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, 2023
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
Trading Symbol(s)
FONR
Exchange Registered
NASDAQ Capital Market
Title of Each Class
Common Stock, $.0001 par
value
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 ☒
.
FONAR CORPORATION AND SUBSIDIARIES
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes ☒ No ☐ .
Indicate by check mark whether the registrant (1) has submitted electronically and posted on its
corporate website, 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 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 ☐
Smaller reporting company ☒ Emerging Growth Company ☐
Accelerated filer ☐
Non-accelerated filer ☒
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, 2022 based on the closing price of $16.75 per share on such date as reported on
the NASDAQ System, was approximately $106.2 million. The other outstanding classes do not
have a readily determinable market value.
As of September 8, 2023, 6,450,882 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
TABLE OF CONTENTS
FORM 10-K ITEMS
PART I
PART II
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Item 5.
Mine Safety Disclosures
Legal Proceedings
Properties
Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
Item 6.
Item 7.
[Reserved[
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
PAGE
4
26
29
29
29
29
30
31
31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
39
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 9C. Disclosures Regarding Foreign Jurisdictions that Prevent
Inspections
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
39
81
81
82
82
82
86
88
Item 13. Certain Relationships and Related Transactions, and Director
90
Independence
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits and Financial Statement Schedules
PART IV
91
92
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FONAR CORPORATION AND SUBSIDIARIES
PART I
ITEM 1. BUSINESS
GENERAL
FONAR Corporation, sometimes referred to as the “Company” or “FONAR”, is a Delaware
corporation which was incorporated on July 17, 1978. Our address is 110 Marcus Drive,
Melville, New York 11747 and our telephone number is 631-694-2929. FONAR also maintains a
website at www.fonar.com. FONAR provides copies of its filings with the Securities and
Exchange Commission on Forms 10-K, 10-Q and 8-K and amendments to these reports to
stockholders on request.
We conduct our business in two segments. Our medical equipment segment is conducted
directly through FONAR. Our physician management and diagnostic services segment is
conducted through our subsidiary Health Management Corporation of America (“HMCA”).
HMCA 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 five diagnostic imaging facilities in Florida, where the
corporate practice of medicine is permitted.
FONAR is engaged in the business of designing, manufacturing, selling and servicing magnetic
resonance imaging scanners, also referred to as “MRI” or “MR” scanners, which utilize MRI
technology for the detection and diagnosis of human disease, abnormalities, other medical
conditions and injuries. FONAR’s founders built the first MRI scanner in 1977 and FONAR
introduced the first commercial MRI scanner in 1980. FONAR is also the originator of the iron-
core non-superconductive and permanent magnet MRI technology.
FONAR’s iron frame technology made FONAR the originator of “open” MRI scanners. We
introduced the first “open” MRI in 1980. Since that time we have concentrated on further
application of our “open” MRI, introducing most recently the Upright® Multi-Position™” MRI
scanner (also referred to as the “Upright®” or “Stand-Up®” MRI scanner) and the FONAR 360™
MRI scanner. The FONAR 360™ MRI is not presently being marketed.
See Note 16 to the Consolidated Financial Statements for separate financial information
regarding our medical equipment and physician and diagnostic management services
segments.
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FONAR CORPORATION AND SUBSIDIARIES
CAUTIONARY NOTE REGARDING 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.
MEDICAL EQUIPMENT SEGMENT
PRODUCTS
The Upright® MRI scanner is the product we are presently promoting.
The Upright® MRI is a “whole-body” MRI, meaning that it can be used to scan virtually any part
of the body.
The Upright® MRI differs from conventional MRI scanners in that it is not limited to scanning
patients in the recumbent posture. For example, patients can be scanned while sitting, standing,
bending, or lying down.
The Upright® MRI is also, by design, a non-claustrophobic MRI scanner. The Upright® MRI
employs a dipole magnet whose magnetic field orientation is transverse to the axis of the
patient’s body. The gap between the poles of the magnet is the space into which the patient is
placed. Because the magnetic field direction is horizontal and transverse to the body, a patient
who is scanned seated or standing has an unobstructed view out of the gap of the magnet. In
typical installations, patients watch television while being scanned, without the aid of special
glasses with mirrors.
The fact that the patient space is unobstructed permits scanning in a variety of postures that
cannot be duplicated in conventional MRI scanners. Most conventional MRI scanners in use
today employ solenoidal super-conducting magnets whose magnetic field orientation is along
the axis of the patient’s body, which must be placed into the bore of the scanner in either a
supine or prone posture. Our experience is that when presented with a choice between being
scanned lying down in a tunnel-like enclosure or seated in an open MRI, most patients will
choose the latter.
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FONAR CORPORATION AND SUBSIDIARIES
The Upright® MRI facilitates patient scanning in a variety of postures thanks to a unique, three-
axis patient handling system. The motorized patient table, or bed, can be rotated to any angle
between 0 (horizontal) and 84 degrees (nearly vertical). Unlike a conventional recumbent MRI
patient table, which can only move into or out of the scanner’s bore, the Upright® MRI bed can
be translated with two degrees of freedom, in/out and up/down. User-friendly software allows
the scanner operator to move the anatomical region of interest precisely to the center of the
magnet using a cursor placed on a localizer image. Anatomically true image orientation is
assured, regardless of the rotation angle of the bed, via computer read-back of the table’s
position. A seat can be hooked onto the bed in a variety of locations, or removed, as needed.
Transpolar VersaRests™ and other devices can be used to keep the patient comfortable and
motionless throughout the scanning process.
IMAGE QUALITY AND FIELD STRENGTH
Most commercially available MRI scanners range in magnetic field strength from about 0.2 T
(Tesla) to 7.0 T, and open MRI scanners range from about 0.2 T to 1.2 T.
Field strength is an important characteristic of MRI scanners, but not the only one. Higher field
strengths generally provide higher signal-to-noise ratios (SNR) on account of the Boltzmann
distribution, but SNR is not the only determinant of image quality. For example, the spin-lattice
relaxation time T1 that characterizes the nuclear magnetic resonance (NMR) signal increases
with field strength, decreasing the difference in T1 values between tissues that is an essential
contributor to contrast in images. For example, grey/white matter contrast in the brain falls off
rapidly above about 1.0 T, and some studies have shown that optimal tissue contrast occurs in
the mid-field region, down to 0.2 T. Imaging bandwidth, receiver coil design, pulse sequence
design, and scan parameters significantly affect image quality. Indeed, researchers and MRI
vendors are pushing the boundaries of MRI technology in both directions, that is, to very low (1
– 199 mT) and very high (7.0 T and above) field strengths for a variety of technical and
diagnostic reasons. For instance, one advantage of lower field strengths is that image artifacts
arising from metallic implants such as surgical screws diminish as field strength decreases. This
is particularly important for surgeons referring their postoperative patients for diagnostic imaging
studies.
The Upright® MRI operates at a mid-field strength of 0.6 T and enjoys wide acceptance in the
radiological community. The scanner is diagnostically versatile and equipped with a broad range
of clinically proven imaging protocols that produce images of exceptional quality, and a fully-
featured, robust, and user-friendly software interface.
DIAGNOSTIC ADVANTAGES OF POSITIONAL MRI
Apart from its attractiveness as an open, non-claustrophobic, general-purpose MRI, the
Upright® MRI can deliver diagnostically relevant information that correlates with patient posture.
For example, a variety of injuries to and pathologies of the spine, such as spondylolisthesis
(“slipped disc”), may go undetected in the recumbent posture, but manifest themselves when
the patient is scanned in a normal, weight-bearing (“physiological”) position, such as seated, or
seated in forward flexion, extension, or standing.
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FONAR CORPORATION AND SUBSIDIARIES
The Upright® MRI has demonstrated its value for patients suffering from scoliosis, who typically
undergo regular x-ray exams over a course of years. 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 received on average over the course of their treatment. Prior to the advent of
the Upright® MRI, the x-ray machine was the only imaging modality that could evaluate the
condition because the patient must be imaged standing. FONAR has developed an RF receiver
coil and a 3D scanning protocol that for the first time allows scoliosis patients to obtain
diagnostic, multi-slice images of their spines while standing, without the risks associated with
radiation, and with the soft-tissue-contrast benefits of MRI over x-ray.
The utility of upright, weight-bearing MRI is not limited to the spine. For example, approximately
one in a thousand people (some 200,000 to 500,000 in the US) have a congenital condition
known as Chiari malformation, an abnormality of the brain at the junction with the spine at the
base of the skull. In people with Chiari malformation, the lowest lying structures of the brain, the
tonsils of the cerebellum, descend into and become entrapped by the foramen magnum, the
circular bony opening at the base of the skull where the spinal cord exits. While most of these
individuals are asymptomatic, many suffer from more severe forms of the syndrome (e.g., type II
or Arnold-Chiari syndrome), in which brain stem compression results in severe neurological
symptoms. The Chiari syndrome is also called Cerebellar Tonsillar Ectopia (CTE) because of
the displacement (ectopia) of the cerebellar tonsils. Classic symptoms of Chiari syndrome
include the “drop attack,” in which the afflicted individual unexpectedly experiences an explosive
rush at the base of the brain that 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 this pathology is most visible and the symptoms are most acute when the
patient is scanned in the upright, weight-bearing position (Brain Injury 2010, 24 (7-8) 988-994).
In the body, the Upright® MRI is being utilized in a variety of ways, for example to image pelvic
organ prolapse in the standing posture, inguinal hernias, defecation in the sitting posture
(utilizing cine MRI), and the prostate in the sitting posture (utilizing a flat, multi-channel receiver
coil on top of which the patient simply sits).
PRODUCT MARKETING
FONAR’s principal marketing efforts in the medical equipment segment have been focused on
the Upright® MRI, which we believe is a unique product. We expect to focus on the Upright®
MRI going forward.
The principal markets for the Company’s scanners are private diagnostic imaging centers and
hospital outpatient imaging facilities.
We use internal personnel and independent manufacturer’s representatives for domestic and
foreign sales.
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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 some sales of the
Upright® MRI scanner and is intended to increase FONAR’s presence in the medical equipment
market. FONAR focuses primarily on four target audiences: neurosurgeons, orthopedic
surgeons, radiologists, and general physicians.
Our advertising for FONAR and HMCA reinforces the unique value provided by the FONAR
Upright® MRI scanner. We have increased internet awareness of our product by driving patient
traffic to the HMCA scanning centers we manage via the FONAR website as well as through
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 the
Upright® MRI scanner. A complete list of the sites managed by HMCA can be found at HMCA’s
website, www.hmca.com.
SERVICE AND UPGRADES FOR MRI SCANNERS
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 $7.5 million in fiscal 2023 and $7.7 million in fiscal 2022.
We expect to maintain service revenues at present levels or better, based on the demonstrated
longevity of the Upright® MRI scanner and continued customer satisfaction with the product.
Critical to this longevity and customer satisfaction is the stream of software improvements and
hardware upgrades that FONAR has delivered over the years to keep the scanners competitive
with the latest technology in the marketplace. We also anticipate that our installed base of
scanners will generate income from upgrades in future fiscal years.
RESEARCH AND DEVELOPMENT
During the fiscal year ended June 30, 2023, we incurred expenditures of $1,567,749, none of
which were capitalized, on research and development, as compared to $1,494,181, none of
which were capitalized, during the fiscal year ended June 30, 2022.
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.
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FONAR CORPORATION AND SUBSIDIARIES
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 and lead to a better
understanding of human physiology.
BACKLOG
Our backlog of unfilled orders at September 8, 2023 was approximately $608,000, as compared
to $844,000 at September 8, 2022. It is expected that the existing backlog of orders will be filled
during the 2023 fiscal year.
PATENTS AND LICENSES
We currently have numerous patents in effect which relate to the technology and components of
our MRI scanners. We believe that these patents, and the know-how we have developed, are
material to our business.
One of our patents, issued in the name of Dr. Damadian and licensed to FONAR, was United
States patent No. 3,789,832, 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. 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 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,
2023, 225 patents had been issued to FONAR, and approximately 8 patents were pending. Two
new patents were issued in fiscal year 2023. One patent describes an equipment calibration
system for ultrasound equipment used to non-invasively measure intracranial pressure. The
other described a method for identifying the presence and amount of vascular congestion using
MRI.
We also have patent cross-licensing agreements with other MRI manufacturers. We have not
licensed, however, any technology relating to Upright® MRI scanning.
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FONAR CORPORATION AND SUBSIDIARIES
PRODUCT COMPETITION
MRI SCANNERS
FONAR faces competition for MRI product sales from companies such as Siemens, General
Electric, Hitachi, Philips, Canon, and United Imaging. Each of these is primarily focused on the
high-field (1.0 T and above) marketplace, though some have produced open MRI scanners for
imaging in the recumbent posture. None of these firms has so far introduced an open, upright
MRI.
