UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
SCHEDULE
14A INFORMATION
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Fonar
Corporation
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FONAR
CORPORATION
110
Marcus Drive
Melville,
New York 11747
(631)
694-2929
NOTICE
OF ANNUAL MEETING OF STOCKHOLDERS
Monday,
May 22, 2023
To
The Stockholders:
The
Annual Meeting of the stockholders of Fonar Corporation will be held at the Double Tree Hotel, Wilmington Downtown, 700 King Street,
Wilmington, Delaware 19801 (302-655-0400), on Monday, May 22, 2023, at 10:00 a.m. local time for the following purposes:
1.
To elect five Directors to the Board of Directors.
2.
To approve, on an advisory basis, the compensation of the Company’s named executive officers.
3.
To ratify the selection of Marcum LLP as the Company’s auditors for the fiscal year ending June 30, 2023.
4.
To transact such other business as may properly come before the meeting.
Only
stockholders of record at the close of business on March 24, 2023 are entitled to notice of, and to vote at, this meeting. A list of
such stockholders will be available for examination by any stockholder for any purpose germane to the meeting, during normal business
hours, at the principal office of the Company, 110 Marcus Drive, Melville, New York, for a period of ten days prior to the meeting.
Whether
or not you expect to attend in person, we urge you to vote your shares at your earliest convenience. You may vote by internet, by phone
or by signing, dating, and returning your proxy at your earliest convenience. Voting by internet, telephone or mail will not prevent
you from voting your stock at the meeting if you desire to do so, as your proxy is revocable at your option.
BY
ORDER OF THE BOARD OF DIRECTORS
/s/
Claudette J.V. Chan
Claudette
J.V. Chan, Secretary
PROXY
STATEMENT
FOR
ANNUAL MEETING OF
STOCKHOLDERS
TO BE HELD MONDAY, MAY 22, 2023
This
proxy statement, which is first being made available to shareholders on or about April 6, 2023 on the internet, is furnished in connection
with the solicitation of proxies by the Board of Directors of Fonar Corporation (the "Company"), to be voted at the annual
meeting of the stockholders of the Company to be held at 10:00 a.m. on May 22, 2023 and any adjournment(s) thereof for the purposes set
forth in the accompanying Notice of Annual Meeting of Stockholders. At the same time a paper notice regarding the availability of proxy
materials will be mailed to stockholders. Stockholders who execute proxies retain the right to revoke them at any time prior to the exercise
of the powers conferred thereby. The cost of solicitation of proxies will be borne by the Company.
The
stockholders will have several options as to how to view the materials and vote their shares.
The
Company is posting the Notice of Annual Meeting and Proxy Statement, together with the Annual Report on the internet. You may read the
materials online or print out a copy. You will also have the ability to vote online.
In
the alternative, you may elect to receive an e-mail or the traditional paper copies of the Notice of Annual Meeting and Proxy Statement,
and the Annual Report. There is no charge for receiving e-mail or paper copies, BUT you must request paper copies if you want them. To
facilitate timely delivery please make the request as instructed on or before March 31, 2023.
To
view the materials and vote on the internet, have the 12 Digit Control Number(s) located on the Notice Regarding the Availability of
Proxy Materials available and visit: www.proxyvote.com.
Stockholders
may request a copy of the Proxy Materials:
1.
By internet – visit www.proxy.com
2.
By telephone – 1-800-579-1639
3.
By e-mail – sendmaterial@proxyvote.com
Only
stockholders of record at the close of business on March 24, 2023, will be entitled to vote at the meeting. Shares of Common Stock are
entitled to one vote per share, shares of Class B Common Stock are entitled to ten votes per share and shares of Class C Common Stock
are entitled to twenty-five votes per share. At the close of business on March 23, 2023, there were issued and outstanding 6,538,148
shares of Common Stock held of record by approximately 1,001 stockholders, 146 shares of Class B Common Stock held of record by 12 stockholders
and 382,513 shares of Class C Common Stock held of record by 3 shareholders. The 313,438 shares of Class A Nonvoting Preferred Stock
were held by 1008 stockholders at the close of business on March 23, 2023, are not entitled to vote. Except for the shares of Class A
Nonvoting Preferred Stock, there are no shares of Preferred Stock issued and outstanding.
Any
proxy may be revoked at any time before it is exercised by delivery of a written instrument of revocation or a later dated proxy to the
Secretary of the Company at the principal executive office of the Company or, while the meeting is in session, to the Secretary of the
meeting, without, however, affecting any vote previously taken. The presence of a stockholder at the meeting will not operate to revoke
his proxy. The casting of a ballot by a stockholder who is present at the meeting, however, will revoke his proxy, but only as to the
matters on which the ballot is cast and not as to any matters on which he does not cast a ballot or as to matters previously voted upon.
Proxies
received by management will be voted at the meeting or any adjournment thereof. EACH PROXY WILL BE VOTED IN ACCORDANCE WITH THE SPECIFICATIONS
MADE THEREIN BY THE PERSON GIVING THE PROXY. TO THE EXTENT NO CHOICE IS SPECIFIED, HOWEVER, THE PROXY WILL BE VOTED FOR MANAGEMENT’S
PROPOSALS. All of management’s proposals have been unanimously approved by the Board of Directors.
1.
ELECTION OF DIRECTORS AND MANAGEMENT INFORMATION
Five
directors are to be elected at the annual meeting, to hold office until the next annual meeting of stockholders and until their successors
are elected and qualified. It is intended that the accompanying proxy will be voted in favor of the following nominees to serve as directors
unless the stockholder indicates to the contrary on the proxy. All of the nominees are currently directors. Management expects that each
of the nominees will be available for election.
NOMINEES
FOR ELECTION OF DIRECTORS
1.
Timothy Damadian
2.
Claudette J.V. Chan
3.
Ronald G. Lehman
4.
Richard E. Turk
5.
Jessica Maher
BIOGRAPHIES
FOR DIRECTORS AND OFFICERS
Timothy
Damadian (age 58) has been the Chairman of the Board since August 3, 2022 and the President and Chief Executive Officer of Fonar since
February 11, 2016. He has also served as Treasurer since August 3, 2022. 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 subsidiary of Fonar that was formed to manage medical and diagnostic imaging offices. In 2001, Timothy Damadian
left Fonar to form Integrity Healthcare Management, Inc., a diagnostic imaging management company that would eventually manage 11 MRI
scanning centers in New York and Florida. The company was a success and was sold to Health Diagnostics, LLC in 2007. Mr. Damadian returned
to Fonar as a consultant in 2010 and was appointed as Fonar’s Chief Executive Officer and President on February 11, 2016 as well
as President of HMCA and a Manager of HMCA’s subsidiaries., Imperial Management Services, LLC and Health Diagnostics Management,
LLC.
Luciano
B. Bonanni (age 67) has served as Chief Operating Officer (COO) and Executive Vice President (EVP) for Fonar Corporation since June 27,
2016. Prior to his appointment as COO, Mr. Bonanni had served the Company as Vice President since 1989, during which time he oversaw
general operations, research and development, manufacturing, service, sales, finance, accounting and regulatory compliance. Prior to
1989, Mr. Bonanni held the title of Vice President of Production and Engineering from the time of Fonar’s initial public offering
in 1981. Mr. Bonanni joined the Company as an electrical engineer in 1978. He holds a Bachelor of Electrical Engineering degree from
Manhattan College.
Claudette
J.V. Chan (age 85) 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.
Ronald
G. Lehman (age 46) 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 the former Director Robert Djerejian. From October, 2009 through March, 2022, 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). In April, 2022, the firm transitioned its investment banking practice to Bruderman Advisory Group.
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 (age 38) 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. Since joining PRISM in November, 2018, Mr. Turk has helped source, analyze, and complete 12 acquisitions. He spearheaded
growth efforts that helped PRISM expand from a single-speciality (retina) provider with 17 locations and 21 physicians to a comprehensive,
vertically-integrated, multi-specialty, eye care organization with approximately 90 physicians and more than 50 locations across New
Jersey, Pennsylvania, Delaware and Maryland. Prior to his tenure at PRISM, Mr. Turk was employed by Professional Physical Therapy, a
private equity-backed outpatient physical and occupational therapy company headquartered in Uniondale, New Jersey with more than 180
locations across New York, New Jersey, Connecticut, Massachusetts and New Hampshire. During his four years at Professional Physical Therapy,
Mr. Turk sourced, analyzed, and completed 32 acquisitions comprised of 116 clinics, expanding the company’s services and adding
three states. From 2007 to 2014, Mr. Turk was employed by Bruderman Brothers, a broker dealer involved in investment banking, merchant
banking, investment advisory, and consulting for lower middle market companies ($10M-$250M of enterprise value) in a variety of industries,
including healthcare. Mr. Turk was Vice President of Bruderman Brothers from 2011 to 2014. Mr. Turk graduated from Columbia University
with a B.A. in American History in 2007.
Jessica
Maher (age 25) has been a director of Fonar Corporation and a member of the audit committee since March 20, 2023, when she was appointed
to fill the vacancy resulting from John Collins’ resignation from the board of directors and the audit committee. Mrs. Maher is
an accountant in private practice at Ives & Sultan, LLP in Woodbury, New York. Mrs. Maher’s expertise at the firm included
auditing clients’ financial statements and 401(k) plans, overseeing audit testing areas and preparing personal and business tax
returns. Her first position after graduating from Fairfield University, was with PriceWaterhouseCoopers.
| Board
Diversity Matrix as of March 24, 2023 |
| Total
Number of Directors |
5 |
| Part
I: Gender Identity |
Female |
Male |
| |
Directors |
2 |
3 |
| Part
II: Demographic Background |
|
| |
White |
2 |
3 |
CORPORATE
GOVERNANCE, THE BOARD AND ITS COMMITTEES
All
of the nominees are presently directors of the Company. The five nominees will be elected to hold office for the ensuing year or until
their respective successors are elected and qualified. Of the five nominees, Ronald G. Lehman, Richard E. Turk and Jessica Maher are
independent, as defined in the Securities and Exchange Commission Regulations and Nasdaq Market Place Rules. In making such determinations,
there were no transactions, relationships or arrangements not disclosed in our SEC filings to be considered by the Board of Directors,
in determining whether the director was independent.
BOARD
MEETINGS
During
the year ended June 30, 2022 the Board of Directors unanimously consented to take action in lieu of a meeting on two occasions, and the
audit committee met four times.
The
attendance of the Board of Directors at annual meetings is not required. The Chairman of the Board, however, when he attends the annual
meeting of stockholders, acts as Chairman of the Meeting.
Timothy
Damadian receives no compensation for serving on the Board. The other directors are each paid a minimum of $20,000 per year in their
capacities as directors. This is the sole compensation payable to the directors.
Board
Leadership Structure. The current Board Chairman is Timothy Damadian. In addition, although the Company has not selected a lead independent
director, Ronald G. Lehman effectively functions as such. The Company believes that the Company’s current leadership structure
is appropriate for the Company in the context of the specific circumstances facing the Company. Consideration of the Company’s
leadership structure is a continuing process which the Board of Directors and Management of the Company undertake in coordination with
each other.
The
lead independent director, Ronald G. Lehman, acts as the Chairman of the Audit Committee. As such he plays a leading role in the engagement
of auditors and the review of the Company’s financial statements. Under certain circumstances, he will also serve as the principal
point for employees.
The
Company believes its present leadership structure is successfully meeting the Company’s current needs, including:
| * |
|
Efficient
communication between Management and the Board; |
| * |
|
Clarity
for the Company’s stockholders on corporate leadership and accountability; |
| * |
|
The
Chairman of the Board having the Company’s strategy, operations and financial conditions; and |
| * |
|
Continuity
in the Company’s leadership, as the Chairman of the Board, Timothy Damadian, began his career at Fonar in 1985. |
The
Company's Board of Directors has an audit committee. There is no standing compensation committee, nominating committee or other committee
of the Board.
In
accordance with the Nasdaq Marketplace Rules, the Board of Directors adopted a written charter for the audit committee which took effect
in June, 2001 and was revised on November 17, 2004. All of the directors on the audit committee are independent.
Stockholders
may communicate with directors by writing to them at the Company in accordance with the Company’s corporate governance policies
and code of conduct, or in any other manner the particular director may provide. Depending on the sensitivity and timing of a matter
raised by a stockholder and the need for disclosure of matters to be made not to just one stockholder, but to the stockholders as a whole,
it may not be possible for the director to reply to the stockholder.
The
Company’s Chairman of the Board, Timothy Damadian, as trustee and individually, controls more than 50% of the voting power of the
Company’s outstanding stock. Consequently, the Company is a controlled company for purposes of NASDAQ Marketplace Rule 4350(c).
AUDIT
COMMITTEE
The
Audit Committee, which is comprised solely of independent directors, is governed by a Board approved charter that contains, among other
things, the Committee’s membership requirements and responsibilities. The audit committee oversees the Company’s accounting,
financial reporting processes, internal controls and audits, and consults with management and the independent public accountants on,
among other items, matters related to the annual audit, the published financial statements and the accounting principles applied. As
part of its duties, the audit committee appoints, evaluates and retains the Company’s independent public accountants. It also maintains
direct responsibility for the compensation, termination and oversight of the Company’s independent public accountants and evaluates
the independent public accountants’ qualifications, performance and independence.
Financial
Expert on Audit Committee: The Board has determined that Mr. Ronald G. Lehman, is the audit committee financial expert. The Board made
a qualitative assessment of Mr. Lehman’s level of knowledge and experience based on a number of factors, including his formal education
and experience.
Board
Oversight of Risk Management. The Company faces risk in many different areas, including business strategy; government regulation; financial
condition; health care compliance; product research and development; competition for talent; business vitality; operational efficiency;
quality assurance; reputation; intellectual property; and trade secrets, among others. The oversight function is carried out in the quarterly
and annual Audit Committee meetings and by communication and meetings with the Company’s Management, which exercises the responsibility
for oversight of risk management.
AUDIT
COMMITTEE REPORT
The
audit committee has (a) reviewed and discussed the audited financial statements with management, (b) discussed with the independent auditors
the matters required to be discussed by SAS 61 (Statement on Auditing Standards No. 61) and (c) has received the written disclosures
and the letter from the independent auditors required by Independence Standards Board, Standard No. 1 and has discussed with the independent
auditors the independent accountants’ independence.
Based
on the foregoing review and discussions, the audit committee recommended to the Board of Directors that the audited financial statements
be included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
The
members of the audit committee are Ronald G. Lehman, Richard E. Turk and Jessica Maher, all of whom are independent directors, as defined
in the Securities and Exchange Commission Regulations and Nasdaq Market Place Rules.
NOMINATING
COMMITTEE
The
Board of Directors does not believe it requires a separate standing nominating committee because the Board of Directors is relatively
small and can make the nominations acting as a whole. The Board does not have a policy with regard to director candidates recommended
by stockholders because the absence of such recommendations makes a formal policy unnecessary. Historically, there usually has not been
a need for a committee to identify new nominees in the case of the resignation or death of an existing director. The remaining directors
evaluate a new nominee based on the nominee’s integrity, loyalty, competence and experience, and how the nominee’s background
complements that of the remaining directors.
Promoting
diversity in the selection of nominees has not yet been considered, but the Board follows a policy of nondiscrimination and equal opportunity.
COMPENSATION
COMMITTEE
COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The
Board of Directors does not believe it requires a separate standing compensation committee because the management, under the authority
of the Chairman of the Board and the Chief Executive Officer, is best equipped to make compensation decisions. The Board reserves the
right to change this policy at any time.
Timothy
Damadian, who serves as the Chairman of the Board, Chief Executive Officer and President of the Company, participates in the deliberation
and determination of executive officer and director compensation.
VOTE
REQUIRED AND BOARD RECOMMENDATION
The
directors will be elected by the vote of a plurality of the votes represented at the meeting. THE BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR ALL OF THE NOMINEES FOR THE DIRECTORS OF THE COMPANY.
INFORMATION
REGARDING BENEFICIAL OWNERSHIP OF PRINCIPAL STOCKHOLDERS, DIRECTORS, AND MANAGEMENT
The
following table sets forth information regarding the beneficial ownership of the Company's common shares held by holders of at least
5% of the shares of any class, by the nominees for directors, the Company's Chief Executive Officer, and the directors and executive
officers as a group as of the close of business on March 20, 2023 unless otherwise noted.
| Name
and Address of Beneficial Owner (1) | |
Shares
Beneficially Owned | |
|
| Timothy
Damadian, as Trustee (2) | |
| | | |
| | |
| c/o
Fonar Corporation, Melville, New York | |
| | | |
| | |
| Chairman
of the Board, CEO and President | |
| | | |
| | |
| 5%
+ Stockholder | |
| | | |
| | |
| Common
Stock | |
| 123,465 | | |
| 1.89 | % |
| Class
C Stock | |
| 382,447 | | |
| 99.98 | % |
| Class
A Preferred | |
| 19,093 | | |
| 6.09 | % |
| | |
| | | |
| | |
| Kayne
Anderson Rudnick | |
| | | |
| | |
| Investment
Management LLC | |
| | | |
| | |
| 1800
Avenue of the Stars, 2nd Floor | |
| | | |
| | |
| Los
Angeles, CA 90067 | |
| | | |
| | |
| Common
Stock | |
| 629,737 | | |
| 9.63 | % |
| | |
| | | |
| | |
| Dimensional
Fund Advisors LP | |
| | | |
| | |
| Building
One | |
| | | |
| | |
| 6300
Bee Cave Road | |
| | | |
| | |
| Austin,
Texas 78746 | |
| | | |
| | |
| Common
Stock | |
| 394,616 | | |
| 6.04 | % |
| Name
and Address of Beneficial Owner (1) | |
| |
|
| Renaissance
Technologies LLC | |
| | | |
| | |
| Renaissance
Technologies Holding Corporation | |
| | | |
| | |
| 800
Third Avenue | |
| | | |
| | |
| New
York, New York 10022 | |
| | | |
| | |
| Common
Stock | |
| 338,416 | | |
| 5.18 | % |
| | |
| | | |
| | |
| Timothy
Damadian, | |
| | | |
| | |
| Chairman
of the Board, President and Chief Executive Officer | |
| | | |
| | |
| Common
Stock | |
| 42,700 | | |
| * | |
| Class
A Preferred | |
| 800 | | |
| * | |
| | |
| | | |
| | |
| Luciano
B. Bonanni, | |
| | | |
| | |
| Executive
Vice President | |
| | | |
| | |
| And
Chief Operating Officer | |
| | | |
| | |
| Common
Stock | |
| 54,253 | | |
| * | |
| Class
A Preferred | |
| 1,285 | | |
| * | |
| | |
| | | |
| | |
| Claudette
Chan | |
| | | |
| | |
| Director
and Secretary | |
| | | |
| | |
| Common
Stock | |
| 106 | | |
| * | |
| Class
A Preferred | |
| 32 | | |
| * | |
| | |
| | | |
| | |
| Ronald
G. Lehman | |
| | | |
| | |
| Director | |
| | | |
| | |
| Common
Stock | |
| 4,330 | | |
| * | |
| | |
| | | |
| | |
| Richard
E. Turk | |
| | | |
| | |
| Director | |
| | | |
| | |
| Common
Stock | |
| 0 | | |
| * | |
| | |
| | | |
| | |
| Jessica
Maher | |
| | | |
| | |
| Director | |
| | | |
| | |
| Common
Stock | |
| 0 | | |
| * | |
| | |
| | | |
| | |
| All
Officers and Directors | |
| | | |
| | |
| as
a Group (6 persons) | |
| | | |
| | |
| Common
Stock | |
| 101,389 | | |
| 1.55 | % |
| Class
C Stock | |
| 0 | | |
| 0 | % |
| Class
A Preferred | |
| 2,117 | | |
| 0.68 | % |
________________________
*
Less than one percent
___________________________
(1).
Address provided for each beneficial owner owning more than five percent of the voting securities of Fonar.
(2).
Timothy Damadian is the trustee under testamentary trusts holding such shares established for the benefit of Timothy Damadian, and Jevan
Damadian and Keira Reinmund.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
See
Item 13, “Certain Relationships and Related Transactions” of the Company’s Annual Report on Form 10-K for the fiscal
year ended June 30, 2022, which is specifically incorporated by reference herein. A copy of the Form 10-K is included in the Annual Report
to Stockholders which is being sent to the Company’s stockholders with this Proxy Statement.)
The
Company believes that each of the related transactions described therein were on terms at least as favorable to the Company as were available
from non-affiliated parties.
COMPENSATION
DISCUSSION AND ANALYSIS OF DIRECTORS AND EXECUTIVE OFFICERS
The
compensation of the Company’s executive officers is based on a combination of salary and bonuses based on performance. Decisions
concerning compensation are made on a case by case basis and not pursuant to standardized formulas, programs, policies or criteria, except
for commissions in the case of sales. The Board of Directors does not have a compensation committee and does not believe such a committee
is required, in view of the manner in which compensation matters are handled. Timothy Damadian and Claudette J.V. Chan are executive
officers as well as members of the Board of Directors. Mr. Damadian, who also has voting control of the Company and serves as Chairman
of the Board, and who has served as CEO and President of the Company since February 11, 2016, and Luciano Bonanni the Executive Vice
President and Chief Operating Officer of the Company since June 27, 2016, participate in the determination of executive compensation
for the Company’s officers.
As
noted above, the Company's compensation policy is primarily based upon the practice of pay-for-performance. Section 162(m) of the Internal
Revenue Code imposes a limitation on the deductibility of nonperformance-based compensation in excess of $1 million paid to the Principal
Executive Officer. No officer of the Company received compensation in excess of $1 million in fiscal 2020 or in any previous fiscal year.
The Board currently believes that the Company should be able to continue to manage its executive compensation program for others so as
to preserve the related federal income tax deductions.
The
Company does not believe that there are any risks arising from its compensation policies and practices for its employees that are likely
to have a material adverse effect on the Company.
The
Company maintains no pension or deferred compensation plans except for a 401(k) plan.
SUMMARY
COMPENSATION TABLE
The
following table discloses compensation received for the three years ended June 30, 2020, June 30, 2021 and June 30, 2022 by the Company’s
Principal Executive Officer, the Company’s Principal Financial Officer and any officer of the Company receiving at least $100,000
for the year.
| |
| |
| |
Cash | |
Stock | |
|
| Name
and Principal Position | |
Year | |
Salary | |
Bonus | |
Awards | |
Total |
| Timothy
R. Damadian | |
| 2022 | | |
$ | 0 | | |
$ | 305,800 | | |
$ | 0 | | |
$ | 305,800 | |
| President,
Principal | |
| 2021 | | |
$ | 0 | | |
$ | 155,800 | | |
$ | 0 | | |
$ | 155,800 | |
| Executive
Officer | |
| 2020 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Raymond
V. Damadian | |
| 2022 | | |
$ | 153,095 | | |
$ | 305,800 | | |
$ | 0 | | |
$ | 458,895 | |
| deceased
(August 3, 2022) | |
| 2021 | | |
$ | 153,095 | | |
$ | 305,800 | | |
$ | 0 | | |
$ | 458,895 | |
| Chairman
of the Board; | |
| 2020 | | |
$ | 153,095 | | |
$ | 0 | | |
$ | 0 | | |
$ | 153,095 | |
| Acting
Principal Financial Officer; Director | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Luciano
Bonanni | |
| 2022 | | |
$ | 148,572 | | |
$ | 305,800 | | |
$ | 0 | | |
$ | 454,372 | |
| Executive
Vice President | |
| 2021 | | |
$ | 146,038 | | |
$ | 0 | | |
$ | 152,931 | | |
$ | 298,969 | |
| and
Chief Operating Officer | |
| 2020 | | |
$ | 146,496 | | |
$ | 0 | | |
$ | 152,902 | | |
$ | 299,398 | |
No
executive officer has a written or unwritten employment agreement with the Company. Salaries, bonuses and discretionary stock and stock
option awards comprise the full amount of total compensation. The only exceptions are commissions, based on a percentage of the sales
prices, payable to salesmen.
Compensation
Pursuant to Stock Options and SAR Grants
No
stock options or stock appreciation rights were granted to the Company’s Principal Executive Officer and Principal Financial Officer
during fiscal 2022.
Option/SAR
Exercises and Year End Values
No
options or stock appreciation rights were exercised by the Company’s Chief Executive Officer during fiscal 2022. The Company’s
Chief Executive Officer did not hold any unexercised stock options or stock appreciation rights at the end of fiscal 2022.
DIRECTOR
COMPENSATION
The
following table shows the compensation paid to the Directors for fiscal 2022:
| Name | |
Fees
earned paid in cash ($) | |
Stock
awards ($) | |
Option
awards ($) | |
Non- equity
incentive plan
compen- sation | |
Non- qualified
deferred compen- sation
earnings ($) | |
All other
compen- sation ($) | |
Total ($) |
| (a) | |
(b) | |
(c) | |
(d) | |
(e) | |
(f) | |
(g) | |
(h) |
| A.
Claudette J.V. Chan | |
$ | 20,000 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 38,880 | | |
$ | 58,880 | |
| B. Ronald
G. Lehman | |
$ | 20,000 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 60,000 | | |
$ | 80,000 | |
| C.
Richard E. Turk | |
$ | 20,000 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 15,000 | | |
$ | 35,000 | |
| D.
John Collins | |
$ | 20,000 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 1,538 | | |
$ | 21,538 | |
| E.
Charles N. O'Data | |
$ | 9,931 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
$ | 9,931 | |
| (Deceased) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
With
the exception of Timothy Damadian who receives no compensation for serving as a director, each director is entitled to receive a minimum
of $20,000 per annum for his or her services as a director of the Company, including service on any committee of the Board of Directors.
2.
ADVISORY VOTE ON COMPENSATION OF THE COMPANY’S NAMED EXECUTIVE OFFICERS
The
following proposal provides the Company’s stockholders with an opportunity to vote to approve, on an advisory basis, the compensation
of the Company’s named executive officers, as disclosed in this proxy statement. In considering your vote, you may wish to review
with care the “Compensation Discussion and Analysis” section, which provides details as to the Company’s compensation
policies, procedures and decisions, as well as the Summary Compensation Table and other related compensation tables, notes and narrative
disclosures under the executive compensation section of this proxy statement. This vote is not intended to address any specific element
of the Company’s executive compensation program, but rather the overall compensation program for the Company’s named executive
officers. This vote currently is being taken on an annual basis at the Company’s annual meeting.
In
accordance with Section 14A of the Securities Exchange Act of 1934, we are asking stockholders to approve the following advisory resolution
at the Annual Meeting of Stockholders
RESOLVED,
that the stockholders of Fonar Corporation (the “Corporation”) approve, on an advisory basis, the overall compensation of
the Corporation’s named executive officers disclosed in the Compensation Discussion and Analysis, Summary Compensation Table and
related compensation tables, notes and narrative discussion in this Proxy Statement for the Annual Meeting of Stockholders.
The
Board of Directors recommends a vote FOR this resolution because it believes that the policies and practices described in the Compensation
Discussion and Analysis are effective in achieving the Company’s goals of rewarding sustained financial and operating performance
and leadership excellence and aligning the executives’ long-term interests with those of the stockholders, as well as motivating
the executives to remain with the Company for long and productive careers.
This
advisory resolution, commonly referred to as a “say-on-pay” resolution, is non-binding on the Board of Directors. Although
non-binding, the Board will review and consider the voting results when evaluating our executive compensation program.
3.
RATIFICATION OF SELECTION OF AUDITORS
The
Board of Directors selected Marcum LLP, as the Company's independent auditors for the fiscal year ending June 30, 2023. The stockholders
will be asked to ratify this action by the Board. Marcum LLP were the Company’s auditors for the fiscal years ended June 30, 2020,
June 30, 2021 and June 30, 2022.
One
or more representatives of Marcum LLP, may be present at the Meeting with the opportunity to make a statement if they desire to do so,
and to be available to respond to appropriate questions.
The
affirmative vote of shares holding a majority of the votes represented at the meeting is required to ratify the selection of auditors
by the Board of Directors. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL.
AUDIT
FEES
The
aggregate fees billed by Marcum LLP for the audit of the Company’s annual financial statements for the fiscal year ended June 30,
2022 and the reviews of the financial statements included in the Company’s Forms 10-Q for the fiscal year ended June 30, 2022 were
$379,000.
