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,
June 15, 2015
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, June 15, 2015, 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, 2015.
4. To transact
such other business as may properly come before the meeting.
Only
stockholders of record at the close of business on April 16, 2015 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, JUNE 15, 2015
This
proxy statement, which is first being made available to shareholders on or about May 6, 2015 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 June 15, 2015 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 them if you want
them. To facilitate timely delivery please make the request as instructed on or before June 1, 2015.
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 April 16, 2015 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 April 16, 2015, there were issued and outstanding
6,050,840 shares of Common Stock held of record by approximately 1,788 stockholders, 146 shares of Class B Common Stock held of
record by 11 stockholders and 382,513 shares of Class C Common Stock held of record by 3 stockholders. The shares of Class A Nonvoting
Preferred Stock, 313,438 shares held of record by approximately 1,650 stockholders at the close of business on April 16, 2015,
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 DIRECTORS AND OFFICERS
Raymond
V. Damadian, M.D. (age 79), has been the Chairman of the Board and President of Fonar since its inception in 1978 and Treasurer
since February, 2001. 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. Dr. Damadian 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. Dr. Damadian is a 1988 recipient
of the National Medal of Technology and in 1989 was inducted into the National Inventors Hall of Fame, for his contributions in
conceiving and developing the application of magnetic resonance technology to medical applications including whole body scanning
and diagnostic imaging. Dr. Damadian
is the President, Treasurer and director of HMCA and a Manager of HMCA’s two subsidiaries.
Claudette
J.V. Chan (age 77), has been a Director of Fonar since October 1987 and Secretary of Fonar since January 2008. Mrs. Chan was employed
from 1992 through 1997 by Raymond V. Damadian, M.D. MR Scanning Centers Management Company and since 1997 by HMCA, as "site
inspector," in which capacity she is responsible for supervising and implementing standard procedures and policies for MRI
scanning centers. From 1989 to 1994 Mrs. Chan was employed by St. Matthew's and St. Timothy's Neighborhood Center, Inc., as the
director of volunteers in the "Meals on Wheels" program, a program which cares for the elderly. From approximately 1983
to 1989, Mrs. Chan was President of the Claudette Penot Collection, a retail mail-order business specializing in women's apparel
and gifts. Mrs. Chan practiced and taught in the field of nursing until 1973, when her son was born. She received a bachelor of
science degree in nursing from Cornell University in 1960. Mrs. Chan is the sister of Raymond V. Damadian.
Robert
J. Janoff (age 87), has been a Director of Fonar since February 1989. Mr. Janoff has been a self-employed New York State licensed
private investigator for more than thirty-five years and was a Senior Adjustor in Empire Insurance Group for more than 15 years
until retiring from that position on July 1, 1997. Mr. Janoff also served, from June 1985 to June 1991, as President of Action
Data Management Strategies, Ltd., a supplier of computer programs for use by insurance companies. Mr. Janoff was a member of the
Board of Directors of Harmony Heights of Oyster Bay, New York for over 25 years, which is a nonprofit residential school for girls
with learning disabilities.
Charles
N. O'Data (age 79), has been a Director of Fonar since February 1998. From 1961 to 1997, Mr. O'Data was the Vice President for
Development for Geneva College, a liberal arts college located in western Pennsylvania. In that capacity, he acted as the College's
chief investment officer. His responsibilities included management of the College's endowment fund and fund raising. In July 1997,
Mr. O'Data retired from Geneva College after 36 years of service to assume a position of National Sales Executive for SC Johnson
Company's Professional Markets Group, a unit of SC Johnson Wax, and specialized in healthcare and education sales, a position
he held until the spring of 1999. In his capacity with SC Johnson he was responsible for sales to the nation’s three largest
Group Purchasing Organizations which included some 4,000 hospitals. Mr. O'Data presently acts as an independent financial consultant
to various entities. Mr. O'Data served on the board of The Medical Center, Beaver, Pennsylvania, now a part of Heritage Valley
Health System, a 500 bed acute care facility, for 26 years, three as its Chair. Mr. O’Data also served on the board of the
Hospital Council of Western Pennsylvania, a shared-services and group purchasing organization covering seven states. He founded
The Beaver County Foundation, a Community Foundation, in 1992, and serves as its President. Mr. O'Data is listed as a finance
associate in the Middle States Association, Commission on Higher Education. The commission is the formal accrediting body for
higher education in the eastern region of the country. In this capacity he evaluates the financial aspects of educational organizations.
Mr. O’Data is a graduate of Geneva College, where he received a B.S. degree in Economics in 1958.
Ronald
G. Lehman, (age 38), 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.
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, Messrs. Charles N. O’Data, Robert
J. Janoff and Ronald G. Lehman 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, 2014 the Board of Directors unanimously consented to take action in lieu of a meeting on four 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 and Chief Executive Officer,
Dr. Raymond V. Damadian, however, attends the annual meeting of stockholders where he acts as Chairman of the Meeting.
Dr.
Damadian receives no compensation for serving on the Board. The other directors are each paid $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, Dr. Raymond V. Damadian, is also the current President and Chief Executive
Officer of the Company. In addition, although the Company has not selected a lead independent director, Charles N. O’Data,
in his capacity as Chairman of the Audit Committee, effectively functions as such. The Company believes that the Company’s
current model of the combined Chairman/Chief Executive Officer role is the appropriate leadership structure for the Company at
this time. The Company believes that each of the possible leadership structures for a board has its particular pros and cons,
which must be considered in the context of the specific circumstances, culture and challenges facing a company, and that such
consideration fall squarely on the shoulders of a company’s board and necessitates a diversity of views and experiences.
The combined Chairman/Chief Executive Officer model is a leadership model that has served our shareholders well since the inception
of the Company.
The
lead independent director, Charles N. O’Data, is 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 also serves
as a contact point for employees.
The
Company believes the combined Chairman/Chief Executive Officer position has certain advantages over other board leadership structures
that continue to best meet 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 possessing the best knowledge of the Company’s strategy,
operations and financial conditions; and |
| · | Continuity
in the Company’s leadership, as Dr. Damadian founded the Company in 1978. |
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.
Due
to the shareholdings of the Company’s Chairman of the Board and Chief Executive Officer, Dr. Raymond V. Damadian, which
total more than 50% of the voting power of the Company, 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 process, 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. Charles N. O’Data, who currently is a financial consultant
to various entities and previously was the Vice President for Development for Geneva College, is the audit committee financial
expert. The Board made a qualitative assessment of Mr. O’Data’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 Chief Executive
Officer, who also serves as Chairman of the Board and exercises the principal 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 accountants required by Independence Standards Board, Standard No. 1 and has discussed
with the independent accountants the independent accountant’s 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, 2014.
The
members of the audit committee are Messrs. Charles N. O’Data, Robert J. Janoff and Ronald G. Lehman. Messrs. O’Data,
Janoff and Lehman 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 to identify new nominees in the absence of the resignation or death of an existing director. The remaining directors
evaluate a new nominee based on his integrity, loyalty, competence and experience, and how his background complements that of
the remaining directors.
Promoting
diversity in the selection of nominees has not yet been considered. Traditionally, the Board has followed 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 Chief Executive Officer, is best equipped to make compensation decisions. The Board reserves
the right to change this policy at any time.
Dr.
Raymond V. Damadian, who serves as Chairman of the Board, Chief Executive Officer and President of the Company, participates in
deliberation and the 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 April 16, 2015.
Name
and Address of Beneficial Owner (1) |
|
Shares
Beneficially
Owned |
|
Percent
of
Class |
Raymond
V. Damadian, M.D.
c/o
FONAR Corporation
Melville,
New York
Nominee
for Director, Director, President, PEO, PFO 5% + Stockholder |
|
|
|
|
Common
Stock |
|
112,952 |
|
1.87% |
Class
C Stock |
|
382,447 |
|
99.98% |
Class
A Preferred |
|
19,093 |
|
6.09% |
Claudette
Chan |
|
|
|
|
Nominee
for Director, |
|
|
|
|
Director
and Secretary |
|
|
|
|
Common
Stock |
|
106 |
|
* |
Class
A Preferred |
|
32 |
|
* |
Robert
J. Janoff |
|
|
|
|
Nominee
for Director and Director |
|
|
|
|
Common
Stock |
|
2,000 |
|
* |
Class
A Preferred |
|
79 |
|
* |
Charles
N. O'Data |
|
|
|
|
Nominee
for Director and Director |
|
|
|
|
Common
Stock |
|
528 |
|
* |
Ronald
G. Lehman, |
|
|
|
|
Nominee
for Director and Director |
|
|
|
|
Common
Stock |
|
0 |
|
* |
All
Officers, Directors and Nominees
as
a Group (5 persons) |
|
|
|
|
Common
Stock |
|
115,586 |
|
1.91% |
Class
C Stock |
|
382,447 |
|
99.98% |
Class
A Preferred |
|
19,204 |
|
6.13% |
*
Less than one percent
1.
Address provided for each beneficial owner owning more than five percent of the voting securities of the Company.
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, 2014 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
With
the exception of the Principal Executive Officer and Principal Financial Officer, Dr. Raymond V. Damadian, 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. Dr. Damadian,
who serves as both the Principal Executive Officer and Principal Financial Officer, receives compensation which consists only
of a salary, which has remained at modest levels to conserve funds. 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. Dr. Raymond
V. Damadian and Claudette J.V. Chan are executive officers as well as members of the Board of Directors. Dr. Damadian, who also
has voting control of the Company and serves as Chairman of the Board and President, participates 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 2014
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 noncontributory 401(k) plan.
SUMMARY
COMPENSATION TABLE
The
following table discloses compensation received for the three years ended June 30, 2014 by the Company’s Principal Executive
Officer and Principal Financial Officer.
Name
and Principal Position Position |
Year |
Salary |
Bonus |
Stock
and Option Awards |
Plans,
Pension, Deferred Compen-sation |
All
other Compen-sation |
Total |
Raymond
V. Damadian Chairman of the Board; |
2014 |
$36,002.38
|
0 |
0 |
0 |
0 |
$36,002.38
|
President;
Principal Executive Officer; |
2013 |
$36,111.30
|
0 |
0 |
0 |
0 |
$36,111.30
|
Acting
Principal Financial Officer; Director |
2012 |
$35,934.76
|
0 |
0 |
0 |
0 |
$35,934.76
|
No
executive officer has a written or unwritten employment agreement with the Company. Salaries, bonuses and discretionary stock
and stock option awards comprise the full amount of total compensation. The only exceptions are commissions, based on a percentage
of the sales prices, payable to salesmen.
Compensation
Pursuant to Stock Options and SAR Grants
No
stock options or stock appreciation rights were granted to the Company’s Principal Executive Officer and Principal Financial
Officer during fiscal 2014.
Option/SAR
Exercises and Year End Values
No
options or stock appreciation rights were exercised by the Company’s Chief Executive Officer during fiscal 2014. The Company’s
Chief Executive Officer did not hold any unexercised stock options or stock appreciation rights at the end of fiscal 2014.
DIRECTOR
COMPENSATION
The
following table shows the compensation paid to the Directors for fiscal 2014:
|
Name |
Fees
earned or paid in cash ($) |
Stock
awards ($) |
Option
awards (4) |
Non-equity
incentive plan compen- sation |
Non-
qualified deferred compen- sation earnings ($) |
All
other compen- sation ($) |
Total
($) |
(a)
|
(b) |
(c)
|
(d) |
(e)
|
(f) |
(g)
|
(h) |
A.
Claudette J.V. Chan |
$19,999.98 |
0 |
0 |
0 |
0 |
0 |
$19,999.98 |
B.
Charles N. O’Data |
$20,000.24 |
0 |
0 |
0 |
0 |
0 |
$20,000.24 |
C.
Robert Janoff |
$20,000.24 |
0 |
0 |
0 |
0 |
0 |
$20,000.24 |
D.
Ronald G. Lehman |
$19,999.98 |
0 |
0 |
0 |
0 |
0 |
$19,999.98 |
|
|
|
|
|
|
|
|
|
With
the exception of Dr. Damadian who receives no compensation for serving as a director, each director is entitled to receive $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.
No other fees are paid to the directors for their services as directors of the Company.
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 beginning on page 9, 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, 2015. 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, 2012, June 30, 2013 and June 30, 2014.
One
or more representatives of Marcum LLP, are expected to 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, 2014 and the reviews of the financial statements included in the Company’s Forms 10-Q for the fiscal year ended
June 30, 2014 were $628,772.
The
aggregate fees billed by Marcum LLP for the audit of the Company’s annual financial statements for the fiscal year ended
June 30, 2013, and the reviews of the financial statements included in the Company’s Forms 10-Q for the fiscal year ended
June 30, 2013 were $542,692.
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
audit-related fees were billed by Marcum LLP for the fiscal years ended June 30, 2014 and June 30, 2013 for services related to
the audit or review of our financial statements that are not included under the caption “AUDIT FEES”.
TAX
FEES
The
aggregate fees billed by Marcum LLP for tax compliance, tax advice and tax planning in the fiscal years ended June 30, 2014 and
June 30, 2013 were $66,580 and $147,979, respectively.
ALL
OTHER FEES
The
aggregate fees billed by Marcum LLP for all other services rendered by them during the fiscal years ended June 30, 2014 and June
30, 2013 were $0 and $95,929. In fiscal 2013 these services included services in connection with the registration of securities,
employee benefit plan audits and reviews and procedures that we requested Marcum LLP to undertake to provide assurances on matters
not required by laws or regulations.
No
fees were billed by Marcum LLP for the fiscal years ended June 30, 2014 or June 30, 2013 for designing, operating, supervising
or implementing any of our financial information systems or any hardware or software systems for our financial information.
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.
The
Company’s audit committee believes that the provision by Marcum LLP of services in addition to audit services in fiscal
2014 and 2013 were compatible with maintaining their independence. The services to be performed are presented by Marcum LLP to
the committee or its chairman. The matter is then evaluated and a decision made.
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 February 12, 2016 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, May 6, 2015
A COPY
OF THE COMPANY'S FORM 10-K REPORT FOR FISCAL YEAR 2014 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 for fiscal year 2015 -
Monday,
June 15, 2015 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 Raymond V. 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 Monday, June 15, 2015 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 |
|
WITHHOLD
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
- Raymond V. Damadian, 02 - Claudette J. V. Chan, 03 - Robert J. Janoff,
04
- Charles N. O'Data, 05 – Ronald G. Lehman
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, 2015.
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.
FONAR
2014 ANNUAL REPORT
FONAR
PRESIDENT’S LETTER TO SHAREHOLDERS
May
2015
Dear
Shareholders:
I
am pleased to report to our shareholders that as of December 31, 2014, FONAR posted 19 consecutive quarters of positive net income
and positive income from operations.
Comparing
Fiscal 2014 (July 1, 2013 to June 30, 2014) to Fiscal 2013 (July 1, 2012 to June 30, 2013), revenue increased by 39% (from $49.1
million to $68.5 million); net income increased by 31% (from $10.3 million to $13.4 million); and diluted net income per common
share available to common stockholder increased by 18% (from $1.34 to $1.58).
Comparing
the first half of Fiscal 2015 (July 1, 2014 to December 31, 2014) to the first half of Fiscal 2014 (July 1, 2013 to December 31,
2013), revenue increased by 2% (from $34.4 million to $35.1 million); net income increased by 0.6% (from $6.67 million to $6.71
million); and diluted net income per common share available to common stockholder increased by 13% (from $0.70 to $0.79).
The
company stock, which is listed on the NASDAQ Capital Markets under the symbol FONR, has had substantial interest by institutions.
Currently, institutional ownership stands at approximately 18%. The company also has been a member of the Russell Microcap Index
since 2013.
As
many long-standing investors know, FONAR has always shown great promise. It is very gratifying, after all these years, to see
the company consistently profitable.
A
Brief Overview of FONAR
FONAR
is the Original MRI Company – the first company to produce an MRI scanner. With great pride, we call FONAR the inventor
of the MRI scanner. FONAR was incorporated in 1978 and introduced the first commercial MRI scanner (the QED 80) in 1980. We have
installed approximately 300 recumbent-OPEN MRIs and 161 FONAR UPRIGHT® Multi-Position™ MRIs world-wide. The company,
headquartered on Long Island, New York, became a publicly-traded company in 1981.
Our
primary product is the FONAR UPRIGHT® Multi-Position™ MRI (also known as the STAND-UP® MRI), the only whole-body
MRI that performs Position™ Imaging (pMRI™) and scans patients in numerous weight-bearing positions, i.e. standing,
sitting, bending, in flexion and extension, as well as the conventional lie-down position. The FONAR UPRIGHT® Multi-Position™
MRI often detects patients’ problems that lie-down MRIs cannot.
FONAR’s
Successful Response to Marketplace Difficulties
You
may recall that several years ago overall sales of MRI scanners dropped significantly. FONAR quickly responded by establishing
a business plan that included making some deep cost-saving cuts and redirecting resources to two of its main divisions –
the Field Service Division and, more significantly, the company’s management subsidiary, Health Management Corporation of
America (HMCA). HMCA provides non-medical management services for diagnostic imaging centers, predominantly those equipped with
a FONAR UPRIGHT® Multi-Position™ MRI. We have adhered to our business plan and I am pleased to report that HMCA thrives
and continues to provide our company with a reliable and growing source of revenue.
The
Number of HMCA-Managed MRI Centers More than Doubles
On
March 5 of 2013, FONAR and its subsidiary HMCA acquired a majority interest (50.5%) in a newly formed limited liability company,
Health Diagnostics Management, LLC (HDM). Prior to the acquisition, HMCA was managing eleven (11) STAND-UP® MRI diagnostic
centers – eight (8) in New York and three (3) in Florida. In one giant step, HMCA grew by an additional fourteen (14) MRI
facilities under HMCA management – ten (10) in New York and four (4) in Florida, all of them equipped with FONAR scanners,
twelve (12) of them FONAR STAND-UP® MRIs. Since then, the Company’s net profit has gone from $1.6 million (for the quarter
ending on December 31, 2012) to $3.5 million (for the quarter ending on December 31, 2014). That is nearly $2 million more per
quarter.
The
FONAR UPRIGHT® Multi-Position™ MRI Withstands Cuts in Reimbursement
For
years now, MRI centers have faced regular, unremitting, across-the-board cuts in provider reimbursement amounts by payers of all
types, including Medicare, Medicaid and a host of commercial insurance carriers. Many of these cuts were brought about by Obamacare,
i.e. the Affordable Care Act. The centers that we manage have been able to withstand these cuts by increasing scan volume, which
is primarily attributable to the fact that nearly all of these centers are equipped with the FONAR UPRIGHT® Multi-Position™
MRI. The UPRIGHT® MRI has enormous appeal for basically two reasons: 1) Better Patient OUTCOMES and 2) a nearly perfect patient
experience.
| 1. | Better
Patient OUTCOMES |
We
are seeing the clinical importance of Position-of-Symptoms MRI and Weight-Bearing MRI steadily gaining traction in the medical
community. Our message to referring physicians is that the FONAR UPRIGHT® Multi-Position™ MRI is able to provide a ‘BETTER
PATIENT OUTCOME’ for their patients. More and more physicians are realizing that a weight-bearing UPRIGHT® MRI scan
can give them the most accurate diagnosis available compared to conventional weightless, recumbent-only MRIs. Physicians are learning
firsthand that the UPRIGHT® MRI has the power to “see it all” and not only part of it (i.e. the recumbent part)
and is therefore indispensable for achieving their ultimate objective of optimizing treatment OUTCOMES for their patients.
After
all, physicians do not want to run the risk of failure to visualize a patient’s problem and adopt a treatment plan that
could consequently result in a poor OUTCOME.
| 2. | A
Nearly Perfect Patient Experience |
Because
of the unique geometric design of the UPRIGHT® MRI, the rate of claustrophobic rejection by patients is nearly 0%. Approximately
85% of patients are scanned sitting while they watch a 42” or larger flat-screen TV. Patients in need of an MRI scan have
driven long distances to the nearest UPRIGHT® MRI in order to avoid being scanned in one of our competitor’s highly
claustrophobic “tube” or “tunnel” MRIs. This is a major reason for the success of our scanner over the
conventional recumbent-only MRI technology.
Recent
News and Developments from FONAR
| · | The
FONAR UPRIGHT® MRI Opens a New Medical Frontier: Cinematography of Upright CSF Flow |
The
FONAR UPRIGHT® Multi-Position™ MRI imaging has a new and powerful imaging tool that makes motion pictures of CSF (cerebrospinal
fluid) flow as it moves in and out of the vertically-positioned brain, i.e. as it flows out of the lateral ventricles of the vertical
weight-bearing brain, down through the Foramen of Monro into the 3rd ventricle, down the Aqueduct of Sylvius into the 4th ventricle,
down the full length of the spinal canal to the Sacrum, and then back up into the upright, weight-bearing brain. This new vertical-position
imaging technology, created and introduced for the first time by the FONAR UPRIGHT® Multi-Position™ MRI, opens a new
frontier in clinical medicine.
This
cinematography of CSF flow in the Upright position, in and out of the brain, has proven uniquely sensitive to the visualization
of any impairments of CSF flow, often indicating an etiology of cervical anatomy dislocation that might be contributing to the
symptoms of the patient.
In
football, for example, “U.S.-style football sends more athletes to emergency rooms for neck injuries than ice hockey or
soccer according to a new study” (WebMD, Health News, April 20, 2005). For the period 1990 to 1999, “there
were an estimated 5,038 neck injuries from ice hockey, 19,341 from soccer, and 114,706 from American football.” “The
rates for total neck injuries and combined neck contusions, sprains or strains were higher for (American) football than for ice
hockey, or soccer in all years for which data were available” (Br. J. Sports Med. 2005;39:189).
Recognizing
that such neck injuries may result in obstructions of the normal UPRIGHT® cerebrospinal fluid (CSF) flow from the brain down
the spinal column to the sacrum and back up into the brain, it is critical that symptomatic professional athletes, football players
in particular, have FONAR UPRIGHT® Multi-Position™ MRI examinations of their heads and necks and UPRIGHT® cerebrospinal
fluid (CSF) flow cinematography of the cranio-cervical junction and cervical spine to assure that CSF is flowing up and down the
spinal column normally and that there are no obstructions to flow.