In recent years Paramed and Esaote have introduced MRI scanners aimed at the upright,
weight-bearing MRI market. Their success in the US has so far been limited. We believe that
the higher field strength and larger dimensions of the FONAR Upright® MRI magnet, together
with the greater variety of patient positioning possibilities afforded by the FONAR Upright® MRI
bed, give us a competitive advantage over the products introduced by these companies.
Most of our 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.
OTHER IMAGING MODALITIES
FONAR’s MRI scanners also compete with other diagnostic imaging systems, all of which are
based upon the ability of some form of energetic wave to penetrate human tissue and be
detected by either photographic film or electronic devices for presentation on a display monitor.
Three different kinds of energy waves – x-ray, gamma, and sound – are used in medical
imaging techniques that compete with MRI, 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 cost, space requirements, and specific clinical applications.
X-rays are the most common energy source used in imaging the body and are employed in
three imaging modalities: conventional x-ray systems, computerized tomography (CT), and
digital radiography. None of these enjoy the exquisite soft-tissue contrast of MRI, but they do
offer high resolution imaging in certain applications and high speed of image acquisition.
Nuclear medicine systems, which are based upon the detection of photons (gamma radiation)
generated by radioactive pharmaceuticals introduced into the body, are used to provide
information concerning soft tissue and internal body organs and particularly to examine organ
function over time.
Ultrasound systems emit, detect, and process high frequency sound waves reflected from organ
boundaries and tissue interfaces to generate images of soft tissue and internal body organs.
Although the images are substantially less detailed than those obtainable with x-rays or MRI,
ultrasound is generally considered harmless and therefore has found applications in imaging the
pregnant uterus and the breast, to name two.
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FONAR CORPORATION AND SUBSIDIARIES
X-ray (including CT), nuclear medicine, and ultrasound compete with the MRI scanners by
offering significantly lower price and space requirements. However, history has shown that the
superior tissue contrast characteristics of MRI have secured its place as the diagnostic imaging
modality of choice for a wide variety of pathologies.
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.
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.
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FONAR CORPORATION AND SUBSIDIARIES
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
Medical Device Reporting Regulation
Manufacturers must report all MDR reportable events to the FDA. Each manufacturer must
review and evaluate all complaints to determine whether the complaint represents an event
which is required to be reported to FDA. Section 820.3(b) of the Quality Systems regulation
defines a complaint as, “any written, electronic or oral communication that alleges deficiencies
related to the identity, quality, durability, reliability, safety, effectiveness, or performance of a
device after it is released for distribution.”
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FONAR CORPORATION AND SUBSIDIARIES
A report is required when a manufacturer becomes aware of information that reasonably
suggests that one of their marketed devices has or may have caused or contributed to a death,
serious injury, or has malfunctioned and that the device or a similar device marketed by the
manufacturer would be likely to cause or contribute to a death or serious injury if the malfunction
were to recur.
Malfunctions are not reportable if they are not likely to result in a death, serious injury or other
significant adverse event experience.
A malfunction which is or can be corrected during routine service or device maintenance still
must be reported if the recurrence of the malfunction is likely to cause or contribute to a death or
serious injury if it were to recur.
We have established and maintained written procedures for implementation of the MDR
regulation. These procedures include internal systems that:
provide for timely and effective identification, communication and evaluation of adverse
events;
provide a standardized review process and procedures for determining whether or not an
event is reportable; and
provide procedures to insure the timely transmission of complete reports.
These procedures also include documentation and record keeping requirements for information
that was evaluated to determine if an event was reportable;
all medical device reports and information submitted to the FDA;
any information that was evaluated during preparation of annual certification reports; and
systems that ensure access to information that facilitates timely follow up and inspection by
FDA.
FDA Enforcement
FDA may take the following actions to enforce the MDR regulation:
FDA-Initiated or Voluntary Recalls
Recalls are regulatory actions that remove a hazardous, potentially hazardous, or a misbranded
product from the marketplace. Recalls are also used to convey additional information to the user
concerning the safe use of the product. Either FDA or the manufacturer can initiate recalls.
There are three classifications, i.e., I, II, or III, assigned by the Food and Drug Administration to
a particular product recall to indicate the relative degree of health hazard presented by the
product being recalled.
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FONAR CORPORATION AND SUBSIDIARIES
Class I
Is a situation in which there is a reasonable probability that the use of, or exposure to, a violative
product will cause serious adverse health consequences or death.
Class II
Is a situation in which use of, or exposure to, a violative product may cause temporary or
medically reversible adverse health consequences or where the probability of serious adverse
health consequences is remote.
Class III
Is a situation in which use of, or exposure to, a violative product is not likely to cause adverse
health consequences.
FONAR has initiated six voluntary recalls which occurred between 1987 and 2016. Five of the
recalls were Class II and one was Class III. The recalls involved making minor corrections to the
product in the field. Frequently, corrections which are made at the site of the device are called
field corrections as opposed to recalls.
Civil Money Penalties
The FDA, after an appropriate hearing, may impose civil money penalties for violations of the
FD&C Act that relate to medical devices. In determining the amount of a civil penalty, FDA will
take into account the nature, circumstances, extent, and gravity of the violations, the violator’s
ability to pay, the effect on the violator’s ability to continue to do business, and any history of
prior violations.
Warning Letters
FDA issues written communications to a firm, indicating that the firm may incur more severe
sanctions if the violations described in the letter are not corrected. Warning letters are issued to
cause prompt correction of violations that pose a hazard to health or that involve economic
deception. The FDA generally issues the letters before pursuing more severe sanctions.
Seizure
A seizure is a civil court action against a specific quantity of goods which enables the FDA to
remove these goods from commercial channels. After seizure, no one may tamper with the
goods except by permission of the court. The court usually gives the owner or claimant of the
seized merchandise approximately 30 days to decide a course of action. If they take no action,
the court will recommend disposal of the goods. If the owner decides to contest the
government’s charges, the court will schedule the case for trial. A third option allows the owner
of the goods to request permission of the court to bring the goods into compliance with the law.
The owner of the goods is required to provide a bond or, security deposit, to assure that they
will perform the orders of the court, and the owner must pay for FDA supervision of any
activities by the company to bring the goods into compliance.
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FONAR CORPORATION AND SUBSIDIARIES
Citation
A citation is a formal warning to a firm of intent to prosecute the firm if violations of the FD&C
Act are not corrected. It provides the firm an opportunity to convince FDA not to prosecute.
Injunction
An injunction is a civil action filed by FDA against an individual or company. Usually, FDA files
an injunction to stop a company from continuing to manufacture, package or distribute products
that are in violation of the law.
Prosecution
Prosecution is a criminal action filed by FDA against a company or individual charging violation
of the law for past practices.
Foreign and Export Regulation
We obtain approvals as necessary in connection with the sales of our products in foreign
countries. In some cases, FDA approval has been sufficient for foreign sales as well. Our
standard practice has been to require either the distributor or the customer to obtain any such
foreign approvals or licenses which may be required.
Legally marketed devices that comply with the requirements of the Food Drug & Cosmetic Act
require a Certificate to Foreign Government issued by the FDA for export. Other devices that do
not meet the requirements of the FD&C Act but comply with the laws of a foreign government
require a Certificate of Exportability issued by the FDA. All products which we sell have FDA
clearance and would fall into the first category.
Foreign governments have differing requirements concerning the import of medical devices into
their respective jurisdictions. The European Union’s new medical device regulation, EU
2017/745 went into effect on May 25, 2021, and contains significant changes from the prior
European regulatory scheme. We have applied to the Notified Body, TUV-SUD, to perform a
Conformity Assessment of our technical documentation and our Quality Management
System. We (optimistically) expect to have this completed by end of our third quarter, March
30, 2024.
Other countries require that their own testing laboratories perform an evaluation of our devices.
This requires that we must bring the foreign agency’s personnel to the USA to perform the
evaluation at our expense before exporting.
Some countries, including many in Latin America and Africa, have very few regulatory
requirements, beyond FDA clearance.
To date, FONAR has been able to comply with all foreign regulatory requirements applicable to
its export sales.
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FONAR CORPORATION AND SUBSIDIARIES
PHYSICIAN AND DIAGNOSTIC SERVICES MANAGEMENT BUSINESS
Health Diagnostics Management, LLC (HDM) is owned by Health Management Corporation of
America (70.8%) and investors (29.2%). Health Management Corporation of America is owned
100% by FONAR Corporation. During the fiscal year 2022, the Company purchased non-
controlling interests from the minority shareholders for $546,000.
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.
As of June 30, 2023, HMCA managed a total of 41 MRI scanners of which twenty-four (24)
scanners are located in New York and seventeen (17) scanners are located in Florida. For the
2023 fiscal year, the revenues HMCA recognized from the MRI facilities has increased to $90.4
million from $89.4 million in fiscal 2022. Six 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. During fiscal 2023, two scanners were installed in Casselberry, Florida. We
completed the consolidation of our two Manhattan centers into their new location in Midtown,
removing the scanner previously located at Avenue A. The extremity-only scanner at our
Brooklyn location was deemed to be passed its useful life and was removed from service.
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.
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FONAR CORPORATION AND SUBSIDIARIES
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 six 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.
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.
5. Cost Saving Programs. Based on available volume discounts, HMCA seeks to assist in
obtaining favorable pricing for office and medical supplies, medical imaging film, equipment,
contrast agents, such as gadolinuim, and magnavist and other inventory for its clients.
6. Diagnostic Imaging and Ancillary Services. HMCA can offer access to diagnostic imaging
equipment through diagnostic imaging facilities it manages. The Company is expanding the
ancillary services offered in its network to include x-rays, and other MRI equipment such as
high-field (1.5 or 3.0 Tesla magnet strength) MRI scanners and extremity MRI scanners.
7. Marketing Strategies. HMCA is responsible for developing and proposing marketing plans for
its clients.
8. Expansion Plans. HMCA assists the clients in developing expansion plans including the
opening of new or replacement facilities where appropriate.
HMCA’s objective is to free physicians from as many non-medical duties as is practicable,
allowing physicians to spend less time on business and administrative matters and more time
practicing medicine.
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FONAR CORPORATION AND SUBSIDIARIES
The exceptions to this general model of operation are six 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 2023,
the aggregate amount of active management fees was $4,860,732 per month. In fiscal 2022,
the aggregate amount of active management fees was $4,865,443 per month.
Fees under the management agreements are subject to adjustment by mutual agreement on an
annual basis.
Timothy Damadian currently owns three HMCA-managed MRI facilities in Florida. The facilities
were owned by Dr. Damadian until his passing in August of 2022. The fees for these three sites
are flat monthly fees which are subject to adjustment by mutual agreement on an annual basis.
In fiscal 2023 and fiscal 2022, the aggregate monthly amount of management fees payable to
HMCA by these sites was $995,825.
The six Florida facilities owned by HMCA subsidiaries directly bill their patients or the patients’
insurance carriers. Patient fees net of provision for bad debts were $29,793,993 in fiscal 2023
as compared to $29,582,238 in fiscal 2022.
HMCA had previously contracted with an outside billing company (located in Melville, New York)
which performed billing and collection for their clients’ No-Fault and Workers’ Compensation
business. The Company had entered into a one year renewable agreement to provide IT
services to the billing company for a monthly fee of $23,884. This agreement was terminated
on May 31, 2023. HMCA has been handling these billing and collection services internally since
the termination of this agreement.
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.
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FONAR CORPORATION AND SUBSIDIARIES
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. Four facilities in New York and eight facilities in Florida have two or
more MRI scanners. One facility in New York and two in Florida also perform X-rays. During
fiscal 2023, a new location was opened in Casselberry, Florida.
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.
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FONAR CORPORATION AND SUBSIDIARIES
We have experienced reimbursement reductions for radiology services provided to Medicare
beneficiaries, including reductions pursuant to the Deficit Reduction Act, or DRA.
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, 2023, Medicare revenues
represented approximately 2.9% of the revenues for HMCA’s clients and subsidiaries as
compared to 3.2% for the fiscal year ended June 30, 2022.
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 2023, approximately 0.05%
of the revenues of HMCA’s clients were attributable to Medicaid, as compared to 0.07% in fiscal
2022.
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.
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FONAR CORPORATION AND SUBSIDIARIES
With respect to the diagnostic imaging facilities managed by HMCA, the outpatient diagnostic
imaging industry is highly competitive. Competition focuses primarily on attracting physician
referrals at the local market level and increasing referrals through relationships with managed
care organizations, as well as emphasizing to potential referral sources the advantages of
Upright® MRI scanning. HMCA believes that principal competitors for the diagnostic imaging
centers are hospitals and independent or management company-owned imaging centers.
Competitive factors include quality and timeliness of test results, ability to develop and maintain
relationships with managed care organizations and referring physicians, type and quality of
equipment, facility location, convenience of scheduling and availability of patient appointment
times. HMCA believes that it will be able to effectively meet the competition in the outpatient
diagnostic imaging industry with the FONAR Upright® MRI scanners and strategically placed
high field MRI scanners at its facilities.