The
aggregate fees billed by Marcum LLP for the audit of the Company’s annual financial statements for the fiscal year ended June 30,
2021, and the reviews of the financial statements included in the Company’s Forms 10-Q for the fiscal year ended June 30, 2021
were $390,000.
All
work on the audits in each of the last two fiscal years was performed by full-time permanent employees of Marcum LLP.
AUDIT-RELATED
FEES
No
fees were billed by Marcum LLP for the fiscal years ended June 30, 2022 and June 30, 2021 for services related to the audit or review
of our financial statements that are not included under the caption “AUDIT FEES”.
TAX
FEES
No
fees were billed by Marcum LLP for tax compliance, tax advice or tax planning in the fiscal years ended June 30, 2022 and June 30, 2021.
ALL
OTHER FEES
No
fees were billed by Marcum LLP for any other services during the fiscal years ended June 30, 2022 and June 30, 2021.
Since
January 1, 2003, the audit committee has adopted policies and procedures for pre-approving all non-audit work performed by its 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. Marcum LLP has not provided any services in addition to audit services in fiscal 2022 and 2021.
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.
PROPOSALS
OF STOCKHOLDERS
Proposals
of stockholders intended to be presented at next year’s annual meeting of stockholders must be received by the Company no later
than January 18, 2024 to be included in the Company's proxy statement and form of proxy related to that meeting.
SOLICITATION
OF PROXIES
The
proxy accompanying this proxy statement is solicited by the Board of Directors of the Company. Proxies may be solicited by officers,
directors, and regular supervisory and executive employees of the Company, none of whom will receive any additional compensation for
their services. Such solicitations may be made personally, or by mail, e-mail, facsimile, telephone, telegraph, or messenger. The Company
will pay persons holding shares of stock in their names or in the names of nominees, but not owning such shares beneficially, such as
brokerage houses, banks, and other fiduciaries, for the expense of forwarding solicitation materials to their principals. All of the
costs of solicitation of proxies will be paid by the Company.
VOTING
TABULATION
The
election of the Company's directors requires a plurality of the votes represented in person or by proxy at the meeting. The ratification
of proposals and the selection of auditors requires the affirmative vote of a majority of the votes represented in person or by proxy
at the meeting. Votes cast by proxy or in person at the meeting will be tabulated by the Company.
A
stockholder who abstains from voting on any or all proposals will be included in the number of shareholders present at the meeting for
the purpose of determining the presence of a quorum. Abstentions will not be counted either in favor of or against the election of the
nominees or other proposals. Under the rules of the National Association of Securities Dealers, brokers holding stock for the accounts
of their clients who have not been given specific voting instructions as to a matter by their clients in certain cases may vote their
clients' proxies in their own discretion. Where a proposal requires a majority of the votes present for its passage, an abstention or
broker non-vote will have the same effect as a negative vote.
OTHER
MATTERS
The
Board of Directors does not intend to bring any other business before the meeting, and so far as is known to the Board, no matters are
to be brought before the meeting except as specified in the notice of the meeting. However, as to any other business which may properly
come before the meeting, it is intended that proxies, in the form enclosed, will be voted in respect thereof in accordance with the judgment
of the persons voting such proxies, where the authorization to do so has been granted.
DATED:
Melville, New York, April 6, 2023
A
COPY OF THE COMPANY'S FORM 10-K REPORT FOR FISCAL YEAR 2022 CONTAINING INFORMATION ON OPERATIONS, FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, IS AVAILABLE UPON REQUEST. PLEASE WRITE TO:
INVESTOR
RELATIONS DEPARTMENT
FONAR
CORPORATION
110
MARCUS DRIVE
MELVILLE,
NEW YORK 11747
FONAR
CORPORATION
Proxy
- Annual Meeting of Stockholders
May
22, 2023, 10:00 AM
THIS
PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The
undersigned, a stockholder of Fonar Corporation (the "Company"), hereby revoking any proxy heretofore given, does hereby appoint
Timothy R, Damadian, Luciano Bonanni, Daniel Culver and Ellen Yeske and each of them, proxies with full power of substitution, for
and in the name of the undersigned to attend the Annual Meeting of the Stockholders of the Company to be held at the Double Tree
Hotel, Wilmington Downtown, 700 King Street, Wilmington, Delaware on May 22, 2023, at 10:00 a.m., local time, and at any
adjournment(s) thereof, and there to vote upon all matters specified in the notice of said meeting, as set forth herein, and upon
such other business as may properly and lawfully come before the meeting, all shares of stock of the Company which the undersigned
would be entitled to vote if personally present at said meeting.
THIS
PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN, SUCH
SHARES WILL BE VOTED FOR ALL PROPOSALS.
The
Board of Directors Recommends you vote FOR the following:
No.
1. Election of Directors
| |
FOR
ALL |
|
WITHOLD
ALL |
|
FOR
ALL EXCEPT |
|
| |
|
|
|
|
|
|
INSTRUCTION:
To withhold authority to vote for any individual nominee(s), mark "FOR ALL EXCEPT" and circle or cross out the name(s) of those nominee(s).
01
- Timothy R. Damadian, 02 - Claudette J. V. Chan, 03 - Ronald G. Lehman,
04
- Richard E. Turk, 05 - Jessica Maher
The
Board of Directors recommends you vote for proposals 2, 3 and 4:
No.
2. On an advisory basis, to approve the executive compensation.
No.
3. To ratify the selection of Marcum LLP as the Company's independent auditors for the fiscal
year ended June 30, 2022.
No.
4. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the meeting.
__________________________________
_______________________
Signature
Date
__________________________________
_______________________
Signature
(Joint owners) Date
Please
sign exactly as your name(s) appear(s) hereon or on your stock certificate(s). When signing as an attorney, executor, proxy, administrator,
trustee, guardian or other fiduciary, please give full title as such. Joint owners should each sign personally. All holders must sign.
If a corporation, please sign in full corporate name, by an authorized officer. If a partnership, limited liability company or other
entity, please sign in the company’s name by an authorized person, indicating your capacity.
ANNUAL
REPORT
2022
FONAR
CHAIRMAN’S LETTER TO SHAREHOLDERS
April
2023
Dear
Shareholders
As
many of you know, my beloved father, Dr. Raymond V. Damadian, the founder and Chairman of FONAR Corporation, died on August 3, 2022 at
86 years of age. He is sorely missed by family, friends, employees, business associates, customers, admirers, and many shareholders who
had the privilege to know him. I feel it only appropriate that I open this letter by paying tribute to him.
Raymond
Vahan Damadian was born on March 16, 1936 to Vahan and Odette Damadian, both Armenian-Americans. Growing up in Forest Hills, New York,
he excelled in whatever he put his mind to. While attending public schools in Forest Hills he studied violin at the Juilliard School
of Music until winning a Ford Foundation scholarship that took him to the University of Wisconsin at the age of fifteen. After graduation
with a B.S. in Mathematics, he enrolled at Albert Einstein College of Medicine where he earned his M.D. in 1960. Soon after graduation,
he married Donna Terry, who passed away in 2020.
|
Raymond
V. Damadian
March
16, 1936 – August 3, 2022
|
After
internships and fellowships in internal medicine, nephrology, and biophysics, Dr. Damadian joined the faculty at the State University
of New York Downstate Medical Center in Brooklyn, New York in 1967. It was there that he began the long and arduous journey that would
ultimately lead to the invention of the MRI scanner. While working on a research project, he was introduced to a physical phenomenon
known as Nuclear Magnetic Resonance (NMR). NMR spectrometers, which had been used by chemists for years, are able to detect signals from
the contents of a test tube for the purpose of analyzing chemical composition.
Captivated
by this tool, in 1969 Dr. Damadian – physician and scientist – conceived the idea of using it on a much larger scale. He
envisioned a machine that could noninvasively and harmlessly (unlike x-rays) look inside the human body, not just inside a test tube.
In the next year, 1970, he discovered that the relaxation times of NMR signals from normal and cancerous tissues of the same type were
markedly different, as were the signals of different types of tissues.* This was a monumental discovery. In theory, it would enable him
to noninvasively detect cancer in vivo. But his work was not done.
The
path to building a machine that would do this was not easy. He was met with resistance and even ridicule from the scientific community.
Dr. Damadian’s conception of an NMR machine to scan the body was, by one prominent scientist, dismissed as “visionary nonsense.”
Nevertheless, he prevailed. On July 3, 1977, Dr. Damadian and his team achieved the world’s first human MRI scan using the machine
they had built, dubbed Indomitable, now at the Smithsonian Institution in Washington, D.C. Encouraged by this achievement and eager to
bring the benefits of this technology to the world, Dr. Damadian started his own business in 1978, which he soon thereafter named FONAR
Corporation.
FONAR
sold its first commercial MRI scanner in 1980. The potential of NMR imaging to revolutionize diagnostic medicine was not lost on the
well-heeled corporate giants of the world, including Johnson & Johnson, General Electric, Philips, Siemens, Hitachi, and others,
who soon entered the business with their own products. A David versus Goliath battle ensued, fought in the marketplace and in the courts.
Despite the challenges, thanks to technological innovations, extraordinary perseverance, the help of devoted family members, friends,
and employees, and God’s blessing and support, Dr. Damadian kept FONAR afloat through years of financial uncertainty and produced
ever more powerful MRI scanners. Over the years the Company installed some 400 MRIs all over the world and eventually achieved consistent
profitability.
Among
Dr. Damadian’s achievements and honors are these:
| · | *Dr.
Damadian’s seminal discovery was reported in Science in 1971 [R. Damadian, “Tumor
Detection by Nuclear Magnetic Resonance,” Science, Volume 171, pp.1151-1153]. This
paper was referenced by other scientist-authors in the field so frequently that it was recognized
as a ‘Citation Classic’ by the Institute for Scientific Information, Philadelphia,
PA, whose mission it is to monitor scientific citations. |
| · | The
first MRI Patent (U.S. Patent #3,789,832; “Apparatus and Method for Detecting Cancer
in Tissue,” 1974), which patented the use of NMR in medical scanning. It was acknowledged
and enforced by the U.S. Supreme Court in 1997. There are currently more than 4,500 patents
on MRI issued by the U.S. Patent and Trademark Office. |
| · | Recipient
of the National Medal of Technology, awarded by President Ronald Reagan in 1988. |
| · | Induction
into the National Inventors Hall of Fame in 1989, joining a select group of renowned pioneers,
including Orville and Wilbur Wright, Henry Ford, Thomas Edison and Alexander Graham Bell. |
| · | The
Excellence in Medicine Award from the Chiari & Syringomyelia Foundation (CSF) in London,
England on November 10, 2018. |
|
Raymond
V. Damadian, M.D.
and
Indomitable, the first MRI scanner.
Smithsonian
Institution, Washington D.C. |
Based
on Dr. Damadian’s fundamental discovery, the ever-expanding diagnostic capabilities of MRI technology have enabled medical practitioners
the world over to dramatically improve the quality of healthcare and save countless numbers of lives. To this day, over 40 years since
FONAR introduced the first commercial MRI scanner, MRI remains a premiere diagnostic imaging tool, and the term “MRI” is
now a household word.
Dr.
Damadian poured his heart and soul into FONAR. Retirement was the farthest thing from his mind. He came to work every morning and was
usually among the last to leave at the end of the day. His guidance, passion, experience, humor, wisdom, and day-to-day presence are
sorely missed. Personally, I will also remember him as a devoted husband, a loving father, grandfather, and great-grandfather, and a
trusted friend.
Today,
we at FONAR and HMCA gratefully enjoy the fruits of my father’s genius, tenacity, and tireless devotion, and are committed to honor
him with continuing success.
HMCA
When
FONAR was formed in 1978, it was the world’s first MRI company. Its business was manufacturing, selling, and servicing MRI machines.
By the mid 1980s the well-capitalized, diversified medical equipment manufacturing companies, having recognized early on the enormous
importance and potential of MRI scanning, collectively dominated the marketplace. After years of battling with them in an often erratic
MRI equipment sales marketplace, FONAR expanded its business operations in 1997 by forming a diagnostic imaging management subsidiary,
Health Management Company of America (HMCA), with the goal of providing FONAR with a steady and reliable source of revenue. By that time,
FONAR had been working with hundreds of customers for nearly 20 years, most of them independent MRI business owners, so we were well
acquainted with the practices and strategies that worked and those that didn’t, which made FONAR’s expansion into the diagnostic
imaging management business a natural one. By 2009, HMCA was managing nine MRI facilities, six in New York and three in Florida. Annual
scan volume was 29,000 patients, and FONAR Total Revenues-Net were $31.8 million (Fiscal 2010).
The
HMCA Growth Strategy
In
2010 we assembled a new management team comprised of an outstanding group of experienced, competent, proven, and trusted professionals
that launched what has been a very successful growth strategy built upon the unique features and benefits of the FONAR UPRIGHT® MRI,
also known as the STAND-UP® MRI.
HMCA’s
growth strategy is three-pronged: 1) Grow by increasing scan volume at existing sites by applying proven marketing techniques and providing
outstanding service to patients and their physicians, 2) Acquire or establish de novo sites in locations that would enhance or expand
the Company’s existing networks, and 3) Install additional MRI scanners at sites in need of reducing patient backlog and/or sites
that would benefit by expanding MRI services in their regions. Adding a second or even a third MRI to a site is very cost effective.
Aside from the expense of the equipment, the only other major costs are those associated with the additional space needed and a minimal
increase in staff to accommodate the increase in patient volume.
HMCA
has become the Company’s leading source of revenue and profit and now manages 40 MRI scanners: 25 in New York and 15 in Florida.
In Fiscal 2022, annual scan volume was 186,448 with FONAR Total Revenues-Net of $97.6 million,
9% higher than achieved in Fiscal 2021.
HMCA
Update
As
a result of the COVID-19 pandemic, scan volume at HMCA-managed sites in the fourth quarter of Fiscal 2020 (March, April and May of 2020)
was 38% lower than that of the previous quarter. Based on scan volumes in the first three quarters of Fiscal 2020, we anticipated total
scan volume for the full year to be higher than that of Fiscal 2019. Instead, because of the pandemic, scan volume for Fiscal 2020 fell
by 9% in comparison to the previous year, from 184,028 to 166,698. The source of business at every HMCA-managed site is medical providers
who refer their patients for MRI scans. When their patient volume fell precipitously in the fourth quarter of Fiscal 2020, their referrals
did as well. Internally, we were dealing with employee sicknesses, quarantine requirements, and coverage shortages, resulting in fewer
business hours and, consequently, reduced scan volumes.
Our
management team and employees responded immediately. Fiscal 2021 was our first year of recovery: patient scan volume was 178,364, representing
a 9% increase compared to Fiscal 2020. In the following year, Fiscal 2022, our scan volume increased to 186,448, a 5% increase compared
to Fiscal 2021, which was a new record for the Company. It is important to note that this recovery was accomplished while having to cope
with the ongoing negative impact the pandemic was having on our business. Despite the pandemic, we completed some important projects.
We relocated the uptown Manhattan (77th Street) site to midtown Manhattan (55th Street), and installed two additional MRIs: one in Pembroke
Pines, Florida and a second scanner in Manhattan (55th Street), New York, which helped offset the scan volume losses at other locations.
While
the COVID-19 pandemic has reportedly run its course in terms of the rate of new infections, its effect on our business persists in the
form of continuing and unrelenting staffing shortages, which of course negatively impact scan volumes. This problem is not unique to
HMCA – it is widespread in the healthcare industry. According to Healthcare Finance News (January 5, 2022), healthcare
has been the second largest industry sector hit by the “Great Resignation,” with tens of thousands of workers abandoning
their posts or the field altogether in the wake of the COVID-19 pandemic. At the same time, U.S. Bureau of Labor Statistics data point
to a trend that more technologists will be needed to meet growing demand for imaging services. Prior to the pandemic, HMCA-managed
sites competed with other MRI providers for patient referrals. Now we are competing for both referrals and MRI technologists.
In
response to this crisis, we have developed and implemented innovative recruitment strategies. As a result, we have already recruited
over 20 MRI technologists, allowing for expanded business hours and therefore higher scan volumes. We are now employing some of those
same strategies to fill other types of positions in the Company.
As
of this writing, HMCA is managing 40 MRI scanners, 25 in New York and 15 in Florida. We will be opening a new location in Casselberry,
Florida in the third quarter of Fiscal 2022, followed shortly thereafter by another new location in the southern part of Bronx, New York.
Both are brand new facilities and are ideal extensions of the existing HMCA networks in their respective regions. We expected them to
contribute significantly to the growth of the Company.
FONAR
FONAR,
the Inventor of MR Scanning™, introduced the world’s first commercial MRI in 1980, went public in 1981, and has installed
over 400 MRIs all over the world. Located in Melville, New York, FONAR continues to manufacture, sell, service, and upgrade FONAR scanners.
Our signature product is the FONAR UPRIGHT® Multi-Position™ MRI (also known as the STAND-UP® MRI).
The
FONAR UPRIGHT® MRI is the only whole-body MRI that can scan patients in weight-bearing positions, i.e., standing, sitting, in flexion
and extension, as well as in the conventional recumbent, or lie-down, position. Other MRI machines can scan patients only when they are
recumbent. Because of the FONAR UPRIGHT® MRI’s unique multi-position capability, it can detect patient problems that are underestimated
or missed entirely on recumbent-only MRI scanners, particularly in the spine. As a result, referring physicians are able to achieve better
outcomes for their patients. The weight-bearing feature of the FONAR UPRIGHT® MRI is especially valuable for imaging the spine, which
is why many physicians refer all of their patients who need an MRI of the spine to a FONAR UPRIGHT® MRI facility.
For
many patients the strongest appeal of the FONAR UPRIGHT® MRI is its physical configuration. Many patients simply want to avoid or
cannot tolerate the claustrophobia-inducing confines of the conventional “tunnel” or “tube” MRIs. The FONAR UPRIGHT®
MRI is the most open of the so-called open MRIs. Most patients are scanned seated while watching a wide-screen TV. FONAR users everywhere
benefit substantially from these highly prized features. In fact, HMCA’s success in attracting patients and referrals is largely
attributable to the FONAR UPRIGHT® MRI.
Ongoing
Research
Before
his passing, Dr. Damadian was conducting research on cerebrospinal fluid (CSF) flow in the neck and brain. By capitalizing on the FONAR
UPRIGHT®’s unique ability to scan patients in a recumbent and an upright (seated) position, he and his team were able to compare
CSF flow measurements in both postures. They found significant position-dependent differences. The
data they collected enabled them to investigate the degree to which CSF flow impairment is responsible for a patient’s symptoms
and the degree to which a patient’s surgical or non-surgical CCJ (craniocervical junction) treatment restored normal brain and
central nervous system function. Dr. Damadian surmised that appreciating the postural differences in CSF flow might enable physicians
to address a variety of unsolved medical problems and lead to a better understanding of the role of CSF in normal physiological function
as well as in the pathophysiology of neurodegenerative diseases, such as Multiple Sclerosis.
I
am pleased to report that this important research has continued, as I’m sure Dr. Damadian would have wished.
Conclusion
It
has now been over three years since COVID-19 reached America. This pandemic has been described as one of the most formidable crises our
country – and the world – has ever faced. All of us are saddened by the effects it has had, and continues to have, on so
many individuals, families, and businesses. At the same time, I am very grateful to our management
team and to all the FONAR and HMCA employees for having kept FONAR profitable throughout these difficult years.
As
of December 31, 2022, FONAR has posted 51 consecutive quarters of positive net income and positive income from operations. That is something
all of us, employees and shareholders, can be proud of. While Dr. Damadian will always be sorely missed, we are confident that the tireless
pursuit of excellence and success that he modeled and instilled in us will keep our Company profitable and innovative for many years
to come. Thank you for your continued support.
Sincerely,
Timothy
R. Damadian
Chairman,
President and CEO
FONAR
Corporation
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,
2022
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
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FONAR
CORPORATION |
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(Exact
name of registrant as specified in its charter) |
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delaware |
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11-2464137 |
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(State
of incorporation) |
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(IRS
Employer Identification Number) |
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110
Marcus Drive, Melville, New York |
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11747 |
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(Address
of principal executive offices) |
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(Zip
Code) |
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(631)
694-2929 |
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(Registrant’s
telephone number, including area code) |
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Securities
registered pursuant to Section 12(b) of the Act: |
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Common
Stock, par value $.0001 per share |
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Securities
registered pursuant to Section 12(g) of the Act: |
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None |
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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 Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate
by check mark if disclosure of delinquent filers, pursuant to Item 405 of Regulation S-K, §229.405 of this Chapter, is not contained,
and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this 10-K or any amendment to the Form 10-K. ☒
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer”, “accelerated filer and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one):
| Large
accelerated filer ☐ |
Accelerated
filer ☐ |
Non-accelerated
filer ☒ |
| Smaller
reporting company ☒ |
Emerging
Growth Company ☐ |
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ .
The
aggregate market value of the shares of Common Stock held by non-affiliates as of December 31, 2021 based on the closing price of $14.98
per share on such date as reported on the NASDAQ System, was approximately $95.0 million. The other outstanding classes do not have a
readily determinable market value.
As
of September 1, 2022, 6,554,210 shares of Common Stock, 146 shares of Class B Common Stock, 382,513 shares of Class C Common Stock and
313,438 shares of Class A Non-voting Preferred Stock of the registrant were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
NONE
FONAR
CORPORATION AND SUBSIDIARIES
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 17 to the Consolidated Financial Statements for separate financial information regarding our medical equipment and physician and
diagnostic management services segments.
FONAR
CORPORATION AND SUBSIDIARIES
FORWARD
LOOKING STATEMENTS.
Certain
statements made in this Annual Report on Form 10-K are “forward-looking statements”, within the meaning of the Private Securities
Litigation Reform Act of 1995, regarding the plans and objectives of Management for future operations. Such statements involve known
and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements
are based on current expectations that involve numerous risks and uncertainties. Our plans and objectives are based, in part, on assumptions
involving the expansion of business. These assumptions involve judgments with respect to, among other things, future economic, competitive
and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which
are beyond our control. Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Annual
Report will prove to be accurate. In light of the significant uncertainties inherent in our forward-looking statements, the inclusion
of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.
We
must now take into account is the COVID-19 virus, which adds additional uncertainties to future expectations. Although the impact will
be negative, the severity, duration and recurrence of new strains of the COVID-19 virus adds a new dimension to the challenges and uncertainty
facing our business and the world economy in general.
THE
UPRIGHT® MRI SCANNER
The
Upright® MRI scanner is the product we are presently promoting. The Upright® MRI (also known as the “Stand-Up® MRI”)
is a “whole-body” MRI, meaning it can be used to scan any part her back, the Upright® MRI permits MRI scans to be taken
in a weight-bearing state. Patients can be scanned while standing, sitting, bending or lying down. This means that an abnormality or
injury, such as a slipped disk, may be scanned in a weight-bearing posture, which more often than not is the position in which patients
experience pain. An adjustable bed allows patients to stand, sit or lie on their backs, sides or stomachs. The Upright® MRI is by
design a non-claustrophobic MRI scanner. We have introduced the name “Upright®” as an alternative to “Stand-Up®”
because of the multiplicity of positions in which the patient may be scanned where the patient is not standing.
As
of June 30, 2022, HMCA manages a total of 41 MRI scanners. Twenty-six (26) MRI scanners are located in New York and fifteen (15) which
are located in Florida. We believe that the utilization of Fonar UPRIGHT® MRI scanning systems has been a significant factor in
maintaining the patient volume of the scanning facilities and our ability to cope with the effects of the COVID-19 pandemic.
FONAR
CORPORATION AND SUBSIDIARIES
MEDICAL
EQUIPMENT SEGMENT
PRODUCTS
The
Fonar Upright® MRI is a weight-bearing whole-body open MRI system which enables positional MRI (pMRI®) applications. Operating
at a magnetic field strength of 0.6 Tesla, the scanner is a powerful, diagnostically versatile and cost-effective open MRI that provides
a broad range of clinical capabilities and a complete set of imaging protocols. Patients can be scanned standing, bending, sitting, upright
at an intermediate angle and in the conventional recumbent position. This multi-positional MRI system accommodates an unrestricted range
of motion for flexion, extension, lateral bending, and rotation studies of the cervical (upper) and lumbar (lower) spine. Previously
difficult patient scanning positions can be achieved and compared using the system’s MRI-compatible, three-dimensional, motorized
patient handling system. The system’s lift and tilt functions deliver the targeted anatomical region to the center of the magnet.
True image orientation is assured, regardless of the rotation angle, via computer read-back of the table’s position.
There
is considerable evidence that the weight-bearing Upright® MRI provides medical benefits not duplicated by any other MRI scanner
because patient positioning plays a critical role in accurately detecting clinically significant pathology.
For
instance, the Fonar Upright® technology has demonstrated its key value on patients with the Arnold-Chiari Syndrome, which is believed
to affect 200,000 to 500,000 Americans. In this syndrome, brain stem compression and subsequent severe neurological symptoms occur in
these patients, when because of weakness in the support tissues within the skull, the brain stem descends and is compressed and entrapped
at the base of the skull in the foramen magnum, which is the circular bony opening at the base of the skull where the spinal cord exits
the skull. The brain structures “entrapped” in Chiari Syndrome are the lowest lying structures of the brain, the tonsils
of the cerebellum. The Chiari Syndrome is therefore alternately named Cerebellar Tonsillar Ectopia (CTE) indicating the displacement
(ectopia) of these Cerebellar tonsils in this syndrome. Classic symptoms of the Chiari Syndrome include the “drop attack,”
where the patient unexpectedly experiences an explosive rush at the base of the brain which runs down the body to the extremities, causing
the patient to collapse in a temporary neuromuscular paralysis. These symptoms subside when the patient is lying down. Conventional lie-down
MRI scanners cannot make an adequate evaluation of the pathology since the patient’s pathology is most visible and the symptoms
are most acute when the patient is scanned in the upright weight-bearing position.
A
publication in the Journal “Brain Injury” (Brain Injury 2010, 24 (7-8) 988-994) of 1,200 neck pain patients reported that
the fallen cerebellar tonsils of the brain (CTE) were missed 75% of the time when the patient was scanned only in the recumbent position.
It is critical to have an image of the patient in an upright position so that the neurosurgeons can fully evaluate the brain stem and
choose the most appropriate surgical approach for an operative repair.
FONAR
CORPORATION AND SUBSIDIARIES
The
study was published by 10 authors from distinguished universities in the United States and around the world. The study reported that
Cerebellar Tonsillar Ectopia Herniation (CTE) was missed 75% of the time when the patient was scanned lying down instead of upright.
At the current rate of 1,000,000 automobile whiplash injuries in the U.S. per year, 750,000 patients each year would have the pathology
responsible for their symptoms go undetected if they were examined solely in a conventional recumbent-only MRI.
The
Upright® MRI has also demonstrated its value for patients suffering from scoliosis. Scoliosis patients typically have been subjected
to routine x-ray exams for years and must be imaged upright for an adequate evaluation of their scoliosis. Because the patient must be
standing for the exam, an x-ray machine has been the only modality that could provide that service. The Upright® MRI is the only
MRI scanner that allows the patient to stand during the MRI exam. Fonar has developed a new RF receiver and scanning protocol that for
the first time allows scoliosis patients to obtain diagnostic pictures of their spines without the risks of x-rays. A study by the National
Cancer Institute (2000) of 5,466 women with scoliosis reported a 70% increase in breast cancer resulting from 24.7 chest x-rays these
patients received on average in the course of their scoliosis treatment.
Other
important new applications are Upright® imaging of the pelvic floor and abdomen to image prolapses and inguinal hernias. Fonar has
also developed the first non-invasive method to image the prostate: the patient simply sits on a flat, seat-like coil.
The
Upright® MRI is also the world’s most non-claustrophobic whole-body MRI scanner. Frequently, patients can simply walk into
the magnet, stand or sit for their scans and then walk out. The magnet’s front-open and top-open design provides an unprecedented
degree of comfort because there is nothing in front of the patient’s face except a large (42”) flat-screen TV that is mounted
on the wall. The default position for the bed is a tilt back of six degrees that minimizes patient motion. Special RF receiver coil fixtures,
a patient seat, Velcro straps, and transpolar stabilizing bars are also used to keep the patient comfortable and motionless throughout
the scanning process.
Full-range-of-motion
studies of the joints in multiple directions are possible, an especially useful feature for sports injuries. Full range of motion cines,
or movies, of the lumbar spine can also be achieved under full body weight.