●
Normal Pressure Hydrocephalus (NPH) and Ventriculomegaly
Cinematography
of CSF flow allows visualization of a neurologic syndrome called normal pressure hydrocephalus (NPH). It is determined when a
measurement by lumbar puncture of CSF pressure in the lumbar spinal canal is found to be normal. It is determined to be hydrocephalus
when ventriculomegaly is observed in an MRI image of the brain. However, this is a quandary. What explains the coexistence of
these two diametrically opposed conditions? If there is no measured increase in intracranial pressure (ICP) in the lumbar CSF
sample, what accounts for the observed vertriculomegaly? Among the proposed explanations for the normal measured pressure of NPH
is the possibility that the CSF pressure measurement in the lumbar canal is being obtained below a higher-up obstruction in the
spinal canal (e.g. a cervical CSF flow obstruction) and is not therefore elevated, while the CSF pressure above the obstruction
(e.g. in the brain) is elevated but not readily measured. This dilemma is now addressable by FONAR’s new UPRIGHT® CSF
flow ciné technology, which can readily image the integrity of CSF flow throughout the full length of the spinal
canal and quantify it. Thus the CSF flow obstructions causing the ICP increase responsible for the hydrocephalic ventriculomegalies
can now be directly visualized so they can be therapeutically addressed surgically or non-surgically.
A
common current treatment of NPH is the Ventriculo-Peritoneal (VP) shunt. While such shunts are effective in relieving many of
the dire symptoms of NPH, their current difficulty is their tendency to become obstructed within two years of installation (50%).
This difficulty is addressable by the FONAR UPRIGHT® Multi-Position™ MRI, since the vertical CSF flows of these VP shunts
can now be visualized and monitored by FONAR’s UPRIGHT® Multi-Position™ CSF video technology, to enable a shunt
maintenance program. Signs of any shunt flow impairment can now be detected as soon as they occur, to assure that VP shunt flow
is being optimally maintained.
| · | A
Case-Control Study of Cerebellar Tonsillar Ectopia (CTE)[Chiari] and Head/Neck Trauma
[Whiplash] |
We
reported in July 2010 that the medical journal “Brain Injury” published a significant study of 1200 neck pain
patients (Freeman MD, Rosa S, Harshfield D, Smith F, Bennett R, Centeno CJ, Kornel E, Nystrom A, Heffez D, Kohles SS: A case control
study of cerebellar tonsillar ectopia (Chiari) and head/neck trauma (whiplash). Brain Inj 2010;24:988-994) comparing the FONAR
UPRIGHT® Multi-Position™ MRI to a conventional recumbent MRI and the ability to diagnose whiplash trauma from a motor
vehicle accident. Four groups, including two control groups, were used and the reading radiologists were blinded as to who belonged
to which group. Recumbent MRI images were obtained in a conventional recumbent MRI and the upright images were obtained in the
FONAR UPRIGHT® Multi-Position™ MRI, aka The STAND-UP® MRI. The “Brain Injury” study showed that
the fallen cerebellar tonsils caused by motor vehicle whiplash injuries were being missed 60% of the time where the patient
was scanned recumbent-only in a conventional “lie-down MRI” and not scanned upright. As a result of this study, the
medical evidence indicated that the fallen cerebellar tonsils of a whiplash injury patient can now be reliably visualized by using
the FONAR UPRIGHT® Multi-Position™ MRI. I believe that this study adds significant substance to the proposal that this
needs to be the “new standard of care” for whiplash injury patients.
●
Breakthrough in the Diagnoses of Multiple Sclerosis
In
February 2011, I scanned a patient who had multiple sclerosis (MS). After scanning her head and neck, including CSF Flow studies
in both the Upright and recumbent positions, I noticed that her MS lesions seemed to be directly connected to the CSF in the adjacent
brain ventricles. I reviewed the literature and then scanned seven other patients with MS. The first important observation was
that all eight MS patients who were scanned, as they arrived with no patient selectivity of any kind having been exercised, had
prior histories of serious trauma to the neck.
On
September 20, 2011, I and co-author, FONAR scientist David Chu, PhD., published a paper titled “The Possible Role of Cranio-Cervical
Trauma and Abnormal CSF Hydrodynamics in the Genesis of Multiple Sclerosis,” in the journal Physiological Chemistry and
Physics and Medical NMR (Sept. 20, 2011, 41: 1-17).
We
reported a possible breakthrough in the etiology of multiple sclerosis (MS) based on observations of those eight patients and
our unique UPRIGHT® Multi-Position™ (STAND-UP®) MRI. The findings revealed that the cause of multiple sclerosis
may be biomechanical and related to earlier trauma to the neck, which resulted in the obstruction of the flow of CSF produced
in the central anatomic structures of the brain known as the ventricles. Since the ventricles produce a large net volume of CSF
each day (500 cc), and the total daily CSF circulation through the central nervous system (CNS) is 30.9 liters per day (32.8 quarts
per day), an outflow obstruction of CSF can result in increases in ICP which in turn can result in leakage of the CSF into the
surrounding brain tissue. Since the CSF contains approximately 300 polypeptides, 9 of which are antigenic, they could be the sources
of the antigens known to stimulate the auto-immune reaction (antigen-antibody complexing) responsible for generating the MS lesions
seen brain MRIs of MS patients.
The
complete study in which the diagnostic breakthrough was reported can be viewed at www.fonar.com/pdf/PCP41_damadian.pdf. Images
related to this study can be found at www.fonar.com.
Most
recently there is a published report (Magnano C., et al., “Cine Cerebrospinal Fluid Imaging in Multiple Sclerosis”,
J. Magn. Reson. Imaging 2012 Oct;36(4):825-34. doi: 10.1002/jmri. 23730. Epub 2012 Jun 25) corroborating our findings of the presence
of CSF flow obstructions in MS patients. In their study of 67 MS patients, the authors reported significant obstruction of CSF
flow in the Aqueduct of Sylvius in 67 MS patients, as well as the simultaneous heightening of CSF flow during systole in these
patients. In addition, there is also a newly published report of results that appears to confirm CSF “leakages” as
playing a significant role in the genesis of MS. As we had pointed out, the study reports a generalized increase in the sodium
content of the brain tissues of patients with multiple sclerosis (Radiology, July 17, 2012). This finding would be consistent
with the CSF “leakages” seen in MS and reported in Physiol. Chem. Phys. & Med. NMR, Sept. 20, 2011, 41:
pp 1-17. The significant sodium content of “leaked” CSF (140mm/L) is likely to be the source of the elevated sodium
content that was observed in the brain tissues of the MS patients studied.
●
An Advancement of Image Guided Therapy
We
used the UPRIGHT® MRI to view the flow of CSF in and out of the brain with the patients scanned Upright and also scanned lying
down. The UPRIGHT® MRI also revealed that these obstructions were the result of structural deformities of the cervical spine,
induced by trauma earlier in life. The findings are based on viewing the real-time flow of cerebrospinal fluid in a series of
the eight randomly chosen patients with multiple sclerosis. These invaluable dual observations have only been possible since the
invention by FONAR of an MRI capable of imaging the patient Upright.
One
of the eight MS patients in the study was treated by Dr. Scott Rosa, DC, BCAO, Trauma Imaging Foundation, Rock Hill, NY using
his image guided (UPRIGHT® MRI), patented, proprietary, non-invasive method. The patient’s symptoms subsided. FONAR
reported on the case study on November 2, 2011. It appears that the biomechanical barriers seen on her images, i.e. CTE, were
responsible for the significant CSF “leakages” visualized on her brain MRIs. The observed CSF “leakages”
were directly connected to her MRI visualized MS lesions, suggesting the possibility that the CSF “leakages” were
playing a role in generating her MS lesions. Dr. Rosa eliminated the biomechanical barrier which allowed CSF to flow freely,
and subsequently the patient’s symptoms subsided. The patient is currently being maintained free of MS symptoms (vertigo
and vomiting on recumbency) with continued care.
Accordingly,
in the minds of the researchers who performed the vertical position examinations of these MS patients, there now exists a genuine
hope that if MS patients can have their vertical position CSF flow and ICP monitored and restored to normal, there is the prospect
that these MS patients can be improved.
It
is exciting that our FONAR UPRIGHT® MRI may now be responsible for helping patients with severe illness and the prospect of
being able to deliver these benefits to the patient non-invasively.
●
The Cranio-Cervical Syndrome (CCS)
One
deficiency of the current universal MRI scanner protocols for imaging the neck came to our attention in the course of these UPRIGHT®
positional cervical studies of patients. Current recumbent MRI imaging protocols of the neck do not provide axial images of the
cervical spine above the C2/C3 cervical junction, i.e. axial cuts of the CCJ that visualize the axial positioning of C-1 and C-2.
These key axial images of the cranio-cervical junction are therefore not available for two of the seven vertebra of the cervical
spine with conventional MRI scanning of the cervical spine. The new FONAR axial visualization of C-1 and C-2, the FONAR UPRIGHT®
axial multi-slice CCJ scan, enables direct visualization of any C-1 or C-2 malalignments or malrotations that exist, which cannot
be visualized by conventional recumbent MRI. The FONAR UPRIGHT® Multi-Position™ MRI has therefore added this key cranio-cervical
junction (CCJ) scan to its cervical spine scanning protocol. The C1/C2 junction provides for a 70% rotation of the head and neck
while the cranial C1 junction alone only enables a 40% rotation. The C1/C2 rotation of the skull enabled by the rotary stylus
or dens, provided by C-2 (the Axis) is further enabled by the rotation-enabling alar and transverse ligaments that are increasingly
being recognized as key structures in cranio-cervical mobility, which when traumatized can result in cervical junction malalignment
and the obstruction of CSF flow.
We
have named the syndrome resulting from these cervical malalignments and malrotations the Cranio-Cervical Syndrome (CCS).
| · | Announcing
the 2015 Printing of: |
“The
Craniocervical Syndrome and MRI”
This
2015 monograph is the logical outgrowth of the well-attended 2013 Symposium FONAR hosted on April 6, 2013 in Manhattan, New York.
The symposium was entitled “The Cranio-Cervical Syndrome (CCS).” Our goal at that time was to bring this critical
condition to the attention of the medical community at large. Accordingly, the editors of the book, Professor Francis W. Smith,
MD (Medserena Upright MRI Centre, London, UK) and Jay S. Dworkin, Ph.D. (Senior Physicist, FONAR Corporation) organized contributions
from the symposium speakers.
“The
Craniocervical Syndrome and MRI” was published by S. Karger, AG. Based in Basel, Switzerland,
S. Karger, is a 125-year-old academic publisher of scientific and medical journals and books. See www.karger.com.
The
94-page monograph examines the impact of rapid advances in MRI on treating patients. The book jacket indicates that “Rapid
advances in MRI are transforming the treatment of patients suffering from the craniocervical syndrome (CCS). Articles in this
publication have been written by leading international experts in the field to provide practitioners with a better understanding
of the subtle anatomy and MRI appearances at the craniocervical junction, along with insight into the clinical significance of
cerebrospinal fluid (CSF) flow measurements and their relationship to posture. The surgical management of patients with damage
to the ligaments at the craniocervical junction and the role of cervical spinal trauma in neurodegenerative diseases as well as
CSF flow obstruction are also discussed. This publication is valuable reading for practitioners in the fields of radiology, neurosurgery,
neurology, pain management, orthopaedic surgery and internal medicine, as well as for chiropractors and osteopaths.”
Contributors
to the book:
□
Raymond Damadian, MD and David Chu, PhD of FONAR Corporation contributed a chapter entitled “The
Possible Role of Craniocervical Trauma and Abnormal Cerebrospinal Fluid Hydrodynamics in the Genesis of Multiple Sclerosis and
the Craniocervical Syndrome.” Their published abstract reveals: “The importance of visualizing and measuring
cerebrospinal fluid (CSF) flow dynamics of patients in the upright position is described. Recent observations from the FONAR UPRIGHT®
Weight-Bearing Multi-Position™ MRI likely to provide a new understanding of the origin of neurodegenerative diseases,
such as multiple sclerosis, are discussed. The vulnerability of the human neck and its impact on CSF flow throughout the brain
and spine is also linked to properly identifying the craniocervical syndrome given its plethora of symptoms.”
□
Radiologist Francis W. Smith; “Upright Magnetic Resonance Imaging of the Craniocervical
Junction”
□
Neurosurgeon Joel I. Franck, (Panama City, FL) and P Perrin; “The Cranial Cervical Syndrome
Defined: New Hope for Postwhiplash Migraine Headache Patients – Cervical Digital Motion X-Ray, FONAR UPRIGHT® Weight-Bearing
Multi-Position™ MRI and Minimally Invasive C1–C2 Transarticular Lag Screw Fixation Fusion”
□
Neurosurgeon Joseph Maroon (Vice-Chairman, Department of Neurosurgery, University of Pittsburgh Medical
Center), J Bost, A Amos, R Winkelmann, C Mathyssek; “Concussion Update: Immunoexcitotoxicity, the Common Etiology of Postconcussion
Syndrome, Chronic Traumatic Encephalopathy and Posttraumatic Stress Disorder”
□
Radiologist William G. Bradley, (Chairman, Department of Radiology, University of California at San
Diego); “Cerebrospinal Fluid Physiology and Its Role in Neurologic Disease”
□
Scott Rosa, DC and JW Baird, DC; “The Craniocervical Junction: Observations
regarding the Relationship between Misalignment, Obstruction of Cerebrospinal Fluid Flow, Cerebellar Tonsillar Ectopia, and Image-Guided
Correction”
□
Other authors contributing chapters to the book include: Radiologists Pascal Niggemann (Mannheim),
C.C. Pieper and D.R. Hadizadeh (University of Bonn); “Positional Venous Magnetic Resonance Angiography”
| · | FONAR
UPRIGHT® MRI Scan Leads to Successful |
Treatment
of Former NFL Quarterback
After
being diagnosed in November 2012 on the FONAR UPRIGHT® Multi-Position™ MRI , former NFL quarterback Jim McMahon, who
suffered from post concussion dementia, was able to receive appropriate treatment and relief of his symptoms.
Jim
McMahon, the former NFL quarterback who guided the Chicago Bears to victory at the 1985 Super Bowl, has benefited from having
used the FONAR UPRIGHT® MRI scanner at FONAR's Melville corporate headquarters. Mr. McMahon had severe headaches, body pain,
dementia and other debilitating symptoms. FONAR’s new technology for making cinés of the CSF as it flows in and out
of the brain when the patient is in the Upright position was a promising candidate to help Mr. McMahon. Through a mutual friend,
former FONAR Senior Vice President David Terry contacted Mr. McMahon and scheduled him for an UPRIGHT® CSF flow study at FONAR’s
Melville MRI facility. The FONAR UPRIGHT® CSF flow video demonstrated a significant obstruction of CSF flow and an increased
ICP secondary to prior football injuries to Mr. McMahon’s neck (cervical spine). Subsequently he was treated by Dr. Scott
Rosa, of the Trauma Imaging Foundation, www.traumaimagingfoundation.com.
Dr. Rosa treated Mr. McMahon with his patented IGAT (Image Guided Atlas Treatment) method. Mr. McMahon
gives much credit to Dr. Raymond Damadian, M.D., the FONAR UPRIGHT® Multi-Position™ MRI (Stand-Up® MRI) and Dr.
Scott Rosa, for the wonderful elimination of his pain and dementia symptoms. His experiences are reported and found online by
The Stamford Advocate (Jan. 17, 2014) and The Yankees Yes Network.
As
a result of FONAR’s findings and the new understanding of the role that cervical trauma plays in the etiology of disease,
it is imperative to certify that the sustained neck or head injuries of professional athletes, such as NFL football players, whiplash
patients and others with severe neck trauma, have not resulted in any obstructions of CSF flow or heightened ICP, which would
eventually lead to the symptomatology we have reported as related to the CCS.
SALES
The
Company continues to market its FONAR UPRIGHT® Multi-Position™ MRI. Over the past year we sold UPRIGHT® MRIs in
Alaska, the United Arab Emirates, and Germany (the 5th UPRIGHT® MRI purchased by Medserena).
I
am committed to seeing to it that the advantages of this new FONAR UPRIGHT® technology be brought to the benefit of as many
persons in need of it, as quickly as possible.
CONCLUSION
The
FONAR UPRIGHT® Multi-Position™ MRI is a truly unique technology producing exquisite images in all positions of the body.
Therefore, in addition to providing all the routine scans of the conventional lie-down-only MRI, it not only yields a whole new
treasure of new medical applications in such calamitous medical categories as MS and dementia, but it also possesses the strong
potential to provide fresh new insights into the debilitating chronic consequences of sports injuries, the current epidemic of
automobile whiplash injuries (approximately 1 million/year in the U.S.), low back injuries, pediatric disabilities and pathologies
in need of pediatric imaging, and many more yet to be unearthed. As more and more medical practitioners recognize the power and
the potential of the FONAR UPRIGHT® Multi-Position™ MRI, we can expect a resurgence of sales.
Most
importantly is the revolutionary importance of FONAR’s new UPRIGHT® MRI imaging technology that for the first time in
medical history is providing the revelation of UPRIGHT® real time in-vivo movies and quantification of the cerebrospinal fluid
(CSF) as it flows against gravity in and out of the UPRIGHT® brain. Performing the imaging of CSF in the UPRIGHT®
position and quantifying its flow UPRIGHT® is critical since we now know that CSF flow into the brain in the UPRIGHT®
position is only nearly half of what it is in the recumbent position (see Table 3 attached: Physiol Chem. Phys. and Med.
NRM, 2011, 41:1-47).
The
MRI has enabled, for the first time in medical history, real time in-vivo visualization of the CSF as it flows in and out of the
brain. Moreover, the FONAR UPRIGHT® MRI has enabled the visualization of this vital life-sustaining neurologic fluid as it
flows in and out of the live brain against gravity. The result is the new and very real prospect of surmounting the devastations
of the neurodegenerative diseases.
At
present we envision the prospect of providing a major rescue to patients suffering from the devastating impairments of these neurodegenerative
disorders: Alzheimer’s (5.1 million)2, childhood and adult Autism (3.0 million)2, Parkinson’s
(1.0 million)2, Multiple Sclerosis (250,000 to 350,000)2 and Amyotrophic Lateral Sclerosis (ALS) (30,000)2;
a total population of 9.38 million patients in the U.S. with neurodegenerative pathologies, in need of the benefits of FONAR’s
new UPRIGHT® CSF imaging technology. We envision the prospect of overcoming these syndromes in part or in full by repairing
the bio-mechanical disruptions in the neck which we believe to be responsible for them, namely the obstruction of flow of this
vital physiologic fluid, CSF. We perceive the prospect of overcoming them, or significantly relieving them, with the MRI images
provided by the FONAR UPRIGHT® MRI, as very real.
At
present their etiology is generally unknown, e.g. as reported by Degnan and Levy in the American Journal of Neuroradiology
“the absence of a clear identifiable etiology for a clinical syndrome characterized by elevated ICP1
exists in nearly 90% of cases” (AJNR 2011 32: 1986-1993). As a result, these syndromes exhibiting unexplainable
ICP elevation have been designated by the acronym IIH, Idiopathic Intracranial Hypertension.
Our
findings with the FONAR UPRIGHT® MRI unveiling the obstructions of CSF flow we believe responsible for them (R.V. Damadian
and D. Chu “The Possible Role of Cranio-Cervical Trauma and Abnormal CSF Hydrodynamics in the Genesis of Multiple Sclerosis”
Physiol. Chem. Phys. & Med. NMR 2011, 41:1-17) suggest the possibility that Idiopathic Intracranial Hyertension
(IIH) is no longer Idiopathic. We believe the likelihood is high that they are the result of bio-mechanical obstructions
of CSF flow in and out of the brain.
| | 1
= IntraCranial Pressure: “elevated
ICP”, a common characteristic of the neurodegenerative disorders |
| | 2
= Current published estimates of the
number of patients in the U.S. affected with the syndrome |
Table
3: Change of CSF Inflow With Position in Normal Examinees
1
Peak
INFLOW
(cc/sec)
UPRIGHT
1.023 |
|
2
Peak
INFLOW
(cc/sec)
RECUMBENT
1.935 |
3
Peak
INFLOW
Velocity
(cm/sec)
UPRIGHT
0.4 |
|
4
Peak
INFLOW
Velocity
(cm/sec)
RECUMBENT
0.715 |
|
%
Difference Up/Rec
53% |
|
|
%
Difference Up/Rec
56% |
|
I
remain grateful to our stockholders, customers and employees for their loyal support.
Sincerely,
Raymond
V. Damadian
President
and Chairman
SECURITIES AND EXCHANGE COMMISSION WASHINGTON,
D.C. 20549
FORM
10-K
[X] ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended June 30, 2014
OR
[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES AND
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _____________
to _____________
Commission File No. 0-10248
___________________________
FONAR CORPORATION
(Exact name of registrant as specified in its
charter)
DELAWARE |
|
11-2464137 |
(State of incorporation) |
|
(IRS Employer Identification Number) |
110 Marcus Drive, Melville, New York |
|
11747 |
(Address of principal executive offices) |
|
(Zip Code) |
|
(631) 694-2929 |
|
|
(Registrant's telephone number, including area code) |
|
|
|
|
|
|
____________________________________________________
Securities registered pursuant to Section 12(b)
of the Act:
Common Stock, par value $.0001 per share
Securities registered pursuant
to Section 12(g) of the Act:
None
________________________________________________________________
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ____ No __X__
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ____ No __X__
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No ____
Indicate by check mark whether the registrant
(1) has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes ___X____ No ______
Indicate by check mark if disclosure of
delinquent filers, pursuant to Item 405 of Regulation S-K, §229.405 of this Chapter, is not contained, and will not be contained,
to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this 10-K or any amendment to the Form 10-K. [X]
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer”, “accelerated filer and “smaller reporting company” in
Rule 12b-2 of the Exchange Act.
FONAR CORPORATION AND SUBSIDIARIES
(Check one): Large accelerated filer____, Accelerated filer _X , Non-accelerated filer
(Do not check if a smaller reporting company) ____. Smaller reporting company ____
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ____ No __X
The aggregate market value of the shares
of Common Stock held by non-affiliates as of December 31, 2013 based on the closing price of $21.21 per share on such date as reported
on the NASDAQ System, was approximately $125 million. The other outstanding classes do not have a readily determinable market value.