GOVERNMENT REGULATION APPLICABLE TO HMCA
FEDERAL REGULATION
The healthcare industry is highly regulated and changes in laws and regulations can be
significant. Changes in the law or new interpretation of existing laws can have a material effect
on our permissible activities, the relative costs associated with doing business and the amount
of reimbursement by government and other third-party payors.
Federal False Claims Act
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;
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FONAR CORPORATION AND SUBSIDIARIES
Failure to comply with the Medicare physician supervision requirements for the services we
provide, or the Medicare documentation requirements concerning physician supervision.
The Fraud Enforcement and Recovery Act of 2009 expanded the scope of the False Claims Act
by, among other things, broadening protections for whistleblowers and creating liability for
knowingly retaining a government overpayment, acting in deliberate ignorance of a government
overpayment or acting in reckless disregard of a government overpayment. The 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 2023, approximately 2.9% of the revenues of HMCA’s clients were attributable to
Medicare and 0.05% were attributable to Medicaid. In fiscal 2022, approximately 3.2% 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.
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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 nine 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, 2023 approximately
58.4% of our clients’ receipts were from patients covered by no-fault insurance and
approximately 8.6% of our client’s receipts were from patients covered by workers’
compensation programs. For the fiscal year ended June 30, 2022, approximately 57.7.% of
HMCA’s clients’ receipts were from patients covered by no-fault insurance and approximately
8.6% 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 561 employees as of September 12, 2023. 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.
2.
Reduced Reimbursement Rates. Most of our revenues are derived from our scanning
center business conducted by HMCA. Our scanning center clients and the Florida
facilities owned by HMCA are experiencing lower reimbursement rates from Medicare,
other government programs and private insurance companies. To the extent possible,
we counter these reductions by increasing scanning volume and controlling operating
expenses. Inflation in the cost of both materials and labor have limited our ability to
control our costs, negatively impacting our ability to maintain profitability in this business
segment.
Inflation and Increasing Interest Rates. Inflation has drastically increased our costs for
both materials and labor. The Federal Reserve has increased interest rates
substantially in an attempt to control inflation, which in turn has increased the cost of
capital. Diagnostic imaging facilities require significant amounts of capital to operate,
particularly in the context of opening new diagnostic imaging centers. These increased
costs make it more difficult to achieve organic growth and extend the time that a new
center takes to achieve profitability. Continued costs increases, coupled with reduced
reimbursement rates, may threaten the profitability of our current operations and cause
the cost of expansion to become prohibitively high.
Page 26
3.
4.
6.
7.
8.
FONAR CORPORATION AND SUBSIDIARIES
Demand for MRI Scanners. The reduced margins have a negative effect on our sales of
MRI scanners. With lower revenue projections, prospective customers 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 in 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 27
9.
10.
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.
Current and future changes in Florida Insurance Law. On March 24, 2023, Florida
Governor Ron DeSantis signed into law House Bill 837. Dubbed the Tort Reform Act,
the bill makes sweeping changes to Florida’s negligence laws, including reducing the
statute of limitations, barring recovery for plaintiffs who are found to be 50% or greater at
fault, and changing the rule of evidence regarding admissibility of the costs of prior and
future medical treatment. The bill is viewed as a boon to insurance companies, and is
largely aimed at reducing the cost of personal injury lawsuits to insurers operating in
Florida’s motor vehicle and general liability markets. The full impact of the bill remains to
be seen. Certain provisions of the bill are expected to negatively impact our
reimbursement percentage and/or reimbursement rates. We expect that some
percentage of our patients who are seeking treatment following motor vehicle accidents
will not meet the new 51% threshold, and as a result we expect an increase in the
percentage of uncollectible billings from those patients. We are unable to estimate what
that percentage might be.
Further, changes to the evidentiary admissibility rules may lead to a higher percentage
of our billings being paid at commercial rates instead of at the presently prevailing PIP
schedule, a reduction in reimbursement of approximately 60%. These changes will
negatively impact our Florida diagnostic imaging facilities (both those we own and those
we manage) with more unpaid bills, and lower reimbursement rates. The full extent of
those reductions are unclear at this time.
In addition to the above, Florida legislature continues to propose an outright repeal of
Florida’s No-Fault law. SB 586 and its companion statue H 429, again propose a repeal
of Personal Injury Protection and replacing it with $25,000 Bodily Injury Coverage and
Property Damage Liability Coverage. We cannot predict whether Florida will continue to
pursue the repeal of the No-Fault Law in light of the passage of HB 837, and whether
such efforts will be successful.
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FONAR CORPORATION AND SUBSIDIARIES
10.
Federal and state privacy and information security laws. We must comply with numerous
federal and state laws and regulations governing the collection, dissemination, access,
use, security and privacy of PHI, including HIPAA and its implementing privacy and
security regulations, as amended by the federal HITECH Act. If we fail to comply with
applicable privacy and security laws, regulations and standards, properly maintain the
integrity of our data, protect our proprietary rights to our systems, or defend against
cybersecurity attacks, our business, reputation, results of operations, financial position
and cash flows could be materially and adversely affected.
Information security risks have significantly increased in recent years because of the
proliferation of new technologies, the use of the internet and telecommunications
technologies to conduct our operations, and the increased sophistication and activities of
organized crime, hackers, terrorists and other external parties, including foreign state
agents. Our operations rely on the secure processing, transmission and storage of
confidential, proprietary and other information in our computer systems and networks.
11.
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 Industrial Development Agency on February 29, 2016 of a
50% property tax abatement, valued at $440,000, over a 10 year period commencing January,
2017.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings threatened or pending against the Company.
ITEM 4. MINE SAFETY DISCLOSURES.
Not Applicable
Page 29
FONAR CORPORATION AND SUBSIDIARIES
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our Common Stock is traded on NASDAQ Capital Markets under the symbol FONR.
On September 12, 2023, we had approximately 996 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.
Performance Graph
The following graph compares the Company’s cumulative total stockholder return on its
Common Stock against industry and broad-market indexes which have been compiled by the
Nasdaq Global Index Group. The periods commence on June 28, 2019 for five years and end
on June 30, 2023.. The graph assumes $100 is invested in FONAR Common Stock (NASDAQ:
FONR), the Nasdaq Composite Total Return (Nasdaq Composite), Nasdaq Health Care
Management Services (Nasdaq Health), and Nasdaq Medical Equipment (Nasdaq Equipment).
The comparisons in the graph below are based on historical data and are not intended to
forecast the possible future performance of the common stock.
Date
FONR Common Stock
Nasdaq Composite
Nasdaq Health
Nasdaq Equipment
June 28,
2019
June 30,
2020
June 30,
2021
June 30,
2022
June 30,
2023
$
$
$
$
100 $
100 $
100 $
100 $
99 $
127 $
114 $
106 $
82 $
184 $
58 $
54 $
71 $
141 $
193 $
129 $
79
178
185
145
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FONAR CORPORATION AND SUBSIDIARIES
ITEM 6. [Reserved]
Not applicable.
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.
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 six Florida
subsidiaries which engage in the practice of medicine, and bill and collect fees from patients,
insurers and other third-party payors directly.
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 workforce,
liquidity, financial conditions, revenues, profitability and business operations. The Company has
been able to navigate through these challenges and avoid any significant disruption of the
business and the volume has risen back to pre-COVID-19 levels. Although we are unable to
predict if there will be additional consequences on our operations, the Company believes with
the positive cash flows, low debt and cash on hand, it will be able to continue operations going
forward.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of financial condition and results of operations are based on our
consolidated financial statements that were prepared in accordance with U.S. generally
accepted accounting principles, or GAAP. Management makes estimates and assumptions
when preparing financial statements. These estimates and assumptions affect various matters,
including:
Our reported amounts of assets and liabilities in our consolidated balance sheets at the dates of
the financial statements;
Our disclosure of contingent assets and liabilities at the dates of the financial statements; and
Our reported amounts of net revenue and expenses in our consolidated statements of
operations during the reporting periods.
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FONAR CORPORATION AND SUBSIDIARIES
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, 2022, the net deferred tax asset was valued at $12,842,478. At June 30, 2023, the
net deferred tax asset was valued at $10,041,960.
We depreciate our long-lived assets over their estimated economic useful lives with the
exception of leasehold improvements where we use the shorter of the assets useful lives or the
lease term of the facility for which these assets are associated.
The Company provides for medical receivables that could become uncollectible by establishing
an allowance for doubtful accounts in order to adjust medical receivables to estimated net
realizable value. In evaluating the collectability of medical receivables, the Company considers
a number of factors, including the age of the account, historical collection experiences, payor
type, current economic conditions and other relevant factors. There are various factors that
impact collection trends, such as payor mix, changes in the economy, increase burden on
copayments to be made by patients with insurance and business practices related to collection
efforts. These factors continuously change and can have an impact on collection trends and the
estimation process.
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FONAR CORPORATION AND SUBSIDIARIES
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 2023 COMPARED TO FISCAL 2022
In fiscal 2023, we recognized net income of $12.1 million on revenues of $98.6 million, as
compared to net income of $17.2 million on revenues of $97.6 million for fiscal 2022. This
represents an increase in revenues of 1.1%. Total costs and expenses increased by 10.9%. Our
consolidated operating results decreased by 32.8% to an operating income of $14.8 million for
fiscal 2023 as compared to operating income of $22.0 million for fiscal 2022.
Discussion of Operating Results of Medical Equipment Segment
Fiscal 2023 Compared to Fiscal 2022
Revenues attributable to our medical equipment segment increased by 0.5% to $8.3 million in
fiscal 2023 from $8.2 million in fiscal 2022, with product sales revenues increasing by 41.2%
from $518,000 in fiscal 2022 to $732,000 in fiscal 2023. Service revenue decreased by 2.2%
from $7.7 million in fiscal 2022 to $7.5 million in fiscal 2023.
Product sales to unrelated parties increased by 41.2% from $518,000 in fiscal 2022 to $732,000
in fiscal 2023. There were no product sales to related parties in fiscal 2023 or 2022.
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FONAR CORPORATION AND SUBSIDIARIES
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.
In addition, lower reimbursement rates have reduced the demand for our MRI products,
resulting in lower sales volumes. As a result of fewer sales, service revenues have decreased
since as older scanners are taken out of service, there are fewer new scanners available to sign
service contracts.
The operating loss for the medical equipment segment increased from an operating loss of $4.6
million in fiscal 2022 to an operating loss of $5.9 million in fiscal 2023. 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.
Research and development expenses increased to $1.6 million in fiscal 2023 from $1.5 million
in fiscal 2022. Our expenses for fiscal 2023 represented continued research and development
of various upgrades for the Upright® MRI scanner.
Discussion of Operating Results of Physician and Diagnostic Services Management Segment
Fiscal 2023 Compared to Fiscal 2022
Revenues attributable to the Company’s physician and diagnostic services management
segment, HMCA, increased to $90.4 million in fiscal 2023 as compared to $89.4 million in fiscal
2022. The increase in revenues was due to an increase of $212,000 of patient fees (net of
contractual allowances and discounts less provision for bad debts) from patient and third-party
payors recognized by six of the facilities in Florida. Management and other fees increased by
$799,000.
Cost of revenues as a percentage of the related revenues for our physician and diagnostic
services management segment increased from $47.1 million or 52.7% of related revenues for
the year ended June 30, 2022 to $49.0 million, or 54.1% of related revenues for the year ended
June 30, 2023. The cost relating to these revenues increased more than the revenues.
Operating results of this segment decreased from operating income of $26.6 million in fiscal
2022 to operating income of $20.7 million in fiscal 2023. The decrease is due mainly to more
reserves being taken on management fees. 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 year ended June 30, 2023, 12.1% of total revenues were derived from contract
with facilities that were owned by Dr. Raymond V. Damadian until his passing, and currently
owned by Timothy Damadian, the Chief Executive Officer of FONAR. 11.8% of total revenues
were derived from these contracts for the 2022 fiscal year. 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.
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FONAR CORPORATION AND SUBSIDIARIES
Discussion of Certain Consolidated Results of Operations
Fiscal 2023 Compared to Fiscal 2022
Interest and investment income increased in 2023 compared to 2022. We recognized interest
income of $1.2 million in 2023 as compared to $247,158 in fiscal 2022, representing an increase
of 394.4%. This is due to the increase in the prime interest rate and the Company placing cash
in interest bearing accounts.
Interest expense of $50,131 was recognized in fiscal 2023, as compared to interest expense of
$346,552 in fiscal 2022. The decrease in interest expense is attributable to an assessment of
additional taxes and interest in connection with a state income tax audit in fiscal 2022.
The 29.2% noncontrolling interest allocations of $2,751,000 and $4,793,000 for fiscal 2023 and
fiscal 2022, 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 16).
