and other collection indicators. Auditing management’s
estimate of the price concessions was complex and judgmental due to the significant data
inputs and subjective assumptions utilized in determining the net realizable value of accounts
receivable.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the net realizable value of patient accounts receivable included
the following:
- We obtained an understanding, evaluated the design, and tested the operating
effectiveness of certain controls that address the risks of material misstatement relating
to the measurement of service fee revenue and receivables.
- We tested informational technology general controls around the Company’s billing
system and associated database.
- We evaluated management’s methodology and related assumptions, including cash
collections, by comparing actual results to management’s historical estimates.
- We tested the underlying data related to the recognition of patient level charges and
the subsequent activities, including cash collections and non-cash adjustments.
- We tested the contractual rates set forth by the third-party payers which are input into
the Company’s billing system and then billed to patients and/or third-party payers.
- We tested the mathematical accuracy of the estimates applied to period-end accounts
receivable.
- We evaluated the appropriateness of the industry, economic, and Company factors
that were used in determining the net realizable value of patient accounts receivable.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Continued)
Management Fee Accounts Receivable Reserve – Refer to Note 3 to the financial statements.
Management fee accounts receivable is related to fees outstanding from the related and non-
related professional corporations (“PCs”) under management agreements. Payment of the
outstanding fees is dependent on the PCs ability to collect fees from third-party payers and
patients because the management fees are collateralized by the PCs accounts receivable. The
Company records the management fee accounts receivables net of the estimated implicit price
concessions based on the PCs likelihood to collect on the accounts. Implicit price concessions
on the PCs are estimated by management in the same manner the patient accounts receivable
are analyzed. This implied concession requires extensive judgment and subjective assumptions.
Implicit price concessions relate primarily to amounts due directly from patients and are based
upon management’s assessment of historical write-offs and expected net collections, business
and economic conditions, trends in federal, state, and private employer health care coverage,
and other collection indicators. Auditing management’s estimate of the price concessions was
complex and judgmental due to the significant data inputs and subjective assumptions utilized in
determining the net realizable value of accounts receivable.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the management fee accounts receivable reserve are consistent
with the audit procedures associated with the patient fee accounts receivable reserve. In
addition, we traced the management fees to the underlying agreements and the general ledger.
/s/ Marcum llp
Marcum llp
We have served as the Company’s auditor since 1990, such date takes into account the merger
of Tabb, Conigliaro, McGann, P.C. (“Tabb”) into another firm in approximately 2001 and the
former partners of Tabb joining Marcum LLP in 2002.
New York, New York
October 12, 2021
/s/ Marcum llp
Marcum llp
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FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Current Assets:
Cash and cash equivalents
Short term investments
Accounts receivable – net of allowances for doubtful
accounts of $442,270 and $514,561 at June 30,
2021 and 2020, respectively
Accounts receivable – related party
Medical receivables - net
Management and other fees receivable – net of
allowances for doubtful accounts of $15,786,878 and
$11,063,233 at June 30, 2021 and 2020,
respectively
Management and other fees receivable – related
party medical practices – net of allowances for
doubtful accounts of $4,184,399 and $3,322,055 at
June 30, 2021 and 2020, respectively
Contract assets
Inventories
Income tax receivable
Prepaid expenses and other current assets
Total Current Assets
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
June 30,
2021
2020
$ 44,460,411
32,177
$ 36,802,342
31,884
4,525,435
11,977
17,900,489
4,312,999
5,988
16,171,782
30,947,863
27,437,768
7,814,250
—
1,663,419
—
1,227,463
108,583,484
2,879,946
15,958,961
21,850,139
30,133,285
1,126,990
4,269,277
4,037,599
666,514
$ 189,506,195
6,896,482
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
See accompanying notes to consolidated financial statements.
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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
Contract liabilities
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
June 30,
2021
2020
$
173,206
1,866,035
9,162,118
3,533,656
202,741
4,365,825
731,101
$
108,379
1,965,259
8,185,098
3,370,149
74,699
4,105,265
854,579
14,739
20,049,421
—
18,663,428
2,800,522
238,316
92,663
28,975,132
1,048,431
760,254
171,331
34,086,649
54,136,070
2,655,605
234,106
92,663
30,104,464
1,251,171
865,416
150,311
35,353,736
54,017,164
See accompanying notes to consolidated financial statements.
Page 52
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, 2021
and 2020, 313,438 issued and outstanding at June
30, 2021 and 2020
Preferred stock $.001 par value; 567,000 shares
authorized at June 30, 2021 and 2020, issued and
outstanding – none
Common stock $.0001 par value; 8,500,000 shares
authorized at June 30, 2021 and 2020, 6,565,853
and 6,459,106 issued at June 30, 2021 and 2020,
respectively; 6,554,210 and 6,447,463 outstanding at
June 30, 2021 and 2020, respectively
Class B convertible common stock (10 votes per
share) $.0001 par value; 227,000 shares authorized
at June 30, 2021 and 2020, 146 issued and
outstanding at June 30, 2021 and 2020
Class C common stock (25 votes per share) $.0001
par value; 567,000 shares authorized at June 30,
2021 and 2020, 382,513 issued and outstanding at
June 30, 2021 and 2020
Paid-in capital in excess of par value
Accumulated deficit
Treasury stock, at cost – 11,643 shares of common
stock at June 30, 2021 and 2020
Total Fonar Corporation’s Stockholders’ Equity
Noncontrolling interests
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
June 30,
2021
2020
$
31
$
—
31
—
657
647
—
—
38
185,100,976
(46,007,663 )
38
183,076,888
(56,215,251 )
(675,390 )
138,418,649
(3,048,524 )
135,370,125
$ 189,506,195
(675,390 )
126,186,963
55,253
126,242,216
$ 180,259,380
See accompanying notes to consolidated financial statements.