The
Fonar Upright® MRI operates at a significantly higher magnetic field strength than earlier open MRIs that preceded it, and, therefore,
benefits from more of the MRI image-producing signal needed to make high-quality MRI images.
Fonar
maximizes image quality through an optimal combination of image signal to noise (S/N) and contrast-to noise (C/N) ratios. Technical improvements
incorporated into the scanner design include increased image processing speed, high-S/N Organ Specific(TM) RF receiver coils, high performance
front-end electronics featuring high-speed, wide-dynamic-range analog-to-digital conversion and a miniaturized ultra-low-noise pre-amplifier,
high-speed automatic tuning, bandwidth-optimized pulse sequences, multi-bandwidth sequences, and off-center FOV imaging capability.
FONAR
CORPORATION AND SUBSIDIARIES
In
addition to the signal-to-noise ratio, however, a major determinant of image quality that must be considered is contrast, the quality
that enables reading physicians to clearly distinguish adjacent, and sometimes minute, anatomical structures from their surroundings.
This quality is measured by contrast-to-noise ratios (C/N). Unlike S/N, which increases with increasing field strength, relaxometry studies
have shown that C/N peaks in the mid-field range and actually falls off precipitously at higher field strengths. The Upright® MRI
scanners operate squarely in the optimum C/N range.
FONAR’s
scanners are equipped with a variety of software features which enhance versatility and diagnostic capability. For example, SMART™
scanning allows for same-scan customization of multi-slice scans, each slice with its own thickness, resolution, angle and position.
This is an important feature for scanning parts of the body that include small-structure sub-regions requiring finer slice parameters.
There is also Multi-Angle Oblique™ (MAO) imaging, and oblique imaging.
During
fiscal 2022, sales of our Upright® MRI scanners accounted for approximately 0.1% of our total revenues and 0.8% of our medical equipment
revenues, as compared to 0.8% of total revenues and 10.0% of medical equipment revenues in fiscal 2021.
FONAR’s
principal marketing efforts with respect to its products have been focused on the Upright® MRI, which we believe is a particularly
unique product. It is the only MRI scanner which is both open and allows for weight-bearing imaging. We expect to continue our focus
on the Upright® MRI in the immediate future.
The
materials and components used in the manufacture of our products (circuit boards, computer hardware components, electrical components,
steel and plastic) are generally available at competitive prices. We have not had difficulty acquiring such materials.
PRODUCT
MARKETING
The
principal markets for the Company’s scanners are private diagnostic imaging centers and hospitals.
We
use internal personnel and independent manufacturer’s representatives for domestic and foreign markets. None of Fonar’s competitors
are entitled or been licensed to make the Fonar Upright® MRI scanner.
Fonar’s
Website includes interactive product information for interested customers.
During
fiscal 2022 and previously sales were made to foreign customers. CEO Matthias Schulz of Medserena, Fonar’s principal foreign sales
representative and distributor, has said, “The large number of requests coming from our physicians in Germany are arising because
of the special medical need for FONAR’s unique technology. This is in spite of an intensely active MRI market in Germany, where
there are already many conventional lie-down MRIs installed.”
FONAR
CORPORATION AND SUBSIDIARIES
Fonar’s
marketing strategy has been designed to reach key purchasing decision makers with information concerning the Upright® MRI. This
has led to many inquiries and to some sales of the Upright® MRI scanner and is intended to increase Fonar’s presence in the
medical market. Fonar focuses on four target audiences: neurosurgeons, orthopaedic surgeons, radiologists and physicians in general.
| 1) |
|
Neurosurgeons
and Orthopaedic Surgeons: These are the surgeons who can most benefit from the superior diagnostic benefits of the Fonar Upright®
MRI with its Multi-Position® MRI diagnostic ability. |
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|
| 2) |
|
Radiologists:
These physicians can now offer a new Multi-Position®, weight-bearing MRI modality to their referring physicians. |
| |
|
|
| 3) |
|
All
Physicians: The vast number of doctors who send patients for MRI’s need to be aware of the diagnostic advantages of the Fonar
Upright® Multi-Position™. |
Our
advertising for Fonar and HMCA re-enforces the unique value provided by Fonar MRI scanners. We have increased internet awareness of our
product by driving patient traffic to the Upright® scanning centers we manage via the Fonar website (www.fonar.com) as well as by
creating Websites for each HMCA location. These websites give prospective customers of Upright® MRI scanners a view of operating
Upright® MRI centers and highlight the benefits of using an Upright® MRI scanner. A complete list of the sites managed by HMCA
can be found at HMCA’s website, hmca.com.
SERVICE
AND UPGRADES FOR MRI SCANNERS
Our
customer base of installed scanners has been and will continue to be an additional source of income, independent of direct sales.
Income
is generated from the installed base in two principal areas, namely, service and upgrades. Service and maintenance revenues from our
external installed base were approximately $7.7 million in both fiscal 2022 and fiscal 2021. Our objective is to maintain service revenues
at present levels or better, based on the longevity of the technology, and the refurbishments and upgrades which keep the scanners competitive
with the latest techniques.
We
also anticipate that our scanners will result in upgrades income in future fiscal years. The potential for upgrades income, originates
in the versatility and productivity of the Upright® Imaging technology. New medical uses for MRI technology are constantly being
discovered and are anticipated for the Upright® Imaging technology as well. New features can often be added to the scanner by the
implementation of little more than versatile new software packages, which when coupled with hardware upgrades can add years of useful
life to the scanner.
RESEARCH
AND DEVELOPMENT
During
the fiscal year ended June 30, 2022, we incurred expenditures of $1,494,181, none of which were capitalized, on research and development,
as compared to $1,635,979, none of which were capitalized, during the fiscal year ended June 30, 2021.
FONAR
CORPORATION AND SUBSIDIARIES
Research
and development activities have focused principally on software improvements to the user interface of the MRI scanner. The Windows-based
Sympulse™ platform controls all of the functions of the Upright® scanner except those of the versatile, multi-position patient
table. Separate, dedicated, motion-control software is used to maneuver the Upright® bed, and development of this software is ongoing
as well.
While
software improvements to the user interface are important in their own right, significant value is added to the MRI scanner by the modification
of existing protocols for examining various parts of the body, and the development of new protocols that utilize new underlying capabilities
of the pulse sequence software. Over time, FONAR users have become accustomed to the steady improvement in the recommended clinical protocols
that accompany new software releases. More significantly, in recent years we have seen increasing adoption of FONAR-recommended clinical
protocols over those developed on site. This is a testament to the superior image quality they produce in attractively short scan times.
The
development of clinically practical scan protocols and software depends on close contact between research and development scientists
and engineers, and end users. That close contact is facilitated in part by the relationship with HMCA and the scanning centers. In addition
to that collaboration, R&D staff have pursued a variety of novel and Upright® MRI-specific research projects. It is anticipated
that these will ultimately lead to new applications that are made available to existing customers as upgrade add-ons to their machines.
For example, phase-contrast imaging techniques originally developed for angiography have recently been applied to cerebro-spinal fluid
(CSF) flow. Analysis of CSF flow in upright and recumbent postures may prove to be of significant value in the evaluation of a variety
of disorders.
BACKLOG
Our
backlog of unfilled orders at September 8, 2022 was approximately $844,000, as compared to $62,000 at September 15, 2021. 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.
FONAR
CORPORATION AND SUBSIDIARIES
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, 2022, 223 patents had been issued
to Fonar, and approximately 10 patents were pending. A number of Fonar’s existing patents specifically relate to protecting Fonar’s
position in the Upright MRI market. The patents further enhance Dr. Damadian’s pioneer patent, the 1974 Patent, that initiated
the MRI industry and provided the original invention of MRI scanning. The terms of the patents in Fonar’s portfolio extend to various
times.
We
also have patent cross-licensing agreements with other MRI manufacturers. We have not licensed, however, any technology relating to Upright®
MRI scanning.
PRODUCT
COMPETITION
MRI
SCANNERS
MRI
takes advantage of the nuclear magnetic resonance signal elicited from the body’s tissues and the exceptional sensitivity of this
signal for detecting disease discovered by Fonar. Much of the serious disease of the body occurs in the soft tissue of vital organs.
The maximum contrast available by x-ray with which to discriminate disease is 4%. Brain cancers differ from surrounding healthy brain
by only 1.6% while the contrast in the brain by MRI is 25 times greater at 40%. X-ray contrasts among the body’s soft tissues are
maximally 4%. Their contrast by MRI is 32.5 times greater (130%).
The
soft tissue contrasts with which to distinguish cancers on images by MRI are up to 180%. In the case of cancer these contrasts can be
even more marked making cancers readily visible and detectable anywhere in the body. This is because the nuclear resonance signals from
the body’s normal soft tissue vital organs, differ so dramatically from each other (e.g. small intestine 257 milliseconds, brain
595 milliseconds). Liver cancer and healthy liver signals differ by 180% for example.
A
majority of the MRI scanners in use in hospitals and outpatient facilities and at mobile sites in the United States are based on high
field (1.5 - 3.0 Tesla) air core superconducting magnet technology.
FONAR
CORPORATION AND SUBSIDIARIES
Open
MRIs manufactured by Fonar’s competitors, are recumbent-only machines based on Fonar’s original iron-frame vertical magnetic
field magnet design. These systems have been manufactured and sold by many of our largest competitors over the years. They generally
operate at low field strengths (0.2 - 0.35 Tesla). Their prevalence in the marketplace has led to the perception in the medical community
that Open MRIs are useful only for anxious and claustrophobic patients, that the Open MRI’s image quality is poor, and that the
scan times are long. Recently our competitors have introduced higher field strength Open MRI products (0.5 – 1.2 Tesla). Significantly
better imaging performance (especially at 1.2 T) compared to the low field strength systems, is beginning to change that perception.
However, Fonar continues to maintain its competitive advantage at 0.6 Tesla due to our front-open non-claustrophobic configuration in
which there is nothing in front of the patient’s face, and our unique ability to scan patients in weight-bearing positions. It
is also noteworthy that our horizontal transaxial magnetic field allows the Upright MRI, in contrast to the recumbent-only Open MRIs,
to use the same flat planar-style radiofrequency receiver coil as the high-field MRI systems to image the lumbar and thoracic spine.
The
Upright MRI uses the same configuration RF receiver coil as a high-field MRI system to image the spine other Open MRIs cannot do this.
(This is because of the rule in MRI that the axis of symmetry of the RF receiver coil should be perpendicular to the direction of the
main magnetic field). The upright patient sits comfortably with his back against a flat (“planar”) RF receiver coil in our
horizontal transaxial magnetic field. In contrast, the vertical magnetic field in the recumbent-only Open MRI precludes the use of this
type of receiver coil.
Relative
to the high-field systems, the Upright MRI has two major competitive advantages:
Sometimes
patient positioning is more consequential than a small increase in the image resolution and decrease in the scan time. As it is critical
for physicians to not “miss” anything in the images, they recognize that the position-dependent pathology visualized with
the Upright MRI will be invisible (“missed”) if their patients are scanned at a higher field strength.
Image
artifacts arising from metal implants such as surgical screws are diminished with the 0.6 Tesla Upright MRI compared to those from the
high-field MRIs. It is well known that such artifacts get smaller as the MRI magnet’s field strength is reduced, so the anatomy
adjacent to implanted hardware will be less obscured with the Upright MRI. This is particularly valuable for surgeons referring their
postoperative patients for diagnostic imaging studies.
Fonar
faces competition within the MRI industry from such firms as General Electric Company, Philips N.V., Toshiba Corporation, Hitachi Corporation
and Siemens A.G. Most competitors have marketing and financial resources more substantial than those available to us. They have in the
past, and may in the future, heavily discount the sales price of their scanners. Such competitors sell both high field air core superconducting
MRI scanners and iron frame products. Fonar’s original iron frame design, ultimately imitated by Fonar’s competitors to duplicate
Fonar’s origination of “Open” MRI magnets, gave rise to current patent protected Upright® MRI technology with
the result that Fonar today is the unique and only supplier of the highest field MRI magnets (0.6 Tesla) that are not superconducting,
do not use liquid helium and are not therefore susceptible to severe consequences and downtime cause by a system quench.
FONAR
CORPORATION AND SUBSIDIARIES
The
iron frame, because it controls the magnetic lines of force and places them where wanted and removes them from where not wanted, provides
a more versatile magnet design than is possible with air core magnets. Air core magnets contain no iron but consist entirely of turns
of current carrying wire.
Fonar
expects to be the leader in weight-bearing and positional MRI for providing dynamic visualization of body parts including the spine and
extremities.
OTHER
IMAGING MODALITIES
Fonar’s
MRI scanners also compete with other diagnostic imaging systems, all of which are based upon the ability of energy waves to penetrate
human tissue and to be detected by either photographic film or electronic devices for presentation of an image on a display monitor.
Three different kinds of energy waves - X-ray, gamma and sound - are used in medical imaging techniques which compete with MRI medical
scanning, the first two of which involve exposing the patient to potentially harmful radiation. These other imaging modalities compete
with MRI products on the basis of specific applications.
X-rays
are the most common energy source used in imaging the body and are employed in three imaging modalities:
| 1. | Conventional
X-ray systems, the oldest method of imaging, are typically used to image bones and teeth.
The image resolution of adjacent structures that have high contrast, such as bone adjacent
to soft tissue, is excellent, while the discrimination between soft tissue organs is poor
because of the nearly equivalent penetration of x-rays. |
| 2. | Computerized
Tomography, also referred to as “CT”, systems couple computers to x-ray instruments
to produce cross-sectional images of particular large organs or areas of the body. The CT
scanner addresses the need for images, not available by conventional radiography, that display
anatomic relationships spatially. However, CT images are generally limited to the transverse
plane and cannot readily be obtained in the two other planes, sagittal and coronal. Improved
picture resolution is available at the expense of increased exposure to x-rays from multiple
projections. Furthermore, the pictures obtained by this method are computer reconstructions
of a series of projections and, once diseased tissue has been detected, CT scanning cannot
be focused for more detailed pictorial analysis or obtain a chemical analysis. |
| 3. | Digital
radiography systems add computer image processing capability to conventional x-ray systems.
Digital radiography can be used in a number of diagnostic procedures which provide continuous
imaging of a particular area with enhanced image quality and reduced patient exposure to
radiation. |
FONAR
CORPORATION AND SUBSIDIARIES
| 4. | Nuclear
medicine systems, which are based upon the detection of gamma radiation generated by radioactive
pharmaceuticals introduced into the body, are used to provide information concerning soft
tissue and internal body organs and particularly to examine organ function over time. |
| 5. | Ultrasound
systems emit, detect and process high frequency sound waves reflected from organ boundaries
and tissue interfaces to generate images of soft tissue and internal body organs. Although
the images are substantially less detailed than those obtainable with x-ray methods, ultrasound
is generally considered harmless and therefore has found particular use in imaging the pregnant
uterus. |
| 6. | X-ray
machines, ultrasound machines, digital radiography systems and nuclear medicine compete with
the MRI scanners by offering significantly lower price and space requirements. However, Fonar
believes that the utility of the images produced by its MRI scanners is generally superior
to the utility of the images produced by those other methodologies. |
GOVERNMENT
REGULATION
FDA
Regulation
The
Food and Drug Administration in accordance with Title 21 of the Code of Federal Regulations regulates the manufacturing and marketing
of Fonar’s MRI scanners. The regulations can be classified as either pre-market or post-market. The pre-market requirements include
obtaining marketing clearance, proper device labeling, establishment registration and device listing. Once the products are on the market,
Fonar must comply with post-market surveillance controls. These requirements include the Quality Systems Regulation, or “QSR”,
also known as Current Good Manufacturing Practices or CGMPs, and Medical Device Reporting, also referred to as MDR regulations. The QSR
is a quality assurance requirement that covers the design, packaging, labeling and manufacturing of a medical device. The MDR regulation
is an adverse event-reporting program.
Classes
of Products
Under
the Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetic Act, all medical devices are classified by the FDA into
one of three classes. A Class I device is subject only to general controls, such as labeling requirements and manufacturing practices;
a Class II device must comply with certain performance standards established by the FDA; and a Class III device must obtain pre-market
approval from the FDA prior to commercial marketing. Fonar’s products are Class II devices. Class II devices are subject to “General
Controls”; General Controls include:
| 1. | Establishment
registration of companies which are required to register under 21 CFR Part 807.20, such as
manufacturers, distributors, re-packagers and re-labelers. |
FONAR
CORPORATION AND SUBSIDIARIES
| 2. | Medical
device listing with FDA of devices to be marketed. |
| 3. | Manufacturing
devices in accordance with the Current Good Manufacturing Practices Quality System Regulation
in 21 CFR Part 820. |
| 4. | Labeling
devices in accordance with labeling regulations in 21 CFR Part 801 or 809. |
| 5. | Submission
of a Premarket Notification, pursuant to 510(k), before marketing a device. |
In
addition to complying with general controls, Class II devices are also subject to special controls. Special controls may include special
labeling requirements, guidance documents, mandatory performance standards and post-market surveillance.
On
October 3, 2000 Fonar received FDA clearance for the Upright® MRI under the name “Indomitable”.
Premarketing
Submission
Each
person who wants to market Class I, II and some III devices intended for human use in the U.S. must submit a 510(k) to FDA at least 90
days before marketing unless the device is exempt from 510(k) requirements. A 510(k) is a pre-marketing submission made to FDA to demonstrate
that the device to be marketed is as safe and effective, that is, substantially equivalent, SE, to a legally marketed device that is
not subject to pre-market approval, PMA. Applicants must compare their 510(k) device to one or more similar devices currently on the
U.S. market and make and support their substantial equivalency claims.
The
FDA is committed to a 90-day clearance after submission of a 510(k), provided the 510(k) is complete and there is no need to submit additional
information or data.
The
510(k) is essentially a brief statement and description of the product. As Fonar’s scanner products are Class II products, there
are no pre-market data requirements.
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
FONAR
CORPORATION AND SUBSIDIARIES
The
Quality Management System is applicable to the design, manufacture, administration of installation and servicing of magnetic resonance
imaging scanner systems. The FDA has authority to conduct detailed inspections of manufacturing plants, to establish Good Manufacturing
Practices which must be followed in the manufacture of medical devices, to require periodic reporting of product defects and to prohibit
the exportation of medical devices that do not comply with the law.
Medical
Device Reporting Regulation
Manufacturers
must report all MDR reportable events to the FDA. Each manufacturer must review and evaluate all complaints to determine whether the
complaint represents an event which is required to be reported to FDA. Section 820.3(b) of the Quality Systems regulation defines a complaint
as, “any written, electronic or oral communication that alleges deficiencies related to the identity, quality, durability, reliability,
safety, effectiveness, or performance of a device after it is released for distribution.”
A
report is required when a manufacturer becomes aware of information that reasonably suggests that one of their marketed devices has or
may have caused or contributed to a death, serious injury, or has malfunctioned and that the device or a similar device marketed by the
manufacturer would be likely to cause or contribute to a death or serious injury if the malfunction were to recur.
Malfunctions
are not reportable if they are not likely to result in a death, serious injury or other significant adverse event experience.
A
malfunction which is or can be corrected during routine service or device maintenance still must be reported if the recurrence of the
malfunction is likely to cause or contribute to a death or serious injury if it were to recur.
We
have established and maintained written procedures for implementation of the MDR regulation. These procedures include internal systems
that:
provide
for timely and effective identification, communication and evaluation of adverse events;
provide
a standardized review process and procedures for determining whether or not an event is reportable; and
provide
procedures to insure the timely transmission of complete reports.
These
procedures also include documentation and record keeping requirements for:information that was evaluated to determine if an event was
reportable;
all
medical device reports and information submitted to the FDA;
any
information that was evaluated during preparation of annual certification reports; and
systems
that ensure access to information that facilitates timely follow up and inspection by FDA.
FONAR
CORPORATION AND SUBSIDIARIES
FDA
Enforcement
FDA
may take the following actions to enforce the MDR regulation:
FDA-Initiated
or Voluntary Recalls
Recalls
are regulatory actions that remove a hazardous, potentially hazardous, or a misbranded product from the marketplace. Recalls are also
used to convey additional information to the user concerning the safe use of the product. Either FDA or the manufacturer can initiate
recalls.
There
are three classifications, i.e., I, II, or III, assigned by the Food and Drug Administration to a particular product recall to indicate
the relative degree of health hazard presented by the product being recalled.
Class
I
Is
a situation in which there is a reasonable probability that the use of, or exposure to, a violative product will cause serious adverse
health consequences or death.
Class
II
Is
a situation in which use of, or exposure to, a violative product may cause temporary or medically reversible adverse health consequences
or where the probability of serious adverse health consequences is remote.
Class
III
Is
a situation in which use of, or exposure to, a violative product is not likely to cause adverse health consequences.
Fonar
has initiated six voluntary recalls. Five of the recalls were Class II and one was Class III. The recalls involved making minor corrections
to the product in the field. Frequently, corrections which are made at the site of the device are called field corrections as opposed
to recalls.
Civil
Money Penalties
The
FDA, after an appropriate hearing, may impose civil money penalties for violations of the FD&C Act that relate to medical devices.
In determining the amount of a civil penalty, FDA will take into account the nature, circumstances, extent, and gravity of the violations,
the violator’s ability to pay, the effect on the violator’s ability to continue to do business, and any history of prior
violations.
Warning
Letters
FDA
issues written communications to a firm, indicating that the firm may incur more severe sanctions if the violations described in the
letter are not corrected. Warning letters are issued to cause prompt correction of violations that pose a hazard to health or that involve
economic deception. The FDA generally issues the letters before pursuing more severe sanctions.
FONAR
CORPORATION AND SUBSIDIARIES
Seizure
A
seizure is a civil court action against a specific quantity of goods which enables the FDA to remove these goods from commercial channels.
After seizure, no one may tamper with the goods except by permission of the court. The court usually gives the owner or claimant of the
seized merchandise approximately 30 days to decide a course of action. If they take no action, the court will recommend disposal of the
goods. If the owner decides to contest the government’s charges, the court will schedule the case for trial. A third option allows
the owner of the goods to request permission of the court to bring the goods into compliance with the law. The owner of the goods is
required to provide a bond or, security deposit, to assure that they will perform the orders of the court, and the owner must pay for
FDA supervision of any activities by the company to bring the goods into compliance.
Citation
A
citation is a formal warning to a firm of intent to prosecute the firm if violations of the FD&C Act are not corrected. It provides
the firm an opportunity to convince FDA not to prosecute.
Injunction
An
injunction is a civil action filed by FDA against an individual or company. Usually, FDA files an injunction to stop a company from continuing
to manufacture, package or distribute products that are in violation of the law.
Prosecution
Prosecution
is a criminal action filed by FDA against a company or individual charging violation of the law for past practices.
Foreign
and Export Regulation
We
obtain approvals as necessary in connection with the sales of our products in foreign countries. In some cases, FDA approval has been
sufficient for foreign sales as well. Our standard practice has been to require either the distributor or the customer to obtain any
such foreign approvals or licenses which may be required.
Legally
marketed devices that comply with the requirements of the Food Drug & Cosmetic Act require a Certificate to Foreign Government issued
by the FDA for export. Other devices that do not meet the requirements of the FD&C Act but comply with the laws of a foreign government
require a Certificate of Exportability issued by the FDA. All products which we sell have FDA clearance and would fall into the first
category.
FONAR
CORPORATION AND SUBSIDIARIES
Foreign
governments have differing requirements concerning the import of medical devices into their respective jurisdictions. The European Union,
also referred to as EU, has some essential requirements described in the EU’s Medical Device Directive, also referred to as MDD.
In order to export to one of these countries, we must meet the essential requirements of the MDD and any additional requirements of the
importing country. The essential requirements are similar to some of the requirements mandated by the FDA. In addition the MDD requires
that we enlist a Notified Body to examine and assess our documentation, a Technical Construction File, and verify that the product has
been manufactured in conformity with the documentation. The notified body must carry out or arrange for the inspections and tests necessary
to verify that the product complies with the essential requirements of the MDD, including safety performance and Electromagnetic Compatibility,
also referred to as EMC. Also required is a Quality System, ISO-13485, assessment by the Notified Body. We were approved for ISO 13485
certification for its Quality Management System in April, 2003.
We
received clearance to sell the Upright® MRI scanners in the EU in May, 2002.
Other
countries require that their own testing laboratories perform an evaluation of our devices. This requires that we must bring the foreign
agency’s personnel to the USA to perform the evaluation at our expense before exporting.
Some
countries, including many in Latin America and Africa, have very few regulatory requirements, beyond FDA clearance.
To
date, Fonar has been able to comply with all foreign regulatory requirements applicable to its export sales.
PHYSICIAN
AND DIAGNOSTIC SERVICES MANAGEMENT BUSINESS
Health
Diagnostics Management, LLC (HDM) is owned by Health Management Corporation of America (70.8%) and investors (29.2%). Health Management
Corporation of America is owned 100% by Fonar Corporation. During the current fiscal year, 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.
FONAR
CORPORATION AND SUBSIDIARIES
As
of June 30, 2022, HMCA managed a total of 41 MRI scanners of which twenty-six (26) scanners are located in New York and fifteen (15)
scanners are located in Florida. For the 2022 fiscal year, the revenues HMCA recognized from the MRI facilities has increased to $89.4
million from $80.9 million in fiscal 2021. Five of the facilities in Florida are owned by HMCA subsidiaries, where the corporate practice
of medicine is permitted.
We
believe the utilization of FONAR Upright® MRI scanning systems, which are produced under the protection of our patents, accounts
for the historically robust patient volume at the scanning facilities and, most recently, our steady recovery from the effects of the
COVID-19 pandemic. During fiscal 2022, a scanner was added in New York, NY along with an additional scanner in this location, and an
additional scanner was installed in Pembroke Pines, Florida
HMCA
GROWTH STRATEGY
HMCA’s
growth strategy focuses on upgrading and expanding the existing facilities it manages and expanding the number of facilities it either
owns or manages for its clients, including new sites. In connection with improving the performance of the facilities, we have added high
field MRI scanners, extremity scanners and x-ray machines to the Upright® MRI scanners at certain of the sites where such additional
diagnostic imaging modalities are expected to produce the greatest return. In addition we plan to install two new facilities in fiscal
2023: one in New York and one in Florida.
PHYSICIAN
AND DIAGNOSTIC MANAGEMENT SERVICES
HMCA’s
services to the facilities it manages encompass substantially all of their business operations. Each facility is controlled, however,
not by HMCA, but by the physician owner, or in the case of the four Florida sites owned by HMCA subsidiaries, by the medical director.
All medical services are performed by physicians and other medical personnel under the physician-owner’s supervision. HMCA is the
management company and performs services of a non-medical nature. These services include:
1.
Offices and Equipment. HMCA identifies, negotiates leases for and/or provides office space and equipment to its clients. This includes
technologically sophisticated medical equipment. HMCA also provides improvements to leaseholds, assistance in site selection and advice
on improving, updating, expanding and adapting to new technology.
2.
Personnel. HMCA staffs all the non-medical positions of its clients with its own employees, eliminating the client’s need to interview,
train and manage non-medical employees. HMCA processes the necessary tax, insurance and other documentation relating to employees.
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.
FONAR
CORPORATION AND SUBSIDIARIES
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.
The
exceptions to this general model of operation are five of the facilities located in Florida. These Florida facilities are owned by limited
liability companies which, as our subsidiaries, conduct their operations directly and bill and collect their fees from the patients and
third party payors.
The
facilities enter into contracts with third party payors, including managed care companies. None of HMCA’s clients, however, participate
in any capitated plans or other risk sharing arrangements. Capitated plans are those HMO programs where the provider is paid a flat monthly
fee per patient.
The
management fees payable by the facilities to HMCA are flat monthly fees. In fiscal 2021, the aggregate amount of management fees was
$4,897,720 per month. In fiscal 2022, the aggregate amount of management fees was $4,865,443 per month.
Fees
under the management agreements are subject to adjustment by mutual agreement on an annual basis.
Dr.
Damadian owns three HMCA-managed MRI facilities in Florida. The fees for these three sites in Florida owned by Dr. Damadian are flat
monthly fees which are subject to adjustment by mutual agreement on an annual basis. In fiscal 2022, the aggregate monthly amount of
management fees payable to HMCA by these sites was $995,825 as compared to $931,561 in fiscal 2021.
The
Florida facilities owned by HMCA subsidiaries directly bill their patients or the patients’ insurance carriers. Patient fees net
of provision for bad debts were $29,582,238 in fiscal 2022 as compared to $23,307,389 in fiscal 2021.