While revenue increased by 1.1% selling, general and administrative expenses increased by
25.0% to $29.4 million in fiscal 2023 from $23.5 million in fiscal 2022. This increase in selling,
general and administrative expenses was due to placing more reserves on management fees
and other receivables and from the impact of the COVID-19 virus as compared to fiscal 2022. It
is too early to know how much of these reserves will be recovered. FONAR also resolved
certain sales tax liabilities during the year and was able to reverse accrued interest and
penalties of $55,000 $119,000 for fiscal years ending 2023 and 2022, respectively, which was
recorded under selling, general and administrative expenses.
Revenue from service and repair fees decreased from $7.7 million in fiscal 2022 to $7.5 million
in fiscal 2023.
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 2023 we continued our investment in the development of various upgrades for the
UPRIGHT® MRI, with an investment of $1,567,749 in research and development, none of which
was capitalized, as compared to $1,494,181, none of which was capitalized, in fiscal 2022. The
research and development expenditures were approximately 18.9% of revenues attributable to
our medical equipment segment and 1.5% of total revenues in 2023, and 18.2% of medical
equipment segment revenues and 1.5% of total revenues in fiscal 2022. This represented a
4.9% increase in research and development expenditures in fiscal 2023 as compared to fiscal
2022.
For the physician and diagnostic services management segment, HMCA, revenues increased to
$90.4 million in fiscal 2023 as compared to $89.3 million in fiscal 2022. This is primarily
attributable to an increase in patient scans resulting from our marketing efforts.
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FONAR CORPORATION AND SUBSIDIARIES
For the fiscal year 2023 the Company recorded an income tax expense of $3.6 million
compared with an income tax expense of $5.5 million for 2022. 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
$10.0 million as of June 30, 2023, primarily relating to the tax benefits from the net operating
loss carry forwards, allowance for doubtful accounts and tax credits available to offset future
taxable income. The utilization of these tax benefits is dependent on the Company generating
future taxable income and other factors. A partial valuation allowance will be maintained until
evidence exists to support that it is no longer needed, (principally related to research and
development credits). Although the Company is expecting to generate taxable income in future
periods, we cannot accurately measure the full impact of the adoption of healthcare regulations,
including the impact of continuing changes in MRI scanning reimbursement rates, which could
materially impact operations. A partial valuation allowance will be maintained until evidence
exists to support that it is no longer needed. As of June 30, 2023, the valuation allowance was
$364,000.
We have been taking steps to improve HMCA revenues by our marketing efforts, which focus
on the unique capability of our Upright® MRI scanners to scan patients in different positions. We
have also been increasing the number of health insurance plans in which our clients participate.
Our management fees are dependent on collection by our clients of fees from reimbursements
from Medicare, Medicaid, private insurance, no fault and workers’ compensation carriers, self–
pay and other third-party payors. The health care industry is experiencing the effects of the
federal and state governments’ trend toward cost containment, as governments and other third-
party payors seek to impose lower reimbursement and utilization rates and negotiate reduced
payment schedules with providers. The cost-containment measures, consolidated with the
increasing influence of managed-care payors and competition for patients, have resulted in
reduced rates of reimbursement for services provided by our clients from time to time. Our
future revenues and results of operations may be adversely impacted by future reductions in
reimbursement rates.
Certain third-party payors have proposed and implemented changes in the methods and rates
of reimbursement that have had the effect of substantially decreasing reimbursement for
diagnostic imaging services that HMCA’s clients provide. To the extent reimbursement from
third-party payors is reduced, it will likely have an adverse impact on the rates they pay us, as
they would need to reduce the management fees they pay HMCA to offset such decreased
reimbursement rates. Furthermore, many commercial health care insurance arrangements are
changing, so that individuals bear greater financial responsibility through high deductible plans,
co-insurance and higher co-payments, which may result in patients delaying or foregoing
medical procedures. More frequently, however, patients are scanned and we experience
difficulty in collecting deductibles and co-payments. We expect recent changes to the Florida
insurance laws to result in less patients being reimbursed through no-fault auto insurance,
resulting in both lower reimbursement rates and a higher rate of uncollectible billings. We
expect that any further changes to the rates or methods of reimbursement for services, which
reduce the reimbursement per scan of our clients may partially offset the increases in scan
volume we are working to achieve for our clients, and indirectly will result in a decline in our
revenues.
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FONAR CORPORATION AND SUBSIDIARIES
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 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 5.2% from $48.7 million at June 30, 2022 to $51.3
million at June 30, 2023.
Cash provided by operating activities for fiscal 2023 approximated $14.5 million. Cash provided
by operating activities was attributable to the net income of $12.1 million, depreciation and
amortization of $4.5 million, provision for bad debts of $5.5 million, deferred income tax expense
benefit of $3.0 million which was offset by the increase in accounts, and medical and
management fee receivables of $8.1 million.
Cash used in investing activities for fiscal 2023 approximated $4.3 million. The cash used in
investing activities was attributable to purchases of property and equipment of $4.2 million and
costs of patents of $120,000.
Cash used in financing activities for fiscal 2023 approximated $7.6 million. The principal uses of
cash used in financing activities included the repayment of borrowings and capital lease
obligations of $37,000, purchase of treasury stock of $1.8 million and distributions to non-
controlling interests of $5.8 million.
Total liabilities decreased by 6.3% during fiscal 2023, from approximately $53.1 million at June
30, 2022 to approximately $49.8 million at June 30, 2023.
At June 30, 2023, we had working capital of approximately $110.0 million as compared to
working capital of $101.9 million at June 30, 2022, and stockholders’ equity of $150.8 million at
June 30, 2023 as compared to stockholders’ equity of $146.2 million at June 30, 2022. For the
year ended June 30, 2023, we realized a net income of $12.1 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, 2023, HMCA manages a total of 41
MRI scanners of which 24 MRI scanners are located in New York and 17 are located in Florida.
We have also intensified our marketing activities through the hiring of additional marketers for
HMCA’s clients.
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FONAR CORPORATION AND SUBSIDIARIES
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 $7.7 million for the year ended June
30, 2022 and $7.5 million for the year ended June 30, 2023.
In order to promote profitability and to reduce demands on our cash and other liquid reserves,
we maintain an aggressive program of cost containment. 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 attempt to contain expenses across the
board, despite significant increases in the cost of labor and materials as the result of inflation.
The cost control efforts are intended to enable us to withstand periods of low volumes of MRI
scanner sales, by keeping expenditures at levels which can be supported by service revenues
and HMCA revenues.
Current economic credit conditions have contributed to a slower than optimal business
environment. As a result our business may suffer, should the credit markets not improve in the
near future. The direct impact of these conditions is not fully known.
Revenues from HMCA have been the principal reason for our profitability, and we have so far
been able to maintain and increase such revenues by increasing the number of scans being
performed by the sites we manage and those we own, notwithstanding reductions in
reimbursement rates from third-party payors. The likelihood and effect of any subsequent
reductions is not fully known.
Capital expenditures for fiscal 2023 approximated $4.3 million. Capitalized patent costs were
approximately $120,000. Purchases of property and equipment were approximately $4.2 million.
FONAR is has not committed to making any material capital expenditures in the 2024 fiscal
year.
The Company believes that its business plan has been responsible for the past five consecutive
fiscal years of profitability (fiscal 2023, fiscal 2022, fiscal 2021, fiscal 2020 and fiscal 2019) and
that its capital resources will be adequate to support operations at current levels through
September 30, 2024.
On September 13, 2022, the Company adopted a stock repurchase plan. On September 26,
2022, the Board of Directors has approved up to $9 million to be repurchased under the plan
which will be purchased on the open market at prevailing prices. During fiscal 2023, we
repurchased 103,148 shares for $1.8 million.
During August 2023 the Company renewed their revolving credit agreement. The terms include
borrowing limits of up to $10,000,000 and the agreement was extended to November 15, 2023.
The interest rate on unpaid principal remains at 4% along with certain financial covenants still
applicable.
Page 38
FONAR CORPORATION AND SUBSIDIARIES
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any investments in marketable securities, foreign currencies,
mutual funds, certificates of deposit or other fixed rate instruments. All of our funds are in cash
accounts or money market accounts which are liquid.
All of our revenue, expense and capital purchasing activities are transacted in United States
dollars.
See Note 10 to the consolidated Financial Statements for information on long-term debt.
ITEM 8.
FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS
At June 30, 2023 and 2022
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended June 30, 2023 and 2022
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended June 30, 2023 and 2022
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 2023 and 2022
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE.
40
43
46
48
50
52
Page 39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors 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, 2023 and 2022, the related consolidated
statements of income, stockholders’ equity and cash flows for each of the two years in the
period ended June 30, 2023, 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, 2023 and 2022, and the results of its
operations and its cash flows for each of the two years in the period ended June 30, 2023, 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
audit. 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
provide 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 40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (CONTINUED)
Medical Accounts Receivable Reserve – Refer to Note 3 to the financial statements
Critical Audit Matter Description
Medical 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.
Page 41
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
September 28, 2023
Page 42
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 $198,593 and $204,597 at June 30,
2023 and 2022, respectively
Medical receivables – net
Management and other fees receivable – net of
allowances for doubtful accounts of $12,608,567
and $16,627,917 at June 30, 2023 and 2022,
respectively
Management and other fees receivable – related
party medical practices – net of allowances for
doubtful accounts of $3,989,692 and $4,686,893
at June 30, 2023 and 2022, respectively
Inventories
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,
2023
2022
$ 51,279,707
32,799
$ 48,722,977
32,326
3,861,512
21,259,262
4,335,956
20,108,989
35,888,253
33,419,219
9,161,870
2,569,666
1,607,768
125,660,837
710,085
10,041,960
22,146,373
33,068,755
729,229
4,269,277
3,431,865
523,506
$ 200,581,887
8,602,561
2,359,821
1,104,325
118,686,174
1,871,890
12,842,478
22,281,791
34,232,109
928,109
4,269,277
3,703,885
526,269
$ 199,341,982
See accompanying notes to consolidated financial statements.
Page 43
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES
Current Liabilities:
Current portion of long-term debt
Accounts payable
Other current liabilities
Operating lease liability – current portion
Financing lease liability – current portion
Unearned revenue on service contracts
Customer deposits
Total Current Liabilities
Long-Term Liabilities:
Unearned revenue on service contracts
Deferred income tax liability
Due to related party medical practices
Operating lease liability – net of current portion
Financing lease liability – net of current portion
Long-term debt and capital leases, less current
portion
Other liabilities
Total Long-Term Liabilities
Total Liabilities
June 30,
2023
2022
$
43,767
1,579,240
5,443,724
3,905,484
217,597
3,832,184
602,377
$
40,078
1,551,269
6,417,227
3,880,129
210,140
4,288,766
361,245
15,624,373
16,748,854
760,242
394,758
92,663
32,105,405
620,481
115,075
41,750
34,130,374
49,754,747
1,857,257
215,726
92,663
33,090,990
838,291
155,379
106,541
36,356,847
53,105,701
Commitments, Contingencies and Other Matters
See accompanying notes to consolidated financial statements.
Page 44
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
STOCKHOLDERS’ EQUITY
June 30,
2023
2022
Stockholders’ Equity:
Class A non-voting preferred stock $.0001 par
value; 453,000 shares authorized at June 30, 2023
and 2022, 313,438 issued and outstanding at June
30, 2023 and 2022
Preferred stock $.001 par value; 567,000 shares
authorized at June 30, 2023 and 2022, issued and
outstanding – none
Common stock $.0001 par value; 8,500,000 shares
authorized at June 30, 2023 and 2022, 6,462,524
and 6,565,853 issued at June 30, 2023 and 2022,
respectively 6,450,882 and 6,554,210 outstanding at
June 30, 2023 and 2022, respectively
Class B convertible common stock (10 votes per
share) $.0001 par value; 227,000 shares authorized
at June 30, 2023 and 2022, 146 issued and
outstanding at June 30, 2023 and 2022
Class C common stock (25 votes per share) $.0001
par value; 567,000 shares authorized at June 30,
2023 and 2022, 382,513 issued and outstanding at
June 30, 2023 and 2022
Paid-in capital in excess of par value
Accumulated deficit
Treasury stock, at cost – 11,463 and 11,643 shares
of common stock at June 30, 2023 and 2022,
respectively
Total Fonar Corporation’s Stockholders’ Equity
Noncontrolling interests
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
$
31
$
31
—
—
647
657
—
—
38
38
182,612,518
184,531,535
(24,190,981 )
(33,566,757 )
(515,820 )
(675,390 )
157,906,433
150,290,114
(7,079,293 )
(4,053,833 )
150,827,140
146,236,281
$ 200,581,887
$ 199,341,982
See accompanying notes to consolidated financial statements.