Page 53
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 $83,277
and $0 for the years ended June 30, 2021 and 2020
respectively
Total Costs and Expenses
Income from Operations
Other Income and (Expenses):
Interest expense
Investment income
Other income
Income before provision for income taxes and
noncontrolling interests
Provision for Income Taxes
Net Income
Net Income – Noncontrolling Interests
Net Income – Attributable to FONAR
For the Years Ended June 30,
2021
2020
$ 23,307,389
1,288,483
7,638,608
110,000
46,609,449
$ 22,495,260
297,613
8,055,490
110,000
44,565,405
10,975,836
89,929,765
10,166,694
85,690,462
1,032,676
2,740,625
745,375
2,731,397
39,466
10,917,635
25,384,557
37,298
10,880,265
22,951,301
6,341,168
1,635,979
5,951,189
2,025,376
24,740,044
72,832,150
17,097,615
26,717,345
72,039,546
13,650,916
(248,665 )
311,931
504,450
17,665,331
(3,991,520 )
$ 13,673,811
(3,466,223 )
$ 10,207,588
(74,321 )
502,145
70,771
14,149,511
(2,444,778 )
$ 11,704,733
(3,464,528 )
$ 8,240,205
See accompanying notes to consolidated financial statements.
Page 54
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
2021
$ 9,592,134
2020
$ 7,735,650
$
458,710
$
376,055
$
156,744
$
128,500
$
$
$
1.47
1.45
0.41
$
$
$
1.20
1.18
0.34
6,505,283
6,443,713
6,632,787
6,571,217
382,513
382,513
See accompanying notes to consolidated financial statements.
Page 55
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED JUNE 30, 2021 AND 2020
Balance, July 1, 2019
Net income
Stock issued to employees under
stock bonus plans
Payments on notes receivable from
employee stockholders
Distributions to noncontrolling
interests
Balance, June 30, 2020
Net income
Stock issued to employees under
stock bonus plans
Distributions to noncontrolling
interests
Balance, June 30, 2021
Class A
Non-Voting
Preferred
31
—
$
Common
Shares
Stock
Amount
Class C
Common
Stock
6,357,482 $
—
638 $
—
—
89,981
—
—
31
—
—
—
6,447,463 $
—
9
—
—
647 $
—
—
106,747
10
$
$
—
31
—
6,554,210 $
—
657 $
38
—
—
—
—
38
—
—
—
38
Balance, July 1, 2019
Net income
Stock issued to employees under
stock bonus plans
Distributions to noncontrolling
interests
Balance, June 30, 2020
Net income
Stock issued to employees under
stock bonus plans
Distributions to noncontrolling
interests
Balance, June 30, 2021
Paid-in
Capital in
Excess of Par
Value
Accumulated
Deficit
$ 181,086,517 $ (64,455,456 )
— 8,240,205
1,990,371
—
—
—
$ 183,076,888 $ (56,215,251 )
— 10,207,588
2,024,088
—
—
—
$ 185,100,976 $ (46,007,663 )
See accompanying notes to consolidated financial statements.
Page 56
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED JUNE 30, 2021 AND 2020
Balance, July 1, 2019
Net income
Stock issued to employees under stock
bonus plans
Distributions to noncontrolling interests
Balance, June 30, 2020
Net income
Stock issued to employees under stock
bonus plans
Distributions to noncontrolling interests
Balance, June 30, 2021
Treasury
Stock
Noncontrolling
Interests
$ (675,390 ) $ 2,155,725
3,464,528
—
$ (675,390 ) $
—
—
—
—
(5,565,000 )
55,253
3,466,223
Total
$ 118,112,103
11,704,733
1,990,380
(5,565,000 )
$ 126,242,216
13,673,811
—
(6,570,000 )
$ (675,390 ) $ (3,048,524 )
—
—
2,024,098
(6,570,000 )
$ 135,370,125
See accompanying notes to consolidated financial statements.
Page 57
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 for bad debts
Deferred income tax - net
Income tax receivable
Amortization on right-of-use assets
Compensatory element of stock issuances
Stock issued for costs and expenses
Abandoned patents
(Increase) decrease in operating assets, net:
Accounts, medical and management fee receivables
Notes receivable
Contract assets
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
Financing lease liabilities
Contract liabilities
Other liabilities
NET CASH PROVIDED BY OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment
Proceeds of Short term investment
Purchase of imaging center
Cost of patents
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of borrowings and capital lease obligations
Proceeds from debt
Distributions to noncontrolling interests
NET CASH USED IN FINANCING ACTIVITIES
NET INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS – BEGINNING OF
YEAR
CASH AND CASH EQUIVALENTS – END OF YEAR
For the Years Ended June 30,
2021
2020
$ 13,673,811
$ 11,704,733
4,081,687
5,585,989
2,855,006
671,185
1,458,053
83,277
1,940,821
534
(12,110,859 )
46,944
152,833
(14,649 )
526,425
(18,087 )
(99,224 )
1,382,497
(123,478 )
(965,825 )
(74,698 )
14,739
21,020
19,088,001
(3,533,091 )
(293 )
(1,122,508 )
(163,705 )
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 )
(4,819,597 )
7,422,413
(103,335 )
63,000
(6,570,000 )
(6,610,335 )
7,658,069
(4,957,936 )
5,618,089
(5,565,000 )
(4,904,847 )
22,920,329
36,802,342
$ 44,460,411
13,882,013
$ 36,802,342
See accompanying notes to consolidated financial statements.
Page 58
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
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 the Company has been steadily recovering to pre-COVID-19 levels. At the end of fiscal year
ending June 30, 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 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 and the new variants, the Company believes with the
positive cash flows, low debt and cash on hand, it will be able to continue operations going
forward.
Page 59
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
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 $2,051,000 and $1,870,000 for the years ended June 30, 2021 and 2020
respectively. The estimated useful lives in years are generally as follows:
Estimated Useful Life in Years for Property and Equipment
Diagnostic equipment
Research, development and demonstration equipment
Machinery and equipment
Furniture and fixtures
Leasehold improvements
Building
5–13
3-7
2-7
3-9
3–10
28
Page 60
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
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 61
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
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 606, “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, 2021, the Company has twenty two
22 management agreements of which three 3 are with PC’s owned by Raymond V. Damadian,
M.D., Chairman of the Board of FONAR (“the Related medical practices”) and nineteen 19 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.
Page 62
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (Continued)
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.
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, 2021 and 2020 are summarized in the
following table.
Patient Fee Revenue - Net
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
2021
$ 4,100,440
968,055
15,011,111
3,227,783
$ 23,307,389
2020
$ 4,545,987
1,038,288
16,028,737
882,248
$ 22,495,260
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.