As of September 5, 2014, 6,050,840
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
INDEX TO 10-K
PART I | |
| |
| 3 | |
ITEM 1. | |
Business | |
| 3 | |
ITEM 2. | |
Properties | |
| 25 | |
ITEM 3. | |
Legal Proceedings | |
| 25 | |
ITEM 4. | |
Mine Safety Disclosures Not Applicable | |
| 25 | |
PART II | |
| |
| 25 | |
ITEM 5. | |
Market for Registrant’s Common Equity and Related Stockholder Matters | |
| 25 | |
ITEM 6. | |
Selected Financial Data | |
| 26 | |
ITEM 7. | |
Management’s Discussion and Analysis of Financial Condition and Results of Operation. | |
| 27 | |
ITEM 7A. | |
Qualitative and Quantitative Disclosures About Market Risk | |
| 32 | |
ITEM 8. | |
Financial Statements and Supplementary Data | |
| 33 | |
ITEM 9. | |
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure | |
| 77 | |
ITEM 9A. | |
Controls and Procedures | |
| 77 | |
| |
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting | |
| 79 | |
ITEM 9B. | |
Other Information | |
| 81 | |
PART III | |
| |
| 81 | |
ITEM 10. | |
Directors and Executive Officers of the Registrant. | |
| 81 | |
ITEM 11. | |
Executive Compensation. | |
| 83 | |
ITEM 12. | |
Security Ownership of Certain Beneficial Owners and Management | |
| 85 | |
ITEM 13. | |
Certain Relationships and Related Transactions | |
| 86 | |
ITEM 14. | |
Principal Accounting Fees and Services . | |
| 87 | |
PART IV | |
| |
| 88 | |
ITEM 15. | |
Exhibits, Financial Statement Schedules, and Reports on Form 8-K. | |
| 88 | |
SIGNATURES | |
| |
| 91 | |
Exhibit 21.1 | |
Subsidiaries of the Registrant | |
| | |
Exhibit 23.1 | |
Independent Registered Public Accounting Firm’s Consent | |
| | |
Exhibit 31.1 | |
Section 302 Certification | |
| | |
Exhibit 32.1 | |
Section 906 Certification | |
| | |
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 performs services through
two subsidiaries. In fiscal 2011, HMCA assigned its assets and liabilities to a limited liability company, Imperial Management
Services, LLC (“Imperial”) for a controlling interest in Imperial. In addition to Imperial, in fiscal 2013, HMCA purchased
a 50.5% interest in another limited liability company, Health Diagnostic Management, LLC (“HDM”), which, with some
exceptions, conducts the same business as HMCA. HMCA and HDM provide management services, administrative services, billing and
collection services, office space, equipment, repair, maintenance service, and clerical and other non-medical personnel to medical
providers, engaged in diagnostic imaging. HDM, however, in addition to acting as a management company, owns and operates four 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 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 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).
The product we are promoting is our Upright®
MRI. Our patented Upright® MRI is unique in the industry in that it allows patients to be scanned in fully weight-bearing conditions,
such as standing, sitting or bending in any position that causes adverse symptoms. This means that an abnormality or injury, such
as a slipped disk can be visualized where it may not have been seen with the patient lying down. 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.
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.
COMPANY OVERVIEW.
The Upright® MRI (also known as the
“Stand-Up® MRI”) is a “whole-body” MRI, meaning it can be used to scan any part of the body. Unlike
conventional recumbent MRI scanners, the Upright® MRI permits MRI diagnoses to be made in the weight-bearing state. The Upright®
MRI allows patients to be scanned while standing, sitting, bending or lying down. This means that an abnormality or injury, such
as a slipped disk, may be scanned under full weight-bearing conditions, 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.
Although we are emphasizing sales of the
Upright® MRI, because of uncertain economic conditions and the resulting weakening demand, revenues recognized from the sale
of Upright® MRI scanners decreased in fiscal 2014 by 70.26% from fiscal 2013 (approximately $3.2 million in fiscal 2013 compared
to approximately $957,000 in fiscal 2014). Note that we recognize revenue on a percentage of completion basis. Accordingly, revenue
is recognized as each sub-assembly of a scanner is manufactured. Consequently the revenues for a fiscal period do not necessarily
relate to orders placed in that period or payments received.
The Company completed a private placement
of equity and succeeded in raising $6,000,000 on May 2, 2011. The offering consisted of Preferred Class A membership interests
in a newly formed limited liability company, Imperial Management Services, LLC (“Imperial”). Class B membership interests,
all of which were retained by the Company’s subsidiary, HMCA, hold a 90% equity interest in Imperial. The Class A membership
interests are entitled to receive a dividend of 18% per annum of their capital contributions to the limited liability company.
HMCA contributed all of its assets, together with its liabilities, to Imperial as HMCA’s capital contribution.
On February 13, 2013, HMCA entered into
an agreement to acquire a 50.5% interest in Health Diagnostics Management, LLC (“HDM”). On March 5, 2013 HDM purchased
from Health Diagnostics, LLC (“HD”) and certain of its subsidiaries, a business managing 14 MRI scanning centers, located
in the States of New York and Florida for a total purchase price aggregating $35.9 million.
As a result of the Imperial and HDM transactions,
as of August 31, 2014, HMCA through Imperial and HDM, managed a total of 24 MRI scanning centers, 17 of which are located in New
York and 7 of which are located in Florida, and 23 of which have Upright MRI scanners.
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 detecting clinically significant pathology.
For instance, the Fonar Upright® technology
has demonstrated its key value on patients with the Arnold-Chiari Syndrome, cerebellar tonsil ectopia (CTE), 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 cerebelium. The Chiari Syndrome is therefore alternately named Cerebellar Ectopia (CTE) indicating
the displacement (ectopia) of these Cerebellar tonsils in this syndrome. Classic symptoms of the Chiari Syndrome include the “drop
attack,” where the patient unexpectedly experiences an explosive rush or nervous discharge at the base of the brain which
rushes down the body to the extremities, causing the patient to collapse in a temporary neuromuscular paralysis; this subsides
when the patient is lying down. Conventional lie-down MRI scanners cannot make an adequate evaluation of the pathology since the
patient’s pathology is most visible and the symptoms most acute when the patient is scanned in the upright weight-bearing
position.
A publication in the Journal “Brain
Injury” (Brain Injury 2010, 24 (7-8) 988-994) of 1,200 neck pain patients reported that the fallen cerebellar tonsils of
the brain (CTE) were missed 75% of the time when the patient was scanned only in the recumbent position. It is critical to have
an image of the patient in an upright position so that the neurosurgeons can fully evaluate the extent of the brain stem compression
which is occurring so they can choose the most appropriate surgical approach for the operative repair.
The
study was published by 10 authors from distinguished universities in the United States and around the world. The study reported
that Cerebellar Tonsil Herniation (CTE) was missed 75% of the time when the patient was scanned lying down instead of upright.
At the current rate of 1,000,000 automobile whiplash injuries in the U.S. per year, 600,000 patients each year would have the pathology
responsible for their symptoms go undetected if they were examined solely in a conventional recumbent-only MRI.
The Upright® MRI has also demonstrated
its value for patients suffering from scoliosis. Scoliosis patients have been typically subjected to routine x-ray exams for years
and must be imaged upright for an adequate evaluation of their scoliosis. Because the patient must be standing for the exam, an
x-ray machine has been the only modality that could provide that service. The Upright® MRI, is the only MRI scanner which allows
the patient to stand during the MRI exam. Fonar has developed a new RF receiver and scanning protocol that for the first time allows
scoliosis patients to obtain diagnostic pictures of their spines without the risks of x-rays. A study by the National Cancer Institute
(2000) of 5,466 women with scoliosis reported a 70% increase in breast cancer resulting from 24.7 chest x-rays these patients received
on the average in the course of their scoliosis treatment.
FONAR CORPORATION AND SUBSIDIARIES
The Upright® MRI is also the world’s
most non-claustrophobic whole-body MRI scanner. Patients can simply walk into the magnet, stand or sit for their scans and then
walk out. The magnet’s front-open and top-open design provides an unprecedented degree of comfort because there is nothing
in front of the patient’s face except for a large (42”) flat-screen TV that is mounted on the wall. The default position
for the bed is a tilt back of seven degrees that minimizes patient motion. Special coil fixtures, a patient seat, Velcro straps,
and transpolar stabilizing bars are also used to keep the patient comfortable and motionless throughout the scanning process.
Full-range-of-motion studies of the joints
in a multiple of directions are possible, an especially promising feature for sports injuries. Full Range of Motion cines, or movies,
of the lumbar spine can also be achieved under full body weight.
The Fonar 360™ is an enlarged room
sized magnet in which the floor, ceiling and walls of the scan room are part of the magnet frame. Consequently, this scanner allows
360 degree access to the patient, and physicians and family members are able to enter the scanner and approach the patient.
Although the Fonar 360™ MRI is not
now being actively marketed, the first Fonar 360™ MRI scanner, installed at the Oxford-Nuffield Orthopedic Center in Oxford,
United Kingdom, is carrying a full diagnostic imaging caseload.
The Upright® MRI is designed to maximize
image quality through an optimal combination of signal-to-noise (S/N) and contrast-to-noise (C/N) ratios. The technical improvements
realized in this scanner’s design over its lower field strength predecessors also include increased image-processing speed
and diagnostic flexibility.
Fonar created the high-field open MRI
market segment. High-field open MRIs operate at significantly higher magnetic field strengths than the 0.2-0.35 Tesla open MRIs
that preceded them, and, therefore, benefit from more of the MRI image-producing signal needed to make high-quality MRI images.
Fonar maximizes image quality through
an optimal combination of image signal to noise (S/N) and contrast-to noise (C/N) ratios. Technical improvements incorporated into
the scanner design include increased image processing speed, high-S/N Organ Specific(TM) RF receiver coils, high performance front-end
electronics featuring high-speed, wide-dynamic-range analog-to-digital conversion and a miniaturized ultra-low-noise pre-amplifier;
high-speed automatic tuning, bandwidth-optimized pulse sequences, multi-bandwidth sequences, and off-center FOV imaging capability.
In addition to the signal-to-noise ratio,
however, a major determinant of that must be considered when it comes to image quality 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 provide various
features allowing for versatile diagnostic capability. For example, SMART™ scanning allows for same-scan customization of
up to 63 slices, 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.
The console for these scanners includes
a mouse-driven, multi-window interface for easy operation and a 42-inch, 1280 x 1024-pixel, 20-up, high-resolution image monitor
with features such as electronic magnifying glass and real-time, continuous zoom and pan.
During fiscal 2014, sales of our Upright®
MRI scanners accounted for approximately 1.4% of our total revenues and 7.9% of our medical equipment revenues, as compared to
6.5% of total revenues and 21.6% of medical equipment revenues in fiscal 2013. These results reflect the decrease in our sales
of scanners.
Our principal selling, marketing and advertising
efforts have been focused on the Upright® MRI, which we believe is a particularly unique product, being the only MRI scanner
which is both open and allows for weight-bearing imaging. We expect to continue our focus on the Upright® MRI in the immediate
future.
FONAR CORPORATION AND SUBSIDIARIES
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.
WORKS-IN-PROGRESS
All of our products and works-in-progress
seek to bring to the public MRI products that are expected to provide important advances against serious disease.
MRI takes advantage of the nuclear resonance
signal elicited from the body's tissues and the exceptional sensitivity of this signal for detecting disease. Much of the serious
disease of the body occurs in the soft tissue of vital organs. The principal diagnostic modality currently in use for detecting
disease, as in the case of x-ray mammography, are diagnostic x-rays. X-rays discriminate soft tissues, such as healthy breast tissue
and cancerous tissue poorly, because the x-ray particle traverses the various soft tissues almost equally thereby causing target
films to be nearly equally exposed by x-rays passing through adjacent soft tissues and creating healthy and cancerous shadows on
the film that differ little in brightness. The image contrast in x-ray between cancerous and healthy breast tissue is poor, making
the detection of breast cancers by the x-ray mammogram less than optimal and forcing the mammogram to rely on the presence or absence
of microscopic stones called “microcalcifications” instead of being able to “see” the breast cancer itself.
If microcalcifications are not present to provide the missing contrast, then the breast cancer goes undetected. They frequently
are not present. 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 tissues differ
so dramatically. Liver cancer and healthy liver signals differ by 180% for example. Thus there is some urgency to bring to market
an MRI based breast scanner that can overcome the x-ray limitation and assure that mammograms do not miss serious lesions. The
added benefit of MRI mammography relative to x-ray mammography is the elimination of the need for the patient to disrobe and the
painful compression of the breast typical of the x-ray mammogram. The patient is scanned in her street clothes in MRI mammography.
Moreover MRI mammogram scans the entire chest wall including the axilla for the presence of nodes which the x-ray mammogram cannot
reach.
We view our Upright® MRI as having
the potential for being an ideal breast examination machine as it permits the patient to be seated for the examination, which would
allow easy access for an MRI guided breast biopsy when needed. The Fonar 360™ MRI scanner would also be ideal for breast
examinations.
PRODUCT MARKETING
The principal markets for the Company's
scanners are private diagnostic imaging centers and hospitals.
We use internal and independent manufacturer’s
representatives for domestic and foreign markets. None of Fonar’s competitors are entitled to make the Fonar Upright®
MRI scanner.
Fonar’s Website includes interactive
product information for reaching customers.
Fonar has targeted orthopedic surgeons
and neurosurgeons, particularly spine surgeons, as important markets for the Upright® MRI. Accordingly, Fonar has exhibited
at annual meetings of The American Academy of Orthopaedic Surgeons (AAOS); the North American Spine Society (NASS); the American
Association of Neurological Surgeons (AANS); and the Congress of Neurological Surgeons (CNS).
FONAR CORPORATION AND SUBSIDIARIES
Recognition of the importance of
the Fonar Upright® MRI continues to grow. During fiscal 2014, sales were made to customers in Dubai, United Arab
Emirates, Wasilla, Alaska and to Medserena in Frankfurt, Germany. CEO Matthais Schulz has said, “The large number of
requests coming from our physicians in Germany are arising because of the special medical need for FONAR’s unique
technology. This is in spite of an intensely active MRI market in Germany, where there are already many conventional lie-down
MRIs installed.” Medserena also has expanded its market to the United Kingdom with the opening of a Fonar Upright®
MRI scanner in London.
Even high-field 3.0 Tesla MRI scanners
cannot overshadow the importance of Fonar’s unique technology. In August, 2010, a distinguished board-certified radiologist
in Florida, the owner/operator of two multi-modality imaging centers equipped with MRIs, ordered a Fonar Upright® MRI. He initially
considered purchasing a 3.0 Tesla lie-down MRI, but decided instead to buy the Fonar Upright® Multi-Position™ MRI when
he became aware of its many unique imaging capabilities.
Fonar’s marketing strategy has been
designed to reach key purchasing decision makers with information concerning our flagship product, 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’s advertising has been directed at 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® diagnostic ability. Advertisements to them have appeared in the journal Spine, The Journal of
Neurosurgery, and the Journal of the American Academy of Orthopedic Surgery.
2) Radiologists:
This segment of the campaign is aimed at the physicians who now have a new modality to offer their referring physicians. Our advertisements
directed to them have appeared in Radiology and Diagnostic Imaging.
3) All Physicians:
These advertising efforts have been directed to the total physician audience, so that the vast number of doctors who send patients
for MRI’s are aware of the diagnostic advantages of the Fonar Upright® Multi-Position® MRI. Advertisements directed
to this audience have appeared in the Journal of the American Medical Association.
This advertising has featured a series
of compelling messages. One advertisement pointed out that the AMA book, Guides to the Evaluation of Permanent Impairment, indicates
that diagnosis must be performed upright in flexion and extension. Another advertisement was educational and headlined, “Discover
the power of Upright Imaging”. Fonar realizes that peer-to-peer communications is the most powerful way to speak to physicians.
Consequently, testimonials from surgeons and radiologists have been used to promote our Upright® MRI scanner. The first such
advertisement featured five surgeons and two radiologists, explaining the Multi-Position® diagnostic benefits of the Fonar
Upright® MRI scanner to them. Another advertisement featured a leading radiologist, telling why he bought 12 Fonar Upright®
MRI scanners and planned to buy more.
Also, our advertising for HMCA also serves
as advertising for Fonar MRI scanners. We have increased internet awareness of our product by driving patient traffic to the Upright®
scanning centers we manage by installing Websites for every location. These websites and advertising give prospective customers
of Upright® MRI scanners a view of operating Upright® MRI centers and the benefits of using an Upright® MRI scanner.
The success of HMCA-managed sites not only increases management fees to HMCA but encourages new sales for Fonar as well.
To meet the demand for high-field open
MRI scanners, Fonar plans to devote its principal efforts to marketing the Upright® MRI. The Upright® MRI is the only scanner
in the industry that has the unique capability of scanning patients under weight-bearing conditions and in various positions. Utilizing
a 6000 gauss (0.6 Tesla field strength) iron core electromagnet, the Upright® MRI scanner magnets are among the highest field
"Open MRI" scanners in the industry.
FONAR CORPORATION AND SUBSIDIARIES
The Upright® MRI is also suited to
fill a demand for better diagnoses of scoliosis patients, who must be standing for the exam. Scoliosis patients are typically subjected
to routine x-ray exams for years. In the past, an x-ray machine was the only modality that could provide that service. Typical
MRI scanners cannot provide this service because the patient cannot stand up inside of them. The Fonar Upright™ MRI scanner
is the only MRI scanner which allows the patient to stand during the exam. The Fonar Upright® Scanner avoids radiation of the
x-ray machines currently used for scoliosis, which have been reported by the National Cancer Institute to cause a 70% increase
in the risk of breast cancer. 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.
We also will seek to introduce new MRI
applications for our scanners such as MRI-directed interventions.
Our areas of operations are principally
in the United States. During the fiscal year ended June 30, 2014, 2.5% of the Company's revenues were generated by foreign sales,
as compared to 2.1% for fiscal 2013.
We are seeking to promote foreign sales
and have sold scanners in various foreign countries. Foreign sales, however, have not yet proved to be a significant source of
revenue.
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 $10.2 million in fiscal 2014 and $11.0 million in fiscal 2013. Notwithstanding the decrease in service revenues in
fiscal 2014, we expect service revenues to be essentially stable under present circumstances as customers enter into service contracts
when the warranties on their scanners expire, replacing lost service contracts resulting from older scanners being taken out of
service.
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,
2014, we incurred expenditures of $1,760,821, none of which was capitalized, on research and development, as compared to $1,438,560,
none of which was capitalized, during the fiscal year ended June 30, 2013.
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.
FONAR CORPORATION AND SUBSIDIARIES
The development of clinically practical
scan protocols and software depends on close contact between research and development scientists and engineers, and end users.
That close contact is facilitated in part by the relationship with HMCA and the scanning centers. In addition to that collaboration,
R&D staff have pursued a variety of novel and Upright® MRI-specific research projects. It is anticipated that these will
ultimately lead to new applications that are made available to existing customers as upgrade add-ons to their machines. For example,
phase-contrast imaging techniques originally developed for angiography have recently been applied to cerebro-spinal fluid (CSF)
flow. Analysis of CSF flow in upright and recumbent postures may prove to be of significant value in the evaluation of a variety
of disorders.
BACKLOG
Our backlog of unfilled orders at September
10, 2014 was approximately $2.9 million, as compared to $1.5 million at September 26, 2013. It is expected that the existing backlog
of orders will be filled within the 2015 fiscal year.
PATENTS AND LICENSES
We currently have numerous patents in
effect which relate to the technology and components of the 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 of 4,552 (as of February 13, 2013)
MRI patents issued by the United States Patent Office. The development of our MRI scanners have been based upon the 1974 Patent,
and we believe that the 1974 Patent was the first of its kind to utilize MR to scan the human body and to detect cancer. The 1974
Patent was extended beyond its original 17-year term and expired in February, 1992.
We have significantly enhanced our patent
position within the industry and now possesses a substantial patent portfolio which provides us, under the aegis of United States
patent law, "the exclusive right to make, use and sell" many of the scanner features which Fonar pioneered and which
are now incorporated in most MRI scanners sold by the industry. As of June 30, 2014, 189 patents had been issued to Fonar, and
approximately 23 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
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
super conducting magnet technology.
The remainder, described as Open MRIs,
are recumbent-only machines based on Fonar’s original iron-frame vertical magnetic field magnet design. These systems have
been manufactured and sold by many of our largest competitors over the years. They generally operate at low field strengths (0.2
- 0.35 Tesla). Recently our competitors have attempted to introduce higher field strength Open MRI products, but the perception
of the medical community is still that Open MRIs are useful only for anxious and claustrophobic patients, their image quality is
poor, scan times are long, image resolution is low and they don’t do anything clinically valuable that high-field MRIs don’t
already do.
FONAR CORPORATION AND SUBSIDIARIES
One of the Upright MRI’s big competitive
advantages is that it is dramatically different from the Open MRI in several important ways:
The Upright MRI actually does something
clinically valuable that the high-field MRI machines cannot do (i.e. positional imaging, weight-bearing imaging).
Although the patient can extend their
arms and possibly see out the sides while recumbent in an Open MRI, there is still a large intimidating magnet pole very close
to and directly in front of the patient’s face. The Upright MRI allows the patient look directly out of the scanner and watch
TV because there is nothing in front of their face.
The Upright MRI uses the same configuration
RF receiver coil as a high-field MRI system to image the spine. Open MRIs cannot do this. (This is because of the rule in MRI that
the axis of symmetry of the RF receiver coil should be perpendicular to the direction of the main magnetic field. The upright patient
sits comfortably with their 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).
The Upright® MRI’s magnetic
field strength is 2-3 times that of many Open MRIs still in operation today.
Relative the high-field systems, the Upright®
MRI’s has two major competitive advantages:
Patient positioning sometimes trumps 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 strengths.
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 patient protected Upright® MRI
technology with the result that Fonar today is the unique and only supplier of the highest field MRI magnets (.6 Tesla) that are
not superconducting, do not use liquid helium and are not therefore susceptible to severe consequences and downtime cause by a
system quench.
The iron frame, because it controls the
magnetic lines of force and place them where wanted and remove 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. No other company possesses
the patented Upright® MRI technology necessary to achieve Upright positional MRI imaging.
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 television 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.
FONAR CORPORATION AND SUBSIDIARIES
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.
Nuclear medicine systems, which are based
upon the detection of gamma radiation generated by radioactive pharmaceuticals introduced into the body, are used to provide information
concerning soft tissue and internal body organs and particularly to examine organ function over time.
Ultrasound systems emit, detect and process
high frequency sound waves reflected from organ boundaries and tissue interfaces to generate images of soft tissue and internal
body organs. Although the images are substantially less detailed than those obtainable with x-ray methods, ultrasound is generally
considered harmless and therefore has found particular use in imaging the pregnant uterus.
X-ray machines, ultrasound machines, digital
radiography systems and nuclear medicine compete with the MRI scanners by offering significantly lower price and space requirements.
However, Fonar believes that the quality of the images produced by its MRI scanners is generally superior to the quality 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:
FONAR CORPORATION AND SUBSIDIARIES
1. Establishment registration of companies
which are required to register under 21 CFR Part 807.20, such as manufacturers, distributors, re-packagers and re-labelers.