Page 45
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 expenses
Total Costs and Expenses
Income from Operations
Other Income and (Expenses):
Interest expense
Investment income
Other (expense) 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,
2023
2022
$ 29,793,993
731,607
7,419,104
110,000
48,640,497
$ 29,582,238
517,939
7,590,865
110,000
48,226,787
11,949,900
98,645,101
11,564,316
97,592,145
852,025
3,033,967
416,814
2,991,069
44,983
16,183,166
26,975,563
5,807,454
1,567,749
29,390,932
83,855,839
14,789,262
(50,131 )
1,222,176
(202,720 )
15,758,587
(3,632,071 )
$ 12,126,516
(2,750,740 )
$ 9,375,776
43,344
13,307,819
27,251,268
6,567,887
1,494,181
23,512,581
75,584,963
22,007,182
(346,552 )
247,158
861,087
22,768,875
(5,534,487 )
$ 17,234,388
(4,793,482 )
$ 12,440,906
See accompanying notes to consolidated financial statements.
Page 46
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 –
For the Years Ended June 30,
2023
$ 8,801,974
2022
$ 11,690,796
$
427,666
$
559,072
$
146,136
$
191,038
$
$
$
1.35
1.32
0.38
$
$
$
1.78
1.75
0.50
Common Stockholders
6,539,376
6,554,209
Weighted Average Diluted Shares Outstanding –
Common Stockholders
6,666,880
6,681,713
Weighted Average Basic and Diluted Shares
Outstanding – Class C Common
382,513
382,513
See accompanying notes to consolidated financial statements.
Page 47
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED JUNE 30, 2023 AND 2022
Balance, July 1, 2021
Net income
Stock issued to employees under
stock bonus plans
Distributions to noncontrolling
interests
Balance, June 30, 2022
Net income
Purchase of treasury shares
Cancellation of shares
Distributions to noncontrolling
interests
Balance, June 30, 2023
Class A
Non-Voting
Preferred
31
$
—
—
—
—
—
—
$
Common
Shares
6,554,210
—
—
31
—
6,554,210
—
—
(103,328)
Stock
Amount
Class C
Common
Stock
$
657
$
38
—
—
—
—
—
—
$
657
$
38
—
—
(10)
—
—
—
—
$
31
—
6,450,882
—
$
647
—
$
38
Paid-in
Capital in
Excess of Par
Value
Accumulated
Deficit
$ 185,100,976 $ (46,007,663 )
12,440,906
—
(569,441) —
Balance, July 1, 2021
Net income
Buyout of noncontrolling interests
Distributions to noncontrolling
interests
—
—
Balance, June 30, 2022
Net income
Purchase of treasury shares
Cancellation of shares
Distributions to noncontrolling
interests
$ 184,531,535 $ (33,566,757 )
9,375,776
—
—
(1,919,017)
—
—
—
—
Balance, June 30, 2023
$ 182,612,518 $ (24,190,981 )
See accompanying notes to consolidated financial statements.
Page 48
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED JUNE 30, 2023 AND 2022
Balance, July 1, 2021
Net income
Buyout of noncontrolling interests
Distributions to noncontrolling interests
Balance, June 30, 2022
Net income
Purchase of treasury shares
Cancellation of shares
Distributions to noncontrolling interests
Balance, June 30, 2023
$
$
Treasury
Stock
(675,390 )
—
—
—
(675,390 )
—
(1,759,457)
1,919,027
—
(515,820 )
$
Noncontrolling
Interests
$ (3,048,524 )
4,793,482
23,441
(5,822,232 )
$ (4,053,833 )
2,750,740
—
—
(5,776,200 )
$ (7,079,293 )
Total
$ 135,370,125
17,234,388
(546,000)
(5,822,232 )
$ 146,236,281
12,126,516
(1,759,457)
—
(5,776,200 )
$ 150,827,140
See accompanying notes to consolidated financial statements.
Page 49
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
Amortization on right-of-use assets
Loss on disposition of fixed assets
Gain on forgiveness of PPP loan
(Increase) decrease in operating assets, net:
Accounts, medical and management fee receivables
Notes receivable
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
For the Years Ended June 30,
2023
$12,126,516
2022
$17,234,388
4,540,135
5,513,476
2,979,550
4,264,818
213,244
—
(8,055,843 )
(64,532 )
(209,845 )
(438,911 )
2,763
19,685
(2,527,100 )
241,132
(3,862,814 )
(210,353 )
—
(64,791 )
4,535,236
1,343,533
3,093,893
4,000,131
—
(700,764 )
(5,602,188 )
43,334
(696,402 )
90,638
129,411
(314,766 )
(3,765,215 )
(369,856 )
(3,437,743 )
(202,741 )
(14,739 )
(64,790 )
14,467,130
15,301,360
See accompanying notes to consolidated financial statements.
Page 50
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Continued
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment
Proceeds of Short-term investment
Purchase of noncontrolling interests
Cost of patents
NET CASH USED IN INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of borrowings and capital lease obligations
Purchase of treasury stock
Distributions to noncontrolling interests
NET CASH USED IN FINANCING ACTIVITIES
For the Years Ended June 30,
2023
2022
(4,218,084 )
(473 )
—
(119,571 )
(4,338,128 )
(36,615 )
(1,759,457 )
(5,776,200 )
(7,572,272 )
(4,545,292 )
(149 )
(546,000 )
(87,882 )
(5,179,323 )
(37,239 )
—
(5,822,232 )
(5,859,471 )
NET INCREASE IN CASH AND CASH EQUIVALENTS
2,556,730
4,262,566
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 48,722,977
44,460,411
CASH AND CASH EQUIVALENTS - END OF YEAR
$51,279,707
$48,722,977
See accompanying notes to consolidated financial statements.
Page 51
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
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. During the
year ended June 30, 2022, the Company purchased noncontrolling interests for $546,000 giving
the Company a direct ownership interest of 70.8% and the investors’ a 29.2% ownership
interest. The entire management of diagnostic imaging centers business segment is now being
conducted by HDM.
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. The Company was able to
enact certain decisions to allow the Company to navigate the global pandemic and from further
losses, additional decreases in scan volume and avoid any significant disruption of the
business. The Company must now take into account the severity, duration and recurrence of
new strains of the COVID-19 virus which adds a new dimension to the challenges and
uncertainty facing our business and the world economy in general. Although we are unable to
predict if there will be additional consequences on our operations from the continuing global
pandemic of COVID-19, the Company believes with the positive cash flows, low debt and cash
on hand, it will be able to continue operations going forward.
Page 52
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
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 less
accumulated depreciation. 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 $2,801,000 and $2,783,000 for the
years ended June 30, 2023 and 2022 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 53
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
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 at the end of each fiscal year 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, “Business Combinations”, 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 54
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
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, 2023, the Company has 22
management agreements of which 3 were with PC’s owned by Timothy Damadian, Chairman of
the Board, President, Chief Executive Officer and Treasurer (formerly owned by Raymond V.
Damadian, M.D., Chairman of the Board of FONAR until his unexpected death in August
2022)(“the Related medical practices”) and 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 $84,000 to $447,000. 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 Consolidated
Statement of Operations.
The Company currently recognizes revenue in accordance with the recognition accounting
standard issued by the Financial Accounting Standards Board (“FASB”) and codified in the ASC
as topic 606 (“ASC 606”). The revenue recognition standard in ASC 606 outlines a single
comprehensive model for recognizing revenue as performance obligations, defined in a contract
with a customer as goods or services transferred to the customer in exchange for consideration,
are satisfied. The standard also requires expanded disclosures regarding the Company’s
revenue recognition policies and significant judgments employed in the determination of
revenue.
.
Page 55
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
Our revenues generally relate to net patient fees received from various payers and patients
themselves under contracts in which our performance obligations are to provide diagnostic
services to the patients. Revenues are recorded during the period our obligations to provide
diagnostic services are satisfied. Our performance obligations for diagnostic services are
generally satisfied over a period of less than one day. The contractual relationships with
patients, in most cases, also involve a third-party payer (Medicare, Medicaid, managed care
health plans and commercial insurance companies, including plans offered through the health
insurance exchanges) and the transaction prices for the services provided are dependent upon
the terms provided by (Medicare and Medicaid) or negotiated with (managed care health plans
and commercial insurance companies) the third-party payers. The payment arrangements with
third-party payers for the services we provide to the related patients typically specify payments
at amounts less than our standard charges and generally provide for payments based upon
predetermined rates per diagnostic services or discounted fee-for-service rates. Management
continually reviews the contractual estimation process to consider and incorporate updates to
laws and regulations and the frequent changes in managed care contractual terms resulting
from contract renegotiations and renewals.
The Company’s patient fee revenues, net of contractual allowances and discounts less the
provision for bad debts for the years ended June 30, 2023 and 2022 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
2023
$ 4,124,646
1,063,846
18,670,019
5,935,482
$ 29,793,993
2022
$ 4,248,708
1,060,920
17,907,335
6,365,275
$ 29,582,238
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 56
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense approximated $570,000 and
$634,000 and for the years ended June 30, 2023 and 2022, 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, 2023 and 2022.
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, 2023 and 2022, diluted EPS for common
shareholders includes 127,504 shares upon conversion of Class C Common.
Page 57
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings Per Share (Continued)
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
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
June 30, 2023
Total
Common
Stock
Class C
Common
Stock
$ 9,375,776
$ 8,801,974
$ 146,136
6,539,376
6,539,376
382,513
$
1.43
$
1.35
$
0.38
6,539,376
127,504
382,513
—
6,666,880
382,513
$
1.32
$
0.38
June 30, 2022
Total
Common
Stock
Class C
Common
Stock
$ 12,440,906
$ 11,690,796
$ 191,038
6,554,209
6,554,209
382,513
$
1.90
$
1.78
$
0.50
6,554,209
127,504
382,513
—
6,681,713
382,513
$
1.75
$
0.50
Page 58
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand, cash in banks, investments in certificates of
deposit with original maturities of 90 days or less, and money market funds.
Short-Term Investments
Short-term investments include certificates of deposit with original maturities of greater than 90
days.
Concentration of Credit Risk
Cash: The Company maintains its cash and cash equivalents with various financial institutions,
which exceed federally insured limits throughout the year. At June 30, 2023, the Company had
cash on deposit of approximately $49,203,000 in excess of federally insured limits of $250,000.
Related Parties: Net revenues from related parties accounted for approximately 12% of the
consolidated net revenues for the years ended June 30, 2023 and 2022. Net management fee
receivables from the related party medical practices accounted for approximately 13% of the
consolidated accounts receivable as of June 30, 2023 and 2022.
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, 2023 and
2022, 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 standard establishes 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.
Page 59
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 Standards
FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting
standards, updates, and regulations as of June 30, 2023 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 2023 or 2022, and it does not believe that any of those standards will have a
significant impact on our consolidated financial statements at the time they become effective.
NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND
OTHER FEES RECEIVABLE
Accounts Receivable
Credit risk with respect to the Company’s accounts receivable related to product sales and
service and repair fees is limited due to the customer advances received prior to the
commencement of work performed and the billing of amounts to customers as sub-assemblies
are completed. Service and repair fees are billed on a monthly or quarterly basis and the
Company does not continue providing these services if accounts receivable become past due.
The Company controls credit risk with respect to accounts receivable from service and repair
fees through its credit evaluation process, credit limits, monitoring procedures and reasonably
short collection terms. The Company performs ongoing credit authorizations before a product
sales contract is entered into or service and repair fees are provided.
Page 60
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND
OTHER FEES RECEIVABLE (CONTINUED)
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 two years at
June 30, 2023 is as follows:
Receivables - Non Current - net
620,230
2025
140,012
2026
760,242
Total
$
$
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.
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
insurance companies and health management
reimbursement organizations, principally
organizations.
Payment of the management fee receivables from the PC’s may be impaired by the inability of
the PC’s to collect in a timely manner their medical fees from the third-party payors, particularly
insurance carriers covering automobile no-fault and workers compensation claims due to longer
payment cycles and rigorous informational requirements and certain other disallowed claims.
Approximately 67% and 66%, respectively, of the PCs’ 2023 and 2022 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.
Page 61
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND
OTHER FEES RECEIVABLE (CONTINUED)
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, 2023 and 2022, 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, 2023 and
2022.
Total Facilities
For the Year Ended June 30,
Total Facilities Owned or Managed (at Beginning of Year)
Facilities Added by:
Internal development
Managed Facilities Closed
Total Facilities Owned or Managed (at End of Year)
2023
27
1
(1)
27
2022
27
—
—
27
Page 62
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 4 – INVENTORIES
Inventories included in the accompanying consolidated balance sheets consist of:
Purchased parts, components and supplies
Work-in-process
Inventories
NOTE 5 - PROPERTY AND EQUIPMENT
As of June 30,
2023
$ 2,346,300
223,366
$ 2,569,666
2022
$ 2,125,805
234,016
$ 2,359,821
Property and equipment, at cost, less accumulated depreciation and amortization, at June 30,
2023 and 2022, 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,
2023
$ 33,144,266
6,199,941
2,069,055
3,714,499
15,650,041
939,614
61,717,416
39,571,043
$ 22,146,373
2022
$ 31,304,258
6,199,941
2,069,055
3,484,525
14,087,581
939,614
58,084,974
35,803,183
$ 22,281,791
Depreciation and amortization of property and equipment for the years ended June 30, 2023
and 2022 was $4,148,544 and $4,113,640, respectively. During fiscal year ended June 30 2022,
the Company removed fully depreciated assets of $1,737,918 that related to a location that was
previously closed.