Page 63
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense approximated $633,000 and
$566,000 and for the years ended June 30, 2021 and 2020, 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 $8,215 and $12,056 for the years
ended June 30, 2021 and 2020 respectively.
Income Taxes
Deferred tax assets and liabilities are determined based on the difference between the financial
statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse.
Customer Advances
Cash advances and progress payments received on sales orders are reflected as customer
advances until such time as revenue recognition occurs.
Earnings Per Share
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, 2021 and 2020.
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, 2021 and 2020, diluted EPS for common
shareholders includes 127,504 shares upon conversion of Class C Common.
Page 64
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share (Continued)
Basic
Total
June 30, 2021
Common
Stock
Class C
Common
Stock
Numerator:
Net income available to common
stockholders
Denominator:
Weighted average shares outstanding
Basic income per common share
Diluted
Denominator:
Weighted average shares outstanding
Class C Common Stock
Total Denominator for diluted earnings per
share
Diluted income per common share
Basic
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
$ 10,207,588
$ 9,592,134
$ 156,744
6,505,283
1.57
$
6,505,283
1.47
$
382,513
0.41
$
6,505,283
127,504
382,513
—
6,632,787
1.45
$
382,513
0.41
$
June 30, 2020
Total
Common
Stock
Class C
Common
Stock
$ 8,240,205
$ 7,735,650
$ 128,500
6,443,713
1.28
$
6,443,713
1.20
$
382,513
0.34
$
6,443,713
127,504
382,513
—
6,571,217
1.18
$
382,513
0.34
$
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.
Page 65
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 2021, the Company had
cash on deposit of approximately $42,609,000 in excess of federally insured limits of $250,000.
Related Parties: Net revenues from related parties accounted for approximately 12% and 12%
of the consolidated net revenues for the years ended June 30, 2021 and 2020, 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, 2021 and 2020, respectively.
See Note 3 regarding the Company’s concentrations in the healthcare industry.
Fair Value of Financial Instruments
The financial statements include various estimated fair value information at June 30, 2021 and
2020, 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.
Page 66
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments (Continued)
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 December 2019, the FASB issued ASU 2019-12 (“ASU 2019-12”), Income Taxes (Topic
740). ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax
allocation, the methodology for calculating income taxes in an interim period, and the
recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies
other areas of the standard. ASU 2019-12 was effective beginning in the first quarter of 2021.
Certain amendments in this update must be applied on a prospective basis, certain
amendments must be applied on a retrospective basis, and certain amendments must be
applied on a modified retrospective basis through a cumulative-effect adjustment to retained
earnings/(deficit) in the period of adoption. The adoption of this update did not have a material
impact on our financial statements.
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 had no material impact on our Consolidated Financial Statements.
FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting
standards, updates, and regulations as of June 30, 2021 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 2021 or 2020, 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.
Page 67
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
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, 2021 is as follows:
Receivables - Non
Current - net
2023
2024
2025
2026
Total
$
$
1,020,140
1,020,140
599,545
160,697
2,800,522
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 68
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
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 65% and 66%, respectively, of the PCs’ 2021 and 2020 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 12%, of the consolidated net revenues for the years
ended June 30, 2021 and 2020, 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, 2021 and
2020.
Total Facilities
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 69
For the Year Ended June 30,
2021
2020
25
1
1
—
27
26
—
—
(1 )
25
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 4 – CONTRACT ASSETS AND LIABILITIES
Information relating to uncompleted contracts as of June 30, 2021 and 2020 about contract
assets and contract (liabilities) is as follows:
Costs incurred on uncompleted contracts
Estimated earnings
Costs and estimated earnings on uncompleted
contracts
Less: Billings to date
Costs and estimated earnings in excess of billings on
uncompleted contracts
NOTE 5 – INVENTORIES
As of June 30,
$
2021
294,783
567,978
$
2020
448,437
309,248
862,761
877,500
757,685
604,852
$
(14,739 )
$
152,833
Inventories included in the accompanying consolidated balance sheets consist of:
Purchased parts, components and supplies
Work-in-process
Inventories
NOTE 6 - PROPERTY AND EQUIPMENT
As of June 30,
2021
$ 1,393,329
270,090
$ 1,663,419
2020
$ 1,544,036
104,734
$ 1,648,770
Property and equipment, at cost, less accumulated depreciation and amortization, at June 30,
2021 and 2020, 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,
2021
$ 29,826,829
2020
$ 28,434,063
6,029,551
2,069,055
3,450,664
12,961,887
939,614
55,277,600
33,427,461
$ 21,850,139
5,901,961
2,069,055
3,291,666
10,736,825
939,614
51,373,184
30,009,150
$ 21,364,034
Depreciation and amortization of property and equipment for the years ended June 30, 2021
and 2020 was $3,696,986 and $3,144,580, respectively.
Page 70
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 7 – OPERATING & FINANCING LEASES
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.
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, 2021 is as follows:
Reconciliation of
operating and financing
lease payments
Year Ending June 30,
2022
2023
2024
2025
2026
Thereafter
Present value discount
Total lease liability
Operating Lease Payments
5,077,656
$
5,172,157
4,837,900
4,725,550
4,285,124
16,950,126
(8,539,725 )
32,508,788
$
Page 71
Financing Lease Payments
244,343
$
244,343
244,343
244,343
244,343
162,898
(133,441 )
1,251,172
$
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 7 – OPERATING & FINANCING LEASES (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:
Components of lease expense
9.4
5.6
5.5 %
3.6 %
Operating lease cost
Finance lease cost:
Depreciation of leased equipment
Interest on lease liabilities
Total finance lease cost
For Year Ended
June 30,
2021
$ 6,145,701
$
$
198,881
47,472
246,353
June 30,
2020
$ 5,135,604
$
$
—
—
—
Supplemental cash flow information related to leases was as follows:
Supplemental cash flow information related to leases
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,
2021
$ 4,970,934
130,038
$
June 30,
2020
$ 4,170,977
$
$ 1,531,889
—
$
$ 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.