FONAR
CORPORATION AND SUBSIDIARIES
HMCA
had previously contracted with an outside billing company (located in Melville, New York) to perform billing and collection for their
clients’ No-Fault and Workers’ Compensation business. The fixed monthly fees were $85,000 for HMCA in part of fiscal 2021.
This contract was terminated as of January 1, 2021. The Company also entered into a one year renewable agreement to provide IT services
to the billing company for a monthly fee of $23,884.
HMCA
MARKETING
HMCA’s
marketing strategy is to expand the business and improve the facilities which it manages. HMCA is seeking to increase the number of locations
of those facilities where market conditions are promising and to promote growth of our clients’ and Florida subsidiaries’
patient volume and revenue.
DIAGNOSTIC
IMAGING FACILITIES
Diagnostic
imaging facilities managed by HMCA provide diagnostic imaging services to patients referred by physicians. The facilities are operated
in a manner which eliminates the admission and other administrative inconveniences of in-hospital diagnostic imaging services. Imaging
services are performed in an outpatient setting by trained medical technologists under the direction of physicians. Following diagnostic
procedures, the images are reviewed by the interpreting physicians who prepare reports of these tests and their findings. The vast majority
of reports for the New York facilities are transcribed by HMCA personnel and the remainder are outsourced to professional transcription
services. Reports for the Florida facilities are outsourced to professional transcription services.
HMCA
develops marketing programs and educational programs in an effort to establish and maintain referring physician relationships for our
clients and Florida subsidiaries.
Managed
care providers are an important factor in the diagnostic imaging industry. To further its position, HMCA is seeking to expand the imaging
modalities offered at its managed and owned diagnostic imaging facilities. Five facilities in New York and seven facilities in Florida
have two or more MRI scanners. One facility in New York and two in Florida also perform X-rays. During fiscal 2022, a second MRI was
installed at our Pembroke Pines, Florida facility and in one of our New York, NY facilities.
REIMBURSEMENT
HMCA’s
clients receive reimbursements for their services through Medicare, Medicaid, managed care, private commercial insurance, third party
administrators, Workers’ Compensation, No-Fault and other insurance.
Medicare
FONAR
CORPORATION AND SUBSIDIARIES
The
Medicare program provides reimbursement for hospitalization, physician, diagnostic and certain other services to eligible persons 65
years of age and over and certain other individuals. Providers are paid by the federal government in accordance with regulations promulgated
by the Department of Health and Human Services, HSS, and generally accept the payment with nominal deductible and co-insurance amounts
required to be paid by the service recipient, as payment in full. Hospital inpatient services are reimbursed under a prospective payment
system. Hospitals receive a specific prospective payment for inpatient treatment services based upon the diagnosis of the patient.
Under
Medicare’s prospective payment system for hospital outpatient services, or OPPS, a hospital is paid for outpatient services on
a rate per service basis that varies according to the ambulatory payment classification group, or APC, to which the service is assigned
rather than on a hospital’s costs. Each year the Centers for Medicare and Medicaid Services, or CMS, publishes new APC rates that
are determined in accordance with the promulgated methodology.
Services
provided in non-hospital based freestanding facilities are paid under the Medicare Physician Fee Schedule, or MPFS. All of HMCA’s
clients are presently in this category. The MPFS is updated on an annual basis and sometimes modified more frequently.
We
have experienced reimbursement reductions for radiology services provided to Medicare beneficiaries, including reductions pursuant to
the Deficit Reduction Act, or DRA.
CMS’
2010 regulatory changes to the MPFS included a downward adjustment to services primarily involving the technical component rather than
the physician work component, by adjusting downward malpractice payments for these services. These adjustments have been phased in over
a four year period. For our fiscal year ended June 30, 2022, Medicare revenues represented approximately 3.2% of the revenues for HMCA’s
clients and subsidiaries as compared to 3.4% for the fiscal year ended June 30, 2021.
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 2022, approximately 0.07% of the revenues
of HMCA’s clients were attributable to Medicaid, as compared to 0.09% in fiscal 2021. Four of the Florida facilities (those owned
by HMCA subsidiaries) do not participate in Medicaid.
Managed
Care and Private Insurance.
FONAR
CORPORATION AND SUBSIDIARIES
Health
Maintenance Organizations, or HMO’s, Preferred Provider Organizations, or PPOs, and other managed care organizations attempt to
control the cost of healthcare services by a variety of measures, including imposing lower payment rates, preauthorization requirements,
limiting services and mandating less costly treatment alternatives. Managed care contracting is competitive and reimbursement schedules
in many cases can be at or below Medicare reimbursement levels. Some managed care organizations have reduced or otherwise limited, and
other managed care organizations may reduce or otherwise limit, reimbursement in response to reductions in government reimbursement.
These reductions could have an adverse impact on our financial condition and results of operations. These reductions have been, and any
future reductions may be, similar to the reimbursement reductions previously proposed.
HMCA
COMPETITION
The
physician and diagnostic management services field is highly competitive. A number of large hospitals have acquired medical practices
and this trend may continue. HMCA expects that more competition will develop. Many competitors have greater financial and other resources
than HMCA.
With
respect to the diagnostic imaging facilities managed by HMCA, the outpatient diagnostic imaging industry is highly competitive. Competition
focuses primarily on attracting physician referrals at the local market level and increasing referrals through relationships with managed
care organizations, as well as emphasizing to potential referral sources the advantages of Upright® MRI scanning. HMCA believes
that principal competitors for the diagnostic imaging centers are hospitals and independent or management company-owned imaging centers.
Competitive factors include quality and timeliness of test results, ability to develop and maintain relationships with managed care organizations
and referring physicians, type and quality of equipment, facility location, convenience of scheduling and availability of patient appointment
times. HMCA believes that it will be able to effectively meet the competition in the outpatient diagnostic imaging industry with the
Fonar Upright® MRI scanners and strategically placed high field MRI scanners at its facilities.
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
FONAR
CORPORATION AND SUBSIDIARIES
The
federal False Claims Act and, in particular, the False Claims Act’s “qui tam” or “whistleblower” provisions
allow a private individual to bring actions in the name of the government alleging that a defendant has made false claims for payment
from federal funds. After the individual has initiated the lawsuit the government must decide whether to intervene in the lawsuit and
to become the primary prosecutor. If the government declines to join the lawsuit, the individual may choose to pursue the case alone,
although the government must be kept apprised of the progress of the lawsuit, and may intervene later. Whether or not the federal government
intervenes in the case, it will receive the majority of any recovery.
When
an entity is determined to have violated the federal False Claims Act, it must pay three times the actual damages sustained by the government,
plus mandatory civil penalties for each separate false claim and the government’s attorneys’ fees. Liability arises when
an entity knowingly submits, or causes someone else to submit, a false claim for reimbursement to the federal government. The False Claims
Act defines the term “knowingly” broadly, though simple negligence will not give rise to liability under the False Claims
Act. Examples of the other actions which may lead to liability under the False Claims Act are set forth below:
Failure
to comply with the many technical billing requirements applicable to our Medicare and Medicaid business.
Failure
to comply with the prohibition against billing for services ordered or supervised by a physician who is excluded from any federal healthcare
program, or the prohibition against employing or contracting with any person or entity excluded from any federal healthcare program.
Failure
to comply with the Medicare physician supervision requirements for the services we provide, or the Medicare documentation requirements
concerning physician supervision.
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
FONAR
CORPORATION AND SUBSIDIARIES
Under
the federal Self-Referral Law, also referred to as the “Stark Law”, which is applicable to Medicare and Medicaid patients,
and the self-referral laws of various States, certain health practitioners, including physicians, chiropractors and podiatrists, are
prohibited from referring their patients for the provision of designated health services, including diagnostic imaging and physical therapy
services, to any entity with which they or their immediate family members have a financial relationship, unless the referral fits within
one of the specific exceptions in the statutes or regulations. The federal government has taken the position that a violation of the
federal Stark Law is also a violation of the Federal False Claims Act. Statutory exceptions under the Stark Law include, among others,
direct physician services, in-office ancillary services rendered within a group practice, space and equipment rental and services rendered
to enrollees of certain prepaid health plans. Some of these exceptions are also available under the State self-referral laws. HMCA believes
that it and its clients are in compliance with these laws.
Anti-kickback
Regulation
We
are subject to federal and state laws which govern financial and other arrangements between healthcare providers. These include the federal
anti-kickback statute which, among other things, prohibits the knowing and willful solicitation, offer, payment or receipt of any remuneration,
direct or indirect, in cash or in kind, in return for or to induce the referral of patients for items or services covered by Medicare,
Medicaid and certain other governmental health programs. Under PPACA, knowledge of the anti-kickback statute or the specific intent to
violate the law is not required. Violation of the anti-kickback statute may result in civil or criminal penalties and exclusion from
the Medicare, Medicaid and other federal healthcare programs, and according to PPACA, now provides a basis for liability under the False
Claims Act. In addition, it is possible that private parties may file “qui tam” actions based on claims resulting from relationships
that violate the anti-kickback statute, seeking significant financial rewards. Many states have enacted similar statutes, which are not
limited to items and services paid for under Medicare or a federally funded healthcare program. Neither HMCA nor its clients engage in
this practice.
In
fiscal 2022, approximately 3.2% of the revenues of HMCA’s clients were attributable to Medicare and 0.07% were attributable to
Medicaid. In fiscal 2021, approximately 3.4% of the revenues of HMCA’s clients were attributable to Medicare and 0.09% 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.
FONAR
CORPORATION AND SUBSIDIARIES
The
DRA also codified the reduction in reimbursement for multiple images on contiguous body parts previously announced by CMS, the agency
responsible for administering the Medicare program. In November 2005, CMS announced that it would pay 100% of the technical component
of the higher priced imaging procedure and 50% of the technical component of each additional imaging procedure for imaging procedures
involving contiguous body parts within a family of codes when performed in the same session. CMS had indicated that it would phase in
this 50% rate reduction over two years, so that the reduction was 25% for each additional imaging procedure in 2006 and another 25% reduction
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.
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.
FONAR
CORPORATION AND SUBSIDIARIES
We
believe that we are in compliance with the current HIPAA requirements, as amended by HITECH, together with other legislation and regulations,
and comparable state laws, but we anticipate that we may encounter certain costs associated with future compliance. Moreover, we cannot
guarantee that enforcement agencies or courts will not make interpretations of the HIPAA standards that are inconsistent with ours, or
the interpretations of our contracted radiology practices or their affiliated physicians. A finding of liability under the HIPAA standards
may result in significant criminal and civil penalties. Noncompliance also may result in exclusion from participation in government programs,
including Medicare and Medicaid. These actions could have a material adverse effect on our business, financial condition, and results
of operations.
Civil
Money Penalty Law and Other Federal Statutes
The
Civil Money Penalty, or CMP, law covers a variety of practices. It provides a means of administrative enforcement of the anti-kickback
statute, and prohibits false claims, claims for medically unnecessary services, violations of Medicare participating provider or assignment
agreements and other practices. The statute gives the Office of Inspector General of the HHS the power to seek substantial civil fines,
exclusion and other sanctions against providers or others who violate the CMP prohibitions.
In
addition, in 1996, Congress created a new federal crime: healthcare fraud and false statements relating to healthcare matters. The healthcare
fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors.
A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government sponsored programs such as
the Medicare and Medicaid programs.
Certificates
of Need
Some
states require hospitals and certain other healthcare facilities and providers to obtain a certificate of need, or CON, or similar regulatory
approval prior to establishing certain healthcare operations or services, incurring certain capital projects and/or the acquisition of
major medical equipment including MRI and PET/CT systems. We are not operating in any such states.
Patient
Protection and Affordable Care Act
On
March 23, 2010, President Obama signed into law healthcare reform legislation in the form of PPACA. The implementation of this law 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
FONAR
CORPORATION AND SUBSIDIARIES
In
addition to the federal self-referral law and federal Anti-kickback statute, many States, including those in which HMCA and its clients
operate, have their own versions of self-referral and anti-kickback laws. These laws are not limited in their applicability, as are the
federal laws, to specific programs. HMCA believes that it and its clients are in compliance with these laws.
Various
States prohibit business corporations from practicing medicine. Various States, including New York, also prohibit the sharing of professional
fees or fee splitting. Consequently, in New York HMCA leases space and equipment to clients and provides clients with a range of non-medical
administrative and managerial services for agreed upon fees. Under Florida law a business entity can bill patients and third party payors
directly if that entity is properly licensed through AHCA. All of the eight facilities in Florida are licensed healthcare clinics through
AHCA.
HMCA’s
clients and subsidiaries generate revenue from patients covered by no-fault insurance and workers’ compensation programs. For the
fiscal year ended June 30, 2022 approximately 57.7% 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, 2021, approximately 55.5.% of HMCA’s clients’ receipts were from patients covered by no-fault insurance
and approximately 9.4% of HMCA’s clients’ receipts were from patients covered by workers’ compensation programs. The
foregoing numbers do not include payments from third party administrators. In the event that changes in these laws alter the fee structures
or methods of providing service, or impose additional or different requirements, HMCA could be required to modify its business practices
and services in ways that could be more costly to HMCA or in ways that decrease the revenues which HMCA receives from its clients.
Compliance
Program
We
maintain a program to monitor compliance with federal and state laws and regulations applicable to the healthcare entities. The compliance
program includes the adoption of (i) Standards of Conduct for our employees and affiliates and (ii) a process that specifies how employees,
affiliates and others may report regulatory or ethical concerns. We believe that our compliance program meets the relevant standards
provided by the Office of Inspector General of the Department of Health and Human Services.
An
important part of our compliance program consists of conducting periodic audits of various aspects of our operations and that of the
contracted radiology practices. We also assist our clients with educational programs designed to familiarize them with the regulatory
requirements and specific elements of our compliance program.
HMCA
believes that it and its clients are in compliance with applicable Federal, State and local laws. HMCA does not believe that such laws
will have any adverse material effect on its business.
EMPLOYEES
FONAR
CORPORATION AND SUBSIDIARIES
Fonar
and HMCA had approximately 484 employees as of September 12, 2022. This total number included employees engaged in production, customer
support, research and development, information technology, employees engaged in marketing and sales, billing and collection, legal and
compliance matters, as well as transcriptionists, Florida technologists, field service technicians and individuals in various administrative
positions. A significant number of employees were employed at the MRI facilities managed or owned by HMCA, primarily in administrative
positions.
ITEM
1A. RISK FACTORS
An
investment in our securities is subject to various risks, the most significant of which are summarized below.
| 1. | Reduced
Reimbursement Rates. Most of our revenues are derived from our scanning center business conducted
by HMCA. We are experiencing lower reimbursement rates from Medicare, other government programs
and private insurance companies. To date, we have been able to counter the impact of these
reductions by increasing our volume of scans notwithstanding the Covid-19 pandemic, and reducing
our operating expenses, thereby maintaining profitability in this business segment. There
is, however, no assurance that we will be able to continue to do so. |
| 2. | Demand
for MRI Scanners. The reduced reimbursement rates also affects our sales of MRI scanners
negatively. With lower revenue projections, prospective customers would demand lower prices
for scanners. Although the reduced reimbursements may not affect foreign demand, a lower
number of sales in the aggregate could reduce economies of scale and consequently, profit
margins. |
| 3. | Manufacturing
Competition. Many if not most of our competing scanner manufacturers have significantly greater
financial resources, production capacity, and other resources than we do. Such competitors
would include General Electric, Siemens, Hitachi and Phillips. Although Fonar is the only
company which can manufacture and sell the unique Stand-Up® (Upright®) MRI scanner,
potential customers must be convinced that the purchase of a Fonar scanner is their best
choice. We believe that with time, that objective will be reached, particularly with customers
scanning patients having neck, back, knee and various orthopedic issues who would benefit
from being scanned in weight-bearing positions. |
| 4. | Dependence
on Referrals. HMCA derives substantially all of its revenue, directly or indirectly, from
fees charged for the diagnostic imaging services performed at the facilities. We depend on
referrals of patients from unaffiliated physicians and other third parties to the facilities
we manage or own for the services we perform. If these physicians and other third parties
were to reduce the number of patients they refer or discontinue referring patients, scan
volumes could decrease, which would reduce our net revenue and operating margins. |
FONAR
CORPORATION AND SUBSIDIARIES
| 5. | Pressure
to Control Healthcare Costs. One of the principal objectives of health maintenance organizations
and preferred provider organizations is to control the cost of healthcare services. Healthcare
providers participating in managed care plans may be required to refer diagnostic imaging
tests to certain providers depending on the plan in which a covered patient is enrolled.
In addition, managed care contracting has become very competitive. The expansion of health
maintenance organizations, preferred provider organizations and other managed care organizations
within New York or Florida could have a negative impact on the utilization and pricing of
services performed at the facilities HMCA manages or owns to the extent these organizations
exert control over patients’ access to diagnostic imaging services, selections of the
provider of such services and reimbursement rates for those services. |
| 6. | Scanning
Facility Competition. The market for diagnostic imaging services is highly competitive. The
facilities we manage or own compete for patients on the basis of reputation, location and
the quality of diagnostic imaging services. Groups of radiologists, established hospitals,
clinics and other independent organizations that own and operate imaging equipment are the
principal competitors. |
| 7. | Eligibility
Changes to Insurance Programs. Due to potential decreased availability of healthcare through
private employers, the number of patients who are uninsured or participate in governmental
programs may increase. Healthcare reform legislation will increase the participation of individuals
in the Medicaid program in states that elect to participate in the expanded Medicaid coverage.
A shift in payor mix from managed care and other private payors to government payors or an
increase in the number of uninsured patients may result in a reduction in the rates of reimbursement
or an increase in uncollectible receivables or uncompensated care, with a corresponding decrease
in net revenue. Policies now being offered under various insurance plans are expected to
reduce demand for MRI scans as they become less affordable. Changes in the eligibility requirements
for governmental programs such as the Medicaid program and state decisions on whether to
participate in the expansion of such programs also could increase the number of patients
who participate in such programs and the number of uninsured patients. Even for those patients
who remain in private insurance plans, changes to those plans could increase patient financial
responsibility, resulting in a greater risk of uncollectible receivables. These factors and
events could have a material adverse effect on our business, financial condition, and results
of operations. |
| 8. | Possible
changes in Florida Insurance Law. In early 2019, two senate bills and one house bill in Florida
were introduced, all of them calling for the repeal of PIP and replacing PIP with $25,000
Bodily Injury Coverage and Property Damage Liability Coverage. Another Florida senate bill
was introduced that would preserve PIP but dramatically cut reimbursement rates. None of
the proposed bills made it onto the 2019 legislative agenda. During Fonar’s fiscal
2021, the Florida house and senate reached an agreement and passed similar legislation. It
was, however, vetoed by the Governor. We cannot predict whether such efforts by the Florida
legislature will continue or be successful. Currently, drivers and passengers get car damages
and PIP, paid for up to $10,000, no matter who is at fault in an accident. Drivers have to
pay an additional cost to insurance companies to pay for bodily injuries which covers them
if they are at fault. While PIP is required, coverage for bodily injury is not. |
FONAR
CORPORATION AND SUBSIDIARIES
| | Over
the past several years there have been various bills introduced by a number of Florida legislators
to eliminate PIP and instead mandate coverage including some combination of a minimum of
bodily injury and a reduced or no amount of medical payments (Medpay coverage). Eliminating
PIP would mean that the $10,000 drivers now get paid toward medical costs through their insurers
might not be there for them to pay for injured drivers. Importantly, payments would be reduced
by approximately 60% due to claims being paid at commercial rates or through legal settlements
instead of at the presently prevailing PIP fee schedule. This would negatively impact our
Florida diagnostic imaging facilities (both those we own and those we manage) with more unpaid
bills, lower reimbursement rates and elongated waiting times. To date proponents of these
changes have been unsuccessful. |
| 9. | Federal
and state privacy and information security laws. We must comply with numerous federal and
state laws and regulations governing the collection, dissemination, access, use, security
and privacy of PHI, including HIPAA and its implementing privacy and security regulations,
as amended by the federal HITECH Act. If we fail to comply with applicable privacy and security
laws, regulations and standards, properly maintain the integrity of our data, protect our
proprietary rights to our systems, or defend against cybersecurity attacks, our business,
reputation, results of operations, financial position and cash flows could be materially
and adversely affected. |
Information
security risks have significantly increased because of the proliferation of new technologies, the use of the internet and telecommunications
technologies to conduct our operations, and the increased sophistication and activities of organized crime, hackers, terrorists and other
external parties, including foreign state agents. Our operations rely on the secure processing, transmission and storage of confidential,
proprietary and other information in our computer systems and networks.
| 10. | COVID-19.
Although we believe we have taken the proper steps and made a good recovery from the impact
of the first wave of the COVID-19 virus, new strains of the disease have developed and future
variants may continue to develop. The relatively recent new variants are particularly contagious
and coupled with New York State requirements that medical employees must be vaccinated if
they care for patients, including our technicians and support staff caring for scanning patients,
has resulted in fewer available employees and adversely affected our ability to staff a full
number of shifts. The course and severity of the virus in the following months, and the ultimate
economic and medical impact it will have worldwide and at home, is uncertain. |
| 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. |
FONAR
CORPORATION AND SUBSIDIARIES
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
Fonar
and HMCA currently lease approximately 78,000 square feet of office and plant space at its principal offices in Melville, New York. The
term of the lease runs through November, 2026. Management believes that the premises will be adequate for its current needs. HMCA also
maintains office space for the Facilities owned by its subsidiaries in Florida and for its clients at the clients’ sites in New
York and Florida under leases having various terms. HMCA owns the building for the client’s premises in Tallahassee, Florida. The
Company received approval from the Suffolk County IDA on February 29, 2016 of a 50% property tax abatement, valued at $440,000, over
a 10 year period commencing January, 2017.
ITEM
3. LEGAL PROCEEDINGS.
There
are no material legal proceedings threatened or pending against the Company.
ITEM
4. MINE SAFETY DISCLOSURES.
Not Applicable
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our
Common Stock is traded in the Nasdaq SmallCap market under the National Association of Securities Dealers Automated Quotation System,
also referred to as “NASDAQ”, under the symbol FONR. The following table sets forth the high and low trades reported in NASDAQ
System for the periods shown.
FONAR
CORPORATION AND SUBSIDIARIES
| Fiscal
Quarter | |
High | |
Low |
| January
- |
| March | | |
| 2018 | | |
$ | 29.95 | | |
$ | 22.15 | |
| April
- |
| June | | |
| 2018 | | |
$ | 30.10 | | |
$ | 25.31 | |
| July
- |
| September | | |
| 2018 | | |
$ | 28.80 | | |
$ | 23.70 | |
| October
- |
| December | | |
| 2018 | | |
$ | 25.77 | | |
$ | 19.63 | |
| January |
| March | | |
| 2019 | | |
$ | 23.85 | | |
$ | 20.01 | |
| April
- |
| June | | |
| 2019 | | |
$ | 23.00 | | |
$ | 18.85 | |
| July
- |
| September | | |
| 2019 | | |
$ | 25.25 | | |
$ | 20.44 | |
| October
- |
| December | | |
| 2019 | | |
$ | 20.94 | | |
$ | 19.07 | |
| January
- |
| March | | |
| 2020 | | |
$ | 20.24 | | |
$ | 11.00 | |
| March
- |
| June | | |
| 2020 | | |
$ | 25.99 | | |
$ | 13.85 | |
| July
- |
| September | | |
| 2020 | | |
$ | 26.49 | | |
$ | 20.31 | |
| October
- |
| December | | |
| 2020 | | |
$ | 22.49 | | |
$ | 16.74 | |
| January
- |
| March | | |
| 2021 | | |
$ | 20.40 | | |
$ | 17.31 | |
| April
- |
| June | | |
| 2021 | | |
$ | 19.18 | | |
$ | 16.58 | |
| July
- |
| September | | |
| 2021 | | |
$ | 18.04 | | |
$ | 15.22 | |
| October
- |
| December | | |
| 2021 | | |
$ | 18.94 | | |
$ | 14.32 | |
| January
- |
| March | | |
| 2022 | | |
$ | 19.32 | | |
$ | 14.24 | |
| April
- |
| June | | |
| 2022 | | |
$ | 19.13 | | |
$ | 14.80 | |
| July
- |
| September
14, | | |
| 2022 | | |
$ | 15.44 | | |
$ | 13.56 | |
Performance
Graph
The
following graph compares the annual change in the Company’s cumulative total shareholder return on its Common Stock during a period
commencing on June 29, 2018 and ending on June 30, 2022 (as measured by dividing (i) the sum of (A) the cumulative amount of dividends
for the measurement period, assuming dividend reinvestment and (B) the difference between the Company’s share price at the end
and the beginning of the measurement period; by (ii) the share price at the beginning of the measurement period) with the cumulative
total return of each of: (a) the CRSP Composite Total Return Index for Nasdaq (“Nasdaq”); and (b) the CRSP Total Return Index
for Nasdaq Healthcare companies (“Nas-Hea.”) during such period, assuming a $100 investment on June 29, 2018. The stock price
performance on the graph below is not necessarily indicative of future price performance.
| Relative
Dollar Values |
| |
| TOTAL
RETURN | |
June
29, 2018 | |
June
28, 2019 | |
June
30, 2020 | |
June
30, 2021 | |
June
30, 2022 |
| Fonar
Common Stock | |
$ | 100 | | |
$ | 81 | | |
$ | 80 | | |
$ | 67 | | |
$ | 57 | |
| Nasdaq
Composite | |
$ | 100 | | |
$ | 108 | | |
$ | 137 | | |
$ | 199 | | |
$ | 152 | |
| Nasdaq
Health | |
$ | 100 | | |
$ | 103 | | |
$ | 118 | | |
$ | 163 | | |
$ | 199 | |
| Nasdaq
Medical Equipment | |
$ | 100 | | |
$ | 119 | | |
$ | 127 | | |
$ | 184 | | |
$ | 154 | |
FONAR
CORPORATION AND SUBSIDIARIES
On
September 14, 2022, we had approximately 1,006 stockholders of record of our Common Stock, 12 stockholders of record of our Class B Common
Stock, 3 stockholders of record of our Class C Common Stock and 1,155 stockholders of record of our Class A Non-voting Preferred Stock.
At
the present time, the only class of our securities for which there is a market is the Common Stock.
We
currently have a policy of retaining earnings to finance the development and expansion of our business. We expect to continue this policy
for the foreseeable future.
ITEM
6. SELECTED FINANCIAL DATA.
The
following selected consolidated financial data has been extracted from our consolidated financial statements for the five years ended
June 30, 2022. This consolidated selected financial data should be read in conjunction with our consolidated financial statements and
the related notes included in Item 8 of this form.
FONAR
CORPORATION AND SUBSIDIARIES
| STATEMENT
OF OPERATIONS For the periods ending June 30, |
| | |
2022 | |
2021 | |
2020 | |
2019 | |
2018 |
| Revenues | |
$ | 97,592,145 | | |
$ | 89,929,765 | | |
$ | 85,690,462 | | |
$ | 87,192,887 | | |
$ | 81,515,994 | |
| Cost
of | |
$ | 50,578,201 | | |
$ | 46,456,127 | | |
$ | 43,296,825 | | |
$ | 43,984,593 | | |
$ | 41,950,770 | |
| Revenues | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Research
and | |
$ | 1,494,181 | | |
$ | 1,635,979 | | |
$ | 2,025,376 | | |
$ | 1,812,347 | | |
$ | 1,755,747 | |
| Development | |
| | | |
| | | |
| | | |
| | | |
| | |
| Expenses | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Basic
Net | |
$ | 17,234,388 | | |
$ | 13,673,811 | | |
$ | 11,704,733 | | |
$ | 20,513,674 | | |
$ | 25,452,185 | |
| Income | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Basic
Net | |
$ | 1.78 | | |
$ | 1.47 | | |
$ | 1.20 | | |
$ | 2.26 | | |
$ | 3.16 | |
| Income
per common | |
| | | |
| | | |
| | | |
| | | |
| | |
| Share | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Diluted
Net | |
$ | 1.75 | | |
$ | 1.45 | | |
$ | 1.18 | | |
$ | 2.22 | | |
$ | 3.10 | |
| Income
per common | |
| | | |
| | | |
| | | |
| | | |
| | |
| Share | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Basic | |
| 6,554,209 | | |
| 6,505,283 | | |
| 6,443,713 | | |
| 6,354,103 | | |
| 6,287,510 | |
| Weighted
average numbe r of shares outstanding | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Diluted | |
| 6,681,713 | | |
| 6,632,787 | | |
| 6,571,217 | | |
| 6,481,607 | | |
| 6,415,014 | |
| Weighted
average number of shares outstanding | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| BALANCE
SHEET DATA | |
| | | |
| | | |
| | | |
| | | |
| | |
| Working | |
$ | 101,937,320 | | |
$ | 88,534,063 | | |
$ | 77,226,104 | | |
$ | 70,998,783 | | |
$ | 52,497,840 | |
| Capital | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Total
Assets | |
$ | 199,341,982 | | |
$ | 189,506,195 | | |
$ | 180,259,380 | | |
$ | 133,560,210 | | |
$ | 118,310,945 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Long-term
debt and obligations under capital leases | |
$ | 993,670 | | |
$ | 1,808,685 | | |
$ | 2,116,587 | | |
$ | 273,112 | | |
$ | 306,035 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Stockholder’s
equity | |
$ | 146,236,281 | | |
$ | 135,370,125 | | |
$ | 126,242,616 | | |
$ | 118,112,103 | | |
$ | 102,234,471 | |
FONAR
CORPORATION AND SUBSIDIARIES
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
INTRODUCTION.