Page 63
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 6 – OPERATING & FINANCING LEASES
In July 2019, the Company adopted ASU 2016-02, “Leases” (Topic 842). This 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.
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 these
practical expedients permitted within the standard which eliminates the requirements to
reassess prior conclusions about lease identification, lease classification and indirect costs.
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, 2023 is as follows:
Reconciliation of
operating and financing
lease payments
Year Ending June 30,
2024
2025
2026
2027
2028
Thereafter
Present value discount
Total lease liability
Operating Lease Payments
$
5,592,971
5,600,823
5,174,942
4,190,414
3,600,133
22,306,056
(10,454,450 )
36,010,889
Financing Lease Payments
244,343
$
244,343
244,343
162,897
—
—
(57,848 )
838,078
$
$
Page 64
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 6 – OPERATING & FINANCING LEASES (CONTINUED)
Weighted Average Remaining Lease Term
Operating leases - years
Finance lease - years
Weighted Average Discount Rate
Operating leases
Finance lease
10.8
3.6
5.0 %
3.6 %
The components of lease expense were as follows:
Components of lease expense
Operating lease cost
Finance lease cost:
Depreciation of leased equipment
Interest on lease liabilities
Total finance lease cost
For Year Ended June 30,
2022
2023
$ 5,668,199
$ 5,887,390
$
$
198,881
35,833
234,714
$
$
198,881
41,603
240,484
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 and equipment assets obtained
in
exchange for lease obligations:
For Year Ended June 30,
2022
2023
$ 5,577,578
244,344
$
$ 5,133,369
244,344
$
Operating leases
$ 2,902,584
$ 7,900,074
Page 65
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 7 - OTHER INTANGIBLE ASSETS
Other intangible assets, net of accumulated amortization, at June 30, 2023 and 2022, are
comprised of:
Capitalized software development costs
Patents and copyrights
Non-competition agreements
Customer relationships
Less: Accumulated amortization
As of June 30,
2023
$ 7,004,847
5,452,345
4,150,000
3,900,000
20,507,192
17,075,327
$ 3,431,865
2022
$ 7,004,847
5,332,774
4,150,000
3,900,000
20,387,621
16,683,736
$ 3,703,885
The estimated amortization of other intangible assets for the five years ending June 30, 2028
and thereafter is as follows:
Schedule Of
Other Intangible
Assets For the Years
Ending June 30,
2024
2025
2026
2027
2028
Thereafter
Other intangible
assets - net
$
Total
376,600
371,645
369,022
366,427
362,172
1,585,999
$
Patents
and
Copyrights
176,600
171,645
169,022
166,427
162,172
671,832
$
Customer
Relationships
200,000
200,000
200,000
200,000
200,000
914,167
$
3,431,865
$
1,517,698
$
1,914,167
Page 66
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 7 - OTHER INTANGIBLE ASSETS (CONTINUED)
The weighted average amortization period for other intangible assets is 10.3 years and they
have no expected residual value.
Information related to the above intangible assets for the years ended June 30, 2023 and 2022
is as follows:
Other Intangible Assets
Balance – Beginning of Year
Amounts capitalized
Software or patents written off
Amortization
Balance – End of Year
For the Year-ended June 30,
2023
$ 3,703,885
119,571
—
(391,591 )
$ 3,431,865
2022
$ 4,037,599
87,882
—
(421,596 )
$ 3,703,885
Amortization of patents and copyrights for the years ended June 30, 2023 and 2022 amounted
to $191,591 and $184,096, respectively.
Amortization of non-competition agreements for the years ended June 30, 2023 and 2022
amounted to $0 and $37,500, respectively.
Amortization of customer relationships for the years ended June 30, 2023 and 2022 amounted
to $200,000 and $200,000, respectively.
NOTE 8 - CAPITAL STOCK
Common Stock
Cash dividends payable on the common stock shall, in all cases, be on a per share basis, one
hundred twenty percent (120%) of the cash dividend payable on shares of Class B common
stock and three hundred sixty percent (360%) of the cash dividend payable on a share of Class
C common stock.
Class B Common Stock
Class B common stock is convertible into shares of common stock on a one-for-one basis.
Class B common stock has 10 votes per share. There were 146 of such shares outstanding at
June 30, 2023 and 2022.
Page 67
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 8 - CAPITAL STOCK (CONTINUED)
Class C Common Stock
The Class C common stock has 25 votes per share, as compared to 10 votes per share for the
Class B common stock and one vote per share for the common stock. The Class C common
stock was offered on a three-for-one basis to the holders of the Class B common stock.
Although having greater voting power, each share of Class C common stock has only one-third
of the rights of a share of Class B common stock to dividends and distributions. Class C
common stock is convertible into shares of common stock on a three-for-one basis.
Class A Non-Voting Preferred Stock
On April 3, 1995, the stockholders ratified a proposal consisting of the creation of a new class of
Class A non-voting preferred stock with special dividend rights and the declaration of a stock
dividend on the Company’s common stock consisting of one share of Class A non-voting
preferred stock for every five shares of common stock. The stock dividend was payable to
holders of common stock on October 20, 1995. Class A non-voting preferred stock issued
pursuant to such stock dividend approximates 313,000 shares.
The Class A non-voting preferred stock is entitled to a special dividend equal to 3-1/4% of the
first $10 million, 4-1/2% of the 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, 2023, 450,177 shares of
common stock of FONAR were available for future grant under this plan. For the years ended
June 30, 2023 and 2022, 0 shares were issued.
Page 68
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 8 - CAPITAL STOCK (CONTINUED)
Treasury Stock
On September 13, 2022, the Company adopted a stock repurchase plan. The plan has no
expiration date and cannot determine the number of shares which will be repurchased. On
September 26, 2022, the Board of Directors has approved up to $9 million to be repurchased
under the plan which will be purchased on the publicly traded open market at prevailing prices.
The Company utilizes the cost method of accounting to value the treasury stock when
repurchasing stock. Under this method, the shares are valued at the price paid and recorded to
treasury stock. When the treasury stock is cancelled, the par value of the stock is reduced and
the additional paid in capital is reduced for the remaining value based upon the original stock
sale. For the year ended June 30, 2023, the Company purchased 103,148 shares at a cost of
$1,759,457 and cancelled 103,328 shares valued at $1,919,027.
NOTE 9 – CONTROLLING AND NONCONTROLLING INTERESTS
On February 13, 2013, the Company entered into an agreement with outside investors to
acquire a 50.5% controlling interest in a newly formed limited liability company, Health
Diagnostics Management LLC (HDM). According to the February 13, 2013, LLC operating
agreement of HDM there are two classes of members; Class A members and one Class B
member. The Class A members have an ownership interest of 49.5% of HDM. The Class B
member (HMCA) has an ownership of 50.5% of HDM. On all matters on which members may
vote every member is entitled to cast the percentage of votes equal to their percentage of
ownership interest. Profits and losses on all items of income, gain or loss, deductions or other
allocations of the Company will be allocated among the members in the same proportions as
their membership interests in the Company bear to all the Class A and Class B membership
interests of the Company in the aggregate outstanding. All of the depreciation and amortization
of the assets of the Company will be allocated solely to the Class A members, unless and until
their interests have been redeemed by the Company in full pursuant to the provisions of the
operating agreement. The Company contributed $20,200,000 to HDM and the group of outside
investors contributed $19,800,000 for its non-controlling membership interest.
On March 5, 2013, HDM purchased from Health Diagnostics, LLC (“HD”) and certain of its
subsidiaries, a business managing twelve (12) Stand-Up MRI Centers and two (2) other
scanning centers located in the States of New York and Florida for a total purchase price
(including consideration of $1.5 million to outside investors) aggregating $35.9 million.
Concurrently with the acquisition, HDM entered into several consulting and non-competition
agreements for a consideration of $4.1 million. The acquisition was accounted for using the
purchase method in accordance with ASC 805, “Business Combinations”. The Company
recognized and measured goodwill as of the acquisition date, as the excess of the fair value of
the consideration paid over the fair value of the identified net assets acquired.
Page 69
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 9 – CONTROLLING AND NONCONTROLLING INTERESTS (CONTINUED)
On January 8, 2015, the Company purchased 20% of the Class A members ownership interest
at a cost of $4,971,094. The Company has a 60.4% ownership interest in HDM after this
transaction. During the year ended June 30, 2022, the Company purchased noncontrolling
interests for $546,000 giving the Company a direct ownership interest of 70.8% and the
investors’ a 29.2% ownership interest.
The amount of each class of HDM members’ equity as of June 30, 2023 and 2022 is as follows:
Opening Members'
Equity
Share of Net Income
Buyout of noncontrolling
interests
Distributions
Ending Members'
Equity
June 30, 2023
June 30, 2022
Class A
Members
Class B
Member
Class A
Members
Class B
Member
($4,053,833)
$2,750,740
$50,292,073 ($3,048,524)
$4,793,482
$18,513,540
$41,923,380
$22,228,693
—
($5,776,200)
—
$(14,023,800)
$23,441
($5,822,232)
—
($13,860,000)
($7,079,293)
$54,781,813
($4,053,833)
$50,292,073
Page 70
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 10 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES
Long-term debt, notes payable and capital leases consist of the following:
Note payable requiring monthly payments of interest
at a rate of 7% until May 2009 followed by 240
monthly payments of $4,472 through October 2026.
The loan is collateralized by a building with a net
book value of $344,995 as of June 30, 2023.
The revolving credit note was extended to November
15, 2023. 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 8.5% 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.
Less: Current portion
2023
2022
$
158,842
$
195,457
—
158,842
43,767
115,075
$
—
195,457
40,078
155,379
$
The maturities of debt over the next four years are as follows:
Maturities Of Long-Term Debt
Years Ending June 30,
2024
2025
2026
2027
Long-Term Debt Over Five Years
and Thereafter
$ 43,767
47,002
50,448
17,625
$ 158,842
Page 71
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 11 - INCOME TAXES
In accordance with ASC 740, “Accounting for Income Taxes”, 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 740. The Company believes there are
no uncertain tax positions in prior year’s tax filings and therefore it has not recorded a liability for
unrecognized tax benefits.
In accordance with ASC 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 2019.
The Company has recorded a deferred tax asset of $10,041,960 and a deferred tax liability of
$394,758 as of June 30, 2023, primarily relating to its net Federal operating loss carryforwards,
allowance for doubtful accounts and tax credits of approximately $9,110,000 available to offset
future taxable income through 2031. In addition the Company has state operating loss
carryforwards of approximately $11,130,000 and city operating
loss carryforwards of
approximately $1,235,000. The net operating losses begin to expire in 2025 for federal tax and
state income tax purposes.
Future ownership changes as determined under Section 382 of the Internal Revenue code
could further limit the utilization of net operating loss carryforwards. As of June 30, 2023, no
such changes in ownership have occurred.
Page 72
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 11 - INCOME TAXES (CONTINUED)
The Inflation Reduction Act (“IRA”) was enacted on August 16, 2022. The IRA includes
provisions imposing a 1% excise tax on share repurchases that occur after December 31, 2022
and introduces a 15% corporate alternative minimum tax (“CAMT”) on adjusted financial
statement income. The CAMT will be effective for tax years beginning after December 31,
2022. Currently, the Company does not expect the IRA to have a material impact to the
Company’s financial statements.
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 certain state net operating losses. 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,
2023, by approximately $78,000. The valuation allowance decreased by approximately
$448,000 during the year ended June 30, 2022.
Components of the provision (benefit) for income taxes are as follows:
Components Of The Provision For Income Taxes
Current:
Federal
State
Subtotal
Deferred:
Federal deferred taxes
State deferred taxes
Subtotal
Provision (Benefit) for Income Taxes - Net
Years Ended June 30,
$
2023
—
652,522
652,522
2,770,980
208,569
2,979,549
$ 3,632,071
2022
—
$
2,440,594
2,440,594
2,935,921
157,972
3,093,893
$ 5,534,487
Page 73
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 11 - INCOME TAXES (CONTINUED)
A reconciliation of the federal statutory income tax rate to the Company’s effective tax rate as
reported is as follows:
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
New York State audit settlement
Change in the valuation allowance
Other
Effective income tax rate
Years Ended June 30,
2023
21.0 %
2022
21.0 %
5.1 %
(4.6 )%
2.8 %
(2.3 )%
—
(0.5 )%
1.5 %
23.0 %
4.2 %
(5.5 )%
2.0 %
0.7 %
4.5 %
(2.0 )%
(0.6) %
24.3 %
As of June 30, 2023, the Company has net operating loss (“NOL”) carryforwards of
approximately $9,110,000 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 $2,981,000. 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.
The Company was also under audit with New York State for income tax and was assessed
additional taxes of $1,014,071 plus interest and penalties. These amounts were paid during
fiscal year ending June 30, 2022.