Page 72
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 8 - OTHER INTANGIBLE ASSETS
Other intangible assets, net of accumulated amortization, at June 30, 2021 and 2020 are
comprised of:
Other Intagible Assets - Net
Capitalized software development costs
Patents and copyrights
Non-competition agreements
Customer relationships
Less: Accumulated amortization
As of June 30,
2021
$ 7,004,847
5,244,892
4,150,000
3,900,000
20,299,739
16,262,140
$ 4,037,599
2020
$ 7,004,847
5,081,721
4,100,000
3,800,000
19,986,568
15,877,439
$ 4,109,129
The estimated amortization of other intangible assets for the five years ending June 30, 2026 and
thereafter is as follows:
Schedule Of
Other Intangible
Assets
For the Years
Ending June 30,
2022 $
2023
2024
2025
2026
Thereafter
Other intangible
Total
423,209 $
389,168
388,867
383,912
373,220
2,079,223
Patents and
Copyrights
Non-
competition
Customer
Relationships
185,709 $
189,168
188,867
183,912
173,220
765,056
37,500 $
—
—
—
—
—
200,000
200,000
200,000
200,000
200,000
1,314,167
assets - net $
4,037,599 $
1,685,932 $
37,500 $
2,314,167
The weighted average amortization period for other intangible assets is 11.4 years and they have no
expected residual value.
Information related to the above intangible assets for the years ended June 30, 2021 and 2020 is as
follows:
Other Intangible Assets
Balance – Beginning of Year
Amounts capitalized
Software or patents written off
Amortization
Balance – End of Year
As of June 30,
2021
$ 4,109,129
313,705
(534 )
(384,701 )
$ 4,037,599
2020
$ 4,755,675
117,522
—
(764,068 )
$ 4,109,129
Page 73
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 8 - OTHER INTANGIBLE ASSETS (Continued)
Amortization of patents and copyrights for the years ended June 30, 2021 and 2020 amounted
to $179,701 and $183,592, respectively.
Capitalized software development costs were fully amortized as of June 30, 2018.
Amortization of non-competition agreements for the years ended June 30, 2021 and 2020
amounted to $12,500 and $390,476, respectively.
Amortization of customer relationships for the years ended June 30, 2021 and 2020 amounted
to $192,500 and $190,000, respectively.
NOTE 9 - 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, 2021 and 2020.
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 74
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 9 - 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, 2021, 450,177 shares of
common stock of FONAR were available for future grant under this plan. For the years ended
June 30, 2021 and 2020, 106,747 and 89,981 shares were issued respectively, of which
$83,277 and $0 were expensed and included in selling, general and administrative expenses for
the years ended June 30, 2021 and 2020, 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 75
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 10 – CONTROLLING AND NONCONTROLLING INTERESTS
On February 13, 2013 the Company entered into an agreement with outside investors to acquire
a 50.5% controlling interest in a newly formed limited liability company, Health Diagnostics
Management LLC (HDM). According to the February 13, 2013 LLC operating agreement of
HDM there are two classes of members; Class A members and one Class B member. The
Class A members have an ownership interest of 49.5% of HDM. The Class B member (HMCA)
has an ownership of 50.5% of HDM. On all matters on which members may vote every member
is entitled to cast the percentage of votes equal to their percentage of ownership interest. Profits
and losses on all items of income, gain or loss, deductions or other allocations of the Company
will be allocated among the members in the same proportions as their membership interests in
the Company bear to all the Class A and Class B membership interests of the Company in the
aggregate outstanding. All of the depreciation and amortization of the assets of the Company
will be allocated solely to the Class A members, unless and until their interests have been
redeemed by the Company in full pursuant to the provisions of the operating agreement. The
Company contributed $20,200,000 to HDM and the group of outside investors contributed
$19,800,000 for its non-controlling membership interest.
On March 5, 2013 HDM purchased from Health Diagnostics, LLC (“HD”) and certain of its
subsidiaries, a business managing twelve (12) Stand-Up MRI Centers and two (2) other
scanning centers located in the States of New York and Florida for a total purchase price
(including consideration of $1.5 million to outside investors) aggregating $35.9 million.
Concurrently with the acquisition, HDM entered into several consulting and non-competition
agreements for a consideration of $4.1 million. The acquisition was accounted for using the
purchase method in accordance with ASC 805, “Business Combinations”. The Company
recognized and measured goodwill as of the acquisition date, as the excess of the fair value of
the consideration paid over the fair value of the identified net assets acquired.
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, 2021 and 2020
Class A And B Members' Equity
(HDM Acquisition)
Opening Members’ Equity
Share of Net Income
Distributions
Ending Members’ Equity
June 30, 2021
June 30, 2020
Class A
Members
Class B
Member
Class A
Members
Class B
Member
55,253 $ 39,850,419 $ 2,155,725 $ 36,543,786
$
3,466,223 17,402,961 3,464,528 16,291,633
(6,570,000 ) (15,330,000 ) (5,565,000 ) (12,985,000 )
55,253 $ 39,850,419
$ (3,048,524 ) $ 41,923,380 $
Page 76
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 11 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES
Long-term debt, notes payable and capital leases consist of the following:
Long-term debt, notes payable and capital leases
2021
2020
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 $413,330 as of June 30, 2021.
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 5 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. This note
was forgiven in August 2021.
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 21.
Less: Current portion
Page 77
$
232,696
$
273,031
700,764
700,764
—
933,460
173,206
760,254
$
—
973,795
108,379
865,416
$
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 11 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (CONTINUED)
The maturities of debt over the next five years and thereafter are as follows:
Maturities Of Long-Term Debt
Years Ending June 30,
$
2022
2023
2024
2025
2026
Thereafter
Long-Term Debt Over Five Years
and Thereafter
$
NOTE 12 - INCOME TAXES
173,206
180,972
183,919
187,155
190,601
17,607
933,460
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 $15,958,961 and a deferred tax liability of
$238,316 as of June 30, 2021, primarily relating to its net Federal operating loss carryforwards
of approximately $35,574,000 available to offset future taxable income through 2031. In addition
the Company has state operating loss carryforwards of approximately $7,094,000 and city
operating loss carryforwards of approximately $2,470,000. The net operating losses begin to
expire in 2025 for federal tax and state income tax purposes.
Page 78
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 12 - INCOME TAXES (CONTINUED)
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, 2021, 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 decreased during the year ended June 30,
2021, by approximately $3,547,000. The valuation allowance decreased by approximately
$195,000 during the year ended June 30, 2020.