2. Medical device listing with FDA of
devices to be marketed.
3. Manufacturing devices in accordance
with the Current Good Manufacturing Practices Quality System Regulation in 21 CFR Part 820.
4. Labeling devices in accordance with
labeling regulations in 21 CFR Part 801 or 809.
5. Submission of a Premarket Notification,
pursuant to 510(k), before marketing a device.
In addition to complying with general
controls, Class II devices are also subject to special controls. Special controls may include special labeling requirements, guidance
documents, mandatory performance standards and post-market surveillance.
On October 3, 2000 Fonar received FDA
clearance for the Upright® MRI.
Premarketing Submission
Each person who wants to market Class
I, II and some III devices intended for human use in the U.S. must submit a 510(k) to FDA at least 90 days before marketing unless
the device is exempt from 510(k) requirements. A 510(k) is a pre-marketing submission made to FDA to demonstrate that the device
to be marketed is as safe and effective, that is, substantially equivalent, SE, to a legally marketed device that is not subject
to pre-market approval, PMA. Applicants must compare their 510(k) device to one or more similar devices currently on the U.S. market
and make and support their substantial equivalency claims.
The FDA is committed to a 90-day clearance
after submission of a 510(k), provided the 510(k) is complete and there is no need to submit additional information or data.
The 510(k) is essentially a brief statement
and description of the product. As Fonar’s scanner products are Class II products, there are no pre-market data requirements.
An investigational device exemption, also
referred to as IDE, allows the investigational device to be used in a clinical study pending FDA clearance in order to collect
safety and effectiveness data required to support the Premarket Approval, also referred to as PMA, application or a Premarket Notification
pursuant to 510(k), submission to the FDA. Clinical studies are most often conducted to support a PMA.
For the most part, however, we have not
found it necessary to utilize IDE’s. The standard 90 day clearance for our new MRI scanner products classified as Class II
products makes the IDE unnecessary, particularly in view of the time and effort involved in compiling the information necessary
to support an IDE.
Quality System Regulation
The Quality Management System is applicable
to the design, manufacture, administration of installation and servicing of magnetic resonance imaging scanner systems. The FDA
has authority to conduct detailed inspections of manufacturing plants, to establish Good Manufacturing Practices which must be
followed in the manufacture of medical devices, to require periodic reporting of product defects and to prohibit the exportation
of medical devices that do not comply with the law.
Medical Device Reporting Regulation
Manufacturers must report all MDR reportable
events to the FDA. Each manufacturer must review and evaluate all complaints to determine whether the complaint represents an event
which is required to be reported to FDA. Section 820.3(b) of the Quality Systems regulation defines a complaint as, "any written,
electronic or oral communication that alleges deficiencies related to the identity, quality, durability, reliability, safety, effectiveness,
or performance of a device after it is released for distribution."
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.
FONAR CORPORATION AND SUBSIDIARIES
Malfunctions are not reportable if they
are not likely to result in a death, serious injury or other significant adverse event experience.
A malfunction which is or can be corrected
during routine service or device maintenance still must be reported if the recurrence of the malfunction is likely to cause or
contribute to a death or serious injury if it were to recur.
We have established and maintained written
procedures for implementation of the MDR regulation. These procedures include internal systems that:
provide for timely and effective
identification, communication and evaluation of adverse events;
provide a standardized review process
and procedures for determining whether or not an event is reportable; and
provide procedures to insure the
timely transmission of complete reports.
These procedures also include documentation
and record keeping requirements for:
information that was evaluated
to determine if an event was reportable;
all medical device reports and
information submitted to the FDA;
any information that was evaluated
during preparation of annual certification reports; and
systems that ensure access to information
that facilitates timely follow up and inspection by FDA.
FDA Enforcement
FDA may take the following actions to
enforce the MDR regulation:
FDA-Initiated or Voluntary Recalls
Recalls are regulatory actions that remove
a hazardous, potentially hazardous, or a misbranded product from the marketplace. Recalls are also used to convey additional information
to the user concerning the safe use of the product. Either FDA or the manufacturer can initiate recalls.
There are three classifications, i.e.,
I, II, or III, assigned by the Food and Drug Administration to a particular product recall to indicate the relative degree of health
hazard presented by the product being recalled.
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 five voluntary recalls.
Four 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.
FONAR CORPORATION AND SUBSIDIARIES
Warning Letters
FDA issues written communications to a
firm, indicating that the firm may incur more severe sanctions if the violations described in the letter are not corrected. Warning
letters are issued to cause prompt correction of violations that pose a hazard to health or that involve economic deception. The
FDA generally issues the letters before pursuing more severe sanctions.
Seizure
A seizure is a civil court action against
a specific quantity of goods which enables the FDA to remove these goods from commercial channels. After seizure, no one may tamper
with the goods except by permission of the court. The court usually gives the owner or claimant of the seized merchandise approximately
30 days to decide a course of action. If they take no action, the court will recommend disposal of the goods. If the owner decides
to contest the government's charges, the court will schedule the case for trial. A third option allows the owner of the goods to
request permission of the court to bring the goods into compliance with the law. The owner of the goods is required to provide
a bond or, security deposit, to assure that they will perform the orders of the court, and the owner must pay for FDA supervision
of any activities by the company to bring the goods into compliance.
Citation
A citation is a formal warning to a firm
of intent to prosecute the firm if violations of the FD&C Act are not corrected. It provides the firm an opportunity to convince
FDA not to prosecute.
Injunction
An injunction is a civil action filed
by FDA against an individual or company. Usually, FDA files an injunction to stop a company from continuing to manufacture, package
or distribute products that are in violation of the law.
Prosecution
Prosecution is a criminal action filed
by FDA against a company or individual charging violation of the law for past practices.
Foreign and Export Regulation
We obtain approvals as necessary in connection
with the sales of our products in foreign countries. In some cases, FDA approval has been sufficient for foreign sales as well.
Our standard practice has been to require either the distributor or the customer to obtain any such foreign approvals or licenses
which may be required.
Legally marketed devices that comply with
the requirements of the Food Drug & Cosmetic Act require a Certificate to Foreign Government issued by the FDA for export.
Other devices that do not meet the requirements of the FD&C Act but comply with the laws of a foreign government require a
Certificate of Exportability issued by the FDA. All products which we sell have FDA clearance and would fall into the first category.
Foreign governments have differing requirements
concerning the import of medical devices into their respective jurisdictions. The European Union, also referred to as EU, has some
essential requirements described in the EU’s Medical Device Directive, also referred to as MDD. In order to export to one
of these countries, we must meet the essential requirements of the MDD and any additional requirements of the importing country.
The essential requirements are similar to some of the requirements mandated by the FDA. In addition the MDD requires that we enlist
a Notified Body to examine and assess our documentation, a Technical Construction File, and verify that the product has been manufactured
in conformity with the documentation. The notified body must carry out or arrange for the inspections and tests necessary to verify
that the product complies with the essential requirements of the MDD, including safety performance and Electromagnetic Compatibility,
also referred to as EMC. Also required is a Quality System, ISO-9001, assessment by the Notified Body. We were approved for ISO
9001 certification for its Quality Management System in April, 1999.
We received clearance to sell the Upright®
MRI scanners in the EU in May, 2002.
FONAR CORPORATION AND SUBSIDIARIES
Other countries require that their own
testing laboratories perform an evaluation of our devices. This requires that we must bring the foreign agency’s personnel
to the USA to perform the evaluation at our expense before exporting.
Some countries, including many in Latin
America and Africa, have very few regulatory requirements, beyond FDA clearance.
To date, Fonar has been able to comply
with all foreign regulatory requirements applicable to its export sales.
HEALTH MANAGEMENT CORPORATION OF AMERICA
IMPERIAL MANAGEMENT SERVICES, LLC
HEALTH DIAGNOSTICS MANAGEMENT, LLC
PHYSICIAN AND DIAGNOSTIC SERVICES MANAGEMENT
BUSINESS
Health Management Corporation of America,
formed under the name U.S. Health Management Corporation and referred to as "HMCA", was organized by FONAR in March 1997.
HMCA was formed as a wholly-owned subsidiary to engage in the business of providing comprehensive management services to diagnostic
imaging facilities. The services we provide include development, administration, leasing of office space, facilities and equipment,
provision of supplies, staffing, training and supervision of non-medical personnel, credentialing, accounting, billing and collection,
assistance with compliance matters and the development and implementation of practice growth and marketing strategies.
In May 2011, HMCA transferred all of its
assets, liabilities and business to Imperial Management Services, LLC, a limited liability company which is controlled but not
wholly-owned by HMCA. Imperial is continuing the business of HMCA utilizing the same facilities, equipment and personnel as HMCA.
This transaction did not result in a change of control or policy, but was solely a means to raise capital.
On February 13, 2013, HMCA entered into
an agreement with investors to acquire a 50.5% controlling interest in a newly formed limited liability company, Health Diagnostics
Management, LLC (HDM).
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. The transfer of the Florida facilities took place
in April, 2013, following some required regulatory approvals.
HMCA is the controlling, but not sole
owner of these two limited liability companies, Imperial and HDM, through which HMCA conducts its business. The investors are passive
investors, in that their membership interests do not give them the right to participate in the management of either company.
As of September 5, 2014, HMCA and HDM
managed a total of 24 MRI centers. For the 2013 fiscal year, the revenues HMCA and HDM recognized from the MRI facilities increased
to $34.3 million, and in fiscal 2014 the revenues recognized from the MRI facilities further increased to $56.6 million.
For the sake of simplicity and to avoid
confusion, HMCA, Imperial and HDM are, unless otherwise indicated referred to as “HMCA” for all periods before and
after the Imperial and HDM transactions.
HMCA GROWTH STRATEGY
HMCA’s growth strategy focuses on
upgrading and expanding the existing facilities it manages and expanding the number of facilities it manages for its clients. Our
most important effort in this regard has been to promote and facilitate the replacement of existing MRI scanners with new Fonar
Upright® MRI scanners. As a result, we presently have Upright® MRI scanners at all but one of the MRI facilities we manage.
FONAR CORPORATION AND SUBSIDIARIES
PHYSICIAN AND DIAGNOSTIC MANAGEMENT SERVICES
HMCA’s services to the facilities
it manages encompass substantially all of their business operations. Each facility is controlled, however, by the physician owner,
not HMCA, and all medical services are performed by the physicians and other medical personnel under the physician-owner’s
supervision. HMCA is the management company and performs services of a non-professional nature. These services include:
1. Offices and Equipment. HMCA identifies,
negotiates leases for and/or provides office space and equipment to its clients. This includes technologically sophisticated medical
equipment. HMCA also provides improvements to leaseholds, assistance in site selection and advice on improving, updating, expanding
and adapting to new technology.
2. Personnel. HMCA staffs all the non-medical
positions of its clients with its own employees, eliminating the client's need to interview, train and manage non-medical employees.
HMCA processes the necessary tax, insurance and other documentation relating to employees.
3. Administrative. HMCA assists in the
scheduling of patient appointments, purchasing of office and medical supplies and equipment and handling of reporting, accounting,
processing and filing systems. It prepares and files the physician portions of complex applications to enable its clients to participate
in managed care programs and to qualify for insurance reimbursement. HMCA assists the clients to implement programs and procedures
to ensure full and timely regulatory compliance and appropriate cost reimbursement under no-fault insurance and Workers' Compensation
guidelines, as well as compliance with other applicable governmental requirements and regulations, including HIPAA and other privacy
requirements.
4. Billing and Collections. HMCA is responsible
for the billing and collection of revenues from third-party payors including those governed by No-Fault and Workers' Compensation
statutes. HMCA is presently using a third party to perform its billing and collection services for its clients’ No-Fault
and Workers’ Compensation scanning business.
5. Cost Saving Programs. Based on available
volume discounts, HMCA seeks to assist in obtaining favorable pricing for office and medical supplies, equipment, contrast agents,
such as gadolinuim, 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 may expand
the ancillary services offered in its network to include x-rays and other MRI equipment such as extremity scanners.
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. Practices can treat patients more efficiently if the physicians can spend less
time on business and administrative matters and more time practicing medicine.
HMCA provides its services pursuant to
negotiated contracts with its clients. While HMCA believes it can provide the greatest value to its clients by furnishing the full
range of services appropriate to that client, HMCA would also be willing to enter into contracts providing for a more limited spectrum
of management services.
The exceptions to this general model of
operation are four of the facilities acquired by HMCA from Health Diagnostics, LLC in April, 2013 in Florida. These Florida facilities
are owned by limited liability companies which, as our subsidiaries, conduct their operations directly and bill and collect their
fees from the patients and third party payors.
The facilities enter into contracts with
third party payors, including managed care companies. None of HMCA’s clients, however, participate in any capitated plans
or other risk sharing arrangements. Capitated plans are those HMO programs where the provider is paid a flat monthly fee per patient.
FONAR CORPORATION AND SUBSIDIARIES
The fees paid by the facilities to HMCA
are flat monthly fees. In fiscal 2013, the aggregate amount of management fees were $1,708,739 per month up to March 5, 2013. As
a result of the HDM acquisition and the addition of 14 MRI scanning centers, the aggregate amount of management fees increased
to $3,469,438 per month commencing March 5, 2013. In fiscal 2014, the aggregate amount of management fees was $3,483,916.
Fees under the management agreements are
subject to adjustment by mutual agreement on an annual basis.
Dr. Damadian owns three of the MRI facilities
in Florida managed by HMCA. 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 2014, the aggregate amount of management fees paid to HMCA by these
sites was $615,144.
Patient fees for the Florida subsidiaries
which directly bill their patients were $24,307,192 in fiscal 2014.
HMCA and HDM contract with Tritech Healthcare
Management (Plainview, New York) to perform billing and collection for their clients’ No-Fault and Workers’ Compensation
business. The fixed monthly fees were $30,000 for HMCA and $55,000 for HDM in fiscal 2014.
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 and HDM provide diagnostic imaging services to patients referred by physicians who are either in private practice or affiliated
with managed care providers or other payor groups. 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 employed by the diagnostic imaging facilities. Following diagnostic
procedures, the images are reviewed by the interpreting physicians who prepare a report of these tests and their findings. Reports
for the New York facilities are transcribed by HMCA personnel and reports for the Florida facilities are outsourced to independent
contractors.
HMCA develops marketing programs in an
effort to establish and maintain profitable referring physician relationships and to maximize reimbursement yields. HMCA also directs
its marketing efforts at managed care providers.
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. Two facilities in New York and two facilities in Florida have two MRI scanners.
One facility in New York and two in Florida also perform x-rays.
REIMBURSEMENT
HMCA’s clients receive reimbursements
for their services through Medicare, Medicaid, managed care and other insurance.
FONAR CORPORATION AND SUBSIDIARIES
Medicare
The Medicare program provides reimbursement
for hospitalization, physician, diagnostic and certain other services to eligible persons 65 years of age and over and certain
other individuals. Providers are paid by the federal government in accordance with regulations promulgated by the Department of
Health and Human Services, HSS, and generally accept the payment with nominal deductible and co-insurance amounts required to be
paid by the service recipient, as payment in full. Hospital inpatient services are reimbursed under a prospective payment system.
Hospitals receive a specific prospective payment for inpatient treatment services based upon the diagnosis of the patient.
Under Medicare’s prospective payment
system for hospital outpatient services, or OPPS, a hospital is paid for outpatient services on a rate per service basis that varies
according to the ambulatory payment classification group, or APC, to which the service is assigned rather than on a hospital’s
costs. Each year the Centers for Medicare and Medicaid Services, or CMS, publishes new APC rates that are determined in accordance
with the promulgated methodology.
Services provided in non-hospital based
freestanding facilities are paid under the Medicare Physician Fee Schedule, or MPFS. All of HMCA’s clients are presently
in this category. The MPFS is updated on an annual basis.
Healthcare Reform Legislation
Healthcare reform legislation enacted
in the first quarter of 2010 by the Patient Protection and Affordable Care Act or PPACA, specifically requires the U.S. Department
of Health and Human Services, in computing physician practice expense relative value units, to increase the equipment utilization
factor for advanced diagnostic imaging services (such as MRI, CT and PET) from a presumed utilization rate of 50% to 65% for 2010
through 2012, 70% in 2013, and 75% thereafter. Excluded from the adjustment are low-technology imaging modalities such as ultrasound,
X-ray and fluoroscopy. The Health Care and Education Reconciliation Act of 2010 (H.R. 4872) or Reconciliation Act, which was approved
by the President on March 30, 2010, amends the provision for higher presumed utilization of advanced diagnostic imaging services
to a presumed rate of 75%. These changes may result in decreased revenue for the services performed by our clients for Medicare
beneficiaries. Other changes in reimbursement for services rendered by Medicare Advantage plans may also reduce the revenues for
services rendered to Medicare Advantage enrollees.
We have experienced reimbursement reductions
for radiology services provided to Medicare beneficiaries, including reductions pursuant to the Deficit Reduction Act, or DRA.
The DRA, which became effective in 2007,
set reimbursement for the technical component for imaging services (excluding diagnostic and screening mammography) in non-hospital
based freestanding facilities at the lesser of OPPS or the MPFS.
In addition to the foregoing changes to
the usage assumptions, CMS’ 2010 regulatory changes to the MPFS also included a downward adjustment to services primarily
involving the technical component rather than the physician work component, by adjusting downward malpractice payments for these
services. These adjustments have been phased in over a four year period. For our fiscal year ended June 30, 2014, Medicare
revenues represented approximately 6.5% of the revenues for HMCA’s clients as compared to 7.6% for the fiscal year
ended June 30, 2013. In January, 2014 additional reductions were adopted, and New York State is proposing to reduce workers’
compensation reimbursements.
Because of the many variables involved,
we are unable to predict how the legislative mandates contained in PPACA will be implemented, in their complete and final form,
whether any additional changes to PPACA or regulations (including interpretations), will occur in the future, or what effect any
other future legislation or regulation would have on our business. Many commercial insurance companies, however, tie their reimbursement
rates to the government reimbursement levels.
FONAR CORPORATION AND SUBSIDIARIES
Medicaid
The Medicaid program is a jointly-funded
federal and state program providing coverage for low-income persons. In addition to federally-mandated basic services, the services
offered and reimbursement methods vary from state to state. In many states, Medicaid reimbursement is patterned after the Medicare
program; however, an increasing number of states have established or are establishing payment methodologies intended to provide
healthcare services to Medicaid patients through managed care arrangements. In fiscal 2014, approximately 0.25% of the revenues
of HMCA’s clients were attributable to Medicaid, as compared to 0.5% in fiscal 2013.
Managed Care and Private Insurance.
Health Maintenance Organizations, or HMO’s,
Preferred Provider Organizations, or PPOs, and other managed care organizations attempt to control the cost of healthcare services
by a variety of measures, including imposing lower payment rates, preauthorization requirements, limiting services and mandating
less costly treatment alternatives. Managed care contracting is competitive and reimbursement schedules are at or below Medicare
reimbursement levels. Some managed care organizations have reduced or otherwise limited, and other managed care organizations may
reduce or otherwise limit, reimbursement in response to reductions in government reimbursement. These reductions could have an
adverse impact on our financial condition and results of operations. These reductions have been, and any future reductions may
be, similar to the reimbursement reductions proposed by CMS, Congress and the current federal government administration. The development
and expansion of HMOs, PPOs and other managed care organizations within our core markets could have a negative impact on utilization
of our services in certain markets and/or affect the revenues per procedure we can collect, since such organizations will exert
greater control over patients’ access to diagnostic imaging services, the selection of the provider of such services and
the reimbursement thereof.
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 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.
FONAR CORPORATION AND SUBSIDIARIES
Federal False Claims Act
The federal False Claims Act and, in particular,
the False Claims Act’s “qui tam” or “whistleblower” provisions allow a private individual to bring
actions in the name of the government alleging that a defendant has made false claims for payment from federal funds. After the
individual has initiated the lawsuit the government must decide whether to intervene in the lawsuit and to become the primary prosecutor.
If the government declines to join the lawsuit, the individual may choose to pursue the case alone, although the government must
be kept apprised of the progress of the lawsuit, and may intervene later. Whether or not the federal government intervenes in the
case, it will receive the majority of any recovery.
When an entity is determined to have violated
the federal False Claims Act, it must pay three times the actual damages sustained by the government, plus mandatory civil penalties
for each separate false claim and the government’s attorneys’ fees. Liability arises when an entity knowingly submits,
or causes someone else to submit, a false claim for reimbursement to the federal government. The False Claims Act defines the term
“knowingly” broadly, though simple negligence will not give rise to liability under the False Claims Act. Examples
of the other actions which may lead to liability under the False Claims Act:
Failure to comply with the many
technical billing requirements applicable to our Medicare and Medicaid business.
Failure to comply with the prohibition
against billing for services ordered or supervised by a physician who is excluded from any federal healthcare program, or the prohibition
against employing or contracting with any person or entity excluded from any federal healthcare program.
Failure to comply with the Medicare
physician supervision requirements for the services we provide, or the Medicare documentation requirements concerning physician
supervision.
The Fraud Enforcement and Recovery Act
of 2009 expanded the scope of the False Claims Act by, among other things, broadening protections for whistleblowers and creating
liability for knowingly retaining a government overpayment, acting in deliberate ignorance of a government overpayment or acting
in reckless disregard of a government overpayment. The recently enacted healthcare reform bills in the form of the Patient Protection
and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, “PPACA”)
expanded on changes made by the 2009 Fraud Enforcement and Recovery Act with regard to such “reverse false claims.”
Under PPACA, the knowing failure to report and return an overpayment within 60 days of identifying the overpayment or by the
date a corresponding cost report is due, whichever is later, constitutes a violation of the False Claims Act. HMCA and its clients
have never been sued under the False Claims Act and believe they are in compliance with the law.
Stark Law
Under the federal Self-Referral Law, also
referred to as the "Stark Law", which is applicable to Medicare and Medicaid patients, and the self-referral laws of
various States, certain health practitioners, including physicians, chiropractors and podiatrists, are prohibited from referring
their patients for the provision of designated health services, including diagnostic imaging and physical therapy services, to
any entity with which they or their immediate family members have a financial relationship, unless the referral fits within one
of the specific exceptions in the statutes or regulations. The federal government has taken the position that a violation of the
federal Stark Law is also a violation of the Federal False Claims Act. Statutory exceptions under the Stark Law include, among
others, direct physician services, in-office ancillary services rendered within a group practice, space and equipment rental and
services rendered to enrollees of certain prepaid health plans. Some of these exceptions are also available under the State self-referral
laws. HMCA believes that it and its clients are in compliance with these laws.