Fonar
was formed in 1978 to engage in the business of designing, manufacturing and selling MRI scanners. HMCA, a subsidiary of Fonar, provides
management services to diagnostic imaging facilities.
Fonar’s
principal MRI product is its 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 three Florida subsidiaries which engage in the practice
of medicine, and bill and collect fees from patients, insurers and other third party payors directly.
The
most significant adverse impact on on our Company in fiscal 2020 has been the COVID-19 pandemic. Although it had seemed the worst had
passed, events have shown a spike in new cases due primarily to the new Delta strain in the viruses. This is by no means a problem confined
to our Company, but regardless of our best efforts, our results of operation and financial condition are potentially volatible and severe.
Since
March, 2020 the global pandemic of COVID-19 has caused turbulence and uncertainty in the United States and international economies which
have adversely affected our workforce, liquidity, financial conditions, revenues, profitability and business operations. Generally COVID-19
had caused us to require that much of our workforce work from home and has restricted the ability of our personnel to travel for marketing
purposes or to service our customers. At the end of fiscal 2020, the Company was able to enact certain decisions to allow the Company
to survive during the global pandemic and from further losses or additional decreases in scan volume. The Company also received some
government stimulus funds from the Paycheck Protection Program (“PPP) and Medicare advances/stimulus payments. During fiscal 2022,
the PPP loan was forgiven in its entirety. During fiscal 2022, the Company had to deal with increased strictness in the enforcement of
COVID-19 mandates, such as the requirement that employees in healthcare facilities be vaccinated, along with the newer variants that
are more transmissible. As a result, the Company experienced absences due to illness and the loss of unvaccinated employees whose duties
required them to be in contact with patients. Due to these conditions, The Company was sometimes unable to keep scanning facilities open
for all shifts and as a result there was a slight decrease in scans during the second quarter of fiscal 2022. The Company has been able
to navigate through these challenges and avoid any significant disruption of the business and the volume has risen back almost to pre-COVID-19
levels. 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.
FONAR
CORPORATION AND SUBSIDIARIES
Critical
Accounting Policies
Our
discussion and analysis of financial condition and results of operations are based on our consolidated financial statements that were
prepared in accordance with U.S. generally accepted accounting principles, or GAAP. Management makes estimates and assumptions when preparing
financial statements. These estimates and assumptions affect various matters, including:
our
reported amounts of assets and liabilities in our consolidated balance sheets at the dates of the financial statements
our
disclosure of contingent assets and liabilities at the dates of the financial statements; and
our
reported amounts of net revenue and expenses in our consolidated statements of operations during the reporting periods
These
estimates involve judgments with respect to numerous factors that are difficult to predict and are beyond management’s control.
As a result, actual amounts could differ materially from these estimates.
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, 2021, the net deferred tax asset was valued at $15,958,961. At June 30, 2022, the net deferred
tax asset was valued at $12,842,478.
FONAR
CORPORATION AND SUBSIDIARIES
We
depreciate our long-lived assets over their estimated economic useful lives with the exception of leasehold improvements where we use
the shorter of the assets useful lives or the lease term of the facility for which these assets are associated.
The
Company provides for medical receivables that could become uncollectible by establishing an allowance for doubtful accounts in order
to adjust medical receivables to estimated net realizable value. In evaluating the collectability of medical receivables, the Company
considers a number of factors, including the age of the account, historical collection experiences, payor type, current economic conditions
and other relevant factors. There are various factors that impact collection trends, such as payor mix, changes in the economy, increase
burden on copayments to be made by patients with insurance and business practices related to collection efforts. These factors continuously
change and can have an impact on collection trends and the estimation process.
We
amortize our intangible assets, including patents, and capitalized software development costs, over the shorter of the contractual/legal
life or the estimated economic life. Our amortization life for patents and capitalized software development costs is 15 to 17 years and
5 years, respectively. Our amortization of the non-competition agreements entered into with certain individuals in connection with the
HDM transaction are depreciated over seven years, and customer relationships are amortized over 20 years.
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 2022 COMPARED TO FISCAL 2021
In
fiscal 2022, we recognized net income of $17.2 million on revenues of $97.6 million, as compared to net income of $13.7 million on revenues
of $89.9 million for fiscal 2021. This represents an increase in revenues of 8.5%. Patient fee revenue net of contractual allowances
increased by 26.9%. Total costs and expenses increased by 3.8%. Our consolidated operating results increased by 28.7% to an operating
income of $22.0 million for fiscal 2022 as compared to operating income of $17.1 million for fiscal 2021.
FONAR
CORPORATION AND SUBSIDIARIES
Discussion
of Operating Results of Medical Equipment Segment
Fiscal
2022 Compared to Fiscal 2021
Revenues
attributable to our medical equipment segment decreased by 9.1% to $8.2 million in fiscal 2022 from $9.0 million in fiscal 2021, with
product sales revenues decreasing by 59.8% from $1.3 million in fiscal 2021 to $518,000 in fiscal 2022. Service revenue remained constant
from $7.7 million in fiscal 2021 and in fiscal 2022.
The
Upright® MRI is unique in that it permits MRI scans to be performed on patients upright in the weight-bearing state and in multiple
positions that correlate with symptoms.
Product
sales to unrelated parties decreased by 59.8% in fiscal 2022 from $1.3 million in fiscal 2021 to $518,000 in fiscal 2022. There were
no product sales to related parties in fiscal 2022 or 2021.
We
believe that one of our principal challenges in achieving greater market penetration is attributable to the better name recognition and
larger sales forces of our larger competitors such as General Electric, Siemens, Hitachi, Philips and Toshiba and the ability of some
of our competitors to offer attractive financing terms through affiliates, such as G.E. Capital.
In
addition, lower reimbursement rates have reduced the demand for our MRI products, resulting in lower sales volumes. As a result of fewer
sales, service revenues have decreased since as older scanners are taken out of service, there are fewer new scanners available to sign
service contracts.
The
operating loss for the medical equipment segment increased from an operating loss of $3.4 million in fiscal 2021 to an operating loss
of $4.6 million in fiscal 2022. The losses are attributable most significantly to the fact that costs increased by a greater amount than
revenues. The increase in costs was primarily due to the increase in business activity which resulted in our increased revenues.
We
recognized revenues of $62,000 from the sale of our Upright® MRI scanners in fiscal 2022, while in fiscal 2021, we recognized revenues
of $733,000 from the sale of Upright® MRI scanners.
Research
and development expenses decreased to $1.5 million in fiscal 2022 from $1.6 million in fiscal 2021. Our expenses for fiscal 2021 represented
continued research and development of various upgrades for the Upright® MRI scanner. The reason for the decrease in research and
development was due mainly to supply chain related delays due to the COVID-19 pandemic.
Discussion
of Operating Results of Physician and Diagnostic Services Management Segment.
Fiscal
2022 Compared to Fiscal 2021
Revenues
attributable to the Company’s physician and diagnostic services management segment, HMCA, increased to $89.4 million in fiscal
2022 as compared to $80.9 million in fiscal 2021. The increase in revenues was due to an increase of $6.3 million of patient fees (net
of contractual allowances and discounts less provision for bad debts) from patient and third party payors recognized by five of the facilities
in Florida. Also management and other fees increased by $2.2 million due to two additional scanners being installed in existing facilities.
FONAR
CORPORATION AND SUBSIDIARIES
Cost
of revenues as a percentage of the related revenues for our physician and diagnostic services management segment increased from $42.6
million or 52.7% of related revenues for the year ended June 30, 2021 to $47.1 million, or 52.7% of related revenues for the year ended
June 30, 2022. The revenues increased more than the costs relating to these revenues.
Operating
results of this segment increased from operating income of $20.5 million in fiscal 2021 to operating income of $26.6 million in fiscal
2022. We believe that our efforts to expand and improve the operation of our physician and diagnostic services management segment are
directly responsible for the profitability of this segment and our company as a whole.
For
the fiscal years ended June 30, 2022 and June 30, 2021 11.8% and 12.2%, respectively, of total revenues were derived from contracts with
facilities owned by Dr. Raymond V. Damadian, the Chairman of the Board and principal stockholder of Fonar. The agreements with these
MRI facilities are for one-year terms which renew automatically on an annual basis, unless terminated. The fees for these sites, which
are located in Florida, are flat monthly fees.
Discussion
of Certain Consolidated Results of Operations
Fiscal
2022 Compared to Fiscal 2021
Interest
and investment income decreased in 2022 compared to 2021. We recognized interest income of $247,158 in 2022 as compared to $311,931 in
fiscal 2021, representing a decrease of 20.8%.
Interest
expense of $346,552 was recognized in fiscal 2022, as compared to interest expense of $248,665 in fiscal 2021. The increase in interest
expense is attributable to an assessment of additional taxes and interest in connection with a state income tax audit.
The
29.2% noncontrolling interest allocations of $4,793,000 and $3,466,000 for fiscal 2022 and fiscal 2021 respectively, have been calculated
by Income from operations, and adding depreciation and amortization net of miscellaneous losses and other income from the Physician and
Diagnostic Service Management segment (See Note 17).
While
revenue increased by 8.5% selling, general and administrative expenses decreased by 5.0% to $23.5 million in fiscal 2022 from $24.7 million
in fiscal 2021. This increase in revenues was almost exclusively due to less reserves placed on service contracts and management fees
and other receivables resulting from the COVID-19 pandemic as compared to fiscal 2021. It is too early to know how much of these reserves
will be recovered. Also Fonar resolved certain sales tax liabilities during the year and was able to reverse accrued interest and penalties
of $119,000 which was recorded under selling, general and administrative expenses.
The
compensatory element of stock issuances decreased from $83,277 in fiscal 2021 to $0 in fiscal 2022.
Revenue
from service and repair fees remained constant at $7.7 million in fiscal 2021 to and fiscal 2022.
FONAR
CORPORATION AND SUBSIDIARIES
Continuing
our tradition as the originator of MRI, we remain committed to maintaining our position as the leading innovator of the industry through
investing in research and development. In fiscal 2022 we continued our investment in the development of various upgrades for the UPRIGHT®
MRI, with an investment of $1,494,181 in research and development, none of which was capitalized, as compared to $1,635,979, none of
which was capitalized, in fiscal 2021. The research and development expenditures were approximately 18.2% of revenues attributable to
our medical equipment segment and 1.5% of total revenues in 2022, and 18.1% of medical equipment segment revenues and 1.8% of total revenues
in fiscal 2021. This represented a 8.7% decrease in research and development expenditures in fiscal 2022 as compared to fiscal 2021.
For
the physician and diagnostic services management segment, HMCA, revenues increased to $89.3 million in fiscal 2022 as compared to $80.9
million in fiscal 2021. This is primarily attributable to an increase in patient scans resulting from our marketing efforts.
For
the fiscal year 2022 the Company recorded an income tax expense of $5.5 million compared with an income tax expense of $4.0 million for
2021. 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 $12.8 million as of June 30, 2022, primarily
relating to the tax benefits from the net operating loss carry forwards available to offset future taxable income. The utilization of
these tax benefits is dependent on the Company generating future taxable income. Although the Company is expecting to generate taxable
income in future periods, they cannot accurately measure the full impact of the adoption of healthcare regulations, including the impact
of continuing changes in MRI scanning reimbursement rates, and the severity and the duration of the COVID-19 virus, which could materially
impact operations. A partial valuation allowance will be maintained until evidence exists to support that it is no longer needed.
We
have been taking steps to improve HMCA revenues by our marketing efforts, which focus on the unique capability of our Upright® MRI
scanners to scan patients in different positions. We have also been increasing the number of health insurance plans in which our clients
participate. The utilization of these tax benefits is dependent on the Company generating future taxable income and other factors. A
partial valuation allowance will be maintained until evidence exists to support that it is no longer needed, (principally related to
research and development credits).
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.
FONAR
CORPORATION AND SUBSIDIARIES
Certain
third-party payors have proposed and implemented changes in the methods and rates of reimbursement that have had the effect of substantially
decreasing reimbursement for diagnostic imaging services that HMCA’s clients provide. To the extent reimbursement from third-party
payors is reduced, it will likely have an adverse impact on the rates they pay us, as they would need to reduce the management fees they
pay HMCA to offset such decreased reimbursement rates. Furthermore, many commercial health care insurance arrangements are changing,
so that individuals bear greater financial responsibility through high deductible plans, co-insurance and higher co-payments, which may
result in patients delaying or foregoing medical procedures. More frequently, however, patients are scanned and we experience difficulty
in collecting deductibles and co-payments. We expect that any further changes to the rates or methods of reimbursement for services,
which reduce the reimbursement per scan of our clients may partially offset the increases in scan volume we are working to achieve for
our clients, and indirectly will result in a decline in our revenues.
On
March 23, 2010, President Obama signed into law healthcare reform legislation in the form of the Patient Protection and Affordable Care
Act, or PPACA. The ultimate impact of the PPACA is uncertain but to date has reduced our revenues from what they otherwise would have
been.
In
addition, the use of radiology benefit managers, or RBM’s has increased in recent years. It is common practice for health insurance
carriers to contract with RBMs to manage utilization of diagnostic imaging procedures for their insureds. In many cases, this leads to
lower utilization of imaging procedures based on a determination of medical necessity. The efficacy of RBMs is still a highly controversial
topic. We cannot predict whether the healthcare legislation or the use of RBMs will negatively impact our business, but it is possible
that our financial position and results of operations could be negatively affected.
LIQUIDITY
AND CAPITAL RESOURCES
Cash,
and cash equivalents increased by 9.6% from $44.5 million at June 30, 2021 to $48.7 million at June 30, 2022.
Cash
provided by operating activities for fiscal 2022 approximated $15.3 million. Cash provided by operating activities was attributable to
the net income of $17.2 million, depreciation and amortization of $4.5 million, deferred income tax expense benefit of $3.1 million which
was offset by the increase in accounts, and medical and management fee receivables of $5.6 million.
Cash
used in investing activities for fiscal 2022 approximated $5.2 million. The cash used in investing activities was attributable to purchases
of property and equipment of $4.5 million, purchase of noncontrolling interests of $546,000 and costs of patents of $88,000.
Cash
used in financing activities for fiscal 2021 approximated $5.9 million. The principal uses of cash used in financing activities included
the repayment of borrowings and capital lease obligations of $37,000, and distributions to non-controlling interests of $5.8 million.
Total
liabilities decreased slightly by 1.9% during fiscal 2022, from approximately $54.1 million at June 30, 2021 to approximately $53.1 million
at June 30, 2022.
FONAR
CORPORATION AND SUBSIDIARIES
At
June 30, 2022, we had working capital of approximately $101.9 million as compared to working capital of $88.5 million at June 30, 2021,
and stockholders’ equity of $146.2 million at June 30, 2022 as compared to stockholders’ equity of $135.4 million at June
30, 2021. For the year ended June 30, 2022, we realized a net income of $17.2 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, 2022, HMCA manages a total of 41 MRI scanners of which 26 MRI scanners are located in New York and 15 are located in Florida. We
have also intensified our marketing activities through the hiring of additional marketers for HMCA’s clients.
Our
business plan also calls for a continuing emphasis on providing our customers with enhanced equipment service and maintenance capabilities
and delivering state-of-the-art, innovative and high quality equipment upgrades at competitive prices. Fees for on-going service and
maintenance from our installed base of scanners were $7.7 million for the year ended June 30, 2021 and $7.7 million for the year ended
June 30, 2022.
In
order to promote profitability and to reduce demands on our cash and other liquid reserves, we maintain an aggressive program of cost
cutting. Previously, these measures included consolidating HMCA’s office space with Fonar’s office space and reducing the
size of our workforce, compensation and benefits. We continue to reduce and contain expenses across the board. The cost reductions are
intended to enable us to withstand periods of low volumes of MRI scanner sales, by keeping expenditures at levels which can be supported
by service revenues and HMCA revenues.
Current
economic credit conditions have contributed to a slower than optimal business environment. As a result our business may suffer, should
the credit markets not improve in the near future. The direct impact of these conditions is not fully known.
Revenues
from HMCA have been the principal reason for our profitability, and we have so far been able to maintain and increase such revenues by
increasing the number of scans being performed by the sites we manage and those we own, notwithstanding reductions in reimbursement rates
from third party payors. The likelihood and effect of any subsequent reductions is not fully known.
Capital
expenditures for fiscal 2022 approximated $4.6 million. Capitalized patent costs were approximately $88,000. Purchases of property and
equipment were approximately $4.5 million.
Fonar
is committed to making capital expenditures in the 2023 fiscal year, for placing two scanners at facilities located in Florida and New
York. The facility in Florida will be a new stand-alone facility and the facility in New York will also be a new stand-alone facility.
The current estimated costs of these capital expenditures is approximately $3.1 million.
FONAR
CORPORATION AND SUBSIDIARIES
The
Company believes that its business plan has been responsible for the past five consecutive fiscal years of profitability (fiscal 2022,
fiscal 2021, fiscal 2020, fiscal 2019 and fiscal 2018) and that its capital resources will be adequate to support operations at current
levels through September 30, 2023.
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.
During
August 2021 the Company renewed their revolving credit agreement. The terms include borrowing limits of up to $10,000,000 and the agreement
was extended to August 2022. The interest rate on unpaid principal remains at 4% along with certain financial covenants still applicable.
ITEM
7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The
Company does not have any investments in marketable securities, foreign currencies, mutual funds, certificates of deposit or other fixed
rate instruments. All of our funds are in cash accounts or money market accounts which are liquid.
All
of our revenue, expense and capital purchasing activities are transacted in United States dollars.
See
Note 11 to the consolidated Financial Statements for information on long-term debt.
ITEM
8. FINANCIAL STATEMENTS
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2022 and 2021, the related consolidated statements of income,
stockholders’ equity and cash flows for each of the two years in the period ended June 30, 2022, 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, 2022 and 2021 and the results of its operations
and its cash flows for each of the two years in the period ended June 30, 2022, in conformity with accounting principles generally accepted
in the United States of America.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits
we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provides a reasonable basis for our opinion.
Critical
Audit Matters
The
critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated
or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial
statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters
does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit
matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Patient
Accounts Receivable Reserve – Refer to Note 3 to the financial statements
Critical
Audit Matter Description
Patient
accounts receivable is recorded at net realizable value based on the estimated amounts the Company expects to receive from patients and
third-party payers. Estimates of contractual allowances under managed care, commercial, and governmental insurance plans are based
upon the payment terms specified in the related contractual agreements or as mandated under government payer programs. Management continually
reviews the contractual allowance estimation process to consider and incorporate updates to laws and regulations and the frequent changes
in managed care contractual terms resulting from contract renegotiations and renewals. Receivables related to uninsured patients
and uninsured copayment and deductible amounts for patients who have health insurance coverage may have discounts applied. The Company
also records estimated implicit price concessions (based on historical experience) related to accounts to record the accounts receivable
at the amount the Company expects to collect from patients and third-party payers. This implied concession requires extensive judgment
and subjective assumptions. Implicit price concessions relate primarily to amounts due directly from patients and are based upon management’s
assessment of historical write-offs and expected net collections, business and economic conditions, trends in federal, state, and private
employer health care coverage, and other collection indicators. Auditing management’s estimate of the price concessions was complex
and judgmental due to the significant data inputs and subjective assumptions utilized in determining the net realizable value of accounts
receivable.
How
the Critical Audit Matter Was Addressed in the Audit
Our
audit procedures related to the net realizable value of patient accounts receivable included the following:
| ● | We
obtained an understanding, evaluated the design, and tested the operating effectiveness of
certain controls that address the risks of material misstatement relating to the measurement
of service fee revenue and receivables. |
| ● | We
tested informational technology general controls around the Company’s billing system
and associated database. |
| ● | We
evaluated management’s methodology and related assumptions, including cash collections,
by comparing actual results to management’s historical estimates. |
| ● | We
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. |
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, 2022
688
FONAR
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
ASSETS
| | |
| | | |
| | |
| | |
June
30, |
| | |
2022 | |
2021 |
| Current
Assets: | |
| | | |
| | |
| Cash
and cash equivalents | |
$ | 48,722,977 | | |
$ | 44,460,411 | |
| Short
term investments | |
| 32,326 | | |
| 32,177 | |
| Accounts
receivable – net of allowances for doubtful accounts of $204,597 and $442,270 at June 30, 2022 and 2021, respectively | |
| 4,335,956 | | |
| 4,525,435 | |
| Accounts
receivable – related party | |
| — | | |
| 11,977 | |
| Medical
receivables – net | |
| 20,108,989 | | |
| 17,900,489 | |
| Management
and other fees receivable – net of allowances for doubtful accounts of $16,627,917 and $15,786,878 at June 30, 2022 and 2021,
respectively | |
| 33,419,219 | | |
| 30,947,863 | |
| Management
and other fees receivable – related party medical practices – net of allowances for doubtful accounts of $4,686,893 and
$4,184,399 at June 30, 2022 and 2021, respectively | |
| 8,602,561 | | |
| 7,814,250 | |
| Inventories | |
| 2,359,821 | | |
| 1,663,419 | |
| Prepaid
expenses and other current assets | |
| 1,104,325 | | |
| 1,227,463 | |
| Total
Current Assets | |
| 118,686,174 | | |
| 108,583,484 | |
| Accounts
receivable – long term | |
| 1,871,890 | | |
| 2,879,946 | |
| Deferred
income tax asset | |
| 12,842,478 | | |
| 15,958,961 | |
| Property
and equipment – net | |
| 22,281,791 | | |
| 21,850,139 | |
| Right-of-use-asset
– operating leases | |
| 34,232,109 | | |
| 30,133,285 | |
| Right-of-use-asset
– financing lease | |
| 928,109 | | |
| 1,126,990 | |
| Goodwill | |
| 4,269,277 | | |
| 4,269,277 | |
| Other
intangible assets – net | |
| 3,703,885 | | |
| 4,037,599 | |
| Other
assets | |
| 526,269 | | |
| 666,514 | |
| Total
Assets | |
$ | 199,341,982 | | |
$ | 189,506,195 | |
See
accompanying notes to consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
LIABILITIES
| | |
June
30, |
| | |
2022 | |
2021 |
| Current
Liabilities: | |
| | | |
| | |
| Current
portion of long-term debt and capital leases | |
$ | 40,078 | | |
$ | 173,206 | |
| Accounts
payable | |
| 1,551,269 | | |
| 1,866,035 | |
| Other
current liabilities | |
| 6,417,227 | | |
| 9,162,118 | |
| Operating
lease liability – current portion | |
| 3,880,129 | | |
| 3,533,656 | |
| Financing
lease liability – current portion | |
| 210,140 | | |
| 202,741 | |
| Unearned
revenue on service contracts | |
| 4,288,766 | | |
| 4,365,825 | |
| Customer
deposits | |
| 361,245 | | |
| 731,101 | |
| | |
| | | |
| | |
| Contract
liabilities | |
| — | | |
| 14,739 | |
| Total
Current Liabilities | |
| 16,748,854 | | |
| 20,049,421 | |
| Long-Term
Liabilities: | |
| | | |
| | |
| Unearned
revenue on service contracts | |
| 1,857,257 | | |
| 2,800,522 | |
| Deferred
income tax liability | |
| 215,726 | | |
| 238,316 | |
| Due
to related party medical practices | |
| 92,663 | | |
| 92,663 | |
| Operating
lease liability – net of current portion | |
| 33,090,990 | | |
| 28,975,132 | |
| Financing
lease liability – net of current portion | |
| 838,291 | | |
| 1,048,431 | |
| Long-term
debt and capital leases, less current portion | |
| 155,379 | | |
| 760,254 | |
| Other
liabilities | |
| 106,541 | | |
| 171,331 | |
| Total
Long-Term Liabilities | |
| 36,356,847 | | |
| 34,086,649 | |
| Total
Liabilities | |
| 53,105,701 | | |
| 54,136,070 | |
Commitments,
Contingencies and Other Matters
See
accompanying notes to consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
STOCKHOLDERS’
EQUITY
| | |
June
30, |
| | |
2022 | |
2021 |
| Stockholders’
Equity: | |
| | | |
| | |
| Class
A non-voting preferred stock $.0001 par value; 453,000 shares authorized at June 30, 2022 and 2021, 313,438 issued and outstanding
at June 30, 2022 and 2021 | |
$ | 31 | | |
$ | 31 | |
| Preferred
stock $.001 par value; 567,000 shares authorized at June 30, 2022 and 2021, issued and outstanding – none | |
| — | | |
| — | |
| Common
stock $.0001 par value; 8,500,000 shares authorized at June 30, 2022 and 2021, 6,565,853 issued at June 30, 2022 and 2021,6,554,210
outstanding at June 30, 2022 and 2021 | |
| 657 | | |
| 657 | |
| Class
B convertible common stock (10 votes per share) $.0001 par value; 227,000 shares authorized at June 30, 2022 and 2021, 146 issued
and outstanding at June 30, 2022 and 2021 | |
| — | | |
| — | |
| Class
C common stock (25 votes per share) $.0001 par value; 567,000 shares authorized at June 30, 2022 and 2021, 382,513 issued and outstanding
at June 30, 2022 and 2021 | |
| 38 | | |
| 38 | |
| Paid-in
capital in excess of par value | |
| 184,531,535 | | |
| 185,100,976 | |
| Accumulated
deficit | |
| (33,566,757 | ) | |
| (46,007,663 | ) |
| Treasury
stock, at cost – 11,643 shares of common stock at June 30, 2022 and 2021 | |
| (675,390 | ) | |
| (675,390 | ) |
| Total
Fonar Corporation’s Stockholders’ Equity | |
| 150,290,114 | | |
| 138,418,649 | |
| Noncontrolling
interests | |
| (4,053,833 | ) | |
| (3,048,524 | ) |
| Total
Stockholders’ Equity | |
| 146,236,281 | | |
| 135,370,125 | |
| Total
Liabilities and Stockholders’ Equity | |
$ | 199,341,982 | | |
$ | 189,506,195 | |
See
accompanying notes to consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
| | |
| | | |
| | |
| | |
For
the Years Ended June 30, |
| | |
2022 | |
2021 |
| Revenues | |
| | | |
| | |
| Patient
fee revenue, net of contractual allowances and discounts | |
$ | 29,582,238 | | |
$ | 23,307,389 | |
| Product
sales – net | |
| 517,939 | | |
| 1,288,483 | |
| Service
and repair fees – net | |
| 7,590,865 | | |
| 7,638,608 | |
| Service
and repair fees – related parties – net | |
| 110,000 | | |
| 110,000 | |
| Management
and other fees – net | |
| 48,226,787 | | |
| 46,609,449 | |
| Management
and other fees – related party medical practices – net | |
| 11,564,316 | | |
| 10,975,836 | |
| Total
Revenues – Net | |
| 97,592,145 | | |
| 89,929,765 | |
| Costs
and Expenses | |
| | | |
| | |
| Costs
related to product sales | |
| 416,814 | | |
| 1,032,676 | |
| Costs
related to service and repair fees | |
| 2,991,069 | | |
| 2,740,625 | |
| Costs
related to service and repair fees – related parties | |
| 43,344 | | |
| 39,466 | |
| Costs
related to patient fee revenue | |
| 13,307,819 | | |
| 10,917,635 | |
| Costs
related to management and other fees | |
| 27,251,268 | | |
| 25,384,557 | |
| Costs
related to management and other fees – related party medical practices | |
| 6,567,887 | | |
| 6,341,168 | |
| Research
and development | |
| 1,494,181 | | |
| 1,635,979 | |
| Selling,
general and administrative, inclusive of compensatory element of stock issuances of $0 and $83,277 for the years ended June 30, 2022
and 2021 respectively | |
| 23,512,581 | | |
| 24,740,044 | |
| Total
Costs and Expenses | |
| 75,584,963 | | |
| 72,832,150 | |
| Income
from Operations | |
| 22,007,182 | | |
| 17,097,615 | |
| Other
Income and (Expenses): | |
| | | |
| | |
| Interest
expense | |
| (346,552 | ) | |
| (248,665 | ) |
| Investment
income | |
| 247,158 | | |
| 311,931 | |
| Other
income | |
| 861,087 | | |
| 504,450 | |
| Income
before provision for income taxes and noncontrolling interests | |
| 22,768,875 | | |
| 17,665,331 | |
| Provision
for Income Taxes | |
| (5,534,487 | ) | |
| (3,991,520 | ) |
| Net
Income | |
$ | 17,234,388 | | |
$ | 13,673,811 | |
| Net
Income – Noncontrolling Interests | |
| (4,793,482 | ) | |
| (3,466,223 | ) |
| Net
Income – Attributable to FONAR | |
$ | 12,440,906 | | |
$ | 10,207,588 | |
See
accompanying notes to consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME (Continued)
| | |
2022 | |
2021 |
| Net
Income Available to Common Stockholders | |
$ | 11,690,796 | | |
$ | 9,592,134 | |
| Net
Income Available to Class A Non-Voting Preferred Stockholders | |
$ | 559,072 | | |
$ | 458,710 | |
| Net
Income Available to Class C Common Stockholders | |
$ | 191,038 | | |
$ | 156,744 | |
| Basic
Net Income Per Common Share Available to Common Stockholders | |
$ | 1.78 | | |
$ | 1.47 | |
| Diluted
Net Income Per Common Share Available to Common Stockholders | |
$ | 1.75 | | |
$ | 1.45 | |
| Basic
and Diluted Income Per Share – Class C Common | |
$ | 0.50 | | |
$ | 0.41 | |
| Weighted
Average Basic Shares Outstanding – Common Stockholders | |
| 6,554,209 | | |
| 6,505,283 | |
| Weighted
Average Diluted Shares Outstanding – Common Stockholders | |
| 6,681,713 | | |
| 6,632,787 | |
| Weighted
Average Basic and Diluted Shares Outstanding – Class C Common | |
| 382,513 | | |
| 382,513 | |
See
accompanying notes to consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR
THE YEARS ENDED JUNE 30, 2022 AND 2021
| | |
| |
| |
| |
|
| | |
Class
A Non-Voting Preferred | |
Common
Shares | |
Stock
Amount | |
Class
C Common Stock |
| Balance,
July 1, 2020 | |
$ | 31 | | |
| 6,447,463 | | |
$ | 647 | | |
$ | 38 | |
| Net
income | |
| — | | |
| — | | |
| — | | |
| — | |
| Stock
issued to employees under stock bonus plans | |
| — | | |
| 106,747 | | |
| 10 | | |
| — | |
| Payments
on notes receivable from employee stockholders | |
| — | | |
| — | | |
| — | | |
| — | |
| Distributions
to noncontrolling interests | |
| — | | |
| — | | |
| — | | |
| — | |
| Balance,
June 30, 2021 | |
$ | 31 | | |
| 6,554,210 | | |
$ | 657 | | |
$ | 38 | |
| Net
income | |
| — | | |
| — | | |
| — | | |
| — | |
| Stock
issued to employees under stock bonus plans | |
| — | | |
| — | | |
| — | | |
| — | |
| Buyout
of noncontrolling interests | |
| — | | |
| — | | |
| — | | |
| — | |
| Distributions
to noncontrolling interests | |
| — | | |
| — | | |
| — | | |
| — | |
| Balance,
June 30, 2022 | |
$ | 31 | | |
| 6,554,210 | | |
$ | 657 | | |
$ | 38 | |
| | |
| |
|
| | |
Paid-in
Capital in Excess of Par Value | |
Accumulated
Deficit |
| Balance,
July 1, 2020 | |
$ | 183,076,888 | | |
$ | (56,215,251 | ) |
| Net
income | |
| — | | |
| 10,207,588 | |
| Stock
issued to employees under stock bonus plans | |
| 2,024,088 | | |
| — | |
| Distributions
to noncontrolling interests | |
| — | | |
| — | |
| | |
| | | |
| | |
| Balance,
June 30, 2021 | |
$ | 185,100,976 | | |
$ | (46,007,663 | ) |
| Net
income | |
| — | | |
| 12,440,906 | |
| Stock
issued to employees under stock bonus plans | |
| — | | |
| — | |
| Buyout
of noncontrolling interests | |
| (569,441 | ) | |
| — | |
| Distributions
to noncontrolling interests | |
| — | | |
| — | |
| Balance,
June 30, 2022 | |
$ | 184,531,535 | | |
$ | (33,566,757 | ) |
See
accompanying notes to consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR
THE YEARS ENDED JUNE 30, 2022 AND 2021
| | |
| |
| |
|
| | |
Treasury
Stock | |
Noncontrolling
Interests | |
Total |
| Balance,
July 1, 2020 | |
$ | (675,390 | ) | |
$ | 55,253 | | |
$ | 126,242,216 | |
| Net
income | |
| — | | |
| 3,466,223 | | |
| 13,673,811 | |
| Stock
issued to employees under stock bonus plans | |
| — | | |
| — | | |
| 2,024,098 | |
| Distributions
to noncontrolling interests | |
| — | | |
| (6,570,000 | ) | |
| (6,570,000 | ) |
| Balance,
June 30, 2021 | |
$ | (675,390 | ) | |
$ | (3,048,524 | ) | |
$ | 135,370,125 | |
| Net
income | |
| — | | |
| 4,793,482 | | |
| 17,234,388 | |
| Stock
issued to employees under stock bonus plans | |
| — | | |
| — | | |
| — | |
| Buyout
of noncontrolling interests | |
| — | | |
| 23,441 | | |
| (546,000 | ) |
| Distributions
to noncontrolling interests | |
| — | | |
| (5,822,232 | ) | |
| (5,822,232 | ) |
| Balance,
June 30, 2022 | |
$ | (675,390 | ) | |
$ | (4,053,833 | ) | |
$ | 146,236,281 | |
See
accompanying notes to consolidated financial statements.