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.
Page 79
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 12 - INCOME TAXES (CONTINUED)
Components of the provision (benefit) for income taxes are as follows:
Components Of The Benefit Provision For Income Taxes
Current:
Federal
State
Deferred:
Federal deferred taxes
State deferred taxes
Provision (Benefit) for Income Taxes - Net
Years Ended June 30
2021
$
Subtotal
1,136,514
1,136,514
Subtotal
2,718,046
136,960
2,855,006
$ 3,991,520
$
2020
(187,255 )
513,204
325,949
1,953,349
165,480
2,118,829
$ 2,444,778
A reconciliation of the federal statutory income tax rate to the Company’s effective tax rate as
reported is as follows:
Reconciliation Of Federal Statutory Income Tax Rate
To Company's Effective Tax Rate
Taxes at federal statutory rate
State and local income taxes (benefit), net of federal
benefit
Non Controlling interest
Expiration of tax credits
Return to provision adjustments
Change in the valuation allowance
Other
Effective income tax rate
Years Ended June 30,
2021
21.0 %
2020
21.0 %
3.3 %
(4.9 )%
4.6 %
6.1 %
(20.0 )%
12.5 %
22.6 %
4.0 %
(6.1 )%
0.2 %
— %
0.3 %
(2.1 )%
17.3 %
As of June 30, 2021, the Company has net operating loss (“NOL”) carryforwards of
approximately $35,574,000 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 $3,733,000. 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 2031. As such, the
Company has established a valuation reserve for anticipated unused credits of $890,000.
In addition, for New York State income tax purposes, the Company has tax credit carryforwards
aggregating approximately $11,000 which, are accounted for under the flow-through method.
Page 80
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 12 - INCOME TAXES (CONTINUED)
The Company was also under audit with New York State for income tax and was assessed
additional taxes of $423,272 plus interest and penalties. These amounts are accrued for at June
30, 2021 and included in other current liabilities and were paid in August 2021.
Significant components of the Company’s deferred tax assets and liabilities at June 30, 2021
and 2020 are as follows:
Components Of Company's Deferred Tax Assets And
Liabilities
Deferred tax assets:
Allowance for doubtful accounts
Non-deductible accruals
Net operating carryforwards
Tax credits
Inventory
Property and equipment and depreciation
Deferred Tax Assets - gross
Valuation allowance
Total deferred tax assets
Intangibles
Total deferred tax liabilities
Net deferred tax asset
NOTE 13 - OTHER CURRENT LIABILITIES
Included in other current liabilities are the following:
Other Current Liabilities
Accrued salaries, commissions and payroll taxes
Litigation accruals
Sales tax payable
State income taxes payable
Legal and other professional fees
Accounting fees
Self-funded health insurance reserve
Accrued interest and penalty
Other
Other current liabilities
Page 81
June 30,
2021
2020
$ 3,827,382
749,902
8,285,163
3,732,650
66,316
187,632
16,849,045
(890,084 )
15,958,961
(238,316 )
(238,316 )
$ 15,720,645
$ 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
June 30,
2021
$ 5,406,982
900,000
644,623
774,234
37,827
127,262
62,548
493,042
715,600
$ 9,162,118
2020
$ 4,491,941
442,802
1,353,200
—
112,867
120,000
86,504
877,787
699,997
$ 8,185,098
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Leases
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 $6,146,000 and $5,136,000, for the years
ended June 30, 2021 and 2020, 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 $36,799 and $0 employer contributions to the Plan for the years ended June 30,
2021 and 2020.
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, 2021.
Litigation
In September 2019, The Company was notified by one of its landlords that it was required to
vacate the premises within 180 days under the demolition clause in the lease. The Company
believes the lease renewal which was not negotiated in good faith since the renewal was
negotiated in February 2018. The Company is in the process of relocating to a new location but
the original lease provided for penalty payments in the event that the Company had not vacated
the leased space. The Company has been making normal rent payments throughout the course
of the arbitration proceedings. The Company is estimating the leasehold holdover charges to be
approximately $900,000. As of June 30, 2021 this amount has been accrued for under other
current liabilities.
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 paid by the Company on September 28, 2020.
Page 82
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued)
Other Matters
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.
The Company has satisfied most of its delinquencies in filing sales tax returns for certain states,
for which the Company has transacted business. The Company has recorded tax obligations of
approximately $645,000 plus interest and penalties of approximately $232,000 until the
remaining states have been resolved.
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,
2021 and 2020, the Company had approximately $63,000 and $87,000, 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.
NOTE 15 - SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended June 30, 2021 and 2020 the Company paid $75,178 and $137,200 for
interest, respectively.
During the years ended June 30, 2021 and 2020 the Company paid $261,032 and $228,204 for
income taxes, respectively.
During the years ended June 30, 2021 and 2020, the Company issued 102,364 and 89,981
shares of common stock for costs and expenses totaling $1,940,821 and $1,990,380,
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.
Page 83
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 15 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued)
During the year, the Company resolved certain sales tax liabilities and was able to reverse
accrued interest and penalties in the amount of $602,000 which has been recorded under
selling, general and administrative expenses.
NOTE 16 – 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 was $85,000. The
Company terminated this agreement on January 1, 2021. 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, 2021 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 17 - SEGMENT AND RELATED INFORMATION
The Company provides segment data in accordance with the provisions of ASC topic 280,
“Disclosures about Segments of an Enterprise and Related Information”.
The Company operates in two industry segments - manufacturing and the servicing of medical
equipment and management of diagnostic imaging centers.
The accounting policies of the segments are the same as those described in the summary of
significant accounting policies. All intersegment sales are market-based. The Company
evaluates performance based on income or loss from operations.