Page 74
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 11 - INCOME TAXES (CONTINUED)
Significant components of the Company’s deferred tax assets and liabilities at June 30, 2023
and 2022 are as follows:
Deferred tax assets:
Allowance for doubtful accounts
Non-deductible accruals
Net operating carryforwards
Tax credits
Capitalized research and development
Right of use assets and lease liabilities
Inventories
Property and equipment and depreciation
Deferred Tax Assets - gross
Valuation allowance
Total deferred tax assets
Property and equipment and depreciation
Intangibles
Total deferred tax liabilities
Net deferred tax asset
June 30,
2023
2022
$ 3,360,809
707,400
2,768,844
2,981,214
369,675
112,938
105,310
—
10,406,190
(364,230 )
10,041,960
(151,007 )
(243,751 )
(394,758 )
$ 9,647,203
$ 4,239,903
707,400
4,820,010
3,346,509
—
—
98,945
71,576
13,284,343
(441,865 )
12,842,478
—
(215,726 )
(215,726 )
$ 12,626,752
NOTE 12 - OTHER CURRENT LIABILITIES
Included in other current liabilities are the following:
Accrued salaries, commissions and payroll taxes
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
June 30,
2023
$ 4,413,044
193,041
48,353
11,207
100,000
100,971
3,534
573,574
$ 5,443,724
2022
$ 4,652,173
248,702
382,000
20,707
120,000
79,167
59,516
854,962
$ 6,417,227
Page 75
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Leases
The Company rents its operating facilities and certain equipment, pursuant to operating lease
agreements expiring at various dates through March 2030. The leases for certain facilities
contain escalation clauses relating to increases in real property taxes as well as certain
maintenance costs.
Rent expense for operating leases approximated $5,887,000 and $5,668,000, for the years
ended June 30, 2023 and 2022, respectively.
The Company received approval from the Suffolk County Industrial Development Agency 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 $36,523 and $0 employer contributions to the Plan for the years ended June 30,
2023 and 2022, respectively.
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, 2023.
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 counsel, 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 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,
2023 and 2022, the Company had approximately $101,000 and $79,000, respectively, in
reserve for its self-funded health insurance programs. The reserves are included in “Other
current liabilities” in the consolidated balance sheets.
Page 76
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 14 - SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended June 30, 2023 and 2022 the Company paid $50,132 and $617,029 for
interest, respectively.
During the years ended June 30, 2023 and 2022 the Company paid $1,439,507 and $2,408,145
for income taxes, respectively.
During the years ended June 30, 2023 and 2022, the Company resolved certain sales tax
liabilities and was able to reverse accrued interest and penalties in the amount of $55,000 and
$119,000, respectively, which has been recorded under selling, general and administrative
expenses.
NOTE 15 – RELATED PARTY TRANSACTIONS
The CEO and President of the Company is a minority owner of a billing company, which
performs billing and collection services with respect to No-Fault and Workers’ Compensation
claims of the Company’s clients. The monthly fee charged to the Company 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 terminated on May 31, 2023.
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.
Page 77
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 16 - SEGMENT AND RELATED INFORMATION
The Company provides segment data in accordance with the provisions of ASC 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.
NOTE 16 - SEGMENT AND RELATED INFORMATION (CONTINUED)
Summarized financial information concerning the Company’s reportable segments is shown in
the following table:
Summarized Segment Financial Information
Fiscal 2023:
Net revenues from external customers
Intersegment net revenues *
(Loss) Income from operations
Depreciation and amortization
Total identifiable assets
Capital expenditures
Fiscal 2022:
Manufacturing
and Servicing
of Medical
Equipment
$ 8,260,711
$
985,833
$ (5,875,126 )
$
263,720
$ 30,892,807
119,571
$
Management
of Diagnostic
Imaging
Center
Totals
—
$ 90,384,390 $ 98,645,101
$
985,833
$
$ 20,664,388 $ 14,789,262
$ 4,276,415 $ 4,540,135
$ 170,153,612 $ 201,046,419
$ 4,218,084 $ 4,337,655
Net revenues from external customers
Intersegment net revenues *
(Loss) Income from operations
Depreciation and amortization
Total identifiable assets
Capital expenditures
$ 8,218,804
965,417
$
$ (4,604,305 )
$
263,559
$ 30,182,037
258,271
$
—
$ 89,373,341 $ 97,592,145
965,417
$
$
$ 26,611,487 $ 22,007,182
$ 4,271,677 $ 4,535,236
$ 169,159,945 $ 199,341,982
$ 4,374,903 $ 4,633,174
* Amounts eliminated in consolidation
Page 78
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 16 - SEGMENT AND RELATED INFORMATION (CONTINUED)
Export Product Sales
The Company’s areas of operations are principally in the United States. The Company had
export sales of medical equipment amounting to 14.1% and 48.9% of product sales revenues to
third parties for the years ended June 30, 2023 and 2022, respectively.
The foreign product sales, as a percentage of product sales to unrelated parties, were made to
customers in the following countries:
Dominican Republic
Canada
Germany
United Arab Emirates
Puerto Rico
For the Years Ended June 30
2023
2022
—
8.5%
4.9%
0.7%
—
14.1%
12.0%
0.6%
—
—
36.3%
48.9%
Foreign Service and Repair Fees
The Company’s areas of service and repair are principally in the United States. The Company
had foreign revenues of service and repair of medical equipment amounting to 6.4% and 4.4%
of consolidated net service and repair fees for the years ended June 30, 2023 and 2022,
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
United Arab Emirates
Dominican Republic
Canada
Greece
Australia
For the Years Ended June
30,
2023
1.5 %
0.3
1.6
0.6
0.1
0.5
0.6
0.3
0.9
6.4 %
2022
1.5 %
0.3
1.6
0.6
—
—
—
0.3
0.1
4.4 %
The Company does not have any material assets outside of the United States.
Page 79
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
NOTE 17 – ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following represents a summary of allowance for doubtful accounts for the years ended
June 30, 2023 and 2022, respectively:
Summary of Allowance For Doubtful Accounts
Balance
June 30,
2022
204,597 $
Balance
June 30,
2023
$
198,593
16,627,917 4,007,382 8,026,732 12,608,567
Additions
(1)
55,000 $
Deductions
61,004 $
4,686,893 1,451,094 2,148,295 3,989,692
777,354
777,354 —
—
Balance
June 30,
2021
442,270 $ — $ 237,673 $
Balance
June 30,
2022
$
204,597
15,786,878 841,039 — 16,627,917
Additions Deductions
4,184,399 502,494 — 4,686,893
777,354
777,354 — —
Description
Accounts receivable
Management and other fees receivable
Management and other fees receivable -
related medical practices
Notes receivable
Description
Accounts receivable
Management and other fees receivable
Management and other fees receivable -
related medical practices
Notes receivable
(1)
Included in provision for bad debts.
NOTE 18 – SUBSEQUENT EVENTS
The Company evaluates events that have occurred after the balance sheet date, but before the
consolidated financial statements are issued.
On July 31, 2023, the Company entered into a software license agreement for a term of 3 years
at a cost of $1,260,000. The effective date of the agreement is October 1, 2023.
During August 2023, the Company amended their revolving credit agreement. The agreement
was extended to November 15, 2023. The interest rate on borrowings remains at 8.5% along
with certain financial covenants.
As of August 31, 2023, the Company repurchased 27,844 shares at a cost of $469,372 which
was authorized under the stock repurchase plan adopted in September 2022.
Page 80
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 and 2022
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
There have been no disagreements with our independent registered public accounting firm or
other matters requiring disclosure under Regulation S-K, Item 304(b).
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, we performed an
evaluation under the supervision of and with the participation of management, including our
Principal Executive Officer and our Acting Principal Financial Officer, of the design and
effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-
15(e) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”). Based
upon that evaluation, our Principal Executive Officer and Acting Principal Financial Officer
concluded, as of the end of the period covered by this Annual Report that our disclosure
controls and procedures were effective.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as is defined in the Exchange Act. Internal control over financial reporting is
a process designed to provide reasonable assurance regarding the reliability of our financial
reporting and the preparation of financial statements for external reporting purposes in
accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
Our management conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO-2013). Based
on this evaluation, our management concluded that our internal control over financial reporting
was effective at June 30, 2023.
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 for the
fiscal year ending June 30, 2023.
Page 81
FONAR CORPORATION AND SUBSIDIARIES
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, 2023 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
Item 9B. OTHER INFORMATION
None.
Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT
INSPECTIONS
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. During fiscal 2022, with the exception of Dr.
Raymond V. Damadian, who did not receive any fees for serving as a director, each director
receives a base fee of $20,000 per annum for his or her service as a director, with greater
amounts for additional services on the Board of Directors. Officers serve at the discretion of the
Board of Directors.
A majority of our board of directors is composed of independent directors: consisting of, Ronald
G. Lehman, Richard E. Turk and Jessica Maher. 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.
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.
Page 82
FONAR CORPORATION AND SUBSIDIARIES
The officers and directors of the Company are set forth below:
Timothy R. Damadian
59
Chairman of the Board, President, Chief Executive
Luciano B. Bonanni
Claudette J.V. Chan
Ronald J. Lehman
Richard E. Turk
Jessica Maher
68
85
47
39
26
Officer and Treasurer
Executive Vice President, Chief Operating Officer and
acting Principal Financial Officer
Director
Director
Director
Director
Timothy Damadian has been the Chairman of the Board and Treasurer of FONAR since
September 7, 2022 and 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 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.
Luciano B. Bonanni has served as Chief Operating Officer (COO) and Executive Vice President
(EVP) for FONAR Corporation since June 27, 2016. In September 2022, he was appointed to fill
the position of acting Principal Financial Officer. 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.
Page 83
FONAR CORPORATION AND SUBSIDIARIES
Ronald G. Lehman has been a Director of FONAR since April, 2012, when he was unanimously
appointed by the remaining four Directors to fill the vacancy resulting from the death of former
Director Robert Djerejian. From October, 2009 to the present, Mr. Lehman has served as
Managing Director of Investment Banking with Bruderman Brothers, LLC, a private New York-
based broker-dealer registered with the Securities and Exchange Commission and which is a
member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor
Protection Corporation (SIPC). Mr. Lehman directly manages all facets of the firm’s transaction
processes, from deal origination, to sourcing capital, to negotiating deal structures, through
documentation and closing. The firm provides buy and sell-side advisory, capital raising, and
consulting services to lower middle-market companies. Mr. Lehman specializes in advising
healthcare services companies and has recently completed several recapitalizations in the
industry. He also participates in the firm’s merchant banking investments and oversees many of
these assignments. From May, 2008 to October, 2009, Mr. Lehman served as Senior Vice
President of Acquisitions at Health Diagnostics, LLC, where he managed the company’s
acquisition and corporate finance activities. From March, 2000 to May, 2008, Mr. Lehman
worked for various Bruderman entities as a buy and sell-side advisor and as a principal in
several private equity transactions. From September, 1998 to March, 2000, Mr. Lehman worked
at Deutsche Bank Securities, Inc. and last held the position of Associate in their Global Custody
Group. Mr. Lehman graduated from Columbia University with a B.A. in 1998.
Richard E. Turk has been a Director of FONAR since June, 2020, when he was appointed to fill
the vacancies on the Board of Directors and Audit Committee of the Board of Directors resulting
from the death of his predecessor, Robert J. Janoff. Mr. Turk is the Chief Financial Officer of
PRISM Vision Group, a private equity-backed, multi-location, outpatient comprehensive eye
care practice headquartered in Union, New Jersey. Mr. Turk joined PRISM in November, 2018
as the Chief Development Officer and became CFO in March 2021. Mr. Turk has helped PRISM
expand from a single-specialty (retina) provider with 17 locations and 21 physicians to a
comprehensive, vertically-integrated, multi-specialty, eye care organization with approximately
190 physicians and more than 90 locations across New Jersey, Pennsylvania, Delaware,
Virginia, Washington, DC, 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 in 2007.
Page 84
FONAR CORPORATION AND SUBSIDIARIES
Jessica Maher has been a Director of FONAR since March 2023, when she was appointed to fill
the vacancies on the Board of Directors and Audit Committee resulting from the resignation of
her predecessor, John Collins. Mrs. Maher is a staff accountant at Ives & Sultan, LLP in
Woodbury, New York, where she is responsible for preparing audited financial statements for
various clients, overseeing audit testing areas, audits of 401(k) plans, and personal and
company tax returns. Mrs. Maher holds a Bachelor of Science in Accounting with a minor in
Accounting Information Systems, and a Master of Science in Accounting from Fairfield
University in Fairfield, Connecticut. During her early undergraduate years, Mrs. Maher worked
for Tritech Healthcare Management in Melville, New York, where she reviewed patient files,
insurance, charts and documents to ensure that the services provided by clients were being
properly billed. In her senior year, Mrs. Maher interned at Northwell Health in Westbury, New
York, where she supported the financial reporting team for two hospitals, reported into accounts
receivable software, and analyzed patient billing records to identify overpayments. Mrs. Maher’s
first position out of college was with PriceWaterhouseCoopers in Melville, New York, where she
was assigned to two private equity clients, was responsible for a variety of the audit areas, and
assisted managers in reviewing financial statements, footnote disclosures, and audit opinions.