FONAR
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
| | |
| | | |
| | |
| | |
For
the Years Ended June 30, |
| CASH
FLOWS FROM OPERATING ACTIVITIES | |
2022 | |
2021 |
| Net
Income | |
$ | 17,234,388 | | |
$ | 13,673,811 | |
| Adjustments
to reconcile net income to net cash provided by operating activities: | |
| | | |
| | |
| Depreciation
and amortization | |
| 4,535,236 | | |
| 4,081,687 | |
| Provision
for bad debts | |
| 1,343,533 | | |
| 5,585,989 | |
| Deferred
income tax - net | |
| 3,093,893 | | |
| 2,855,006 | |
| Income
tax receivable | |
| — | | |
| 671,185 | |
| Amortization
on right-of-use assets | |
| 4,000,131 | | |
| 1,458,053 | |
| Compensatory
element of stock issuances | |
| — | | |
| 83,277 | |
| Stock
issued for costs and expenses | |
| — | | |
| 1,940,821 | |
| Abandoned
patents | |
| — | | |
| 534 | |
| Gain
on forgiveness of PPP loan | |
| (700,764 | ) | |
| — | |
| (Increase)
decrease in operating assets, net: | |
| | | |
| | |
| Accounts,
medical and management fee receivables | |
| (5,602,188 | ) | |
| (12,110,859 | ) |
| Notes
receivable | |
| 43,334 | | |
| 46,944 | |
| Contract
assets | |
| — | | |
| 152,833 | |
| Inventories | |
| (696,402 | ) | |
| (14,649 | ) |
| Prepaid
expenses and other current assets | |
| 90,638 | | |
| 526,425 | |
| Other
assets | |
| 129,411 | | |
| (18,087 | ) |
| Increase
(decrease) in operating liabilities, net: | |
| | | |
| | |
| Accounts
payable | |
| (314,766 | ) | |
| (99,224 | ) |
| Other
current liabilities | |
| (3,765,215 | ) | |
| 1,382,497 | |
| Customer
advances | |
| (369,856 | ) | |
| (123,478 | ) |
| Operating
lease liabilities | |
| (3,437,743 | ) | |
| (965,825 | ) |
| Financing
lease liabilities | |
| (202,741 | ) | |
| (74,698 | ) |
| Contract
liabilities | |
| (14,739 | ) | |
| 14,739 | |
| Other
liabilities | |
| (64,790 | ) | |
| 21,020 | |
| NET
CASH PROVIDED BY OPERATING ACTIVITIES | |
| 15,301,360 | | |
| 19,088,001 | |
FONAR
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Continued
| | |
For
the Years Ended June 30, |
| | |
2022 | |
2021 |
| CASH
FLOWS FROM INVESTING ACTIVITIES | |
| | | |
| | |
| Purchases
of property and equipment | |
| (4,545,292 | ) | |
| (3,533,091 | ) |
| Proceeds
of Short term investment | |
| (149 | ) | |
| (293 | ) |
| Purchase
of imaging center | |
| — | | |
| (1,122,508 | ) |
| Purchase
of noncontrolling interests | |
| (546,000 | ) | |
| — | |
| Cost
of patents | |
| (87,882 | ) | |
| (163,705 | ) |
| NET
CASH USED IN INVESTING ACTIVITIES | |
| (5,179,323 | ) | |
| (4,819,597 | ) |
| CASH
FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
| Repayment
of borrowings and capital lease obligations | |
| (37,239 | ) | |
| (103,335 | ) |
| Proceeds
from debt | |
| — | | |
| 63,000 | |
| Distributions
to noncontrolling interests | |
| (5,822,232 | ) | |
| (6,570,000 | ) |
| NET
CASH USED IN FINANCING ACTIVITIES | |
| (5,859,471 | ) | |
| (6,610,335 | ) |
| NET
INCREASE IN CASH AND CASH EQUIVALENTS | |
| 4,262,566 | | |
| 7,658,069 | |
| | |
| | | |
| | |
| CASH
AND CASH EQUIVALENTS - BEGINNING OF YEAR | |
| 44,460,411 | | |
| 36,802,342 | |
| | |
| | | |
| | |
| CASH
AND CASH EQUIVALENTS - END OF YEAR | |
$ | 48,722,977 | | |
$ | 44,460,411 | |
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
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.
Since
March 2020 the global pandemic of COVID-19 has caused turbulence and uncertainty in the United States and international markets and economies
which has adversely effected our workforce, liquidity, financial conditions, revenues, profitability and business operations. Generally
COVID-19 had caused us to require that much of our workforce work from home and has restricted the ability of our personnel to travel
for marketing purposes or to service our customers. The Company experienced a sudden drop in scan volume for a short term period and
the Company has been steadily recovering to pre-COVID-19 levels. At the end of fiscal year ending June 30, 2020, the Company was able
to enact certain decisions to allow the Company to survive during the global pandemic and from further losses or additional decreases
in scan volume. The Company also received some government stimulus funds from the Paycheck Protection Program (‘PPP’) program
and Medicare advances/stimulus payments. The Company has been able to navigate through these challenges and avoid any significant disruption
of the business and the volume has risen back almost to pre-COVID-19 levels. 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.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
consolidated financial statements include the accounts of FONAR Corporation, its majority and wholly-owned subsidiaries and partnerships.
The operating activities of subsidiaries are included in the accompanying consolidated statements from the date of acquisition. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities in the consolidated financial statements and accompanying notes. The most significant estimates relate to receivable
allowances, intangible assets, income taxes and related tax asset valuation allowances, useful lives of property and equipment, contingencies,
revenue recognition and the assessment of litigation. In addition, healthcare industry reforms and reimbursement practices will continue
to impact the Company’s operations and the determination of contractual and other allowance estimates. Actual results could differ
from those estimates.
Inventories
Inventories
consist of purchased parts, components and supplies, as well as work-in-process, and are stated at the lower of cost, determined on the
first-in, first-out method, or market.
Property
and Equipment
Property
and equipment procured in the normal course of business is stated at cost. Property and equipment purchased in connection with an acquisition
is stated at its estimated fair value, generally based on an appraisal. Property and equipment is being depreciated for financial accounting
purposes using the straight-line method over their estimated useful lives. Leasehold improvements are being amortized over the shorter
of the useful life or the remaining lease term. Upon retirement or other disposition of these assets, the cost and related accumulated
depreciation of these assets are removed from the accounts and the resulting gains or losses are reflected in the results of operations.
Expenses for maintenance and repairs are charged to operations. Renewals and betterments are capitalized. Maintenance and repair expenses
totaled approximately $2,783,000 and $2,051,000 for the years ended June 30, 2022 and 2021 respectively. The estimated useful lives in
years are generally as follows:
| Estimated
Useful Life in Years for Property and Equipment |
| Diagnostic
equipment |
|
|
5–13 |
|
| Research,
development and demonstration equipment |
|
|
3-7 |
|
| Machinery
and equipment |
|
|
2-7 |
|
| Furniture
and fixtures |
|
|
3-9 |
|
| Leasehold
improvements |
|
|
3–10 |
|
| Building |
|
|
28 |
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
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, 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.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
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, 2022, the Company has 22 management
agreements of which 3 were with PC’s 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 $77,000 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 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.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
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, 2022 and 2021 are summarized in the following table.
| Patient
Fee Revenue - Net | |
| |
|
| | |
For
the Years Ended June 30 |
| | |
2022 | |
2021 |
| Commercial
Insurance/ Managed Care | |
$ | 4,248,708 | | |
$ | 4,100,440 | |
| Medicare/Medicaid | |
| 1,060,920 | | |
| 968,055 | |
| Workers’
Compensation/Personal Injury | |
| 17,907,335 | | |
| 15,011,111 | |
| Other | |
| 6,365,275 | | |
| 3,227,783 | |
| Net
Patient Fee Revenue | |
$ | 29,582,238 | | |
$ | 23,307,389 | |
Research
and Development Costs
Research
and development costs are charged to expense as incurred. The costs of equipment that are acquired or constructed for research and development
activities, and have alternative future uses (either in research and development, marketing or production), are classified as property
and equipment and depreciated over their estimated useful lives.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising
Costs
Advertising
costs are expensed as incurred. Advertising expense approximated $634,000 and $633,000 and for the years ended June 30, 2022 and 2021,
respectively.
Shipping
Costs
The
Company’s shipping and handling costs are included in revenue from product sales and the related expense included in costs related
to product sales is $7,391 and $8,215 for the years ended June 30, 2022 and 2021 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, 2022 and 2021.
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, 2022 and 2021, diluted EPS for common shareholders
includes 127,504 shares upon conversion of Class C Common.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings
Per Share (Continued)
| Schedule
of earnings per share | |
| | | |
| | | |
| | |
| | |
June
30, 2022 |
| Basic | |
Total | |
Common
Stock | |
Class
C Common Stock |
| Numerator: | |
| |
| |
|
| Net
income available to common stockholders | |
$ | 12,440,906 | | |
$ | 11,690,796 | | |
$ | 191,038 | |
| Denominator: | |
| | | |
| | | |
| | |
| Weighted
average shares outstanding | |
| 6,554,209 | | |
| 6,554,209 | | |
| 382,513 | |
| Basic
income per common share | |
$ | 1.90 | | |
$ | 1.78 | | |
$ | 0.50 | |
| Diluted | |
| | | |
| | | |
| | |
| Denominator: | |
| | | |
| | | |
| | |
| Weighted
average shares outstanding | |
| | | |
| 6,554,209 | | |
| 382,513 | |
| Class
C Common Stock | |
| | | |
| 127,504 | | |
| — | |
| Total
Denominator for diluted earnings per share | |
| | | |
| 6,681,713 | | |
| 382,513 | |
| Diluted
income per common share | |
| | | |
$ | 1.75 | | |
$ | 0.50 | |
| | |
June
30, 2021 |
| Basic | |
Total | |
Common
Stock | |
Class
C Common Stock |
| Numerator: | |
| |
| |
|
| Net
income available to common stockholders | |
$ | 10,207,588 | | |
$ | 9,592,134 | | |
$ | 156,744 | |
| Denominator: | |
| | | |
| | | |
| | |
| Weighted
average shares outstanding | |
| 6,505,283 | | |
| 6,505,283 | | |
| 382,513 | |
| Basic
income per common share | |
$ | 1.57 | | |
$ | 1.47 | | |
$ | 0.41 | |
| Diluted | |
| | | |
| | | |
| | |
| Denominator: | |
| | | |
| | | |
| | |
| Weighted
average shares outstanding | |
| | | |
| 6,505,283 | | |
| 382,513 | |
| Class
C Common Stock | |
| | | |
| 127,504 | | |
| — | |
| Total
Denominator for diluted earnings per share | |
| | | |
| 6,632,787 | | |
| 382,513 | |
| Diluted
income per common share | |
| | | |
$ | 1.45 | | |
$ | 0.41 | |
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.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Short
Term Investments
Short
term investments include certificates of deposit with original maturities of greater than 90 days.
Concentration
of Credit Risk
Cash:
The Company maintains its cash and cash equivalents with various financial institutions, which exceed federally insured limits throughout
the year. At June 30, 2022, the Company had cash on deposit of approximately $46,834,000 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, 2022 and 2021. Net management fee receivables from the related party medical practices accounted for approximately 13% of the consolidated
accounts receivable for the years ended June 30, 2022 and 2021.
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, 2022 and 2021, 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.
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.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair
Value of Financial Instruments (Continued)
Receivable
and accounts payable: The carrying amounts approximate fair value because of the short maturity of those instruments.
Notes
receivable: The carrying amount approximates fair value because the discounted present value of the cash flow generated by the parties
approximates the carrying value of the amounts due to the Company.
Long-term
debt and notes payable: The carrying amounts of debt and notes payable approximate fair value due to the length of the maturities, the
interest rates being tied to market indices and/or due to the interest rates not being significantly different from the current market
rates available to the Company.
All
of the Company’s financial instruments are held for purposes other than trading.
Recent
Accounting Standards
FASB,
the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of June 30, 2022
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 2022 or 2021, 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.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
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 three years at June 30, 2022 is as follows:
| Receivables
- Non Current - net |
| |
2024 |
|
|
$ |
1,097,015 |
|
| |
2025 |
|
|
|
620,230 |
|
| |
2026 |
|
|
|
140,012 |
|
| |
Total |
|
|
$ |
1,857,257 |
|
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 reimbursement organizations, principally insurance companies and health management organizations.
Payment
of the management fee receivables from the PC’s may be impaired by the inability of the PC’s to collect in a timely manner
their medical fees from the third party payors, particularly insurance carriers covering automobile no-fault and workers compensation
claims due to longer payment cycles and rigorous informational requirements and certain other disallowed claims. Approximately 66% and
65%, respectively, of the PCs’ 2022 and 2021 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.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
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, 2022 and 2021, 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, 2022 and 2021.
Total
Facilities
| Schedule
of total facilities |
|
|
|
|
|
|
|
|
| |
|
For
the Year Ended June 30, |
| |
|
2022 |
|
2021 |
| Total
Facilities Owned or Managed (at Beginning of Year) |
|
|
27 |
|
|
|
25 |
|
| Facilities
Added by: |
|
|
|
|
|
|
|
|
| Acquisition |
|
|
— |
|
|
|
1 |
|
| Internal
development |
|
|
— |
|
|
|
1 |
|
| Managed
Facilities Closed |
|
|
— |
|
|
|
— |
|
| Total
Facilities Owned or Managed (at End of Year) |
|
|
27 |
|
|
|
27 |
|
NOTE
4 – CONTRACT ASSETS AND LIABILITIES
Information
relating to uncompleted contracts as of June 30, 2022 and 2021 about contract assets and contract (liabilities) is as follows:
| Schedule
of costs and estimated earnings on uncompleted contracts |
|
|
|
|
|
|
|
|
| |
|
As
of June 30, |
| |
|
2022 |
|
2021 |
| Costs
incurred on uncompleted contracts |
|
$ |
— |
|
|
$ |
294,783 |
|
| Estimated
earnings |
|
|
— |
|
|
|
567,978 |
|
| Costs
and estimated earnings on uncompleted contracts |
|
|
— |
|
|
|
862,761 |
|
| Less:
Billings to date |
|
|
— |
|
|
|
877,500 |
|
| Costs
and estimated earnings in excess of billings on uncompleted contracts |
|
$ |
— |
|
|
$ |
(14,739 |
) |
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
5 – INVENTORIES
Inventories
included in the accompanying consolidated balance sheets consist of:
| Schedule
of inventories |
|
|
|
|
|
|
|
|
| |
|
As
of June 30, |
| |
|
2022 |
|
2021 |
| Purchased
parts, components and supplies |
|
$ |
2,125,805 |
|
|
$ |
1,393,329 |
|
| Work-in-process |
|
|
234,016 |
|
|
|
270,090 |
|
| Inventories |
|
$ |
2,359,821 |
|
|
$ |
1,663,419 |
|
NOTE
6 - PROPERTY AND EQUIPMENT
Property
and equipment, at cost, less accumulated depreciation and amortization, at June 30, 2022 and 2021, is comprised of:
| Schedule
of property and equipment |
|
|
|
|
|
|
|
|
| |
|
As
of June 30, |
| |
|
2022 |
|
2021 |
| Diagnostic
equipment |
|
$ |
31,304,258 |
|
|
$ |
29,826,829 |
|
| Research,
development and demonstration equipment |
|
|
6,199,941 |
|
|
|
6,029,551 |
|
| Machinery
and equipment |
|
|
2,069,055 |
|
|
|
2,069,055 |
|
| Furniture
and fixtures |
|
|
3,484,525 |
|
|
|
3,450,664 |
|
| Leasehold
improvements |
|
|
14,087,581 |
|
|
|
12,961,887 |
|
| Building |
|
|
939,614 |
|
|
|
939,614 |
|
| |
|
|
58,084,974 |
|
|
|
55,277,600 |
|
| Less:
Accumulated depreciation and amortization |
|
|
35,803,183 |
|
|
|
33,427,461 |
|
| |
|
$ |
22,281,791 |
|
|
$ |
21,850,139 |
|
Depreciation
and amortization of property and equipment for the years ended June 30, 2022 and 2021 was $4,113,640 and $3,696,986, respectively. During
fiscal year ended June 30 2022, the Company wrote off fully depreciated assets of $1,737,918 that related to a location that was previously
closed.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
7 – 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 thee 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, 2022 is as follows:
| Reconciliation
of operating and financing lease payments |
|
|
|
|
| Year
Ending June 30, |
|
Operating
Lease Payments |
|
Financing
Lease Payments |
| |
2023 |
|
|
$ |
5,512,691 |
|
|
$ |
244,343 |
|
| |
2024 |
|
|
|
5,355,310 |
|
|
|
244,343 |
|
| |
2025 |
|
|
|
5,256,243 |
|
|
|
244,343 |
|
| |
2026 |
|
|
|
4,829,443 |
|
|
|
244,343 |
|
| |
2027 |
|
|
|
3,781,761 |
|
|
|
162,897 |
|
| |
Thereafter |
|
|
|
22,529,257 |
|
|
|
— |
|
| |
Present
value discount |
|
|
|
(10,293,586 |
) |
|
|
(91,838 |
) |
| |
Total
lease liability |
|
|
$ |
36,971,119 |
|
|
$ |
1,048,431 |
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
7 – OPERATING & FINANCING LEASES (CONTINUED)
Weighted
Average Remaining Lease Term
| Schedule
of Weighted Average Remaining Lease Term |
|
|
|
|
| Operating
leases - years |
|
|
10.9 |
|
| Finance
lease - years |
|
|
4.6 |
|
| Weighted
Average Discount Rate |
|
|
|
|
| Operating
leases |
|
|
4.9 |
% |
| Finance
lease |
|
|
3.6 |
% |
The
components of lease expense were as follows:
| Components
of lease expense |
|
|
|
|
| |
|
For
Year Ended June 30, |
| |
|
2022 |
|
2021 |
| Operating
lease cost |
|
$ |
5,668,199 |
|
|
$ |
6,145,701 |
|
Finance
lease cost: |
|
|
|
|
|
|
|
|
| Depreciation
of leased equipment |
|
$ |
198,881 |
|
|
$ |
198,881 |
|
| Interest
on lease liabilities |
|
|
41,603 |
|
|
|
47,472 |
|
| Total
finance lease cost |
|
$ |
240,484 |
|
|
$ |
246,353 |
|
Supplemental
cash flow information related to leases was as follows:
| Supplemental
cash flow information related to leases |
|
|
|
|
| |
|
For
year ended June 30, |
| Cash
paid for amounts included in the measurement of lease liabilities: |
|
2022 |
|
2021 |
| Operating
cash flows from operating leases |
|
$ |
5,133,369 |
|
|
$ |
4,970,934 |
|
| Financing
cash flows from financing leases |
|
$ |
244,344 |
|
|
$ |
130,038 |
|
| Right-of-use
& equipment assets obtained in exchange for lease obligations: |
|
|
|
|
|
|
|
|
| Operating
leases |
|
$ |
7,900,074 |
|
|
$ |
1,531,889 |
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
8 - OTHER INTANGIBLE ASSETS
Other
intangible assets, net of accumulated amortization, at June 30, 2022 and 2021 are comprised of:
| Schedule
of other intangible assets - net |
|
|
|
|
|
|
|
|
| |
|
As
of June 30, |
| |
|
2022 |
|
2021 |
| Capitalized
software development costs |
|
$ |
7,004,847 |
|
|
$ |
7,004,847 |
|
| Patents
and copyrights |
|
|
5,332,774 |
|
|
|
5,244,892 |
|
| Non-competition
agreements |
|
|
4,150,000 |
|
|
|
4,150,000 |
|
| Customer
relationships |
|
|
3,900,000 |
|
|
|
3,900,000 |
|
| |
|
|
20,387,621 |
|
|
|
20,299,739 |
|
| Less:
Accumulated amortization |
|
|
16,683,736 |
|
|
|
16,262,140 |
|
| |
|
$ |
3,703,885 |
|
|
$ |
4,037,599 |
|
The
estimated amortization of other intangible assets for the five years ending June 30, 2027 and thereafter is as follows:
| Schedule
Of Other Intangible Assets For the Years Ending June 30, | |
Total | |
Patents
and Copyrights | |
Customer
Relationships |
| | 2023 | | |
$ | 386,747 | | |
$ | 186,747 | | |
$ | 200,000 | |
| | 2024 | | |
| 386,446 | | |
| 186,446 | | |
| 200,000 | |
| | 2025 | | |
| 381,491 | | |
| 181,491 | | |
| 200,000 | |
| | 2026 | | |
| 378,866 | | |
| 178,866 | | |
| 200,000 | |
| | 2027 | | |
| 368,206 | | |
| 168,206 | | |
| 200,000 | |
| | Thereafter | | |
| 1,802,129 | | |
| 687,962 | | |
| 1,114,167 | |
| | Other
intangible assets - net | | |
$ | 3,703,885 | | |
$ | 1,589,718 | | |
$ | 2,114,167 | |
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
8 - OTHER INTANGIBLE ASSETS (CONTINUED)
The
weighted average amortization period for other intangible assets is 10.9 years and they have no expected residual value.
Information
related to the above intangible assets for the years ended June 30, 2022 and 2021 is as follows:
| Other
Intangible Assets |
|
|
|
|
| |
|
As
of June 30, |
| |
|
2022 |
|
2021 |
| Balance
– Beginning of Year |
|
$ |
4,037,599 |
|
|
$ |
4,109,129 |
|
| Amounts
capitalized |
|
|
87,882 |
|
|
|
313,705 |
|
| Software
or patents written off |
|
|
— |
|
|
|
(534 |
) |
| Amortization |
|
|
(421,596 |
) |
|
|
(384,701 |
) |
| Balance
– End of Year |
|
$ |
3,703,885 |
|
|
$ |
4,037,599 |
|
Amortization
of patents and copyrights for the years ended June 30, 2022 and 2021 amounted to $184,096 and $179,701, respectively.