Page 84
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 17 - SEGMENT AND RELATED INFORMATION (Continued)
Summarized financial information concerning the Company’s reportable segments is shown in
the following table:
Summarized Segment Financial Information
Manufacturing
and Servicing
of Medical
Equipment
$ 9,037,091
$
901,250
$ (3,410,189 )
264,830
$
$
83,277
$ 24,592,582
291,294
$
Management
of Diagnostic
Imaging
Center
Totals
$ 80,892,674 $ 89,929,765
$
901,250
— $
$ 20,507,804 $ 17,097,615
$ 3,816,857 $ 4,081,687
$
83,277
— $
$ 164,913,613 $ 189,506,195
$ 3,405,502 $ 3,696,796
$ 8,463,103
875,000
$
$ (6,425,411 )
368,498
$
$
—
$ 30,492,757
$ 2,440,640
$ 77,227,359 $ 85,690,462
875,000
— $
$
$ 20,076,327 $ 13,650,916
$ 3,540,150 $ 3,908,648
$
—
— $
$ 149,790,753 $ 180,283,510
$ 4,981,773 $ 7,422,413
Fiscal 2021:
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 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
* Amounts eliminated in consolidation
Export Product Sales
The Company’s areas of operations are principally in the United States. The Company had
export sales of medical equipment amounting to 69.3% and 20.2% of product sales revenues to
third parties for the years ended June 30, 2021 and 2020, respectively.
The foreign product sales, as a percentage of product sales to unrelated parties, were made to
customers in the following countries:
Export Product Sales
Dominican Republic
Canada
Germany
Puerto Rico
For the Years Ended June 30
2021
2020
67.0 %
0.1
2.1
0.1
69.3 %
— %
—
20.2
—
20.2 %
Page 85
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 17 - 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 4.5% and 5.6%
of consolidated net service and repair fees for the years ended June 30, 2021 and 2020
respectively. Foreign service and repair fees, as a percentage of total service and repair fees,
were provided principally to the following countries:
Foreign Service and Repair Fees
Puerto Rico
Switzerland
Germany
England
Canada
Greece
Australia
For the Years Ended June 30,
2021
2020
1.5 %
0.3
1.5
0.6
0.3
0.3
—
4.5 %
1.6 %
0.3
1.5
0.7
0.3
0.2
1.0
5.6 %
The Company does not have any material assets outside of the United States.
NOTE 18 – ACQUISTION
On March 29, 2021, the Company completed the acquisition of certain assets of Rockland
Management Group, located in West Yonkers. The Company used an incremental borrowing
rate of 4% to value the right to use asset in connection with the assumed operating lease
obligation. We made a preliminary fair value determination of the acquired assets and assumed
liabilities as follows:
Fair value assets and assumed liabilities
Property and equipment
Right to use assets
Intangible assets
Security Deposit
Right to use liability
Goodwill
Total purchase consideration
$
$
650,000
434,219
150,000
38,628
(434,219 )
283,880
1,122,508
Page 86
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 18 – ACQUISTION (Continued)
In accordance with ASC 805-10-25-1, Business Combinations – Overall Recognition, the
Company recorded the transaction as a business combination. ASC 805-10-25-1 provides the
requirements of recording the transaction by applying the acquisition method. The acquisition
method requires the Company to determine if the assets and liabilities acquired are a business
or not. Under ASC 805-10-25-1, it must be determined if there is a specific acquisition party,
acquisition date, identifiable assets acquired and liabilities assumed and you must be able to
recognized and measure goodwill or a gain from the purchase. Based upon this guidance, the
acquisition had been recorded as a business combination.
The net assets acquired and consideration is as follow:
Net assets acquired
Leasehold Improvements
Diagnostic Equipment
Customer Lists
Covenant Not to Compete
Security Deposit
Closing costs - expensed
Goodwill
Cash Consideration Paid
$
$
550,000
100,000
100,000
50,000
38,628
3,478
283,880
1,125,986
The results of operations of Rockland Management Group were diminutive and did not affect
the pro forma results of operations.
NOTE 19 – ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following represents a summary of allowance for doubtful accounts for the years ended
June 30, 2021 and 2020 respectively:
Summary of Allowance For Doubtful
Accounts
Balance
June 30,
2020
514,561 $
Additions
(1)
Deductions
— $ 72,291 $
Balance
June 30,
2021
442,270
Description
Accounts receivable
Management and other fees
receivable
Management and other fees
receivable - related medical practices 3,322,055 862,344
—
Notes receivable
11,063,233 4,723,645
777,354
$
— 15,786,878
— 4,184,399
777,354
—
Page 87
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 19 – ALLOWANCE FOR DOUBTFUL ACCOUNTS (Continued)
Balance
June 30,
2019
Balance
June 30,
2020
514,561
Description
Accounts receivable
Management and other fees
receivable
Management and other fees
receivable - related medical practices 2,310,731 1,011,324
— 777,354
Notes receivable
$ 190,244 $ 380,000 $
Additions Deductions
55,683 $
9,404,944 3,526,742 (1,868,453 ) 11,063,233
— 3,322,055
777,354
—
(1) Included in provision for bad debts.
NOTE 20 - QUARTERLY FINANCIAL DATA (UNAUDITED)
(000’s omitted, except per share data)
Quarterly Financial Data
September
30, 2020
December
30, 2020
March 31,
2021
June 30,
2021
Total
Total Revenues – Net
Total Costs and Expenses
Net Income
Basic Net Income Per Common
Share Available to Common
Stockholders
Diluted Net Income Per Common
Share Available to Common
Stockholders
$ 20,979 $ 21,164 $ 23,090 $ 24,697 $ 89,930
16,829 16,182 18,968 20,853 72,832
2,196 13,674
3,251
4,299
3,928
$
$
0.37 $
0.45 $
0.55 $
0.10 $
1.47
0.36 $
0.44 $
0.54 $
0.11 $
1.45
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
Total
$ 21,747 $ 21,451 $ 21,686 $ 20,806 $ 85,690
16,261 16,430 19,071 20,278 72,040
1,076 11,705
4,506
1,914
4,209
0.48 $
0.45 $
0.18 $
0.09 $
1.20
0.47 $
0.44 $
0.18 $
0.09 $
1.18
Page 88
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 and 2020
NOTE 21 – SUBSEQUENT EVENTS
The Company evaluates events that have occurred after the balance sheet date, but before the
consolidated financial statements are issued.
During August 2021 the Company amended their revolving credit agreement. The agreement
was extended to August 2022. The interest rate on borrowings remains at 4% along with certain
financial covenants.
The loan of $700,764 received under the Paycheck Protection Program was forgiven in August
2021.
Page 89
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.