Board Diversity Matrix as of September 12, 2023
Total Number of Directors
Part I: Gender Identity
Directors
Part II: Demographic Background
White
5
Female
2
2
Male
3
3
Board Diversity Matrix as of September 15, 2022
Total Number of Directors
Part I: Gender Identity
Directors
Female
1
Part II: Demographic Background
White
Did Not Disclose Demographic Background: 1
Director with Disabilities
1
Male
3
3
5
Did not disclose gender
1
1
Page 85
FONAR CORPORATION AND SUBSIDIARIES
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 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. 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
Ronald G. Lehman, Richard E. Turk and Jessica Maher.
Our compensation policy includes a combination of salary, commissions, bonuses, stock
bonuses and stock options, designed to incentivize our employees. There is no universal plan
applicable to all of our employees. The fixed and variable components of our employees’
compensation tend to be individualized, based on a combination of the employees’
performance, responsibilities and position, our assessment of how best to motivate a person in
such a position and the needs and preferences of the particular employees, as negotiated
between employees and their supervisors or management.
There is set forth in the following Summary Compensation Table the compensation provided by
us during fiscal 2023, 2022 and 2021 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
($)
Cash
Bonuses
($)
Stock
Awards
($)
Total
Compensation
($)
Year
(b)
2023 $
2022 $
2021 $
(c)
(d)
0 $ 152,900 $
0 $ 305,800 $
0 $ 155,800 $
(e)
0 $
0 $
0 $
(f)
152,900
305,800
155,800
2023 $ 23,553 $ 305,800 $
2022 $ 153,095 $ 305,800 $
2021 $ 153,095 $ 305,800 $
0 $
0 $
0 $
329,353
458,895
458,895
Luciano Bonanni
Chief Operating Officer and
Executive Vice President
2023 $ 143,416 $ 305,800 $
2022 $ 148,572 $ 305,800 $
2021 $ 146,496 $
0 $
0 $
0 $ 152,931 $
449,216
454,372
298,969
Page 86
FONAR CORPORATION AND SUBSIDIARIES
II. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Number Of Securities
Underlying
Unexercised Options
(#) Exercisable
(a)
0
0
0
Option
Exercise
Price ($)
(b)
0
0
0
Option
Exercise
Expiration
Date
(c)
N/A
N/A
N/A
Name
Raymond V. Damadian, Chairman
of the Board, Treasurer and
Principal Financial Officer
Timothy R. Damadian, President
and Principal Executive Officer
Luciano Bonanni, Chief Operating
Officer, Executive Vice President
and acting Principal Financial
Officer
III DIRECTOR COMPENSATION
The following table shows the compensation paid to the Directors for fiscal 2023:
Fees
earned
in pad
in cash
($)
(b)
$ 20,000
$ 20,000
$ 20,000
$ 9,423
$ 15,384
Non-
equity
incentive
plan
compen-
sation
(e)
Option
awards
($)
(d)
Nonqualified
deferred
compen-
sation
earnings
($)
(f)
Stock
awards
($)
(c)
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Total
($)
(h)
All other
compen-
sation ($)
(g)
0
38,880 $ 58,880
60,000 $ 80,000
0
0 $15,000 $ 35,000
0
$0 $ 9,423
0 $44,038 $ 59,423
Name
(a)
A. Claudette J.V. Chan
B. Ronald G. Lehman
C. Richard E. Turk
D. Jessica Maher
E. John Collins
EMPLOYEE COMPENSATION PLANS
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, 2023, 450,177 shares were available for issuance.
Page 87
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, 2023.
Name and Address of Beneficial Owner (1)
Timothy R. Damadian, as trustee of the Fonar Class C
Trust
c/o FONAR Corporation, Melville, New York
Class C Stock
Shares
Beneficially
Owned
Percent of
Class
382,447
99.98 %
Kayne Anderson Rudnick
Investment Management LLC
1800 Avenue of the Stars, 2nd Floor
Los Angeles, CA 90067
Common Stock
Dimensional Fund Advisors LP
Building One
6300 Bee Cave Road
Austin, Texas 78746
Common Stock
The Vanguard Group, Inc.
100 Vanguard Boulevard
Malvern, PA 19355-2331
Common Stock
Timothy R. Damadian,
Chairman of the Board, President
Chief Executive Officer and Treasurer
Common Stock
Class A Preferred
Page 88
628,700
9.75 %
409,855
6.35 %
373,859
5.80 %
42,700
800
*
*
FONAR CORPORATION AND SUBSIDIARIES
Continued
Name and Address of Beneficial Owner (1)
Luciano B. Bonanni,
Executive Vice President,
Chief Operating Officer and acting Principal Financial
Shares
Beneficially
Owned
Percent of
Class
Officer
Common Stock
Class A Preferred
Claudette Chan
Director and Secretary
Common Stock
Class A Preferred
Ronald G. Lehman
Director
Common Stock
Richard E. Turk
Director
Common Stock
Jessica Maher
Director
Common Stock
All Officers and Directors as a Group (6 persons)
Common Stock
Class C Stock
Class A Preferred
54,253
1,285
106
32
4,330
0
0
*
*
*
*
*
*
*
101,389
382,447
2,117
1.50 %
99.98 %
*
1. Address provided for each beneficial owner owning more than five percent of the voting
securities of FONAR.
Page 89
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 11, 2023, 22 of our clients had
management agreements with HMCA. Six 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 $84,000 to $447,000 per month in fiscal 2023.
Timothy Damadian, the Chairman of the Board, President, Chief Executive Officer and
Treasurer of the Company during the 2023 fiscal year owned three of the imaging facilities in
Florida managed by HMCA. The facilities were owned by Dr. Raymond Damadian until his
death in August 2022. Those facilities paid HMCA flat rate monthly fees ranging from $245,535
to $411,589 per month during fiscal 2023. These fees are renegotiable on an annual basis.
During the fiscal years ended June 30, 2023 and June 30, 2022, the net revenues received by
HMCA from the imaging facilities owned by Timothy Damadian and previously by Dr. Damadian
were approximately $11.9 million, and $11.6 million, respectively.
Timothy Damadian, the Chairman of the Board, President, Chief Executive Officer and
Treasurer of FONAR, was one of the owners of a billing company that performed billing and
collection services for No-Fault and Workers’ Compensation claims on behalf of HMCA’s clients.
The monthly fee charged to HMCA was $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,
2022 and terminated on May 31, 2023. The Company billed them $191,072 in the fiscal year
ended June 30, 2023 and $286,608 in the fiscal year ended June 30, 2022.
Timothy Damadian sold his ownership interest in the billing company on May 31, 2023.
Ronald Lehman, a Director of FONAR, holds a .0378% interest in Health Management
Company of America’s Class A membership interests.
Claudette J.V. Chan, a Director and the Secretary of FONAR, owns a .0378% interest in Health
Management Company of America’s Class A Membership interests.
Page 90
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, 2023 and the reviews of the financial statements
included in our Forms 10-Q for the fiscal year ended June 30, 2023 were $374,000.
The aggregate fees billed by Marcum LLP for the audit of our annual financial statements for the
fiscal year ended June 30, 2022 and the reviews of the financial statements included in our
Forms 10-Q for the fiscal year ended June 30, 2022 were $379,000.
Audit Related Fees
No fees were billed by Marcum LLP for the fiscal years ended June 30, 2023 or June 30, 2022
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, 2023 or June 30, 2022
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, 2023.
No fees billed by Marcum LLP for tax compliance, tax advice and tax planning in the fiscal year
ended June 30, 2022.
All Other Fees
No fees were billed by Marcum LLP for any other services during the fiscal years ended June
30, 2023 and June 30, 2022.
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 91
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, 2023 and 2022.
Consolidated Statements of Income for the Years Ended June 30, 2023 and 2022.
Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2023 and 2022.
Consolidated Statements of Cash Flows for the Years Ended June 30, 2023 and 2022 .
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 consolidated financial
statements.
b) REPORTS ON FORM 8-K
1. Registrant’s Report on Form 8-K: Item 2.02, Results of Operations and Financial
Condition for the Fiscal Year ended June 30, 2022, reported September 28, 2022. Commission
File No. 0-10248.
2. Registrant’s Report on Form 8-K: Item 5.02, Departure of Directors or Certain Officers,
reported March 20, 2023. Commission File No. 0-10248.
3. Registrant’s Report on Form 8-K: Item 5.07, Submission of Matters to a Vote of Security
Holders, at the annual meeting of stockholders, reported on May 22, 2023. Commission File No.
0-10248.
c) EXHIBITS
3.1 Certificate of Incorporation, as amended, of the Registrant incorporated by reference to
Exhibit 3.1 to the Registrant’s registration statement on Form S-1,Commission File No. 33-
13365.
3.2 Article Fourth of the Certificate of Incorporation, as amended, of the Registrant incorporated
by reference to Exhibit 4.1 to the Registrant’s registration statement on Form S-8, Commission
File No. 33-62099.
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FONAR CORPORATION AND SUBSIDIARIES
3.3 Section A of Article Fourth of the Certificate of Incorporation, as amended, of the Registrant
incorporated by reference to Exhibit 4.3 to the Registrant’s registration statement on Form S-3,
Commission File No. 333-63782.
3.4 Section A of Article Fourth of the Certificate of Incorporation, as amended, of the Registrant
incorporated by reference to Exhibit 3.3 of the Registrant’s Annual Report on Form 10-K for the
fiscal year ended June 30, 2003, Commission File No. 0-10248.
3.5 By-Laws, as amended, of the Registrant incorporated by reference to Exhibit 3.2 to the
Registrant’s registration statement on Form S-1, Commission File No. 33-13365.
4.1 Specimen Common Stock Certificate incorporated by reference to Exhibit 4.1 to the
Registrant’s registration statement on Form S-1, Commission File No. 33-13365.
4.2 Specimen Class B Common Stock Certificate incorporated by reference to Exhibit 4.2 to the
Registrant’s registration statement on Form S-1, Commission File No. 33-13365.
10.1 License Agreement between the Registrant and Raymond V. Damadian incorporated by
reference to Exhibit 10 (e) to Form 10-K for the fiscal year ended June 30, 1983, Commission
File No. 0-10248.
10.2 Stock Purchase Agreement, dated July 31, 1997, by and between U.S. Health
Management Corporation, Raymond V. Damadian, M.D. MR Scanning Centers Management
Company and Raymond V. Damadian, incorporated by reference to Exhibit 2.1 to the
Registrant’s Form 8-K, July 31, 1997, commission File No: 0-10248.
10.3 Merger Agreement and Supplemental Agreement dated June 17, 1997 and Letter of
Amendment dated June 27, 1997 by and among U.S. Health Management Corporation and
Affordable Diagnostics Inc. et al., incorporated by reference to Exhibit 2.1 to the Registrant’s 8-
K, June 30, 1997, Commission File No: 0-10248.
10.4 Stock Purchase Agreement dated March 20, 1998 by and among Health Management
Corporation of America, FONAR Corporation, Giovanni Marciano, Glenn Muraca et al.,
incorporated by reference to Exhibit 2.1 to the Registrant’s 8-K, March 20, 1998, Commission
File No: 0-10248.
10.5 Stock Purchase Agreement dated August 20, 1998 by and among Health Management
Corporation of America, FONAR Corporation, Stuart Blumberg and Steven Jonas, incorporated
by reference to Exhibit 2 to the Registrant’s 8-K, September 3, 1998, Commission File No. 0-
10248.
10.6 2002 Incentive Stock Option Plan incorporated by reference to Exhibit 99.1 to the
Registrant’s registration statement on Form S-8, Commission File No.: 333-96557.
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FONAR CORPORATION AND SUBSIDIARIES
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.
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.
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FONAR CORPORATION AND SUBSIDIARIES
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.
FONAR CORPORATION
Dated: September 28, 2023
By:
/s/Timothy Damadian
Timothy Damadian,
Chairman of the Board of Directors
Chief Executive Officer
President and Treasurer
By
/s/Luciano B. Bonanni
Luciano B. Bonanni
Executive Vice President,
Chief Operating Officer and
Acting Principal Financial Officer
Signature
/s/ Timothy R. Damadian
Timothy R. Damadian
Title
Chairman of the Board of Directors
Chief Executive Officer
President and Treasurer
Date
September 28, 2023
/s/Claudette J.V. Chan
Claudette J.V. Chan
/s/Ronald G. Lehman
Ronald G. Lehman
/s/Richard E. Turk
Richard E. Turk
/s/Jessica Maher
Jessica Maher
Director
Director
Director
Director
September 28, 2023
September 28, 2023
September 28, 2023
September 28, 2023
Page 95