Amortization
of non-competition agreements for the years ended June 30, 2022 and 2021 amounted to $37,500 and $12,500, respectively.
Amortization
of customer relationships for the years ended June 30, 2022 and 2021 amounted to $200,000 and $192,500, respectively.
NOTE
9 - CAPITAL STOCK
Common
Stock
Cash
dividends payable on the common stock shall, in all cases, be on a per share basis, one hundred twenty percent (120%) of the cash dividend
payable on shares of Class B common stock and three hundred sixty percent (360%) of the cash dividend payable on a share of Class C common
stock.
Class
B Common Stock
Class
B common stock is convertible into shares of common stock on a one-for-one basis. Class B common stock has 10 votes per share. There
were 146 of such shares outstanding at June 30, 2022 and 2021.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
9 - 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 first $10 million, 4-1/2% of next $20 million
and 5-1/2% on amounts in excess of $30 million of the amount of any cash awards or settlements received by the Company in connection
with the enforcement of five of the Company’s patents in its patent lawsuits, less the revised special dividend payable on the
common stock with respect to one of the Company’s patents.
The
Class A non-voting preferred stock participates on an equal per share basis with the common stock in any dividends declared and ranks
equally with the common stock on distribution rights, liquidation rights and other rights and preferences (other than the voting rights).
Stock
Bonus Plans
On
April 23, 2010, the Board approved the 2010 Stock Bonus Plan. The plan entitles the Company to reserve 2,000,000 shares of common stock.
On August 10, 2010, the Company filed Form S-8 to register the 2,000,000 shares. As of June 30, 2022, 450,177 shares of common stock
of FONAR were available for future grant under this plan. For the years ended June 30, 2022 and 2021, 0 and 106,747 shares were issued
respectively, of which $0 and $83,277 were expensed and included in selling, general and administrative expenses for the years ended
June 30, 2022 and 2021, respectively.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
9 - CAPITAL STOCK (CONTINUED)
Options
The
Company had stock option plans, which provided for the awarding of incentive and non-qualified stock options to employees, directors
and consultants who may contribute to the success of the Company. The options granted vest either immediately or ratably over a period
of time from the date of grant, typically three or four years, at a price determined by the Board of Directors or a committee of the
Board of Directors, generally the fair value of the Company’s common stock at the date of grant. The options had to be exercised
within ten years from the date of grant.
NOTE
10 – CONTROLLING AND NONCONTROLLING INTERESTS
On
February 13, 2013, the Company entered into an agreement with outside investors to acquire a 50.5% controlling interest in a newly formed
limited liability company, Health Diagnostics Management LLC (HDM). According to the February 13, 2013, LLC operating agreement of HDM
there are two classes of members; Class A members and one Class B member. The Class A members have an ownership interest of 49.5% of
HDM. The Class B member (HMCA) has an ownership of 50.5% of HDM. On all matters on which members may vote every member is entitled to
cast the percentage of votes equal to their percentage of ownership interest. Profits and losses on all items of income, gain or loss,
deductions or other allocations of the Company will be allocated among the members in the same proportions as their membership interests
in the Company bear to all the Class A and Class B membership interests of the Company in the aggregate outstanding. All of the depreciation
and amortization of the assets of the Company will be allocated solely to the Class A members, unless and until their interests have
been redeemed by the Company in full pursuant to the provisions of the operating agreement. The Company contributed $20,200,000 to HDM
and the group of outside investors contributed $19,800,000 for its non-controlling membership interest.
On
March 5, 2013 HDM purchased from Health Diagnostics, LLC (“HD”) and certain of its subsidiaries, a business managing twelve
(12) Stand-Up MRI Centers and two (2) other scanning centers located in the States of New York and Florida for a total purchase price
(including consideration of $1.5 million to outside investors) aggregating $35.9 million. Concurrently with the acquisition, HDM entered
into several consulting and non-competition agreements for a consideration of $4.1 million. The acquisition was accounted for using the
purchase method in accordance with ASC 805, “Business Combinations”. The Company recognized and measured goodwill as of the
acquisition date, as the excess of the fair value of the consideration paid over the fair value of the identified net assets acquired.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
10 – 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 $546,000 giving the Company a direct ownership interest of 70.8% and the investors’ a 29.2% ownership interest.
Amount
of each class of HDM members’ equity as of June 30, 2022 and 2021
| class
a and b members' equity (hdm acquisition) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June
30, 2022 |
|
June
30, 2021 |
| |
|
Class
A Members |
|
Class
B Member |
|
Class
A Members |
|
Class
B Member |
| Opening
Members’ Equity |
|
($ |
3,048,524 |
) |
|
$ |
41,923,380 |
|
|
$ |
55,253 |
|
|
$ |
39,850,419 |
|
| Share
of Net Income |
|
$ |
4,793,482 |
|
|
$ |
22,228,693 |
|
|
$ |
3,466,223 |
|
|
$ |
17,402,961 |
|
| Buyout
of noncontrolling interests |
|
$ |
23,441 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Distributions |
|
($ |
5,822,232 |
) |
|
($ |
13,860,000 |
) |
|
($ |
6,570,000 |
) |
|
($ |
15,330,000 |
) |
| Ending
Members’ Equity |
|
($ |
4,053,833 |
) |
|
$ |
50,292,073 |
|
|
($ |
3,048,524 |
) |
|
$ |
41,923,380 |
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
11 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES
Long-term
debt, notes payable and capital leases consist of the following:
| Long-term
debt, notes payable and capital leases | |
| |
|
| | |
2022 | |
2021 |
| 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 $379,163 as of June 30, 2022. | |
$ | 195,457 | | |
$ | 232,696 | |
| Note
payable received under the Paycheck Protection Program (‘PPP’) which was established as part of the Coronavirus Aid,
Relief and Economic Security Act (“Cares Act’) that provides for loans to qualifying businesses for amounts up to 2.5
times of the average monthly payroll expenses. The loans and accrued interest are forgivable after 24 weeks as long as the proceeds
are used for eligible purposes, including payroll, benefits, rent and utilities and maintains certain payroll levels. The unforgiven
portion of the PPP loan is payable over 5 five years at an interest rate of 1%, with a deferral of payments for the first six months.
The proceeds from the note payable were received on June 30, 2020. This note was forgiven in August 2021. | |
| — | | |
| 700,764 | |
| The
revolving credit note was extended to October 26, 2022. 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 5.5% 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. | |
| — | | |
| — | |
| | |
| 195,457 | | |
| 933,460 | |
| Less:
Current portion | |
| 40,078 | | |
| 173,206 | |
| | |
$ | 155,379 | | |
$ | 760,254 | |
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
11 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (CONTINUED)
The
maturities of debt over the next five years are as follows:
| Maturities
Of Long-Term Debt |
|
|
| Years
Ending June 30, |
|
|
| |
2023 |
|
|
$ |
40,078 |
|
| |
2024 |
|
|
|
43,766 |
|
| |
2025 |
|
|
|
47,002 |
|
| |
2026 |
|
|
|
50,448 |
|
| |
2027 |
|
|
|
14,163 |
|
| |
Long-Term
Debt Over Five Years and Thereafter |
|
|
$ |
195,457 |
|
NOTE
12 - INCOME TAXES
ASC
topic 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax
positions taken or expected to be taken in a corporate tax return. For those benefits to be recognized, a tax position must be more-likely-than-not
to be sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return
and the benefit recognized and measured pursuant to the interpretation are referred to as unrecognized benefits. A liability is recognized
(or amount of net operating loss carryforward or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents
an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying
the provisions of ASC topic 740. The Company believes there are no uncertain tax positions in prior years tax filings and therefore it
has not recorded a liability for unrecognized tax benefits.
In
accordance with ASC topic 740, interest costs related to unrecognized tax benefits are required to be calculated (if applicable) and
would be classified as “Interest expense, net. Penalties if incurred would be recognized as a component of “Selling, general
and administrative” expenses.
The
Company files corporate income tax returns in the United States (federal) and in various state and local jurisdictions. In most instances,
the Company is no longer subject to federal, state and local income tax examinations by tax authorities for years prior to 2017 for federal
and 2016 for state.
The
Company has recorded a deferred tax asset of $12,842,478 and a deferred tax liability of $215,726 as of June 30, 2022, primarily relating
to its net Federal operating loss carryforwards of approximately $20,048,000 available to offset future taxable income through 2031.
In addition the Company has state operating loss carryforwards of approximately $5,309,000 and city operating loss carryforwards of approximately
$1,853,000. The net operating losses begin to expire in 2025 for federal tax and state income tax purposes.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
12 - INCOME TAXES (CONTINUED)
Future
ownership changes as determined under Section 382 of the Internal Revenue code could further limit the utilization of net operating loss
carryforwards. As of June 30, 2022, no such changes in ownership have occurred.
The
ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which temporary
differences become deductible or when such net operating losses can be utilized. The Company considers projected future taxable income,
the regulatory environment of the industry, and tax planning strategies in making this assessment. At present, the Company believes that
it is more likely than not that the benefits from certain deferred tax asset carryforwards, will not all be fully realized. In recognition
of this inherent risk, a valuation allowance was established for the partial value of the deferred tax asset, which principally related
to research and development tax credits.
A
valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of the remainder of the valuation.
The
valuation allowance for deferred tax assets decreased during the year ended June 30, 2022, by approximately $448,000. The valuation allowance
decreased by approximately $3,547,000 during the year ended June 30, 2021.
Components
of the provision (benefit) for income taxes are as follows:
| Components
Of The Provision For Income Taxes |
|
|
|
|
| |
|
Years
Ended June 30, |
| Current: |
|
2022 |
|
2021 |
| Federal |
|
$ |
|
|
|
$ |
- |
|
| State |
|
|
2,440,594 |
|
|
|
1,136,514 |
|
| Subtotal |
|
|
2,440,594 |
|
|
|
1,136,514 |
|
| Deferred: |
|
|
|
|
|
|
|
|
| Federal
deferred taxes |
|
|
2,935,921 |
|
|
|
2,718,046 |
|
| State
deferred taxes |
|
|
157,972 |
|
|
|
136,960 |
|
| Subtotal |
|
|
3,093,893 |
|
|
|
2,855,006 |
|
| Provision
(Benefit) for Income Taxes - Net |
|
$ |
5,534,487 |
|
|
$ |
3,991,520 |
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
12 - 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 |
|
|
|
|
| |
|
Years
Ended June 30, |
| |
|
2022 |
|
2021 |
| Taxes
at federal statutory rate |
|
|
21.0 |
% |
|
|
21.0 |
% |
| State
and local income taxes (benefit), net of federal benefit |
|
|
4.2 |
% |
|
|
3.3 |
% |
| Non
Controlling interest |
|
|
(5.5 |
)% |
|
|
(4.9 |
)% |
| Expiration
of tax credits |
|
|
2.0 |
% |
|
|
4.6 |
% |
| Return
to provision adjustments |
|
|
0.7 |
% |
|
|
6.1 |
% |
| NYS
Audit Settlement |
|
|
4.5 |
% |
|
|
3.2 |
% |
| Change
in the valuation allowance |
|
|
(2.0 |
)% |
|
|
(20.0 |
)% |
| Other |
|
|
(0.6 |
)% |
|
|
9.3 |
% |
| Effective
income tax rate |
|
|
24.3 |
% |
|
|
22.6 |
% |
As
of June 30, 2022, the Company has net operating loss (“NOL”) carryforwards of approximately $20,048,000 that will be available
to offset future taxable income. The utilization of certain of the NOLs is limited by separate return limitation year rules pursuant
to Section 1502 of the Internal Revenue Code.
The
Company has, for federal income tax purposes, research and development tax credits and investments tax credits carryforwards aggregating
$3,347,000. However, the realization of these credits may be limited as a result of expiring prior to their utilization. These credits
can only be applied after all net operating losses have been used, which expire through 2031. As such, the Company has established a
valuation reserve for anticipated unused credits of $442,000.
In
addition, for New York State income tax purposes, the Company has tax credit carryforwards aggregating approximately $27,000 which, are
accounted for under the flow-through method.
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.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
12 - INCOME TAXES (CONTINUED)
Significant
components of the Company’s deferred tax assets and liabilities at June 30, 2022 and 2021 are as follows:
| Components
Of Company’s Deferred Tax Assets And Liabilities |
|
|
|
|
| |
|
June
30, |
| |
|
2022 |
|
2021 |
| Deferred
tax assets: |
|
|
|
|
|
|
|
|
| Allowance
for doubtful accounts |
|
$ |
4,239,903 |
|
|
$ |
3,827,382 |
|
| Non-deductible
accruals |
|
|
707,400 |
|
|
|
749,902 |
|
| Net
operating carryforwards |
|
|
4,820,010 |
|
|
|
8,285,163 |
|
| Tax
credits |
|
|
3,346,509 |
|
|
|
3,732,650 |
|
| Inventory |
|
|
98,945 |
|
|
|
66,316 |
|
| Property
and equipment and depreciation |
|
|
71,576 |
|
|
|
187,632 |
|
| Deferred
Tax Assets - gross |
|
|
13,284,343 |
|
|
|
16,849,045 |
|
| Valuation
allowance |
|
|
(441,865 |
) |
|
|
(890,084 |
) |
| Total
deferred tax assets |
|
|
12,842,478 |
|
|
|
15,958,961 |
|
| Intangibles |
|
|
(215,726 |
) |
|
|
(238,316 |
) |
| Total
deferred tax liabilities |
|
|
(215,726 |
) |
|
|
(238,316 |
) |
| Net
deferred tax asset |
|
$ |
12,626,752 |
|
|
$ |
15,720,645 |
|
NOTE
13 - OTHER CURRENT LIABILITIES
Included
in other current liabilities are the following:
| Other
Current Liabilities |
|
|
|
|
| |
|
June
30, |
| |
|
2022 |
|
2021 |
| Accrued
salaries, commissions and payroll taxes |
|
$ |
4,652,173 |
|
|
$ |
5,406,982 |
|
| Litigation
accruals |
|
|
— |
|
|
|
900,000 |
|
| Sales
tax payable |
|
|
248,702 |
|
|
|
644,623 |
|
| State
income taxes payable |
|
|
382,000 |
|
|
|
774,234 |
|
| Legal
and other professional fees |
|
|
20,707 |
|
|
|
37,827 |
|
| Accounting
fees |
|
|
120,000 |
|
|
|
127,262 |
|
| Self-funded
health insurance reserve |
|
|
79,167 |
|
|
|
62,548 |
|
| Accrued
interest and penalty |
|
|
59,516 |
|
|
|
493,042 |
|
| Other |
|
|
854,962 |
|
|
|
715,600 |
|
| Other
current liabilities |
|
$ |
6,417,227 |
|
|
$ |
9,162,118 |
|
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
14 - COMMITMENTS AND CONTINGENCIES
Leases
The
Company rents its operating facilities and certain equipment, pursuant to operating lease agreements expiring at various dates through
March 2030. The leases for certain facilities contain escalation clauses relating to increases in real property taxes as well as certain
maintenance costs.
Rent
expense for operating leases approximated $5,668,000 and $6,146,000, for the years ended June 30, 2022 and 2021, respectively.
The
Company received approval from the Suffolk County IDA on February 29, 2016 of a 50% property tax abatement, valued at $440,000, over
a 10 year period commencing January 2017.
Employee
Benefit Plans
The
Company has a non-contributory 401(k) Plan (the “401(k) Plan”). The 401(k) Plan covers all non-union employees who are at
least 21 years of age with no minimum service requirements. There were $0 and $36,799 employer contributions to the Plan for the years
ended June 30, 2022 and 2021.
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, 2022.
Litigation
In
September 2019, The Company was notified by one of its landlords that it was required to vacate the premises within 180 days under the
demolition clause in the lease. The Company believes the lease renewal which was not negotiated in good faith since the renewal was negotiated
in February 2018. The Company is in the process of relocating to a new location but the original lease provided for penalty payments
in the event that the Company had not vacated the leased space. The Company has been making normal rent payments throughout the course
of the arbitration proceedings. The Company settled the case for $900,000 for the leasehold holdover charges which was paid in August
2021.
In
September 2020, the Company entered into a settlement agreement with an unrelated third party for a claim made during March 2018 which
was scheduled for arbitration. The settlement was for $1.2 million of which $900,000 was paid by the Company’s insurance on September
15, 2020 with the remaining $315,000 paid by the Company on September 28, 2020.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
14 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Other
Matters
The
Company is subject to other legal proceedings and claims arising from the ordinary course of its business, including personal injury,
customer contract and employment claims besides the claim above. In the opinion of management, and with consultation with legal council,
the aggregate liability, if any, with respect to such actions, will not have a material adverse effect on the consolidated financial
position or results of operations of the Company.
The
Company 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, 2022 and 2021, the Company had approximately $79,000 and $63,000, respectively,
in reserve for its self-funded health insurance programs. The reserves are included in “Other current liabilities” in the
consolidated balance sheets.
The
Company regularly analyzes its reserves for incurred but not reported claims, and for reported but not paid claims related to its reinsurance
and self-funded insurance programs. The Company believes its reserves are adequate. However, significant judgment is involved in assessing
these reserves such as assessing historical paid claims, average lags between the claims’ incurred date, reported dates and paid
dates, and the frequency and severity of claims. There may be differences between actual settlement amounts and recorded reserves and
any resulting adjustments are included in expense once a probable amount is known. There were no significant adjustments recorded in
the years covered by this report.
NOTE
15 - SUPPLEMENTAL CASH FLOW INFORMATION
During
the years ended June 30, 2022 and 2021 the Company paid $617,029 and $75,178 for interest, respectively.
During
the years ended June 30, 2022 and 2021 the Company paid $2,408,145 and $261,032 for income taxes, respectively.
During
the years ended June 30, 2022 and 2021, the Company issued 0 and 102,364 shares of common stock for costs and expenses totaling $0 and
$1,940,821, respectively.
During
the years ended June 30, 2022 and 2021, the Company resolved certain sales tax liabilities and was able to reverse accrued interest and
penalties in the amount of $119,000 and $602,000, respectively, which has been recorded under selling, general and administrative expenses.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
16 – RELATED PARTY TRANSACTIONS
The
CEO and President of the Company is a minority owner of a billing company, which performs billing and collection services with respect
to No-Fault and Workers’ Compensation claims of the Company’s clients. The monthly fee charged to the Company was $85,000.
The Company terminated this agreement on January 1, 2021. On June 1, 2017, the Company also entered into a one year renewable agreement
to provide IT services to the billing company for a monthly fee of $23,884. The agreement was renewed on June 1, 2022 for another year.
Bensonhurst
MRI Limited Partnership, in which the CEO and President of the Company holds an interest, is party to an agreement with the Company for
the service and maintenance of its Upright MRI Scanner for a price of $110,000 per annum.
NOTE
17 - SEGMENT AND RELATED INFORMATION
The
Company provides segment data in accordance with the provisions of ASC topic 280, “Disclosures about Segments of an Enterprise
and Related Information”.
The
Company operates in two industry segments - manufacturing and the servicing of medical equipment and management of diagnostic imaging
centers.
The
accounting policies of the segments are the same as those described in the summary of significant accounting policies. All intersegment
sales are market-based. The Company evaluates performance based on income or loss from operations.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
17 - SEGMENT AND RELATED INFORMATION (CONTINUED)
Summarized
financial information concerning the Company’s reportable segments is shown in the following table:
Summarized
Segment Financial Information
| Schedule
of summarized segment financial information |
|
|
|
|
|
|
| |
|
Manufacturing
and Servicing of Medical |
|
Management
of Diagnostic Imaging |
|
|
| Fiscal
2022: |
|
Equipment |
|
Center |
|
Totals |
| Net
revenues from external customers |
|
$ |
8,218,804 |
|
|
$ |
89,373,341 |
|
|
$ |
97,592,145 |
|
| Intersegment
net revenues * |
|
$ |
965,417 |
|
|
$ |
— |
|
|
$ |
965,417 |
|
| (Loss)
Income from operations |
|
$ |
(4,604,305 |
) |
|
$ |
26,611,487 |
|
|
$ |
22,007,182 |
|
| Depreciation
and amortization |
|
$ |
263,559 |
|
|
$ |
4,271,677 |
|
|
$ |
4,535,236 |
|
| Compensatory
element of stock issuances |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
| Total
identifiable assets |
|
$ |
10,259,937 |
|
|
$ |
189,082,045 |
|
|
$ |
199,341,982 |
|
| Capital
expenditures |
|
$ |
258,271 |
|
|
$ |
4,374,903 |
|
|
$ |
4,633,174 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal
2021: |
|
|
|
|
|
|
|
|
|
|
|
|
| Net
revenues from external customers |
|
$ |
9,037,091 |
|
|
$ |
80,892,674 |
|
|
$ |
89,929,765 |
|
| Intersegment
net revenues * |
|
$ |
901,250 |
|
|
$ |
— |
|
|
$ |
901,250 |
|
| (Loss)
Income from operations |
|
$ |
(3,410,189 |
) |
|
$ |
20,507,804 |
|
|
$ |
17,097,615 |
|
| Depreciation
and amortization |
|
$ |
264,830 |
|
|
$ |
3,816,857 |
|
|
$ |
4,081,687 |
|
| Compensatory
element of stock issuances |
|
$ |
83,277 |
|
|
$ |
— |
|
|
$ |
83,277 |
|
| Total
identifiable assets |
|
$ |
24,592,582 |
|
|
$ |
164,913,613 |
|
|
$ |
189,506,195 |
|
| Capital
expenditures |
|
$ |
291,294 |
|
|
$ |
3,405,502 |
|
|
$ |
3,696,796 |
|
| * |
Amounts
eliminated in consolidation |
Export
Product Sales
The
Company’s areas of operations are principally in the United States. The Company had export sales of medical equipment amounting
to 48.9% and 69.3% of product sales revenues to third parties for the years ended June 30, 2022 and 2021, respectively.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
17 - SEGMENT AND RELATED INFORMATION (CONTINUED)
Export
Product Sales
The
foreign product sales, as a percentage of product sales to unrelated parties, were made to customers in the following countries:
| Schedule
of export product sales |
|
|
|
|
|
|
|
|
| |
|
For
the Years Ended June 30 |
| |
|
2022 |
|
2021 |
| Dominican
Republic |
|
|
12.0 |
% |
|
|
67.0 |
% |
| Canada |
|
|
0.6 |
% |
|
|
0.1 |
% |
| Germany |
|
|
— |
|
|
|
2.1 |
% |
| Puerto
Rico |
|
|
36.3 |
% |
|
|
0.1 |
% |
| |
|
|
48.9 |
% |
|
|
69.3 |
% |
Foreign
Service and Repair Fees
The
Company’s areas of service and repair are principally in the United States. The Company had foreign revenues of service and repair
of medical equipment amounting to 4.4% and 4.5% of consolidated net service and repair fees for the years ended June 30, 2022 and 2021
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
| Schedule of foreign
service and repair fees |
|
|
|
|
|
|
|
|
| |
|
For
the Years Ended June 30, |
| |
|
2022 |
|
2021 |
| Puerto
Rico |
|
|
1.5 |
% |
|
|
1.5 |
|
| Switzerland |
|
|
0.3 |
|
|
|
0.3 |
|
| Germany |
|
|
1.6 |
|
|
|
1.5 |
|
| England |
|
|
0.6 |
|
|
|
0.6 |
|
| Canada |
|
|
— |
|
|
|
0.3 |
|
| Greece |
|
|
0.3 |
|
|
|
0.3 |
|
| Australia |
|
|
0.1 |
|
|
|
— |
|
| |
|
|
4.4 |
% |
|
|
4.5 |
|
The
Company does not have any material assets outside of the United States.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
18 – ACQUISTION
On
March 29, 2021, the Company completed the acquisition of certain assets of Rockland Management Group, located in West Yonkers. The Company
used an incremental borrowing rate of 4% to value the right to use asset in connection with the assumed operating lease obligation. We
made a fair value determination of the acquired assets and assumed liabilities as follows:
| Fair
value assets and assumed liabilities |
|
|
| Property
and equipment |
|
$ |
650,000 |
|
| Right
to use assets |
|
|
434,219 |
|
| Intangible
assets |
|
|
150,000 |
|
| Security
Deposit |
|
|
38,628 |
|
| Right
to use liability |
|
|
(434,219 |
) |
| Goodwill |
|
|
283,880 |
|
| Total
purchase consideration |
|
$ |
1,122,508 |
|
In
accordance with ASC 805-10-25-1, Business Combinations – Overall Recognition, the Company recorded the transaction as a business
combination. ASC 805-10-25-1 provides the requirements of recording the transaction by applying the acquisition method. The acquisition
method requires the Company to determine if the assets and liabilities acquired are a business or not. Under ASC 805-10-25-1, it must
be determined if there is a specific acquisition party, acquisition date, identifiable assets acquired and liabilities assumed and must
be able to recognized and measure goodwill or a gain from the purchase. Based upon this guidance, the acquisition had been recorded as
a business combination.
The
net assets acquired and consideration is as follow:
| Net
assets acquired |
|
|
| Leasehold
Improvements |
|
$ |
550,000 |
|
| Diagnostic
Equipment |
|
|
100,000 |
|
| Customer
Lists |
|
|
100,000 |
|
| Covenant
Not to Compete |
|
|
50,000 |
|
| Security
Deposit |
|
|
38,628 |
|
| Closing
costs - expensed |
|
|
3,478 |
|
| Goodwill |
|
|
283,880 |
|
| Cash
Consideration Paid |
|
$ |
1,125,986 |
|
The
results of operations of Rockland Management Group were diminutive and did not affect the pro forma results of operations.
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
19 – ALLOWANCE FOR DOUBTFUL ACCOUNTS
The
following represents a summary of allowance for doubtful accounts for the years ended June 30, 2022 and 2021 respectively:
| Summary
of Allowance For Doubtful Accounts |
| Description |
|
Balance
June 30, 2021 |
|
Additions
(1) |
|
Deductions |
|
Balance
June 30, 2022 |
| Accounts
receivable |
|
$ |
442,270 |
|
|
$ |
— |
|
|
$ |
237,673 |
|
|
$ |
204,597 |
|
| Management
and other fees receivable |
|
|
15,786,878 |
|
|
|
841,039 |
|
|
|
— |
|
|
|
16,627,917 |
|
| Management
and other fees receivable - related medical practices |
|
|
4,184,399 |
|
|
|
502,494 |
|
|
|
— |
|
|
|
4,686,893 |
|
| Notes
receivable |
|
|
777,354 |
|
|
|
— |
|
|
|
— |
|
|
|
777,354 |
|
| |
|
Balance |
|
|
|
|
|
Balance |
| Description |
|
June
30, 2020 |
|
Additions |
|
Deductions |
|
June
30, 2021 |
| Accounts
receivable |
|
$ |
514,561 |
|
|
$ |
— |
|
|
$ |
72,291 |
|
|
$ |
442,270 |
|
| Management
and other fees receivable |
|
|
11,063,233 |
|
|
|
4,723,645 |
|
|
|
— |
|
|
|
15,786,878 |
|
| Management
and other fees receivable - related medical practices |
|
|
3,322,055 |
|
|
|
862,344 |
|
|
|
— |
|
|
|
4,184,399 |
|
| Notes
receivable |
|
|
777,354 |
|
|
|
— |
|
|
|
— |
|
|
|
777,354 |
|
| (1) |
Included
in provision for bad debts. |
FONAR
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
20 - QUARTERLY FINANCIAL DATA (UNAUDITED)
(000’s
omitted, except per share data)
| Quarterly
Financial Data |
|
|
|
|
|
|
|
|
|
|
| |
|
September
30, 2021 |
|
December
30, 2021 |
|
March
31, 2022 |
|
June
30, 2022 |
|
Total |
| Total
Revenues – Net |
|
$ |
23,730 |
|
|
$ |
24,479 |
|
|
$ |
24,571 |
|
|
$ |
24,812 |
|
|
$ |
97,592 |
|
| Total
Costs and Expenses |
|
|
17,989 |
|
|
|
17,996 |
|
|
|
18,933 |
|
|
|
20,667 |
|
|
|
75,585 |
|
| Net
Income |
|
|
5,182 |
|
|
|
5,137 |
|
|
|
3,262 |
|
|
|
3,653 |
|
|
|
17,234 |
|
| Basic
Net Income Per Common Share Available to Common Stockholders |
|
$ |
0.56 |
|
|
$ |
0.58 |
|
|
$ |
0.33 |
|
|
$ |
0.31 |
|
|
$ |
1.78 |
|
| Diluted
Net Income Per Common Share Available to Common Stockholders |
|
$ |
0.55 |
|
|
$ |
0.57 |
|
|
$ |
0.32 |
|
|
$ |
0.31 |
|
|
$ |
1.75 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
September
30, 2020 |
|
December
30, 2020 |
|
March
31, 2021 |
|
June
30, 2021 |
|
Total |
| Total
Revenues – Net |
|
$ |
20,979 |
|
|
$ |
21,164 |
|
|
$ |
23,090 |
|
|
$ |
24,697 |
|
|
$ |
89,930 |
|
| Total
Costs and Expenses |
|
|
16,829 |
|
|
|
16,182 |
|
|
|
18,968 |
|
|
|
20,853 |
|
|
|
72,832 |
|
| Net
Income |
|
|
3,251 |
|
|
|
3,928 |
|
|
|
4,299 |
|
|
|
2,196 |
|
|
|
13,674 |
|
| Basic
Net Income Per Common Share Available to Common Stockholders |
|
$ |
0.37 |
|
|
$ |
0.45 |
|
|
$ |
0.55 |
|
|
$ |
0.10 |
|
|
$ |
1.47 |
|
| Diluted
Net Income Per Common Share Available to Common Stockholders |
|
$ |
0.36 |
|
|
$ |
0.44 |
|
|
$ |
0.54 |
|
|
$ |
0.11 |
|
|
$ |
1.45 |
|
NOTE
21 – SUBSEQUENT EVENTS
The
Company evaluates events that have occurred after the balance sheet date, but before the consolidated financial statements are issued.