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FONAR CORPORATION AND SUBSIDIARIES
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, 2021.
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, 2021 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
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.. Mr. Lehman would also qualify as an audit committee financial expert, and has acted in
Mr. O’Data’s place when Mr. O’Data is unavailable to do so. His relevant experience is
described in his biographical information.
Page 91
FONAR CORPORATION AND SUBSIDIARIES
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
85
57
66
83
85
45
37
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
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”), and
a Manager of Health Diagnostics Management, LLC (“HDM”) which three entities are
subsidiaries of Fonar. Raymmond Damadian is the father of Timothy Damadian and the brother
of Claudette J.V. Chan.
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FONAR CORPORATION AND SUBSIDIARIES
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 Health Diagnostics
Management, LLC, which are subsidiaries of HMCA. Timothy Damadian is the son Dr.
Damadian and nephew of Claudette J.V. Chan.
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 and
aunt of Timothy Damadian.
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FONAR CORPORATION AND SUBSIDIARIES
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.
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FONAR CORPORATION AND SUBSIDIARIES
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. 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.
\
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FONAR CORPORATION AND SUBSIDIARIES
There is set forth in the following Summary Compensation Table the compensation provided by
us during fiscal 2021, 2020 and 2019 to our Principal Executive Officer, and our acting Principal
Financial Officer. There is set forth in the following Outstanding Equity Awards Table and
Director Compensation Table the required information.
I. SUMMARY COMPENSATION TABLE
Name and All Other Principal
Position
(a)
Timothy R. Damadian
President, Principal
Executive Officer
Raymond V. Damadian
Chairman of the Board,
Treasurer and
Principal Financial Officer
Salary
($)
(c)
Cash
Bonuses
($)
(d)
0 $ 155,800 $
0 $
0 $
0 $ 155,800 $
Year
(b)
2021 $
2020 $
2019 $
2021 $ 153,095 $ 305,800 $
2020 $ 153,095 $
0 $
2019 $ 153,095 $ 305,800 $
Stock
Awards
($)
(e)
Total
Compensation
($)
(f)
155,800
0
155,800
0 $
0 $
0 $
0 $
0 $
0 $
458,895
153,095
458,895
Luciano Bonanni
Chief Operating Officer and
Executive Vice President
2021 $ 146,038 $
2020 $ 146,496 $
2019 $ 145,672 $
0 $ 152,931 $
0 $ 152,902 $
0 $ 152,740 $
298,969
299,398
305,565
II. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Name
Timothy R. Damadian, President and
Principal Executive Officer
Raymond V. Damadian, Chairman of the
Board, Treasurer and Principal Financial
Officer
Luciano Bonanni, Chief Operating Officer
and Executive Vice President
Number Of
Securities
Underlying
Unexercised
Options (#)
Exercisable
(a)
0
0
0
Option
Exercise
Price ($)
(b)
Option
Exercise
Expiration
Date
(c)
0
0
0
N/A
N/A
N/A
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FONAR CORPORATION AND SUBSIDIARIES
III. DIRECTOR COMPENSATION
Name
Raymond V. Damadian
Claudette J.V. Chan
Robert J. Janoff (deceased)
Charles N. O’Data
Ronald G. Lehman
Richard E. Turk
EMPLOYEE COMPENSATION PLANS
Fees Earned
or Paid in
Cash ($)
$
$
$
$
$
$
0
20,000
20,000
20,000
20,000
20,000
Total
($)
0
20,000
20,000
20,000
20,000
20,000
$
$
$
$
$
$
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, 2021, 450,177 shares were available for issuance.
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FONAR CORPORATION AND SUBSIDIARIES
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth the number and percentage of shares of Fonar’s securities held by
each director, by each person known by us to own in excess of five percent of Fonar’s voting
securities and by all officers and directors as a group as of September 1, 2021.
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
1800 Avenue of the Stars, 2nd Floor
Los Angeles, CA 90067
Common Stock
Renaissance Technologies LLC
Renaissance Technologies Holding
Corporation
800 Third Avenue
New York, New York 10022
Common Stock
Dimensional Fund Advisors LP
Building One
6300 Bee Cave Road
Austin, Texas 78746
Common Stock
Shares
Beneficially
Owned
Percent of
Class
121,402
382,447
19,093
1.85 %
99.98 %
6.09 %
788,513
12.03 %
489,816
7.47 %
404,018
6.16 %
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FONAR CORPORATION AND SUBSIDIARIES
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
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
* Less than one percent
Shares
Beneficially
Owned
Percent of
Class
38,000
800
49,726
1,285
106
32
658
4,330
0
*
*
*
*
*
*
*
*
*
209,892
382,447
21,210
3.20 %
99.98 %
6.77 %
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 15, 2021, 22 of our clients had management
agreements with HMCA. Five 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 $530,000 per month in fiscal 2021.
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 $258,035 to $347,881 per
month during fiscal 2021. These fees are renegotiable on an annual basis.
During the fiscal years ended June 30, 2021 and June 30, 2020, the net revenues received by
HMCA from the imaging facilities owned by Dr. Damadian were approximately $11.0 million,
and $10.2 million respectively.
Dr. Damadian owns a .75% interest in Health Management Company of America’s Class A
membership interests. Dr. Damadian is also a Manager of Health Management Company of
America.
Timothy Damadian, the President and Chief Executive Officer of Fonar, is one of the owners of
a billing company, which performs billing and collection services for HMCA with respect to No-
Fault and Workers’ Compensation claims of HMCA’s clients. The monthly fee charged to HMCA
is $85,000. These services were terminated on January 1, 2021.
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,
2020 and June 1, 2021.
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.
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FONAR CORPORATION AND SUBSIDIARIES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Audit Fees
The aggregate fees billed by Marcum LLP for the audit of our annual consolidated financial
statements for the fiscal year ended June 30, 2021 and the reviews of the financial statements
included in our Forms 10-Q for the fiscal year ended June 30, 2021 were $345,000.
The aggregate fees billed by Marcum LLP for the audit of our annual 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.
Audit Related Fees
No fees were billed by Marcum LLP for the fiscal years ended June 30, 2021 or June 30, 2020
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, 2020 or June 30, 2019
for designing, operating, supervising or implementing any of our financial information systems or
any hardware or software systems for our financial information
Tax Fees
No fees were billed by Marcum LLP for tax compliance, tax advice and tax planning in the fiscal
year ended June 30, 2021.