FONAR CORPORATION AND SUBSIDIARIES
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 2014, approximately 6.5% of
the revenues of HMCA’s clients were attributable to Medicare and 0.25% were attributable to Medicaid. In fiscal 2013, approximately
7.6% of the revenues of HMCA’s clients were attributable to Medicare and 0.5% 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 will be
the lesser of the Medicare Physician Fee Schedule or the Hospital Outpatient Prospective Payment System (HOPS) rates. Implementation
of these reimbursement reductions contained in the DRA has had an adverse effect on our business. In fiscal 2012, however, we were
able to counter this effect by increasing our clients’ scan volumes through our vigorous marketing efforts.
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 scheduled
for 2007. However, for services furnished on or after July 1, 2010, the PPACA requires the full 50% reduction to be implemented.
We believe that the impact of this final 25% reduction will not materially affect our operations.
Health Insurance Portability and Accountability
Act
Congress enacted the Health Insurance
Portability and Accountability Act of 1996, or HIPAA, in part, to combat healthcare fraud and to protect the privacy and security
of patients’ individually identifiable healthcare information. HIPAA, among other things, amends existing crimes and criminal
penalties for Medicare fraud and enacts new federal healthcare fraud crimes, including actions affecting non-government healthcare
benefit program by means of false or fraudulent representations in connection with the delivery of healthcare services is subject
to a fine or imprisonment, or potentially both. In addition, HIPAA authorizes the imposition of civil money penalties against entities
that employ or enter into contracts with excluded Medicare or Medicaid program participants if such entities provide services to
federal health program beneficiaries. A finding of liability under HIPAA could have a material adverse effect on our business,
financial condition and results of operations.
FONAR CORPORATION AND SUBSIDIARIES
Further, HIPAA requires healthcare providers
and their business associates to maintain the privacy and security of individually identifiable protected health information (“PHI”).
HIPAA imposes federal standards for electronic transactions, for the security of electronic health information and for protecting
the privacy of PHI. The Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”), signed
into law on February 17, 2009, dramatically expanded, among other things, (1) the scope of HIPAA to now apply directly to “business
associates,” or independent contractors who receive or obtain PHI in connection with providing a service to a covered entity,
(2) substantive security and privacy obligations, including new federal security breach notification requirements to affected individuals,
DHHS and prominent media outlets, of certain breaches of unsecured PHI, (3) restrictions on marketing communications and a prohibition
on covered entities or business associates from receiving remuneration in exchange for PHI, and (4) the civil and criminal penalties
that may be imposed for HIPAA violations, increasing the annual cap in penalties from $25,000 to $1.5 million per occurrence.
In addition, many states have enacted
comparable privacy and security statues or regulations that, in some cases, are most stringent than HIPAA requirements. In those
cases it may be necessary to modify our operations and procedures to comply with the more stringent state laws, which may entail
significant and costly changes for us. We believe that we are in compliance with such state laws and regulations. However, if we
fail to comply with applicable state laws and regulations, we could be subject to additional sanctions.
We believe that we are in compliance with
the current HIPAA requirements, as amended by HITECH, 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.
FONAR CORPORATION AND SUBSIDIARIES
Patient Protection and Affordable Care
Act
On March 23, 2010, President Obama signed
into law healthcare reform legislation in the form of PPACA. The implementation of this law will likely have a profound impact
on the healthcare industry. Most of the provisions of PPACA are being phased in over time and can be conceptualized as a broad
framework not only to provide health insurance coverage to millions of Americans, but to fundamentally change the delivery of care
by bringing together elements of health information technology, evidence-based medicine, chronic disease management, medical “homes,”
care collaboration and shared financial risk in a way that will accelerate industry adoption and change. There are also many provisions
addressing cost containment, reductions of Medicare and other payments and heightened compliance requirements and additional penalties,
which will create further challenges for providers. We are unable to predict the full impact of PPACA at this time due to the law’s
complexity and current lack of implementing regulations or interpretive guidance. Moving forward, we believe that the federal government
will likely have greater involvement in the healthcare industry than in prior years.
State Regulation
In addition to the federal self-referral
law and federal Anti-kickback statute, many States, including those in which HMCA and its clients operate, have their own versions
of self-referral and anti-kickback laws. These laws are not limited in their applicability, as are the federal laws, to specific
programs. HMCA believes that it and its clients are in compliance with these laws.
Various States prohibit business corporations
from practicing medicine. Various States, including New York, also prohibit the sharing of professional fees or fee splitting.
Consequently, in New York HMCA leases space and equipment to clients and provides clients with a range of non-medical administrative
and managerial services for agreed upon fees. Under Florida law a business entity can bill patients and third party payors directly,
and at four of the seven facilities in Florida, HMCA’s subsidiaries do so.
HMCA’s clients generate revenue
from patients covered by no-fault insurance and workers' compensation programs. For the fiscal year ended June 30, 2014 approximately
43.4% of our clients’ receipts were from patients covered by no-fault insurance and approximately 6.3% of our client’s
receipts were from patients covered by workers’ compensation programs. For the fiscal year ended June 30, 2013, approximately
37.0% of HMCA’s clients’ receipts were from patients covered by no-fault insurance and approximately 3.8% 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. We have a compliance officer who is charged
with implementing and supervising our compliance program, which 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
to our compliance officer. 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 conduct mandatory educational programs designed to familiarize our employees 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.
FONAR CORPORATION AND SUBSIDIARIES
EMPLOYEES
Fonar and its subsidiaries, HMCA and HDM
had approximately 430 employees as of August 1, 2014. This total number included 15 in production, 30 in customer support, 8 in
research and development, 4 in information technology, 48 in marketing and sales, 42 transcriptionists, 30 technologists, 39 in
billing and collections, and 214 in various administrative positions. Approximately 231 employees employed at the MRI facilities
managed or owned by HMCA and HDM, primarily in administrative positions.
ITEM 2. PROPERTIES
Fonar currently leases 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 2016.
Management believes that the premises will be adequate for its current needs. HMCA and HD already have consolidated their headquarters
with those of Fonar as part of the Company’s cost cutting measures. HMCA and HD maintain leased office premises for their
clients at the clients’ sites under leases having various terms.
ITEM 3. LEGAL PROCEEDINGS
Matt Malek Madison v. Fonar Corporation,
United States District Court, Northern District of California, was commenced by plaintiff on August 27, 2007 to recover a down
payment for a scanner in the amount of $300,000, with interest. The plaintiff sought costs of suit and attorney’s fees as
well. Fonar answered the complaint and sued the plaintiff for breach of contract in the amount of $450,000. Although down payments
are usually expressly non-refundable in Fonar’s quotations and agreements, in this case, the quotation contemplated the sale
of four scanners, and provided that the deposit would be refundable with interest, if the customer were unable to find suitable
locations in the San Francisco Bay area. The issue was whether the customer made a good faith effort to find locations; Fonar’s
position was that the customer did not. The case went to trial before a judge; the parties submitted post-trial briefs, and judgment
was awarded to the plaintiff. Fonar appealed the trial court’s decision, but on January 31, 2012, the U.S. Court of Appeals
for the 9th Circuit affirmed the lower court’s decision awarding the plaintiff the $300,000 deposit with prejudgment
interest from July 1, 2006. Fonar sought to have the Court of Appeals reconsider the decision en banc, (by all or a larger
number of the judges on the Circuit Court of Appeals), but this was not granted. Although the case has been concluded, the plaintiff
has not taken any steps to collect the judgment.
ITEM 4. MINE SAFETY DISCLOSURES. Not Applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded in the Nasdaq SmallCap
market under the National Association of Securities Dealers Automated Quotation System, also referred to as "NASDAQ",
under the symbol FONR. The following table sets forth the high and low trades reported in NASDAQ System for the periods shown.
Fiscal Quarter | |
| |
High | |
Low |
January - March | |
| 2012 | | |
| 2.89 | | |
| 1.68 | |
April - June | |
| 2012 | | |
| 6.8 | | |
| 2.68 | |
July - September | |
| 2012 | | |
| 4.12 | | |
| 3.02 | |
January - March | |
| 2013 | | |
| 7.44 | | |
| 4.42 | |
April - June | |
| 2013 | | |
| 7.94 | | |
| 5.67 | |
July - September | |
| 2013 | | |
| 6.7 | | |
| 5.12 | |
January - March | |
| 2014 | | |
| 27.95 | | |
| 16.2 | |
April - June | |
| 2014 | | |
| 18.7 | | |
| 11.28 | |
FONAR CORPORATION AND SUBSIDIARIES
On September 2, 2014, we had approximately
1,813 stockholders of record of our Common Stock, 11 stockholders of record of our Class B Common Stock, 3 stockholders of record
of our Class C Common Stock and 1,807 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 paid cash dividends in fiscal 1998
and the first three quarters of fiscal 1999 on monies we received from the enforcement of our patents. Except for these dividends,
we have not paid any cash dividends. Except for these dividends, we expect that we will retain earnings to finance the development
and expansion of our business 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, 2014. This consolidated selected
financial data should be read in conjunction with our consolidated financial statements and the related notes included in Item
8 of this form.
As of and For the Periods Ended June 30,
| |
2014 | |
2013 | |
2012 | |
2011 | |
2010 |
STATEMENT OF OPERATIONS | |
| | | |
| | | |
| | | |
| | | |
| | |
Revenues | |
$ | 68,505,477 | | |
$ | 49,141,814 | | |
$ | 39,444,419 | | |
$ | 33,136,395 | | |
$ | 31,815,555 | |
Cost of revenues | |
$ | 37,247,449 | | |
$ | 26,121,365 | | |
$ | 21,195,680 | | |
$ | 18,479,550 | | |
$ | 18,620,220 | |
Research and Development Expenses | |
$ | 1,760,821 | | |
$ | 1,438,560 | | |
$ | 1,242,656 | | |
$ | 1,440,032 | | |
$ | 2,458,342 | |
Net Income (Loss) | |
$ | 13,396,769 | | |
$ | 10,256,362 | | |
$ | 6,875,073 | | |
$ | 3,309,019 | | |
($ | 3,012,742.00 | ) |
Basic Net Income (Loss) per common share | |
$ | 1.62 | | |
$ | 1.37 | | |
$ | 0.93 | | |
$ | 0.56 | | |
($ | 0.61 | ) |
Diluted Net Income (Loss) per common share | |
$ | 1.58 | | |
$ | 1.34 | | |
$ | 0.91 | | |
$ | 0.55 | | |
($ | 0.61 | ) |
Basic Weighted average number of shares outstanding | |
| 6,009,822 | | |
| 5,933,318 | | |
| 5,778,695 | | |
| 5,264,795 | | |
| 4,932,044 | |
Diluted Weighted average number of shares outstanding | |
| 6,137,326 | | |
| 6,060,822 | | |
| 5,906,199 | | |
| 5,392,299 | | |
| 4,932,044 | |
BALANCE SHEET DATA | |
| | | |
| | | |
| | | |
| | | |
| | |
Working capital (deficiency) | |
$ | 21,624,952 | | |
$ | 16,748,144 | | |
$ | 4,805,347 | | |
($ | 575,628 | ) | |
($ | 10,025,577 | ) |
Total Assets | |
$ | 76,789,843 | | |
$ | 73,150,650 | | |
$ | 33,635,002 | | |
$ | 31,580,674 | | |
$ | 21,628,845 | |
Long-term debt and obligations under capital leases | |
$ | 8,481,830 | | |
$ | 12,887,005 | | |
$ | 777,274 | | |
$ | 1,746,286 | | |
$ | 1,638,963 | |
Stock holder’s (deficiency) equity | |
$ | 45,906,592 | | |
$ | 37,799,276 | | |
$ | 11,101,065 | | |
$ | 5,865,814 | | |
($ | 5,775,966 | ) |
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. In 1997, we formed a wholly-owned subsidiary, Health Management
Corporation of America, also referred to as HMCA and formerly known as U.S. Health Management Corporation, in order to expand into
the physician and diagnostic management services business. HMCA currently provides its services exclusively to diagnostic imaging
facilities.
Fonar's principal MRI product is its Stand-Up®/Upright®
MRI scanner. The Stand-Up® MRI allows patients to be scanned for the first time under weight-bearing conditions. The Stand-Up®
MRI is the only MRI capable of producing images in the weight-bearing state.
At 0.6 Tesla field strength, the Upright®
MRI and Fonar 360™ magnets are 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 commenced operations in July, 1997
and 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 three Florida subsidiaries which
bill and collect fees from patients, insurers and other third party payors directly.
For the fiscal years ended June 30, 2014
and June 30, 2013, 11.1% and 23.0%, respectively, of total revenues were derived from contracts with facilities owned by Dr. Raymond
V. Damadian, the President of Fonar and HMCA, 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.
Industry Updates
For services for which Medicare is billed
directly, the sites are paid under the Medicare Physician Fee Schedule, which is updated on an annual basis. Under the Medicare
statutory formula, payments under the Physician Fee Schedule would have decreased for the past several years if Congress failed
to intervene.
Many private payors use the Medicare Physician
Fee Schedule to determine their own reimbursement rates.
While Congress has repeatedly intervened
to mitigate the negative reimbursement impact associated with the formula, there is no guarantee that Congress will continue to
do so in the future. Moreover, the existing methodology may result in significant yearly fluctuations in the Medicare Physician
Fee Schedule amounts, which may be unrelated to changes in the actual costs of providing physician services.
The 2013 Medicare Physician Fee Schedule
expanded a reduction in reimbursement for multiple images on contiguous body parts to new services, namely diagnostic cardiovascular
services and ophthalmology services. Medicare has a longstanding policy to reduce payment by 50% for the second and subsequent
procedures furnished to the same beneficiary by a single physician or physicians in the same group practice on the same day.
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
FONAR CORPORATION AND SUBSIDIARIES
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 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 evaluate the realizability of the net
deferred tax assets and assess the valuation allowance periodically. 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.
In 2013 we recorded a valuation allowance
resulting in a deferred tax asset of $2,473,892. As of June 30, 2012, we had recorded a valuation allowance which reduced our deferred
tax assets to equal our deferred tax liability. At June 30, 2014, the deferred tax asset was $5,156,297.
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, purchased management agreements 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.
FONAR CORPORATION AND SUBSIDIARIES
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 2014 COMPARED
TO FISCAL 2013
In fiscal 2014, we recognized net income
of $13.4 million on revenues of $68.5 million, as compared to net income of $10.3 million on revenues of $49.1 million for fiscal
2013. This represents an increase in revenues of 39.5%. The increased revenue for fiscal 2014 resulted primarily from the inclusion
of the revenues of HDM for a full fiscal year. Unrelated party management fees increased by 62%. Total costs and expenses increased
by 35%. Our consolidated operating results improved by $4.8 million to an operating income of $12.3 million for fiscal 2014 as
compared to an operating income of $7.5 million for fiscal 2013.
Discussion of Operating Results of
Medical Equipment Segment
Fiscal 2014 Compared to Fiscal 2013
Revenues attributable to our medical equipment
segment decreased by 18.9% to $12.1 million in fiscal 2014 from $14.9 million in fiscal 2013, with product sales revenues decreasing
by 52.3% from $3.9 million in fiscal 2013 to $1.9 million in fiscal 2014. Service revenue decreased from $11.0 million in fiscal
2013 to $10.2 million in fiscal 2014.
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 52.3% in fiscal 2014 from $3.9 million in fiscal 2013 to $1.9 million in fiscal 2014. There were no product sales to related
parties in fiscal 2014 or 2013.
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. Nevertheless, no other competitor offers a whole body weight-bearing
multi-position MRI scanner as the FONAR Upright® MRI.
The operating results for the medical
equipment segment increased from income of $140,000 in fiscal 2013 to income of $469,000 in fiscal 2014. This increase is attributable
most significantly to the fact that costs decreased by a greater amount than the revenues decreased.
We recognized revenues of $957,000
from the sale of our Upright® MRI scanners in fiscal 2014, while in fiscal 2013, we recognized revenues of $3.2 million
from the sale of Upright® MRI scanners.
Research and development expenses, increased
by 22.4% to $1.8 million in fiscal 2014 as compared to $1.4 million in fiscal 2013. Our expenses for fiscal 2014 represented continued
research and development of Fonar’s scanners, Fonar’s new hardware and software product, Sympulse® and new surface
coils to be used with the Upright® MRI scanner.
Discussion of Operating Results of
Physician and Diagnostic Services Management Segment.
Fiscal 2014 Compared to Fiscal 2013
Revenues attributable to the Company's
physician and diagnostic services management segment, HMCA, increased by 65.2% to $56.5 million in fiscal 2014 from $34.3 million
in fiscal 2013. The increase in revenues was primarily due to the 14 additional scanning facilities acquired in the HDM transaction,
which resulted in the recognition of $35.9 million in revenues from HDM, including $13.9
million of patient fees (net of contractual allowances and discounts less provision for bad debts) from patient and third party
payors recognized by four of the facilities in Florida.
FONAR CORPORATION AND SUBSIDIARIES
Cost of revenues as a percentage of the
related revenues for our physician and diagnostic services management segment increased from $19.2 million or 39.2%
of related revenues for the year ended June 30, 2013 to $33.7 million, or 59.6% of
related revenue for the year ended June 30, 2014.
Operating results of this segment increased
from operating income of $7.4 million in fiscal 2013 to operating income of $11.8 million in fiscal 2014. We believe that the 14
additional facilities managed by HDM and our efforts to expand and improve the operation of our physician and diagnostic services
management segment are directly responsible for the profitability of this segment and our company as a whole.
Discussion of Certain Consolidated
Results of Operations
Fiscal 2014 Compared to Fiscal 2013
Interest and investment income decreased
in 2014 compared to 2013. We recognized interest income of $238,928 in 2014 as compared to $217,598 in fiscal 2013, representing
an increase of 9.8%.
Interest expense of $884,541 was recognized
in fiscal 2014, as compared to $500,362 in fiscal 2013, representing an increase of 76.8%.
While revenue increased by 39.4%, selling,
general and administrative expenses increased by 23.1% to $15.4 million in fiscal 2014 from $12.5 million in fiscal 2013.
The compensatory element of stock issuances
decreased from approximately $415,021 in fiscal 2013 to $223,000 in fiscal 2014, reflecting a decrease in Fonar’s use of
its stock bonus plans to pay employees and others.
The higher provision for bad debts of
$1.8 million in fiscal 2014 as compared to $1.5 million in fiscal 2013, reflected an increase in reserves for certain indebtedness
in fiscal 2014 by our physician and diagnostic services management segment. In addition in fiscal 2014, the Company recorded a
provision for bad debts for patient fee revenue of $10.3 million for the four MRI facilities
in Florida which bill patients and third party payors directly. The three Florida sites managed by HMCA jointly and severally guaranteed
the payment of their management fees to HMCA, further securing HMCA’s management fee receivables.
Revenue from service and repair fees decreased
from $11.0 million in fiscal 2013 to $10.2 million in fiscal 2014.
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 2014 we continued our investment in the development of our new MRI scanners, together with software
and upgrades, with an investment of $1,760,821 in research and development, none of which was capitalized, as compared to $1,438,560,
none of which was capitalized, in fiscal 2013. The research and development expenditures were approximately 14.6% of revenues attributable
to our medical equipment segment and 2.6% of total revenues in 2014, and 9.7% of medical equipment segment revenues and 2.9% of
total revenues in fiscal 2013. This represented a 22.4% increase in research and development expenditures in fiscal 2014 as compared
to fiscal 2013.
The physician and diagnostic services
management segment, HMCA, revenues increased, from $34.3 million in fiscal 2013 to $56.5 million in fiscal 2014. This is primarily
attributable to increased revenue resulting from the HDM acquisition for a full fiscal year.
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.
Marketing expenditures may increase, as
the Company continues its efforts to promote sales.
FONAR CORPORATION AND SUBSIDIARIES
Our management fees are dependent on collection
by our clients of fees from reimbursements from Medicare, Medicaid, private insurance, no fault and workers’ compensation
carriers, self–pay and other third-party payors. The health care industry is experiencing the effects of the federal and
state governments’ trend toward cost containment, as governments and other third-party payors seek to impose lower reimbursement
and utilization rates and negotiate reduced payment schedules with providers. The cost-containment measures, consolidated with
the increasing influence of managed-care payors and competition for patients, have resulted in reduced rates of reimbursement for
services provided by our clients from time to time. Our future revenues and results of operations may be adversely impacted by
future reductions in reimbursement rates.
Certain third-party payors have proposed
and implemented changes in the methods and rates of reimbursement that have had the effect of substantially decreasing reimbursement
for diagnostic imaging services that HMCA’s clients provide. To the extent reimbursement from third-party payors is reduced,
it will likely have an adverse impact on the rates they pay us, as they would need to reduce the management fees they pay HMCA
to offset such decreased reimbursement rates. Furthermore, many commercial health care insurance arrangements are changing, so
that individuals bear greater financial responsibility through high deductible plans, co-insurance and higher co-payments, which
may result in patients delaying or foregoing medical procedures. 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 implementation
of this law will likely have a profound impact on the healthcare industry, most of which will go into effect in fiscal 2014 and
thereafter. Healthcare cost containment, reductions of Medicare and other payments, and increased regulation will present additional
challenges for healthcare providers. We are unable to predict the full impact of PPACA at this time, but anticipate the possibility
that it may reduce the profitability of both our medical equipment segment and physician and diagnostic services management segment.
In addition there are also political uncertainties which may result in the repeal or modification of PPACA or the adoption of alternative
medical cost containment and insurance requirements.
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 high 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, cash equivalents and marketable
securities increased by 26.4% from $7.9 million at June 30, 2013 to $10.0 million at June 30, 2014.
Cash provided by operating activities
for fiscal 2014 approximated $13.4 million. Cash provided by operating activities was attributable to the net income of $13.4 million,
depreciation and amortization of $3.8 million, which was offset by the deferred income tax benefit of $2.7 million and the increase
in accounts, medical and management fee receivables of $4.0 million.
Cash used in investing activities for
fiscal 2014 approximated $835,000. The use of cash from investing activities was attributable to purchases of property and equipment
of $621,000, and costs of patents of $214,000.
Cash used by financing activities for
fiscal 2014 approximated $10.4 million. The principal uses of cash in financing activities included the repayment of loans and
capital lease obligations of $4.4 million, distributions to non-controlling interests of $5.0 million and a redemption of non-controlling
interests of $1.1 million.
FONAR CORPORATION AND SUBSIDIARIES
Total liabilities decreased by 13.3% during
fiscal 2014, from approximately $35.4 million at June 30, 2013 to approximately $30.9 million at June 30, 2014.