During
September 2022 the Company amended their revolving credit agreement. The agreement was extended to October 26, 2022. The interest
rate on borrowings remains at 5.5% along with certain financial covenants.
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 purchased under the plan
which will be purchased on the publicly traded open market at prevailing prices.
FONAR
CORPORATION AND SUBSIDIARIES
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There
have been no disagreements with our independent registered public accounting firm or other matters requiring disclosure under Regulation
S-K, Item 304(b).
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As
of the end of the period covered by this Annual Report on Form 10-K, we performed an evaluation under the supervision of and with the
participation of management, including our Principal Executive Officer and our Acting Principal Financial Officer, of the design and
effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act
of 1934 as amended (the “Exchange Act”). Based upon that evaluation, our Principal Executive Officer and Acting Principal
Financial Officer concluded, as of the end of the period covered by this Annual Report that our disclosure controls and procedures were
effective.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting, as is defined in the Exchange
Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our
financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
Our
management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO-2013). Based on this
evaluation, our management concluded that our internal control over financial reporting was effective at June 30, 2022.
Based
on the COSO criteria, management concluded that our internal controls were effective to prevent material misstatements of the Company’s
annual or interim financial statements.
Changes
in Internal Controls over Financial Reporting
There
have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the
most recent fiscal quarter and year ended June 30, 2022 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
FONAR
CORPORATION AND SUBSIDIARIES
Item
9B. OTHER INFORMATION
None.
PART
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS.
Directors
serve from the date of their election until the next annual meeting of stockholders and until their successors are elected and qualify.
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 John Collins.
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.
The
officers and directors of the Company are set forth below:
| Timothy
R. Damadian |
|
|
58 |
|
|
Chairman
of the Board, President, Chief Executive Officer and Treasurer |
| Luciano
B. Bonanni |
|
|
67 |
|
|
Executive
Vice President, Chief Operating Officer and acting Principal Financial Officer |
| Claudette
J.V. Chan |
|
|
84 |
|
|
Director |
| Ronald
J. Lehman |
|
|
46 |
|
|
Director |
| Richard
E. Turk |
|
|
38 |
|
|
Director |
| John
Collins |
|
|
41 |
|
|
Director |
FONAR
CORPORATION AND SUBSIDIARIES
Raymond
V. Damadian, M.D. was the founder of Fonar and served as the Company’s Chairman of the Board until his unexpected death in August,
2022. He continued to work and serve the Company as Chairman of The Board and Treasurer for the full 2022 fiscal year. Prior to founding
Fonar, Dr. Damadian was employed by the State University of New York, Downstate Medical Center, New York, as an Associate Professor of
Biophysics and Associate Professor of Internal Medicine from 1967 until September 1979. He received an M.D. degree in 1960 from Albert
Einstein College of Medicine, New York, and a B.S. degree in mathematics from the University of Wisconsin in 1956. In addition, Dr. Damadian
conducted post-graduate work at Harvard University, where he studied extensively in the fields of physics, mathematics and electronics.
Dr. Damadian is the author of numerous articles and books on the nuclear magnetic resonance effect in human tissue, which is the theoretical
basis for the Fonar MRI scanners. He was a 1988 recipient of the National Medal of Technology. In 1989 he was inducted into the National
Inventors Hall of Fame, for his contributions in conceiving and developing the application of magnetic resonance technology to medical
applications including whole body scanning and diagnostic imaging.
Timothy
Damadian has been the Chariman 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.
FONAR
CORPORATION AND SUBSIDIARIES
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.
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. At PRISM, Mr. Turk has
overseen the sourcing, analysis and completion of 30 acquisitions. He spearheaded growth efforts that helped PRISM expand from a single-speciality
(retina) provider with 17 locations and 21 physicians to a comprehensive, vertically-integrated, multi-specialty, eye care organization
with approximately 180 physicians and more than 90 locations across New Jersey, Pennsylvania, Delaware, Virgina, 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 with a B.A. in American History in 2007.
FONAR
CORPORATION AND SUBSIDIARIES
John
Collins has been a Director of Fonar since November 17, 2021, when he was unanimously appointed by the remaining four Directors to fill
the vacancy resulting from the death of his predecessor, Charles N. O’Data. Mr. Collins is an attorney with Bell Law Group where
he handles the prosecution and defense of personal injury, property damage, insurance coverage disputes and employment matters. He joined
the firm in June 2022. Prior to joining the Bell Law Group, Mr. Collins was a partner at Brownell Partners, PLLC where he provided litigation
defense for the insureds of various commercial and personal lines insurance companies. Mr. Collins graduated magna cum laude from New
York Law School in 2012, where he was a John Marshall Harlan Scholar and a staff editor for the New York Law School Law Review. In 2011,
Mr. Collins served as a judicial intern at the Southern District of New York, in the chambers of the Honorable Paul A. Crotty. Upon graduation,
Mr. Collins completed a Fellowship with the Corporation Counsel of the City of New York.
| Board
Diversity Matrix as of September 15, 2022 |
| Total
Number of Directors |
|
5 |
| Part
I: Gender Identity |
Female |
Male |
Did
not disclose gender |
| |
Directors |
1 |
3 |
1 |
| Part
II: Demographic Background |
|
|
| |
White |
1 |
3 |
|
| Did
Not Disclose Demographic Background |
1 |
| Director
with Disabilities |
|
|
1 |
ITEM
11. EXECUTIVE COMPENSATION.
With
the exception of the Chief Executive Officer and the Chairman of the Board of Directors, the compensation of the Company’s executive
officers is based on a combination of salary and bonuses based on performance. The Chairman of the Board’s compensation consists
of a salary. The Chief Executive Officer and the Chairman of the Board have no understandings with the Company with respect to bonuses,
options or other incentives; they are not subject to our general policy later discussed.
The
Board of Directors does not have a compensation Committee. Dr. Raymond V. Damadian, Chairman of the Board, controls over 50% of the voting
power of our capital stock. Dr. Damadian is both an executive officer and a member of the Board of Directors. Dr. Damadian, the Chief
Executive Officer and the Chief Operating Officer, participate in the determination of compensation for the Company’s management
and other employees.
The
Board of Directors has established an audit committee. The members of the committee are, Ronald G. Lehman, Richard E. Turk and John Collins.
FONAR
CORPORATION AND SUBSIDIARIES
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 2022, 2021 and 2020 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.
SUMMARY
COMPENSATION TABLE
(Reflects
information up to end of Fiscal 2022)
| Name
and All Other Principal Position | |
Year | |
Salary
($) | |
Cash
Bonuses
($) | |
Stock
Awards
($) | |
Total
Compensation ($) |
| (a) | |
(b) | |
(c) | |
(d) | |
(e) | |
(f) |
| Timothy
R. Damadian | |
| 2022 | | |
$ | 0 | | |
$ | 305,800 | | |
$ | 0 | | |
$ | 305,800 | |
| President,
Principal | |
| 2021 | | |
$ | 0 | | |
$ | 155,800 | | |
$ | 0 | | |
$ | 155,800 | |
| Executive
Officer | |
| 2020 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Raymond
V. Damadian | |
| 2022 | | |
$ | 153,095 | | |
$ | 305,800 | | |
$ | 0 | | |
$ | 458,895 | |
| Chairman
of the Board, | |
| 2021 | | |
$ | 153,095 | | |
$ | 305,800 | | |
$ | 0 | | |
$ | 458,895 | |
| Treasurer
and | |
| 2020 | | |
$ | 153,095 | | |
$ | 0 | | |
$ | 0 | | |
$ | 153,095 | |
| Principal
Financial Officer | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Luciano
Bonanni | |
| 2022 | | |
$ | 148,572 | | |
$ | 305,800 | | |
$ | 0 | | |
$ | 454,372 | |
| Chief
Operating Officer and | |
| 2021 | | |
$ | 146,038 | | |
$ | 0 | | |
$ | 152,931 | | |
$ | 298,969 | |
| Executive
Vice President | |
| 2020 | | |
$ | 146,496 | | |
$ | 0 | | |
$ | 152,902 | | |
$ | 299,398 | |
| II | .
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END |
| Name |
|
Number
Of Securities Underlying Unexercised Options (#) Exercisable |
|
Option
Exercise Price ($) |
|
Option
Exercise Expiration Date |
| |
|
(a) |
|
(b) |
|
(c) |
| Raymond
V. Damadian, Chairman of the Board, Treasurer and Principal Financial Officer |
|
|
0 |
|
|
|
0 |
|
|
N/A |
| Timothy
R. Damadian, President and Principal Executive Officer |
|
|
0 |
|
|
|
0 |
|
|
N/A |
| Luciano
Bonanni, Chief Operating Officer, Executive Vice President and acting Principal Financial Officer |
|
|
0 |
|
|
|
0 |
|
|
N/A |
FONAR
CORPORATION AND SUBSIDIARIES
The
following table shows the compensation paid to the Directors for fiscal 2022:
| Name |
|
Fees
earned in pad in cash ($) |
|
Stock
awards ($) |
|
Option
awards ($) |
|
Non-equity
incentive plan compensation |
|
Nonqualified
deferred compensation earnings
($) |
|
All
other compensation ($) |
|
Total
($) |
| (a) |
|
(b) |
|
(c) |
|
(d) |
|
(e) |
|
(f) |
|
(g) |
|
(h) |
| A.
Claudette J.V. Chan |
|
$ |
20,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
38,880 |
|
|
$ |
58,880 |
|
| B.
Ronald G. Lehman |
|
$ |
20,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
60,000 |
|
|
$ |
80,000 |
|
| C.
Richard E. Turk |
|
$ |
20,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
$ |
15,000 |
|
|
$ |
35,000 |
|
| D.
John Collins |
|
$ |
20,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
$ |
1,538 |
|
|
$ |
21,538 |
|
| E.
Charles O’Data(Deceased) |
|
$ |
9,931 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
$ |
0 |
|
|
$ |
9,931 |
|
EMPLOYEE
COMPENSATION PLANS
Fonar’s
2005 Incentive Stock Option Plan, adopted on February 15, 2005, was intended to qualify as an incentive stock option plan under Section
422A of the Internal Revenue code of 1954, as amended. The Plan permits the issuance of stock options covering an aggregate of 80,000
shares of common stock of Fonar. The options issued have an exercise price equal to the fair market value of the underlying stock on
the date the option is granted, are non-transferable, are exercisable for a period not exceeding ten years, and expire upon the voluntary
termination of employment. The Plan terminated on February 14, 2015.
Fonar
adopted its 2010 Stock Bonus Plan, on June 28, 2010. This Plan permits Fonar to issue an aggregate of 2,000,000 shares of common stock
of Fonar as bonus or compensation. As of June 30, 2022, 450,177 shares were available for issuance.
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, 2022.
| Name
and Address of Beneficial Owner (1) (2) |
|
Shares
Beneficially Owned |
|
Percent
of Class |
| Estate
of Raymond V. Damadian, M.D. |
|
|
|
|
|
|
|
|
| c/o
Fonar Corporation, Melville, New York |
|
|
|
|
|
|
|
|
| 5%
+ Stockholder |
|
|
|
|
|
|
|
|
| Common
Stock |
|
|
123,465 |
|
|
|
1.88 |
% |
| Class
C Stock |
|
|
382,447 |
|
|
|
99.98 |
% |
| Class
A Preferred |
|
|
19,093 |
|
|
|
6.09 |
|
| |
|
|
|
|
|
|
|
|
| Kayne
Anderson Rudnick |
|
|
|
|
|
|
|
|
| Investment
Management LLC |
|
|
|
|
|
|
|
|
| 1800
Avenue of the Stars, 2nd Floor |
|
|
|
|
|
|
|
|
| Los
Angeles, CA 90067 |
|
|
|
|
|
|
|
|
| Common
Stock |
|
|
752,006 |
|
|
|
11.45 |
% |
| |
|
|
|
|
|
|
|
|
| Renaissance
Technologies LLC |
|
|
|
|
|
|
|
|
| Renaissance
Technologies Holding |
|
|
|
|
|
|
|
|
| Corporation |
|
|
|
|
|
|
|
|
| 800
Third Avenue |
|
|
|
|
|
|
|
|
| New
York, New York 10022 |
|
|
|
|
|
|
|
|
| Common
Stock |
|
|
382,716 |
|
|
|
5.82 |
% |
| |
|
|
|
|
|
|
|
|
| Dimensional
Fund Advisors LP |
|
|
|
|
|
|
|
|
| Building
One |
|
|
|
|
|
|
|
|
| 6300
Bee Cave Road |
|
|
|
|
|
|
|
|
| Austin,
Texas 78746 |
|
|
|
|
|
|
|
|
| Common
Stock |
|
|
392,907 |
|
|
|
5.98 |
% |
| Timothy
R. Damadian, |
|
|
|
|
Chairman
of the Board, President,
Chief Executive Officer and Treasurer |
|
|
|
|
| Common
Stock |
|
|
38,000 |
|
|
|
|
* |
| Class
A Preferred |
|
|
800 |
|
|
|
|
* |
FONAR
CORPORATION AND SUBSIDIARIES
Continued:
| Name
and Address of Beneficial Owner (1) (2) | |
Shares
Beneficially Owned | |
Percent
of Class |
| Luciano
B. Bonanni, | |
| | | |
| | |
| Executive
Vice President, | |
| | | |
| | |
| Chief
Operating Officer and acting Principal Financial Officer | |
| | | |
| | |
| Common
Stock | |
| 49,553 | | |
| * | |
| Class
A Preferred | |
| 1,285 | | |
| * | |
| | |
| | | |
| | |
| Claudette
Chan | |
| | | |
| | |
| Director
and Secretary | |
| | | |
| | |
| Common
Stock | |
| 106 | | |
| * | |
| Class
A Preferred | |
| 32 | | |
| * | |
| | |
| | | |
| | |
| Ronald
G. Lehman | |
| | | |
| | |
| Director | |
| | | |
| | |
| Common
Stock | |
| 4,330 | | |
| * | |
| | |
| | | |
| | |
| Richard
E. Turk | |
| | | |
| | |
| Director | |
| | | |
| | |
| Common
Stock | |
| 0 | | |
| * | |
| | |
| | | |
| | |
| John
Collins Director Common Stock | |
| 0 | | |
| * | |
| All
Officers and Directors as a Group (6 persons) | |
| | | |
| | |
| Common
Stock | |
| 91,929 | (3) | |
| 3.20 | % |
| Class
C Stock | |
| 382,447 | | |
| 99.98 | % |
| Class
A Preferred | |
| 21,210 | | |
| 6.77 | % |
*
Less than one percent
1.
Address provided for each beneficial owner owning more than five percent of the voting securities of Fonar.
2.
Upon completion of the probate of Dr. Damadian’s estate, the Class C Common Stock will be held in a Trust of which Timothy Damadian
will be the Trustee and exercise the sole voting power of the shares. The beneficial ownership, however, will be shared equally among
Timothy Damadian and his brother and sister. Mr. Damadian is also the Executor of Dr. Damadian’s estate and will have the power
to vote the shares. A second Trust will be established to hold, among other assets, the shares of the other Classes of Stock. The beneficial
ownership will be shared equally by the three children of Dr. Damadian.
3.
Does not include shares held in Dr Raymond Damadian’s Estate.
FONAR
CORPORATION AND SUBSIDIARIES
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
Pursuant
to HMCA’s management agreements with its clients, HMCA provides comprehensive non-medical management and administrative services,
including billing and collection of accounts, payroll and accounts payable processing, office facilities, supplies and utilities. Under
the management agreements, HMCA also provides service for the Fonar Upright® MRI scanners through Fonar. In total, as of September
15, 2022, 22 of our clients had management agreements with HMCA. Five sites in Florida are owned and operated directly by HMCA subsidiaries.
The
fees charged under the management agreements are flat fees charged on a monthly basis. These fees ranged from $77,000 to $447,000 per
month in fiscal 2022.
Dr.
Raymond Damadian, the Chairman of the Board and principal stockholder of the Company during the 2022 fiscal year owned three of the imaging
facilities in Florida managed by HMCA. The facilities owned by Dr. Damadian in Florida paid HMCA flat rate monthly fees ranging from
$245,535 to $402,409 per month during fiscal 2022. These fees are renegotiable on an annual basis.
During
the fiscal years ended June 30, 2022 and June 30, 2021, the net revenues received by HMCA from the imaging facilities then owned by Dr.
Damadian were approximately $11.6 million, and $11.0 million respectively.
Dr.
Damadian owned a .75% interest in Health Management Company of America’s Class A membership interests, which is now owned by his
Estate.
Timothy
Damadian, the Chairman of the Board, President, Chief Executive Officer and Treasurer of Fonar, is one of the owners of a billing company,
which performs billing and collection services for HMCA with respect to No-Fault and Workers’ Compensation claims of HMCA’s
clients. The monthly fee charged to HMCA is $85,000. These services were terminated on January 1, 2021. The amount charged in fiscal
years ended June 30, 2022 and June 30, 2021 were $0 and $510,000, respectively.
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, 2021
and June 1, 2022. The company billed them $286,608 in both fiscal years ended June 30, 2022 and 2021.
Ronald
Lehman, a Director of Fonar, holds a .0378% interest in Health Management Company of America’s Class A membership interests.
Claudette
J.V. Chan, a Director and the Secretary of Fonar, owns a .0378% interest in Health Management Company of America’s Class A Membership
interests.
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,
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.
The
aggregate fees billed by Marcum LLP for the audit of our annual financial statements for the fiscal year ended June 30, 2021 and the
reviews of the financial statements included in our Forms 10-Q for the fiscal year ended June 30, 2021 were $390,000.
Audit
Related Fees
No
fees were billed by Marcum LLP for the fiscal years ended June 30, 2022 or June 30, 2021 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, 2021 or June 30, 2020 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, 2022.
No
fees billed by Marcum LLP for tax compliance, tax advice and tax planning in the fiscal year ended June 30, 2021.
All
Other Fees
No
fees were billed by Marcum LLP for any other services during the fiscal years ended June 30, 2022 and June 30, 2021.
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.
FONAR
CORPORATION AND SUBSIDIARIES
PART
IV
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
| a) | FINANCIAL
STATEMENTS AND SCHEDULES |
The
following consolidated financial statements are included in Part II, Item 8.
Report
of Independent Registered Public Accounting Firm
Consolidated
Balance Sheets as at June 30, 2022 and 2021.
Consolidated
Statements of Income for the Years Ended June 30, 2022 and 2021.
Consolidated
Statements of Stockholders’ Equity for the Years Ended June 30, 2022 and 2021.
Consolidated
Statements of Cash Flows for the Years Ended June 30, 2022 and 2021 .
Notes
to Consolidated Financial Statements.
Information
required by schedules called for under Regulation S-X is either not applicable or is included in the consolidated financial statements
or notes to the financial statements.
1.
Registrant’s Report on Form 8-K: Item 2.02, Results of Operations and Financial Condition for the Fiscal Year ended
June 30, 2021, reported September 28, 2021. Commission File No. 0-10248.
2.
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 24, 2022. Commission File No. 0-10248.
3.
Registrant’s Report on Form 8-K: Item 2.02, Results of Operations and Financial Condition for the Fiscal Quarter ended
March 31, 2022, reported May 16, 2022. Commission File No. 0-10248.
4.
Registrant’s Report on Form 8-K: Item 5.02, Departure of Directors or Certain Officers, reported August 11, 2022. Commission File
No. 0-10248.
3.1
Certificate of Incorporation, as amended, of the Registrant incorporated by reference to Exhibit 3.1 to the Registrant’s registration
statement on Form S-1,Commission File No. 33-13365.
3.2
Article Fourth of the Certificate of Incorporation, as amended, of the Registrant incorporated by reference to Exhibit 4.1 to the Registrant’s
registration statement on Form S-8, Commission File No. 33-62099.
3.3
Section A of Article Fourth of the Certificate of Incorporation, as amended, of the Registrant incorporated by reference to Exhibit 4.3
to the Registrant’s registration statement on Form S-3, Commission File No. 333-63782.
3.4
Section A of Article Fourth of the Certificate of Incorporation, as amended, of the Registrant incorporated by reference to Exhibit 3.3
of the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2003, Commission File No. 0-10248.
3.5
By-Laws, as amended, of the Registrant incorporated by reference to Exhibit 3.2 to the Registrant’s registration statement on Form
S-1, Commission File No. 33-13365.
4.1
Specimen Common Stock Certificate incorporated by reference to Exhibit 4.1 to the Registrant’s registration statement on Form S-1,
Commission File No. 33-13365.
4.2
Specimen Class B Common Stock Certificate incorporated by reference to Exhibit 4.2 to the Registrant’s registration statement on
Form S-1, Commission File No. 33-13365.
10.1
License Agreement between the Registrant and Raymond V. Damadian incorporated by reference to Exhibit 10 (e) to Form 10-K for the fiscal
year ended June 30, 1983, Commission File No. 0-10248.
10.2
Stock Purchase Agreement, dated July 31, 1997, by and between U.S. Health Management Corporation, Raymond V. Damadian, M.D. MR Scanning
Centers Management Company and Raymond V. Damadian, incorporated by reference to Exhibit 2.1 to the Registrant’s Form 8-K, July
31, 1997, commission File No: 0-10248.
10.3
Merger Agreement and Supplemental Agreement dated June 17, 1997 and Letter of Amendment dated June 27, 1997 by and among U.S. Health
Management Corporation and Affordable Diagnostics Inc. et al., incorporated by reference to Exhibit 2.1 to the Registrant’s 8-K,
June 30, 1997, Commission File No: 0-10248.
10.4
Stock Purchase Agreement dated March 20, 1998 by and among Health Management Corporation of America, Fonar Corporation, Giovanni Marciano,
Glenn Muraca et al., incorporated by reference to Exhibit 2.1 to the Registrant’s 8-K, March 20, 1998, Commission File No: 0-10248.
10.5
Stock Purchase Agreement dated August 20, 1998 by and among Health Management Corporation of America, Fonar Corporation, Stuart Blumberg
and Steven Jonas, incorporated by reference to Exhibit 2 to the Registrant’s 8-K, September 3, 1998, Commission File No. 0-10248.
10.6
2002 Incentive Stock Option Plan incorporated by reference to Exhibit 99.1 to the Registrant’s registration statement on Form S-8,
Commission File No.: 333-96557.
10.7
Asset Purchase Agreement dated July 28, 2005 among Health Plus Management Services, L.L.C., Health Management Corporation of America,
Dynamic Healthcare Management, Inc. and Fonar Corporation, incorporated by reference to Exhibit 2 to the Registrant’s Form 8-K,
August 2, 2005, Commission File No. 0-10248.
10.8
Partnership Interest Purchase Agreement dated September 29, 2008 by and between Diagnostic Management, LLC and Raymond V. Damadian, M.D.
MR Scanning Centers Management Company, incorporated by reference to Exhibit 10.35 to Form 10-K for the fiscal year ended June 30, 2008.
Commission File No. 0-10248.
10.9
2010 Stock Bonus Plan, incorporated by reference to Exhibit 99.1 to the Registrant’s registration statement on Form S-8, Commission
File No. 333-168771.
10.10
Operating Agreement for Imperial Management Services, LLC, incorporated by reference to Exhibit 10.37 to Form 10-K for the fiscal year
ended June 30, 2011. Commission File No. 0-10248.
10.11
Operating Agreement for Health Diagnostics Management, LLC, incorporated by reference to Exhibit 10.38 to Form 10-K for the fiscal year
ended June 30, 2013. Commission File No. 0-10248.
10.12
Modification to Operating Agreement for Health Diagnostics Management, LLC., See Exhibits. incorporated by reference to Exhibit 10.38
to Form 10-K for the fiscal year ended June 30, 2013. Commission File No. 0-10248.
10.13
Purchase Agreement dated March 5, 2013 among Health Diagnostics Management, LLC, Health Diagnostics, LLC and others. Incorporated by
reference to Exhibit 10.1 to the Registrant’s Form 8-K filed March 11, 2013. Commission File No. 0-10248.
14.1
Code of Ethics, incorporated by reference to Exhibit 14.1 of Registrant’s Form 10-K for the fiscal year ended June 30, 2004, Commission
File No.: 0-10248.
21.1
Subsidiaries of the Registrant. See Exhibits.
23.1
Independent Registered Public Accounting Firms Report. See Exhibits.
31.1
Section 302 Certification. See Exhibits.
32.1
Section 906 Certification. See Exhibits.
SIGNATURES.
Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
| FONAR
CORPORATION |
|
|
| |
|
|
| Dated:
September 28, 2022 |
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 |
|
Title |
|
Date |
| /s/
Timothy R. Damadian |
|
Chairman
of the Board of Directors |
|
September
28, 2022 |
|
| Timothy
R. Damadian |
|
Chief
Executive Officer |
|
|
|
| |
|
President
and Treasurer |
|
|
|
| |
|
|
|
|
|
| /s/Claudette
J.V. Chan |
|
Director |
|
September
28, 2022 |
|
| Claudette
J.V. Chan |
|
|
|
|
|
| |
|
|
|
|
|
| /s/Ronald
G. Lehman |
|
Director |
|
September
28, 2022 |
|
| Ronald
G. Lehman |
|
|
|
|
|
| |
|
|
|
|
|
| /s/Richard
E. Turk |
|
Director |
|
September
28, 2022 |
|
| Richard
E. Turk |
|
|
|
|
|
| |
|
|
|
|
|
| /s/John
Collins |
|
Director |
|
September
28, 2022 |
|
| John
Collins |
|
|
|
|
|
CORPORATE
INFORMATION
Corporate
Headquarters
110
Marcus Drive
Melville,
NY 11747
(631)
694-2929
Investor
Relations
FONAR
Corporation
110
Marcus Drive
Melville,
NY 11747
(631)
694-2929
Stock
Transfer Agency
Computershare
Investor Services
Shareholder
Services Number 800-962-4284
Investor
Centre™ portal: www.computershare.com/investor
By
Mail:
Computershare
Investor Services
P.O.
Box 43078
Providence,
RI 02940-3078
By
Overnight Delivery:
Computershare
Investor Services
150
Royall Street - Suite 101
Canton,
MA 02021
Auditors
Marcum
LLP
New
York, New York
Board
of Directors
Timothy
R. Damadian, M.D.
Chairman
of the Board
Claudette
J.V. Chan
Director
Ronald
G. Lehman
Director
Richard
E. Turk
Director
Jessica
Maher
Director
Officers
Timothy
R. Damadian
President,
Chief Executive Officer and Treasurer
Luciano
B. Bonanni
Executive
Vice President, Chief Operating Officer and acting Principal Financial Officer
Claudette
J.V. Chan
Secretary
Fonar (NASDAQ:FONR)
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