No fees billed by Marcum LLP for tax compliance, tax advice and tax planning in the fiscal year
ended June 30, 2020.
All Other Fees
No fees were billed by Marcum LLP for any other services during the fiscal years ended June
30, 2021 and June 30, 2020.
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.
Page 101
PART IV
FONAR CORPORATION AND SUBSIDIARIES
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, 2021 and 2020.
Consolidated Statements of Income for the Years Ended June 30, 2021 and 2020.
Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2021 and 2020.
Consolidated Statements of Cash Flows for the Years Ended June 30, 2021 and 2020 .
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
2020, September 28, 2021. Commission File No. 0-10248.
2. Registrant’s Report on Form 8-K reporting the results of the election of directors and selection
of auditors at the annual meeting of stockholders. May 28, 2021. Commission File No. 0-10248.
3. Registrant’s Report on Form 8-K filed on May 14, 2021, Item 2.02: Results of Operations and
Financial Condition for the fiscal quarter ended March 31, 2021.
c) EXHIBITS
3.1 Certificate of Incorporation, as amended, of the Registrant incorporated by reference to
Exhibit 3.1 to the Registrant’s registration statement on Form S-1,Commission File No. 33-
13365.
3.2 Article Fourth of the Certificate of Incorporation, as amended, of the Registrant incorporated
by reference to Exhibit 4.1 to the Registrant’s registration statement on Form S-8, Commission
File No. 33-62099.
3.3 Section A of Article Fourth of the Certificate of Incorporation, as amended, of the Registrant
incorporated by reference to Exhibit 4.3 to the Registrant’s registration statement on Form S-3,
Commission File No. 333-63782.
3.4 Section A of Article Fourth of the Certificate of Incorporation, as amended, of the Registrant
incorporated by reference to Exhibit 3.3 of the Registrant’s Annual Report on Form 10-K for the
fiscal year ended June 30, 2003, Commission File No. 0-10248.
3.5 By-Laws, as amended, of the Registrant incorporated by reference to Exhibit 3.2 to the
Registrant’s registration statement on Form S-1, Commission File No. 33-13365.
4.1 Specimen Common Stock Certificate incorporated by reference to Exhibit 4.1 to the
Registrant’s registration statement on Form S-1, Commission File No. 33-13365.
4.2 Specimen Class B Common Stock Certificate incorporated by reference to Exhibit 4.2 to the
Registrant’s registration statement on Form S-1, Commission File No. 33-13365.
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FONAR CORPORATION AND SUBSIDIARIES
10.1 License Agreement between the Registrant and Raymond V. Damadian incorporated by
reference to Exhibit 10 (e) to Form 10-K for the fiscal year ended June 30, 1983, Commission
File No. 0-10248.
10.2 Stock Purchase Agreement, dated July 31, 1997, by and between U.S. Health
Management Corporation, Raymond V. Damadian, M.D. MR Scanning Centers Management
Company and Raymond V. Damadian, incorporated by reference to Exhibit 2.1 to the
Registrant’s Form 8-K, July 31, 1997, commission File No: 0-10248.
10.3 Merger Agreement and Supplemental Agreement dated June 17, 1997 and Letter of
Amendment dated June 27, 1997 by and among U.S. Health Management Corporation and
Affordable Diagnostics Inc. et al., incorporated by reference to Exhibit 2.1 to the Registrant’s 8-
K, June 30, 1997, Commission File No: 0-10248.
10.4 Stock Purchase Agreement dated March 20, 1998 by and among Health Management
Corporation of America, Fonar Corporation, Giovanni Marciano, Glenn Muraca et al.,
incorporated by reference to Exhibit 2.1 to the Registrant’s 8-K, March 20, 1998, Commission
File No: 0-10248.
10.5 Stock Purchase Agreement dated August 20, 1998 by and among Health Management
Corporation of America, Fonar Corporation, Stuart Blumberg and Steven Jonas, incorporated by
reference to Exhibit 2 to the Registrant’s 8-K, September 3, 1998, Commission File No. 0-
10248.
10.6 2002 Incentive Stock Option Plan incorporated by reference to Exhibit 99.1 to the
Registrant’s registration statement on Form S-8, Commission File No.: 333-96557.
10.7 Asset Purchase Agreement dated July 28, 2005 among Health Plus Management
Services, L.L.C., Health Management Corporation of America, Dynamic Healthcare
Management, Inc. and Fonar Corporation, incorporated by reference to Exhibit 2 to the
Registrant’s Form 8-K, August 2, 2005, Commission File No. 0-10248.
10.8 Partnership Interest Purchase Agreement dated September 29, 2008 by and between
Diagnostic Management, LLC and Raymond V. Damadian, M.D. MR Scanning Centers
Management Company, incorporated by reference to Exhibit 10.35 to Form 10-K for the fiscal
year ended June 30, 2008. Commission File No. 0-10248.
10.9 2010 Stock Bonus Plan, incorporated by reference to Exhibit 99.1 to the Registrant’s
registration statement on Form S-8, Commission File No. 333-168771.
10.10 Operating Agreement for Imperial Management Services, LLC, incorporated by reference
to Exhibit 10.37 to Form 10-K for the fiscal year ended June 30, 2011. Commission File No. 0-
10248.
10.11 Operating Agreement for Health Diagnostics Management, LLC, incorporated by
reference to Exhibit 10.38 to Form 10-K for the fiscal year ended June 30, 2013. Commission
File No. 0-10248.
10.12 Modification to Operating Agreement for Health Diagnostics Management, LLC., 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.
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FONAR CORPORATION AND SUBSIDIARIES
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: October 12, 2021
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
Title
Chairman of the Board of Directors,
Director, Principal Financial Officer,
Treasurer
Date
October 12, 2021
/s/Claudette J.V. Chan
Claudette J.V. Chan
Director
/s/Charles N. O’Data
Charles N. O’Data
Director
/s/Ronald G. Lehman
Ronald G. Lehman
Director
October 12, 2021
October 12, 2021
October 12, 2021
/s/Richard E. Turk
Richard E. Turk
Director
October 12, 2021
Page 104