As at June 30, 2014, our obligations included
approximately $5.0 million in various state sales taxes, inclusive of penalties and interest. The Company will attempt to obtain
a reduction of penalties in negotiating final settlements.
At June 30, 2014, we had working capital
of approximately $21.6 million as compared to working capital of $16.7 million at June 30, 2013, and stockholders’ equity
of $45.9 million at June 30, 2014 as compared to stockholders’ equity of $37.8 million at June 30, 2013. For the year ended
June 30, 2014, we realized a net income of $13.4 million.
Our principal sources of liquidity has
been derived from investments, revenues and the proceeds of loans obtained in connection with the HDM acquisition.
Our business plan includes a program for
manufacturing and selling our Upright® MRI scanners. In addition, we are enhancing our revenue by participating in the physician
and diagnostic services management business through our subsidiary, HMCA and have upgraded the facilities which it manages, most
significantly by the replacement of the original MRI scanners with new Upright® MRI scanners. Presently, 23 of the 24 MRI facilities
managed by HMCA, are equipped with Upright® MRI scanners. We have also intensified our marketing activities through the hiring
of additional marketers for HMCA’s clients.
Our business plan also calls for a continuing
emphasis on providing our customers with enhanced equipment service and maintenance capabilities and delivering state-of-the-art,
innovative and high quality equipment upgrades at competitive prices. Fees for on-going service and maintenance from our installed
base of scanners were $11.0 million for the year ended June 30, 2013 and $10.2 million for the year ended June 30, 2014.
In order to promote profitability and
to reduce demands on our cash and other liquid reserves, we maintain an aggressive program of cost cutting. These measures included
consolidating HMCA’s office space with Fonar’s office space, reductions in the size of our workforce, compensation
and benefits, as well as across the board reduction of expenses. 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 and
HDM revenues.
Current economic credit conditions have
contributed to a slower than optimal business environment. Given liquidity and credit constraints in the markets, 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 and HDM 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 2014 approximated
$835,000. Capitalized patent costs were approximately $214,000. Purchases of property and equipment were approximately $621,000.
Fonar has not committed to making capital
expenditures in the 2015 fiscal year.
The Company believes that its business
plan has been responsible for the past two consecutive fiscal years of profitability (fiscal 2014 and fiscal 2013) and that its
capital resources will be adequate to support operations at current levels through June 30, 2015.
ITEM 7A. QUALITATIVE AND QUANTITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company does not have any investments
in marketable securities, foreign currencies, mutual funds, certificates of deposit or other fixed rate instruments. All of our
funds are in cash accounts or money market accounts which are liquid.
All of our revenue, expense and capital
purchasing activities are transacted in United States dollars.
See Note 10 to the consolidated Financial
Statements for information on long-term debt.
FONAR CORPORATION AND SUBSIDIARIES
Item 8
FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| |
Page No. |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | |
| 34 | |
CONSOLIDATED BALANCE SHEETS At June 30, 2014 and 2013 | |
| 35 | |
CONSOLIDATED STATEMENTS OF INCOME For the Years Ended June 30, 2014 and 2013 | |
| 38 | |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended June 30, 2014 and 2013 | |
| 40 | |
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended June 30, 2014 and 2013 | |
| 43
| |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
| 45 | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Audit Committee of the
Board of Directors and Stockholders of
FONAR Corporation and Subsidiaries
We have audited the accompanying consolidated
balance sheets of FONAR Corporation and Subsidiaries (the “Company”) as of June 30, 2014 and 2013, and the related
consolidated statements of income, stockholders’ equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated financial position of FONAR Corporation and Subsidiaries
as of June 30, 2014 and 2013, and the consolidated results of its operations and its cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), FONAR Corporation and Subsidiaries internal control
over financial reporting as of June 30, 2014, based on the criteria established in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992 and our report dated September 29, 2014
expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of the
existence of material weaknesses.
Very truly yours,
/s/ Marcum LLP
Marcum LLP
New York, New York
September 29, 2014
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
| |
June 30, |
| |
2014 | |
2013 |
Current Assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 9,951,736 | | |
$ | 7,870,727 | |
Accounts receivable – net of allowances for doubtful accounts of $257,362 at June 30, 2014 and 2013 | |
| 4,450,125 | | |
| 4,443,595 | |
Medical receivables –net of allowances for doubtful accounts of $12,917,751 and $2,584,669 at June 30, 2014 and 2013, respectively | |
| 8,807,856 | | |
| 8,126,476 | |
Management and other fees receivable – net of allowances for doubtful accounts of $10,901,619 and $9,095,320 at June 30, 2014 and 2013, respectively | |
| 11,970,388 | | |
| 11,465,913 | |
Management and other fees receivable – related medical practices – net of allowances for doubtful accounts of $403,047 at June 30, 2014 and 2013 | |
| 3,426,982 | | |
| 2,381,664 | |
Costs and estimated earnings in excess of billings on uncompleted contracts | |
| 759,809 | | |
| 445,742 | |
Inventories | |
| 2,443,536 | | |
| 2,077,088 | |
Prepaid expenses and other current assets | |
| 1,011,358 | | |
| 1,054,551 | |
Total Current Assets | |
| 42,821,790 | | |
| 37,865,756 | |
Deferred Income Tax Asset | |
| 5,740,287 | | |
| 2,935,750 | |
Property and Equipment – Net | |
| 15,029,729 | | |
| 17,524,494 | |
Goodwill | |
| 1,767,098 | | |
| 1,767,098 | |
Other Intangible Assets – Net | |
| 10,508,843 | | |
| 11,904,248 | |
Other Assets | |
| 922,096 | | |
| 1,153,304 | |
Total Assets | |
$ | 76,789,843 | | |
$ | 73,150,650 | |
See accompanying notes to consolidated financial
statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES
| |
June 30, |
| |
2014 | |
2013 |
Current Liabilities: | |
| | | |
| | |
Current portion of long-term debt and capital leases | |
$ | 2,890,816 | | |
$ | 2,885,769 | |
Accounts payable | |
| 2,481,997 | | |
| 2,752,479 | |
Other current liabilities | |
| 9,024,033 | | |
| 8,494,361 | |
Unearned revenue on service contracts | |
| 4,730,962 | | |
| 4,965,415 | |
Customer deposits | |
| 1,926,813 | | |
| 1,857,870 | |
Billings in excess of costs and estimated earnings on uncompleted contracts | |
| 142,217 | | |
| 142,217 | |
Income tax payable | |
| — | | |
| 19,501 | |
Total Current Liabilities | |
| 21,196,838 | | |
| 21,117,612 | |
Long-Term Liabilities: | |
| | | |
| | |
Deferred Income Tax Liability | |
| 583,990 | | |
| 461,858 | |
Due to Related Medical Practices | |
| 234,581 | | |
| 230,626 | |
Long-Term Debt and Capital Leases, Less Current Portion | |
| 8,481,830 | | |
| 12,887,005 | |
Other Liabilities | |
| 386,012 | | |
| 654,273 | |
Total Long-Term Liabilities | |
| 9,686,413 | | |
| 14,233,762 | |
Total Liabilities | |
| 30,883,251 | | |
| 35,351,374 | |
Commitments, Contingencies and Other Matters
See accompanying notes to consolidated financial
statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
STOCKHOLDERS' EQUITY
| |
June 30, |
| |
2014 | |
2013 |
Stockholders' Equity: | |
| | | |
| | |
Class A non-voting preferred stock $.0001 par value; 453,000 shares authorized at June 30, 2014 and 2013, 313,438 issued and outstanding at June 30, 2014 and 2013 | |
$ | 31 | | |
$ | 31 | |
Preferred stock $.001 par value; 567,000 shares authorized at June 30, 2014 and 2013, issued and outstanding – none | |
| — | | |
| — | |
Common stock $.0001 par value; 8,500,000 shares authorized at June 30, 2014 and 2013, 6,057,483 and 5,980,775 issued at June 30, 2014 and 2013, respectively; 6,045,840 and 5,969,132 outstanding at June 30, 2014 and 2013, respectively | |
| 606 | | |
| 598 | |
Class B common stock (10 votes per share) $.0001 par value; 227,000 shares authorized at June 30, 2014 and 2013, 146 issued and outstanding at June 30, 2014 and 2013 | |
| — | | |
| — | |
Class C common stock (25 votes per share) $.0001 par value; 567,000 shares authorized at June 30, 2014 and 2013, 382,513 issued and outstanding at June 30, 2014 and 2013 | |
| 38 | | |
| 38 | |
Paid-in capital in excess of par value | |
| 175,284,437 | | |
| 174,499,020 | |
Accumulated deficit | |
| (149,259,286 | ) | |
| (159,655,416 | ) |
Notes receivable from employee stockholders | |
| (38,828 | ) | |
| (54,820 | ) |
Treasury stock, at cost – 11,643 shares of common stock at June 30, 2014 and 2013 | |
| (675,390 | ) | |
| (675,390 | ) |
Total Fonar Corporation’s Stockholders’ Equity | |
| 25,311,608 | | |
| 14,114,061 | |
Noncontrolling interests | |
| 20,594,984 | | |
| 23,685,215 | |
Total Stockholders' Equity | |
| 45,906,592 | | |
| 37,799,276 | |
Total Liabilities and Stockholders' Equity | |
$ | 76,789,843 | | |
$ | 73,150,650 | |
See accompanying notes to consolidated financial
statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| |
For the Years Ended June 30, |
| |
2014 | |
2013 |
Revenues | |
| | | |
| | |
Product sales – net | |
$ | 1,877,932 | | |
$ | 3,939,140 | |
Service and repair fees – net | |
| 10,082,631 | | |
| 10,841,935 | |
Service and repair fees – related parties – net | |
| 110,000 | | |
| 110,000 | |
Patient fee revenue, net of contractual allowances and discounts | |
| 24,307,192 | | |
| 7,481,865 | |
Provision for bad debts for patient fee | |
| (10,333,082 | ) | |
| (2,584,669 | ) |
Management and other fees – net | |
| 34,839,969 | | |
| 21,493,599 | |
Management and other fees – related medical practices – net | |
| 7,620,835 | | |
| 7,859,944 | |
Total Revenues – Net | |
| 68,505,477 | | |
| 49,141,814 | |
Costs and Expenses | |
| | | |
| | |
Costs related to product sales | |
| 1,067,120 | | |
| 3,656,635 | |
Costs related to service and repair fees | |
| 2,496,985 | | |
| 3,213,420 | |
Costs related to service and repair fees – related parties | |
| 27,242 | | |
| 32,603 | |
Costs related to patient fee revenue | |
| 7,670,484 | | |
| 2,704,758 | |
Costs related to management and other fees | |
| 20,851,065 | | |
| 12,998,243 | |
Costs related to management and other fees – related medical practices | |
| 5,134,553 | | |
| 3,515,706 | |
Research and development | |
| 1,760,821 | | |
| 1,438,560 | |
Selling, general and administrative, inclusive of compensatory element of stock issuances of $223,000 and $415,021 for the years ended June 30, 2014 and 2013, respectively | |
| 15,388,239 | | |
| 12,501,621 | |
Provision for bad debts | |
| 1,806,299 | | |
| 1,544,521 | |
Total Costs and Expenses | |
| 56,202,808 | | |
| 41,606,067 | |
Income from Operations | |
| 12,302,669 | | |
| 7,535,747 | |
Other Income and (Expenses): | |
| | | |
| | |
Interest expense | |
| (884,541 | ) | |
| (500,362 | ) |
Investment income | |
| 238,928 | | |
| 217,598 | |
Other (expense) income – net | |
| (608,599 | ) | |
| 725,488 | |
Income before benefit (provision) for income taxes and noncontrolling interests | |
| 11,048,457 | | |
| 7,978,471 | |
Benefit for Income Taxes | |
| 2,348,312 | | |
| 2,277,891 | |
Net Income | |
$ | 13,396,769 | | |
$ | 10,256,362 | |
Net Income – Noncontrolling Interests | |
| (3,000,639 | ) | |
| (1,577,820 | ) |
Net Income – Controlling Interests | |
$ | 10,396,130 | | |
$ | 8,678,542 | |
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Continued)
| |
For the Years Ended June 30, |
| |
2014 | |
2013 |
Net Income Available to Common Stockholders | |
$ | 9,720,030 | | |
$ | 8,107,367 | |
Net Income Available to Class A Non-Voting Preferred Stockholders | |
$ | 503,911 | | |
$ | 425,708 | |
Net Income Available to Class C Common Stockholders | |
$ | 172,189 | | |
$ | 145,467 | |
Basic Net Income Per Common Share Available to Common Stockholders | |
$ | 1.62 | | |
$ | 1.37 | |
Diluted Net Income Per Common Share Available to Common Stockholders | |
$ | 1.58 | | |
$ | 1.34 | |
Basic and Diluted Income Per Share – Common C | |
$ | 0.45 | | |
$ | 0.38 | |
Weighted Average Basic Shares Outstanding – Common Stockholder | |
| 6,009,822 | | |
| 5,933,318 | |
Weighted Average Diluted Shares Outstanding – Common Stockholder | |
| 6,137,326 | | |
| 6,060,822 | |
Weighted Average Basic Shares Outstanding – Class C Common | |
| 382,513 | | |
| 382,513 | |
Weighted Average Diluted Shares Outstanding – Class C Common | |
| 382,513 | | |
| 382,513 | |
See accompanying notes to consolidated financial
statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2014 AND 2013
| |
Class A Non-Voting Preferred | |
Common Shares | |
Stock Amount | |
Class C Common Stock |
Balance - June 30, 2012 | |
$ | 31 | | |
| 5,901,262 | | |
$ | 590 | | |
$ | 38 | |
Net income | |
| — | | |
| — | | |
| — | | |
| | |
Stock issued to employees under stock bonus plans | |
| — | | |
| 67,870 | | |
| 8 | | |
| | |
Payments on notes receivable from employee stockholders | |
| — | | |
| — | | |
| — | | |
| | |
Buyout of noncontrolling interests | |
| — | | |
| — | | |
| — | | |
| | |
Redemption of noncontrolling interests | |
| — | | |
| — | | |
| — | | |
| | |
Distributions to noncontrolling interests | |
| — | | |
| — | | |
| — | | |
| | |
Proceeds from noncontrolling interest | |
| — | | |
| — | | |
| — | | |
| | |
Balance - June 30, 2013 | |
$ | 31 | | |
| 5,969,132 | | |
$ | 598 | | |
$ | 38 | |
Net income | |
| — | | |
| — | | |
| — | | |
| | |
Stock issued to employees under stock bonus plans | |
| — | | |
| 21,443 | | |
| 2 | | |
| | |
Issuance of stock for goods and services | |
| — | | |
| 45,265 | | |
| 5 | | |
| | |
Payments on notes receivable from employee stockholders | |
| — | | |
| — | | |
| — | | |
| | |
Stock option exercised | |
| — | | |
| 10,000 | | |
| 1 | | |
| | |
Redemption of noncontrolling interests | |
| — | | |
| — | | |
| — | | |
| | |
Distributions to noncontrolling interests | |
| — | | |
| — | | |
| — | | |
| — | |
Balance - June 30, 2014 | |
$ | 31 | | |
| 6,045,840 | | |
$ | 606 | | |
$ | 38 | |
| |
| | | |
| | | |
| | | |
| | |
See accompanying notes to consolidated financial
statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2014 AND 2013
| |
Paid-in Capital in Excess of Par Value | |
Treasury Stock | |
Notes Receivable From Employee Stockholders |
Balance - June 30, 2012 | |
$ | 174,084,007 | | |
($ | 675,390 | ) | |
($ | 70,813 | ) |
Net income | |
| — | | |
| — | | |
| — | |
Stock issued to employees
under stock bonus plans | |
| 415,013 | | |
| — | | |
| — | |
Payments on notes receivable
from employee stockholders | |
| — | | |
| — | | |
| 15,993 | |
Buyout of noncontrolling
interests | |
| | | |
| — | | |
| — | |
Redemption of noncontrolling
interests | |
| — | | |
| — | | |
| — | |
Distributions to noncontrolling
interests | |
| — | | |
| — | | |
| — | |
Proceeds
from noncontrolling interest | |
| — | | |
| — | | |
| — | |
Balance - June 30, 2013 | |
$ | 174,499,020 | | |
($ | 675,390 | ) | |
($ | 54,820 | ) |
Net income | |
| — | | |
| — | | |
| — | |
Stock issued to employees
under stock bonus plans | |
| 222,998 | | |
| — | | |
| — | |
Issuance of stock for
goods and services | |
| 531,820 | | |
| — | | |
| — | |
Payments on notes receivable
from employee stockholders | |
| — | | |
| — | | |
| 15,992 | |
Stock option exercised | |
| 30,599 | | |
| — | | |
| — | |
Redemption of noncontrolling
interests | |
| — | | |
| — | | |
| — | |
Distributions
to noncontrolling interests | |
| — | | |
| — | | |
| — | |
Balance - June 30,
2014 | |
$ | 175,284,437 | | |
($ | 675,390 | ) | |
($ | 38,828 | ) |
See accompanying notes to consolidated financial
statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2014 AND 2013
| |
Accumulated Deficit | |
Noncontrolling Interests | |
Total |
Balance - June 30, 2012 | |
($ | 168,333,958 | ) | |
$ | 6,096,560 | | |
$ | 11,101,065 | |
Net income | |
| 8,678,542 | | |
| 1,577,820 | | |
| 10,256,362 | |
Stock issued to employees under stock bonus plans | |
| — | | |
| — | | |
| 415,021 | |
Payments on notes receivable from employee stockholders | |
| — | | |
| — | | |
| 15,993 | |
Buyout of noncontrolling interests | |
| — | | |
| -564,315 | | |
| -564,315 | |
Redemption of noncontrolling interests | |
| — | | |
| -1,424,900 | | |
| -1,424,900 | |
Distributions to noncontrolling interests | |
| — | | |
| -1,799,950 | | |
| -1,799,950 | |
Proceeds from noncontrolling interest | |
| — | | |
| 19,800,000 | | |
| 19,800,000 | |
Balance - June 30, 2013 | |
($ | 159,655,416 | ) | |
$ | 23,685,215 | | |
$ | 37,799,276 | |
Net income | |
| 10,396,130 | | |
| 3,000,639 | | |
| 13,396,769 | |
Stock issued to employees under stock bonus plans | |
| — | | |
| — | | |
| 223,000 | |
Issuance of stock for goods and services | |
| — | | |
| — | | |
| 531,825 | |
Payments on notes receivable from employee stockholders | |
| — | | |
| — | | |
| 15,992 | |
Stock option exercised | |
| — | | |
| — | | |
| 30,600 | |
Redemption of noncontrolling interests | |
| — | | |
| -1,125,100 | | |
| -1,125,100 | |
Distributions to noncontrolling interests | |
| — | | |
| -4,965,770 | | |
| -4,965,770 | |
Balance - June 30, 2014 | |
($ | 149,259,286 | ) | |
$ | 20,594,984 | | |
$ | 45,906,592 | |
See accompanying notes to consolidated financial
statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
For the Years Ended June 30, |
| |
2014 | |
2013 |
CASH FLOWS FROM OPERATING ACTIVITIES | |
| | | |
| | |
Net income | |
$ | 13,396,769 | | |
$ | 10,256,362 | |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 3,817,205 | | |
| 2,421,177 | |
Abandoned patents or software written off | |
| 250,523 | | |
| 66,619 | |
Provision for bad debts | |
| 1,806,299 | | |
| 1,544,521 | |
Deferred income tax benefit | |
| (2,682,405 | ) | |
| (2,473,892 | ) |
Gain on sale of equipment | |
| — | | |
| (557,473 | ) |
Loss on disposition of equipment | |
| 657,350 | | |
| — | |
Gain on litigation settlement | |
| — | | |
| (755,500 | ) |
Impairment on management agreement | |
| — | | |
| 357,500 | |
Compensatory element of stock issuances | |
| 223,000 | | |
| 415,021 | |
Stock issued for costs and expenses | |
| 531,825 | | |
| — | |
(Increase) decrease in operating assets, net: | |
| | | |
| | |
Accounts, medical and management fee receivables | |
| (4,044,002 | ) | |
| (3,717,440 | ) |
Notes receivable | |
| 95,623 | | |
| 120,976 | |
Costs and estimated earnings in excess of billings on uncompleted contracts | |
| (314,067 | ) | |
| 682,854 | |
Inventories | |
| (366,448 | ) | |
| 117,861 | |
Prepaid expenses and other current assets | |
| 46,967 | | |
| (698,284 | ) |
Other assets | |
| 131,811 | | |
| (204,037 | ) |
Increase (decrease) in operating liabilities, net: | |
| | | |
| | |
Accounts payable | |
| (270,482 | ) | |
| 628,033 | |
Other current liabilities | |
| 295,219 | | |
| (414,402 | ) |
Customer advances | |
| 68,943 | | |
| (567,914 | ) |
Billings in excess of costs and estimated earnings on uncompleted contracts | |
| — | | |
| 142,217 | |
Other liabilities | |
| (268,261 | ) | |
| 253,559 | |
Due to related medical practices | |
| 3,955 | | |
| 1,885 | |
Income tax payable | |
| (19,501 | ) | |
| (80,499 | ) |
NET CASH PROVIDED BY OPERATING ACTIVITIES | |
| 13,360,323 | | |
| 7,539,144 | |
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 INVESTING ACTIVITIES | |
2014 | |
2013 |
Purchases of property and equipment | |
$ | (620,697 | ) | |
$ | (1,135,382 | ) |
Cost of acquisition | |
| — | | |
| (40,000,000 | ) |
Cost of patents | |
| (214,211 | ) | |
| (159,907 | ) |
NET CASH USED IN INVESTING ACTIVITIES | |
| (834,908 | ) | |
| (41,295,289 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | | |
| | |
Proceeds from debt | |
| — | | |
| 14,689,646 | |
Proceeds from sale of equipment | |
| — | | |
| 700,000 | |
Repayment of borrowings and capital lease obligations | |
| (4,400,128 | ) | |
| (1,821,617 | ) |
Repayment of notes receivable from employee stockholders | |
| 15,992 | | |
| 15,993 | |
Stock option exercised | |
| 30,600 | | |
| — | |
Distributions to noncontrolling interests | |
| (4,965,770 | ) | |
| (1,799,950 | ) |
Redemption of noncontrolling interests | |
| (1,125,100 | ) | |
| (1,424,900 | ) |
Buyout of noncontrolling interests | |
| — | | |
| (564,315 | ) |
Proceeds from noncontrolling interest | |
| — | | |
| 19,800,000 | |
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | |
| (10,444,406 | ) | |
| 29,594,857 | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | |
| 2,081,009 | | |
| (4,161,288 | ) |
CASH AND CASH EQUIVALENTS – BEGINNING OF YEAR | |
| 7,870,727 | | |
| 12,032,015 | |
CASH AND CASH EQUIVALENTS – END OF YEAR | |
$ | 9,951,736 | | |
$ | 7,870,727 | |
See accompanying notes to consolidated financial
statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
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 March 5, 2013, the Company acquired a majority
interest in a newly formed limited liability company, Health Diagnostics Management LLC (HDM), a business managing 12 Stand-Up
MRI centers and 2 other scanning centers located in Florida and New York for a total cost of $40 million. HDM has a perpetual existence.
See Note 9.
During May 2011, HMCA contributed all of
its assets together with its liabilities to a newly formed limited liability company, Imperial Management Services, LLC
(“Imperial”), which has a perpetual existence. As of June 30, 2014, Imperial manages 11 diagnostic imaging
facilities which are located in the states of New York and Florida.
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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
Expenditures for maintenance and repairs are charged to operations. Renewals and betterments are capitalized. Maintenance and repair
expenses totaled approximately $1,037,000 and $598,000 for the years ended June 30, 2014 and 2013, respectively. The estimated
useful lives in years are generally as follows:
Diagnostic equipment under capital lease | |
| 2.5 | |
Diagnostic equipment | |
| 5–13 | |
Research, development and demonstration equipment | |
| 3-7 | |
Machinery and equipment | |
| 2-7 | |
Furniture and fixtures | |
| 3-9 | |
Leasehold improvements | |
| 2–10 | |
Building | |
| 28 | |
Long-Lived Assets
The Company periodically assesses the recoverability
of long-lived assets, including property and equipment and intangibles, other than goodwill, when there are indications of potential
impairment, based on estimates of undiscounted future cash flows. The amount of impairment is calculated by comparing anticipated
discounted future cash flows with the carrying value of the related asset. In performing this analysis, management considers such
factors as current results, trends, and future prospects, in addition to other economic factors.
Deferred Rent
Rent expense is recorded on the straight-line
method based on the total minimum rent payments required over the term of the lease. The cumulative difference between the lease
expense recorded under this method and the contractual lease payment terms is recorded as deferred rent.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Other Intangible Assets
1) Capitalized Software Development Costs
Capitalization of software development costs
begins upon the establishment of technological feasibility. Technological feasibility for the Company’s computer software
is generally based upon achievement of a detail program design free of high risk development issues and the completion of research
and development on the product hardware in which it is to be used. The establishment of technological feasibility and the ongoing
assessment of recoverability of capitalized computer software development costs require considerable judgment by management with
respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenue,
estimated economic life and changes in software and hardware technology. Prior to reaching technological feasibility those costs
are expensed as incurred and included in research and development.
Amortization of capitalized software development
costs commences when the related products become available for general release to customers. Amortization is provided on a product
by product basis. The annual amortization is the greater of the amount computed using (a) the ratio that current gross revenue
for a product bears to the total of current and anticipated future gross revenue for that product, or (b) the straight-line method
over the remaining estimated economic life of the product.
The Company periodically performs reviews of
the recoverability of such capitalized software development costs. At the time a determination is made that capitalized amounts
are not recoverable, based on the estimated cash flows to be generated from the applicable software, any remaining capitalized
amounts are written off.
2) Patents and Copyrights
Amortization is calculated on the straight-line
basis over a period ranging from 15 to 17 years.
3) Management Agreement
The management agreement was being amortized
on the straight line basis over the length of the agreement (15 years). For the year ended June 30, 2013, the Company recorded
an impairment of $357,500 as a result of the closing of a scanning center in New York.
4) Non-Competition Agreements
The non-competition agreements are being amortized
on the straight line basis over the length of the agreement (7 years).
5) Customer Relationships
Amortization is calculated on the straight line
basis over 20 years.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Goodwill
Generally accepted accounting principles in
the United States require the Company to perform a goodwill impairment test annually and more frequently when negative conditions
or a triggering event arises. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s
carrying amount, including goodwill to the fair value of the reporting unit. If the carrying amount of the reporting unit exceeds
its fair value, goodwill is considered potentially impaired and a second step is performed to measure the amount of impairment
loss, if any.
Acquired assets and assumed liabilities
Pursuant to ASC No. 805-10-25, if the initial
accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, but during
the allowed measurement period not to exceed one year from the acquisition date, the Company retrospectively adjusts the provisional
amounts recognized at the acquisition date by means of adjusting the amount recognized for goodwill.
Revenue Recognition
Revenue on sales contracts for scanners, included
in “product sales” in the accompanying consolidated statements of operations, is recognized under the percentage-of-completion
method in accordance with FASB ASC 605-35, “Revenue Recognition – Construction-Type and Production-Type Contracts”.
The Company manufactures its scanners under specific contracts that provide for progress payments. Production and installation
take approximately three to six months.
Revenue on scanner service contracts is recognized
on the straight-line method over the related contract period, usually one year.
Revenue from sales of other items 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, 2014, the Company has twenty management agreements of which
three are with PC’s owned by Raymond V. Damadian, M.D., President and Chairman of the Board of FONAR (“the Related
medical practices”) and seventeen 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 $35,000 to $242,000. All fees are re-negotiable at the
anniversary of the agreements and each year thereafter. Revenue under lease contracts is recognized based upon contractual agreements
for the leasing of medical equipment primarily under long term contracts to various unrelated PC’s. The lease fees for the
medical equipment consist of fixed monthly fees ranging from $2,000 to $19,000. All fees are re-negotiable at the anniversary of
the agreements and each year thereafter.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Revenue Recognition (Continued)
Patient fee revenue, net of contractual allowance
and discounts, consist of net patient fees received from insurance companies, third party payors (including federal and state agencies
under Medicare and Medicaid programs), hospitals and patients themselves based mainly upon established contractual billing rates,
less allowances for contractual adjustments and discounts. Patient fee revenue is recorded in the period in which services are
provided.
The Company’s patient fee revenue, net
of contractual allowances and discounts less the provision for bad debts for the years ended June 30, 2014 and 2013 are summarized
in the following table.
| |
For the Year Ended June 30, |
| |
2014 | |
2013 |
Commercial Insurance/ Managed Care | |
$ | 4,217,088 | | |
$ | 1,360,536 | |
Medicare/Medicaid | |
| 1,443,020 | | |
| 541,602 | |
Workers' Compensation/Personal Injury | |
| 13,369,956 | | |
| 3,597,416 | |
Other | |
| 5,277,128 | | |
| 1,982,311 | |
Patient Fee Revenue, net of contractual allowances and discounts | |
| 24,307,192 | | |
| 7,481,865 | |
Provision for Bad Debts | |
| (10,333,082 | ) | |
| (2,584,669 | ) |
Net Patient Fee Revenue | |
$ | 13,974,110 | | |
$ | 4,897,196 | |
Allowance for Doubtful Accounts – Patient
Fee
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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Research and Development Costs
Research and development costs are charged to
expense as incurred. The costs of materials and equipment that are acquired or constructed for research and development activities,
and have alternative future uses (either in research and development, marketing or production), are classified as property and
equipment and depreciated over their estimated useful lives.
Advertising Costs
Advertising costs are expensed as incurred.
Advertising expense approximated $889,000 and $835,000 for the years ended June 30, 2014 and 2013, 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 $1,885 and $5,838
for the years ended June 30, 2014 and 2013, 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 begins.
Earnings Per Share
Basic earnings per share (“EPS”)
is computed based upon the weighted average number of shares of common stock and stock equivalents outstanding, net of common stock.
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, 2014 and June 30, 2013.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Earnings Per Share (Continued)
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 both the year ended June 30, 2014 and June 30, 2013, diluted EPS for common shareholders includes
127,504 shares upon conversion of Class C Common.
| |
June 30, 2014 |
Basic | |
| Total | | |
| Common Stock | | |
| Class C Common Stock | |
Numerator: | |
| | | |
| | | |
| | |
Net income Available to common stockholders | |
$ | 10,396,130 | | |
$ | 9,720,030 | | |
$ | 172,189 | |
Denominator: | |
| | | |
| | | |
| | |
Weighted average shares outstanding | |
| 6,009,822 | | |
| 6,009,822 | | |
| 382,513 | |
Basic income per common share | |
$ | 1.73 | | |
$ | 1.62 | | |
$ | 0.45 | |
Diluted | |
| | | |
| | | |
| | |
Denominator: | |
| | | |
| | | |
| | |
Weighted average shares outstanding | |
| | | |
| 6,009,822 | | |
| 382,513 | |
Class C Common Stock | |
| | | |
| 127,504 | | |
| — | |
Total Denominator for diluted earnings per share | |
| | | |
| 6,137,326 | | |
| 382,513 | |
Diluted income per common share | |
| | | |
$ | 1.58 | | |
$ | 0.45 | |
| |
June 30, 2013 |
Basic | |
| Total | | |
| Common Stock | | |
| Class C Common Stock | |
Numerator: | |
| | | |
| | | |
| | |
Net income Available to common stockholders | |
$ | 8,678,542 | | |
$ | 8,107,367 | | |
$ | 145,467 | |
Denominator: | |
| | | |
| | | |
| | |
Weighted average shares outstanding | |
| 5,933,318 | | |
| 5,933,318 | | |
| 382,513 | |
Basic income per common share | |
$ | 1.46 | | |
$ | 1.37 | | |
$ | 0.38 | |
Diluted | |
| | | |
| | | |
| | |
Denominator: | |
| | | |
| | | |
| | |
Weighted average shares outstanding | |
| | | |
| 5,933,318 | | |
| 382,513 | |
Class C Common Stock | |
| | | |
| 127,504 | | |
| — | |
Total Denominator for diluted earnings per share | |
| | | |
| 6,060,822 | | |
| 382,513 | |
Diluted income per common share | |
| . | | |
$ | 1.34 | | |
$ | 0.38 | |
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Cash and Cash Equivalents
The Company considers all short-term highly
liquid investments with a maturity of three months or less when purchased to be cash equivalents.
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, 2014, the
Company had cash on deposit of approximately $8,035,000 in excess of federally insured limits of $250,000.
Related Parties: Net revenues from related parties
accounted for approximately 11% and 16% of the consolidated net revenues for the years ended June 30, 2014 and 2013, respectively.
Net management fee receivables from the related medical practices accounted for approximately 12% and 9% of the consolidated accounts
receivable for the years ended June 30, 2014 and 2013, respectively.
See Note 3 regarding the Company’s concentrations
in the healthcare industry.
Fair Value of Financial Instruments
The financial statements include various estimated
fair value information at June 30, 2014 and 2013, 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 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.
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, notes payable and accounts 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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Recent Accounting Pronouncements
The FASB has issued ASU No. 2013-11,
Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax
Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force). The amendments in this ASU
state that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial
statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit
carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit
carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional
income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not
require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized
tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax
assets. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after
December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all
unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of this
standard did not have a material impact on the Company’s consolidated financial position and results of operations.
The FASB has issued ASU No. 2014-09, Revenue
from Contracts with Customers. This ASU supercedes the revenue recognition requirements in Accounting Standards
Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires
that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is
effective on January 1, 2017 and should be applied retrospectively to each prior reporting period presented or
retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. The
adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position
and results of operations.
FASB, the Emerging Issues Task Force and the
SEC have issued certain other accounting standards, updates, and regulations as of June 30, 2014 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 2014 or 2013, and it does not believe that any of those pronouncements
will have a significant impact on our consolidated financial statements at the time they become effective.
Reclassifications
Certain prior year amounts have been reclassified
to conform to the current year presentation. The reclassifications did not have any effect on reported net income for any periods
presented.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL
RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE
The Company’s customers are concentrated
in the healthcare industry.
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.
Medical Receivable
Medical receivables are due under fee-for-service
contracts from third party payors, such as hospitals, government sponsored healthcare programs, patient’s legal counsel and
directly from patients. Substantially all the revenue relates to patients residing in Florida. The carrying amount of the medical
receivable is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected.
The Company continuously monitors collections from its clients and maintains an allowance for bad debts based upon the Company’s
historical collection experience. The Company determines allowances for contractual adjustments and uncollectible accounts based
on specific agings, specific payor collection issues that have been identified and based on payor classifications and historical
experience at each site.
Management and Other Fees Receivable
The Company’s receivables from the related
and non-related professional corporations (“PCs”) substantially consist of fees outstanding under management agreements.
Payment of the outstanding fees is dependent on collection by the PCs of fees from third party medical reimbursement organizations,
principally insurance companies and health management organizations.
Payment of the management fee receivables from
the PC’s may be impaired by the inability of the PC’s to collect in a timely manner their medical fees from the third
party payors, particularly insurance carriers covering automobile no-fault and workers compensation claims due to longer payment
cycles and rigorous informational requirements and certain other disallowed claims. Approximately 50% and 41%, respectively, of
the PCs’ 2014 and 2013 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, 2014 and 2013
NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL
RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE (Continued)
Management and Other Fees Receivable (Continued)
Net revenues from management and other fees
charged to the related medical practices accounted for approximately 11% and 16%, of the consolidated net revenues for the years
ended June 30, 2014 and 2013, respectively.
Tallahassee Magnetic Resonance Imaging, PA,
Stand Up MRI of Boca Raton, PA and Stand Up MRI & Diagnostic Center, PA (all related 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 year end June 30, 2014 and 2013.
| |
For The Year Ended June 30, |
| |
2014 | |
2013 |
Total Facilities Owned or Managed (at Beginning of Year) | |
| 24 | | |
| 11 | |
Facilities Added by: | |
| | | |
| | |
Acquisition | |
| — | | |
| 14 | |
Internal development | |
| 1 | | |
| — | |
Managed Facilities Closed | |
| (1 | ) | |
| (1 | ) |
Total Facilities Owned or Managed (at End of Year) | |
| 24 | | |
| 24 | |
NOTE 4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED
CONTRACTS AND CUSTOMER ADVANCES
Information relating to uncompleted contracts
as of June 30, 2014 and 2013 is as follows:
| |
As of June 30, |
| |
2014 | |
2013 |
Costs incurred on uncompleted contracts | |
$ | 1,884,984 | | |
$ | 1,482,384 | |
Estimated earnings | |
| 1,745,608 | | |
| 1,191,141 | |
| |
| 3,630,592 | | |
| 2,673,525 | |
Less: Billings to date | |
| 3,013,000 | | |
| 2,370,000 | |
| |
$ | 617,592 | | |
$ | 303,525 | |
Included in the accompanying consolidated balance
sheets under the following captions:
| |
As of June 30, |
| |
2014 | |
2013 |
Costs and estimated earnings in excess of billings on uncompleted contracts | |
$ | 759,809 | | |
$ | 445,742 | |
Less: Billings in excess of costs and estimated earnings on uncompleted contracts | |
| 142,217 | | |
| 142,217 | |
| |
$ | 617,592 | | |
$ | 303,525 | |
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 5 – INVENTORIES
Inventories included in the accompanying consolidated
balance sheets consist of:
| |
As of June 30, |
| |
2014 | |
2013 |
Purchased parts, components and supplies | |
$ | 2,093,671 | | |
$ | 1,783,847 | |
Work-in-process | |
| 349,865 | | |
| 293,241 | |
| |
$ | 2,443,536 | | |
$ | 2,077,088 | |
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, less accumulated
depreciation and amortization, at June 30, 2014 and 2013, is comprised of:
| |
As of June 30, |
| |
2014 | |
2013 |
Diagnostic equipment under capital leases | |
$ | 620,307 | | |
$ | 620,307 | |
Diagnostic equipment | |
| 17,396,797 | | |
| 18,567,787 | |
Research, development and demonstration equipment | |
| 3,510,224 | | |
| 3,500,902 | |
Machinery and equipment | |
| 2,069,055 | | |
| 4,987,159 | |
Furniture and fixtures | |
| 2,550,627 | | |
| 2,952,449 | |
Leasehold improvements | |
| 5,593,148 | | |
| 5,669,338 | |
Building | |
| 939,614 | | |
| 939,614 | |
| |
| 32,679,772 | | |
| 37,237,556 | |
Less: Accumulated depreciation and amortization | |
| 17,650,043 | | |
| 19,713,062 | |
| |
$ | 15,029,729 | | |
$ | 17,524,494 | |
Depreciation and amortization of property and
equipment for the years ended June 30, 2014 and 2013 was $2,458,113 and $1,554,458, respectively.
Depreciation and amortization of diagnostic
equipment under capital leases for the years ended June 30, 2014 and 2013 was $95,026 and $248,123, respectively. Accumulated depreciation
and amortization of diagnostic equipment under capital leases for the years ended June 30, 2014 and 2013 was $620,307 and $525,281,
respectively.
During the year ended June 30, 2014, the Company
has retired assets that were fully depreciated with a cost and accumulated depreciation basis of $4,418,903.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 7 - OTHER INTANGIBLE ASSETS
Other intangible assets, net of accumulated
amortization, at June 30, 2014 and 2013 are comprised of:
| |
As of June 30, |
| |
2014 | |
2013 |
Capitalized software developmentcosts | |
$ | 7,418,436 | | |
$ | 7,668,959 | |
Patents and copyrights | |
| 4,408,011 | | |
| 4,193,800 | |
Non-competition agreements | |
| 4,100,000 | | |
| 4,100,000 | |
Customer relationships | |
| 3,800,000 | | |
| 3,800,000 | |
| |
| 19,726,447 | | |
| 19,762,759 | |
Less: Accumulated amortization | |
| 9,217,604 | | |
| 7,858,511 | |
| |
$ | 10,508,843 | | |
$ | 11,904,248 | |
Information related to the above intangible
assets for the years ended June 30, 2014 and 2013 is as follows:
| |
As of June 30, |
| |
2014 | |
2013 |
Balance – Beginning of Year | |
$ | 11,904,248 | | |
$ | 3,835,179 | |
Amounts capitalized | |
| 214,211 | | |
| 9,359,907 | |
Abandon software or patents written off | |
| (250,523 | ) | |
| (66,619 | ) |
Impairment of management agreement | |
| — | | |
| (357,500 | ) |
Amortization | |
| (1,359,093 | ) | |
| (866,719 | ) |
Balance – End of Year | |
$ | 10,508,843 | | |
$ | 11,904,248 | |
Amortization of patents and copyrights for the
years ended June 30, 2014 and 2013 amounted to $178,836 and $168,631, respectively.
Amortization of capitalized software development
costs for the years ended June 30, 2014 and 2013 was $407,876 and $335,350, respectively.
Amortization of management agreement for the
years ended June 30, 2014 and 2013 amounted to $0 and $100,833, respectively.
Amortization of non-competition agreements for
the years ended June 30, 2014 and 2013 amounted to $585,714 and $195,238, respectively.
Amortization of customer relationships for the
years ended June 30, 2014 and 2013 amounted to $186,667 and $66,667, respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 7 - OTHER INTANGIBLE ASSETS (Continued)
The estimated amortization of other intangible
assets for the five years ending June 30, 2019 and thereafter is as follows:
For the Years Ending June 30, | |
Total | |
Patents and Copyrights | |
Capitalized Software Development Costs | |
Non- competition | |
Customer Relationships |
| 2015 | | |
$ | 1,328,315 | | |
$ | 189,559 | | |
$ | 363,042 | | |
$ | 585,714 | | |
$ | 190,000 | |
| 2016 | | |
| 1,347,439 | | |
| 205,114 | | |
| 366,611 | | |
| 585,714 | | |
| 190,000 | |
| 2017 | | |
| 1,368,582 | | |
| 220,668 | | |
| 372,200 | | |
| 585,714 | | |
| 190,000 | |
| 2018 | | |
| 1,329,294 | | |
| 230,647 | | |
| 322,933 | | |
| 585,714 | | |
| 190,000 | |
| 2019 | | |
| 1,043,968 | | |
| 228,665 | | |
| 39,589 | | |
| 585,714 | | |
| 190,000 | |
| Thereafter | | |
| 4,091,245 | | |
| 1,104,100 | | |
| — | | |
| 390,478 | | |
| 2,596,667 | |
| | | |
$ | 10,508,843 | | |
$ | 2,178,753 | | |
$ | 1,464,375 | | |
$ | 3,319,048 | | |
$ | 3,546,667 | |
The weighted average amortization period for
other intangible assets is 11.0 years and they have no expected residual value.
NOTE 8 - CAPITAL STOCK
Common Stock
Cash dividends payable on the common stock shall,
in all cases, be on a per share basis, one hundred twenty percent (120%) of the cash dividend payable on shares of Class B common
stock and three hundred sixty percent (360%) of the cash dividend payable on a share of Class C common stock.
Class B Common Stock
Class B common stock is convertible into shares
of common stock on a one-for-one basis. Class B common stock has 10 votes per share. There were 146 and 146 of such shares outstanding
at June 30, 2014 and 2013, respectively.
Class C Common Stock
On April 3, 1995, the stockholders ratified
a proposal creating a new Class C common stock and authorized the exchange offering of three shares of Class C common stock for
each share of the Company's outstanding Class B common stock. The Class C common stock has 25 votes per share, as compared to 10
votes per share for the Class B common stock and one vote per share for the common stock. The Class C common stock was offered
on a three-for-one basis to the holders of the Class B common stock. Although having greater voting power, each share of Class
C common stock has only one-third of the rights of a share of Class B common stock to dividends and distributions. Class C common
stock is convertible into shares of common stock on a three-for-one basis.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 8 - CAPITAL STOCK (Continued)
Class A Non-Voting Preferred Stock
On April 3, 1995, the stockholders ratified
a proposal consisting of the creation of a new class of Class A non-voting preferred stock with special dividend rights and the
declaration of a stock dividend on the Company's common stock consisting of one share of Class A non-voting preferred stock for
every five shares of common stock. The stock dividend was payable to holders of common stock on October 20, 1995. Class A non-voting
preferred stock issued pursuant to such stock dividend approximates 313,000 shares.
The Class A non-voting preferred stock is entitled
to a special dividend equal to 3-1/4% of first $10 million, 4-1/2% of next $20 million and 5-1/2% on amounts in excess of $30 million
of the amount of any cash awards or settlements received by the Company in connection with the enforcement of five of the Company's
patents in its patent lawsuits, less the revised special dividend payable on the common stock with respect to one of the Company's
patents.
The Class A non-voting preferred stock participates
on an equal per share basis with the common stock in any dividends declared and ranks equally with the common stock on distribution
rights, liquidation rights and other rights and preferences (other than the voting rights).
Stock Bonus Plans
On April 23, 2010, the Board approved the 2010
Stock Bonus Plan. The plan entitles the Company to reserve 2,000,000 shares of common stock. On August 10, 2010, the Company filed
Form S-8 to register the 2,000,000 shares. As of June 30, 2014, 958,367 shares of common stock of FONAR were available for future
grant under this plan. For the years ended June 30, 2014 and 2013, 46,708 and 67,870 shares were issued, respectively.
Options
The Company has stock option plans, which provide
for the awarding of incentive and non-qualified stock options to employees, directors and consultants who may contribute to the
success of the Company. The options granted vest either immediately or ratably over a period of time from the date of grant, typically
three or four years, at a price determined by the Board of Directors or a committee of the Board of Directors, generally the fair
value of the Company's common stock at the date of grant. The options must be exercised within ten years from the date of grant.
FONAR’s 2002 Incentive Stock Option Plan
(the “FONAR 2002 Plan”), adopted on July 1, 2002, is intended to qualify as an incentive stock option plan under Section
422A of the Internal Revenue Code of 1954, as amended. The FONAR 2002 Plan permits the issuance of stock options covering an aggregate
of 100,000 shares of common stock of FONAR. The options have an exercise price equal to the fair market value of the underlying
stock on the date the option is granted, are nontransferable, are exercisable for a period not exceeding ten years and expire upon
the voluntary termination of employment. The FONAR 2002 Plan terminated on June 30, 2012. During the year ended June 30, 2014,
6,610 options expired, therefore no options remain outstanding.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 8 - CAPITAL STOCK (Continued)
Options (Continued)
FONAR’s 2005 Incentive Stock Option Plan
(the “FONAR 2005 Plan”), adopted on February 16, 2005,is intended to qualify as an incentive stock option plan under
Section 422A of the Internal Revenue Code of 1954, as amended. The FONAR 2005 Plan permits the issuance of stock options covering
an aggregate of 80,000 shares of common stock of FONAR. The options have an exercise price equal to the fair 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 FONAR 2005 Plan will terminate on February 14, 2015. As of June 30, 2014, 70,000
shares of common stock of FONAR were available for future grant under this Plan.
Stock option activity and weighted average exercise
prices under these plans and grants for the years ended June 30, 2014 and 2013 were as follows:
| |
Number of Options | |
Weighted Average Exercise Price | |
Aggregate Intrinsic Value |
Outstanding, June 30, 2012 | |
| 14,022 | | |
| 27.76 | | |
| — | |
Granted | |
| — | | |
| — | | |
| — | |
Exercised | |
| — | | |
| — | | |
| — | |
Forfeited / Expired | |
| (7,412 | ) | |
| 26.65 | | |
| — | |
Outstanding, June 30, 2013 | |
| 6,610 | | |
| 29.00 | | |
| — | |
Granted | |
| | | |
| — | | |
| — | |
Exercised | |
| — | | |
| — | | |
| — | |
Forfeited / Expired | |
| (6,610 | ) | |
| 29.00 | | |
| — | |
Outstanding, June 30, 2014 | |
| — | | |
| — | | |
| — | |
Exercisable at: | |
| | | |
| | | |
| | |
June 30, 2013 | |
| 6,610 | | |
$ | 29.00 | | |
| | |
June 30, 2014 | |
| — | | |
$ | — | | |
| | |
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 9 – CONTROLLING AND NONCONTROLLING
INTERESTS
On February 13, 2013 the Company entered into
an agreement with outside investors to acquire a 50.5% controlling interest in a newly formed limited liability company, Health
Diagnostics Management LLC (HDM). According to the February 13, 2013 LLC operating agreement of HDM there are two classes of members;
Class A members and one Class B member. The Class A members have an ownership interest of 49.5% of HDM. The Class B member (HMCA)
has an ownership of 50.5% of HDM. On all matters on which members may vote every member is entitled to cast the percentage of votes
equal to their percentage of ownership interest. Profits and losses an 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. During March 2013 the Company contributed $20,200,000
to HDM and the group of outside investors contributed $19,800,000 for its non-controlling membership interest.
To fund its capital contribution the Company
borrowed a total of $14,000,000 from a bank in the form of a term loan aggregating $11,000,000 and a revolving credit loan aggregating
$3,000,000. The term loan is payable in 60 consecutive monthly installments, commencing September 1, 2013. The term loan bears
interest at 4.75% per annum and is payable monthly. The revolving credit loan is due March 5, 2016. The Company can prepay the
loan in whole or in part in multiples of $100,000 at any time without penalty. The revolving credit note bears interest at a rate
of 4% per annum and is payable monthly. All borrowings under the loan agreements are collateralized by substantially all of the
Company’s assets. The loan agreements also contain certain financial covenants that must be met on a periodic basis.
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 accompanying consolidated financial statements include the operations of HDM
from the date of acquisition. The Company recognizes and measures 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, 2014 and 2013
NOTE 9 – CONTROLLING AND NONCONTROLLING
INTERESTS (Continued)
The following table summarizes the estimated
fair values of the assets and liabilities assumed at the acquisition date:
Management fee receivable | |
$ | 6,667,259 | |
Medical receivables | |
| 7,389,953 | |
Prepaid expenses and other current assets | |
| 10,262 | |
Property and equipment | |
| 14,912,650 | |
Intangible assets | |
| 9,200,000 | |
Goodwill | |
| 1,767,098 | |
Other assets | |
| 332,949 | |
Other current liabilities | |
| (6,323 | ) |
Long term debt | |
| (273,848 | ) |
Net assets acquired | |
$ | 40,000,000 | |
The purchase price was allocated to the tangible
and intangible assets and liabilities assumed based on estimates of their respective fair values at the date of acquisition with
the remaining unallocated purchase price recorded as goodwill. Management is responsible for the valuation of net assets acquired
and considered a number of factors, including valuations and appraisals, when estimating the fair values and estimated useful lives
of acquired assets and liabilities. The intangible assets, excluding goodwill, are being amortized on a straight-line basis over
their weighted average lives as follows:
| |
| Fair Value | | |
| | |
Non compete | |
$ | 4,100,000 | | |
| 7 years | |
Customer relationships | |
| 3,800,000 | | |
| 20 years | |
Developed software | |
| 1,300,000 | | |
| 5 years | |
Total intangible assets | |
$ | 9,200,000 | | |
| | |
The following unaudited pro forma results
of operations for the twelve months ended June 30, 2013 assumes that the above acquisitions were made at the beginning of the year
of acquisition. The unaudited pro forma information does not purport to be indicative of the results that would have been
obtained if the acquisitions had actually occurred at the beginning of the year prior to acquisition, nor of the results that may
be reported in the future.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 9 – CONTROLLING AND NONCONTROLLING
INTERESTS (Continued)
| |
Year ended
June 30, 2013 |
Total Revenues - Net | |
| 69,723,542 | |
Net Income - Controlling Interests | |
| 17,442,337 | |
Net Income Available to Common Stockholders | |
| 16,294,377 | |
Net Income Available to Class A Non-Voting Preferred Stockholders | |
| 855,597 | |
Net Income Available to Class C Common Stockholders | |
| 292,363 | |
Basic Net Income Per Common Share Available to Common Stockholders | |
| 2.75 | |
Diluted Net Income Per Common Share Available to Common Stockholders | |
| 2.69 | |
Basic and Diluted Income Per Share - Common C | |
| 0.76 | |
Weighted Average Basic Shares Outstanding | |
| 5,933,318 | |
Weighted Average Diluted Shares Outstanding | |
| 6,060,822 | |
Weighted Average Basic and Diluted Shares Outstanding - Class C Common | |
| 382,513 | |
HDM’s total net revenues and income
from operations for the period from the acquisition date (March 5, 2013) to June 30, 2013 was $14,834,143 and $1,958,714, respectively.
Amount of each class of members’ equity as of June 30,
2014 and 2013
| |
June 30, 2014 | |
June 30, 2013 |
| |
Class A Members | |
Class B Member | |
Class A Members | |
Class B Member |
Opening Members’ Equity | |
$ | 19,526,475 | | |
$ | 20,763,830 | | |
$ | — | | |
$ | — | |
Share of Net Income | |
| 2,266,473 | | |
| 4,566,186 | | |
| 543,225 | | |
| 1,397,080 | |
Contributions | |
| — | | |
| — | | |
| 19,800,000 | | |
| 20,200,000 | |
Distributions | |
| (4,133,250 | ) | |
| (4,216,750 | ) | |
| (816,750 | ) | |
| (833,250 | ) |
Ending Members’ Equity | |
$ | 17,659,698 | | |
$ | 21,113,266 | | |
$ | 19,526,475 | | |
$ | 20,763,830 | |
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 9 – CONTROLLING AND NONCONTROLLNG
INTERESTS (Continued)
On May 2, 2011, the Company completed a private
placement of equity and succeeded in raising $6,000,000. The offering consisted of Preferred Class A membership interests in a
newly formed limited liability company, Imperial Management Services, LLC (“Imperial”). The Class B membership interests
in Imperial, all of which were retained by the Company’s subsidiary, HMCA, hold a 75% equity interest in Imperial. The Class
A membership interests are entitled to receive a dividend of 18% per annum of their cash capital contribution of $6,000,000. HMCA
contributed all of its assets, together with its liabilities, to Imperial as HMCA’s capital contribution. The Imperial operating
agreement provides for the Class A members to receive priority distributions until their original capital contributions are returned.
Dividends are payable quarterly beginning August 1, 2011. On May 1, 2014 and on May 1, 2013, the Company returned a portion of
the Class A Members capital contribution in the amount of $1,125,100 and $1,424,900, respectively. As of June 30, 2014, the Company’s
subsidiary, HMCA, now owns approximately 91% interest in Imperial Management Services.
Amount of each class of members’ equity
as of June 30, 2014 and 2013
| |
June 30, 2014 | |
June 30, 2013 |
| |
| Class A Members | | |
| Class B Member | | |
| Class A Members | | |
| Class B Member | |
Opening Members’ Equity | |
$ | 3,599,519 | | |
$ | 7,772,781 | | |
$ | 4,918,365 | | |
$ | 3,824,945 | |
Share of Net Income | |
| 536,913 | | |
| 3,306,536 | | |
| 959,254 | | |
| 3,947,836 | |
Contributions | |
| — | | |
| — | | |
| — | | |
| — | |
Distributions | |
| (607,520 | ) | |
| — | | |
| (853,200 | ) | |
| — | |
Redemption | |
| (1,125,100 | ) | |
| — | | |
| (1,424,900 | ) | |
| — | |
Ending Members’ Equity | |
$ | 2,403,812 | | |
$ | 11,079,317 | | |
$ | 3,599,519 | | |
$ | 7,772,781 | |
On May 1, 2010, the Company purchased a 15.2%
interest from an unrelated party of an entity that provides management services to a diagnostic center in the New York Metropolitan
area. On January 1, 2011, the Company purchased an additional 34.8% interest by the issuance of a promissory note of $400,000.
Commencing January 1, 2011, the Company consolidates the activity of this entity. On June 1, 2013, the Company purchased from the
noncontrolling members their remaining 50% interest for $700,000.
The Company also has a 50% controlling interest
in an entity which the Company consolidates, that provides management services to a diagnostic center in the New York Metropolitan
area. The center began operations during January 2012. The noncontrolling interest as of June 30, 2014 and 2013 aggregated $531,474
and $559,221, respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 10 - LONG-TERM DEBT, NOTES PAYABLE AND
CAPITAL LEASES
Long-term debt, notes payable and capital leases
consist of the following:
| |
June 30, |
| |
2014 | |
2013 |
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 $652,505 as of June 30, 2014. | |
$ | 439,983 | | |
$ | 461,648 | |
The revolving credit note is due by March 5, 2016. The Company can prepay the loan in whole or part in multiples of $100,000 at any time without penalty. The note bears interest at a rate of 4% 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. | |
| 300,000 | | |
| 2,400,000 | |
The term loan is payable with interest only for 6 consecutive months commencing at the inception of the loan followed by 60 consecutive monthly installments, commencing October 1, 2013. The term loan bears interest at 4.75% 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. | |
| 9,349,994 | | |
| 11,000,000 | |
Note payable requiring 12 consecutive interest only payments commencing at the inception of the loan followed by 48 consecutive monthly payments, commencing May 1, 2014. The note bears interest at a rate of 4.75% 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. | |
| 660,911 | | |
| 689,646 | |
Other (including capital leases for property and equipment). | |
| 621,758 | | |
| 1,221,480 | |
| |
| 11,372,646 | | |
| 15,772,774 | |
Less: Current portion | |
| 2,890,816 | | |
| 2,885,769 | |
| |
$ | 8,481,830 | | |
$ | 12,887,005 | |
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 10 - LONG-TERM DEBT, NOTES PAYABLE AND
CAPITAL LEASES (Continued)
The maturities of long-term debt over the next
five years and thereafter are as follows:
Years Ending June 30, | |
|
| 2015 | | |
$ | 2,890,816 | |
| 2016 | | |
| 2,782,561 | |
| 2017 | | |
| 2,440,108 | |
| 2018 | | |
| 2,372,330 | |
| 2019 | | |
| 580,891 | |
| Thereafter | | |
| 305,940 | |
| | | |
$ | 11,372,646 | |
NOTE 11 - INCOME TAXES
ASC topic 740 prescribes a recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to be taken in a corporate tax return. For those benefits to be
recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. Differences between
tax positions taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to the interpretation
are referred to as “unrecognized benefits”. A liability is recognized (or amount of net operating loss carryforward
or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise’s potential future
obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC topic
740.
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 2009.
The Company netted a deferred tax asset of $5,740,287
and a deferred tax liability of $583,990 as of June 30, 2014, primarily relating to net operating loss carryforwards of approximately
$137,252,000 available to offset future taxable income through 2034. The net operating losses begin to expire in 2019 for federal
tax purposes and in 2014 for state income tax purposes.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 11 - INCOME TAXES (Continued)
The ultimate realization of deferred tax assets
is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible.
The Company considers projected future taxable income and tax planning strategies in making this assessment. At present, the Company
does have a sufficient history of income and anticipates profitability in the coming years and has concluded that it is more-likely-than-not
that the Company will be able to realize a portion of its tax benefits in the near future and therefore a valuation allowance was
established for the partial value of the deferred tax asset.
A valuation allowance will be maintained until
sufficient positive evidence exists to support the reversal of the remainder of the valuation. Should the Company continue
to remain profitable in future periods with supportable trends, the valuation allowance will be reversed accordingly.
Components of the current (benefit) provision
for income taxes are as follows:
| |
Years Ended June 30, |
| |
2014 | |
2013 |
Current: | |
| | | |
| | |
Federal | |
$ | 310,000 | | |
$ | 125,000 | |
State | |
| 24,093 | | |
| 71,001 | |
Deferred taxes | |
| (2,682,405 | ) | |
| (2,473,892 | ) |
| |
$ | (2,348,312 | ) | |
$ | (2,277,891 | ) |
A reconciliation of the federal statutory income
tax rate to the Company's effective tax rate as reported is as follows:
| |
Years Ended June 30, |
| |
2014 | |
2013 |
Taxes at federal statutory rate | |
| 34.0 | % | |
| 34.0 | % |
State and local income taxes (benefit), net of federal benefit | |
| 6.0 | % | |
| 6.0 | % |
Permanent differences | |
| (0.9 | )% | |
| 0.6 | % |
(Decrease) increase in the valuation allowance and true ups | |
| (68.3 | )% | |
| (76.2 | )% |
Effective income tax rate | |
| (29.2 | )% | |
| (35.6 | )% |
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 11 - INCOME TAXES (Continued)
As of June 30, 2014, the Company has net operating
loss (“NOL”) carryforwards of approximately $137,252,000 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 credit carryforwards aggregating $3,742,000, which are accounted for under the flow-through method.
The Company also has $578,000 in alternative minimum tax credits.
In addition, for New York State income tax purposes,
the Company has tax credit carryforwards, aggregating approximately $1,133,000, which are accounted for under the flow-through
method. The tax credit carryforwards expire during the years ending June 30, 2014 to June 30, 2029.
Significant components of the Company's deferred
tax assets and liabilities at June 30, 2014 and 2013 are as follows:
| |
June 30, |
| |
2014 | |
2013 |
Deferred tax assets: | |
| | | |
| | |
Allowance for doubtful accounts | |
$ | 6,961,016 | | |
$ | 6,139,291 | |
Non-deductible accruals | |
| 65,108 | | |
| 264,062 | |
Net operating carryforwards | |
| 54,900,136 | | |
| 58,052,831 | |
Tax credits | |
| 5,644,097 | | |
| 5,873,204 | |
Property and equipment and depreciation | |
| 195,408 | | |
| 1,070,291 | |
Inventory | |
| 130,822 | | |
| 84,136 | |
| |
| 67,896,587 | | |
| 71,483,815 | |
Valuation allowance | |
| (62,156,300 | ) | |
| (68,548,065 | ) |
Total deferred tax assets | |
| 5,740,287 | | |
| 2,935,750 | |
Deferred tax liabilities: Inventory | |
| — | | |
| — | |
Capitalized software development costs | |
| (583,990 | ) | |
| (461,858 | ) |
Total deferred tax liabilities | |
| (583,990 | ) | |
| (461,858 | ) |
Net deferred tax asset | |
$ | 5,156,297 | | |
$ | 2,473,892 | |
The valuation allowance for deferred tax assets
decreased by approximately $6,392,000 during the year ended June 30, 2014 and decreased by approximately $5,206,000 during the
year ended June 30, 2013.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 12 - OTHER CURRENT LIABILITIES
Included in other current liabilities are the
following:
| |
June 30, |
| |
2014 | |
2013 |
Accrued salaries, commissions and payroll taxes | |
$ | 834,324 | | |
$ | 710,897 | |
Accrued interest | |
| 117,480 | | |
| 117,480 | |
Litigation accruals | |
| 664,349 | | |
| 809,349 | |
Sales tax payable | |
| 2,665,181 | | |
| 2,858,652 | |
Legal and other professional fees | |
| 438,730 | | |
| 569,049 | |
Accounting fees | |
| 325,139 | | |
| 305,000 | |
Purchase scanners | |
| 450,000 | | |
| — | |
Insurance premiums | |
| 306,092 | | |
| 13,443 | |
Interest and penalty – sales tax | |
| 2,374,339 | | |
| 2,321,858 | |
Penalty – 401k plan | |
| — | | |
| 250,000 | |
Rent | |
| — | | |
| 147,665 | |
Other | |
| 848,399 | | |
| 390,968 | |
| |
$ | 9,024,033 | | |
$ | 8,494,361 | |
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Leases
The Company rents its operating facilities and
certain equipment, pursuant to operating lease agreements expiring at various dates through December 2022. The leases for certain
facilities contain escalation clauses relating to increases in real property taxes as well as certain maintenance costs.
Future minimum operating lease commitments consisted
of the following at June 30, 2014:
Year Ending June 30, | |
Facilities And Equipment (Operating Lease) |
| 2015 | | |
$ | 3,753,050 | |
| 2016 | | |
| 3,042,814 | |
| 2017 | | |
| 1,295,636 | |
| 2018 | | |
| 835,680 | |
| 2019 | | |
| 351,732 | |
| Thereafter | | |
| 894,072 | |
| Total minimum obligations | | |
$ | 10,172,984 | |
Rent expense for operating leases approximated
$4,571,000 and $4,035,000, for the years ended June 30,
2014 and 2013, respectively. The expense for the year ended June 30, 2013 included an expense for early termination of a lease of approximately
$690,000.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
Employee Benefit Plans
The Company has a non-contributory 401(k) Plan
(the “401(k) Plan”). The 401(k) Plan covers all non-union employees who are at least 21 years of age with no minimum
service requirements. There were no employer contributions to the Plan for the years ended June 30, 2014 and 2013. (See Other Matters
below)
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, 2014.
Stipulation Agreements
The Company has entered into stipulation agreements
with a number of its creditors that in the aggregate total $305,916, which is included in other current liabilities and other liabilities
on the Company’s balance sheet as of June 30, 2014. The monthly payments total $19,552.
The amounts to be paid over the next three years
are as follows:
Year Ending June 30, | |
|
| 2015 | | |
$ | 152,166 | |
| 2016 | | |
| 96,000 | |
| 2017 | | |
| 57,750 | |
| | | |
$ | 305,916 | |
Litigation
The Company is subject to legal proceedings
and claims arising from the ordinary course of its business, including personal injury, customer contract and employment claims.
In the opinion of management, the aggregate liability, if any, with respect to such actions, will not have a material adverse effect
on the consolidated financial position or results of operations of the Company.
On or about June 30, 2010, one of Fonar’s
customers, Golden Triangle Company, commenced an action against Fonar and certain individual defendants employed or formerly employed
by Fonar, in the United States District Court for the Eastern District of New York based on the alleged wrongful failure of Fonar
to deliver a scanner in Kuwait. The claim alleged various causes of action including breach of contract, fraud, conspiracy to defraud
and conversion.
Golden Triangle Company v. Fonar Corporation et al, CV10-2933. The Plaintiff contracted with Fonar to purchase
a scanner, and paid $1,455,500 in advance. The scanner was never delivered, but Plaintiff never designed a site for delivery either.
Alleging other damages, fraud and deceptive trade practices, Plaintiff sought up to $5,000,000. Fonar made a motion to dismiss
the complaint, the outcome of which left Plaintiff with only a cause of action for breach of contract. The claims against the individual
officers and employees of Fonar were dismissed. Fonar filed its answer, together with a counterclaim alleging that the Plaintiff,
by attempting to overcharge the end-customer, had damaged Fonar’s reputation and ability to sell in Kuwait. The case was
settled in June 2013 for $480,000 in cash and 30,000 shares of Fonar’s common stock payable in installments. The Company
recorded a gain of $755,500 on the statements of income for the year ended June 30, 2013.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
Jack Shapiro v. Fonar Corporation,
Supreme Court of the State of New York, Nassau County, was commenced by plaintiff in July, 2009 to recover $500,000 based on
Fonar’s failure to refund a deposit on an MRI scanner and termination of plaintiff’s sales representative
agreement. Plaintiff alleged that the deposit on the machine was in part consideration for the sales representative
agreement. Fonar’s view was that the sales agreement and sales representative agreement were separate and (1) Fonar was
entitled to keep the deposit on the sale when plaintiff failed to proceed with the transaction and (2) properly terminated
the sales representative agreement in accordance with its terms. During the year ended June 30, 2013, the case has been
settled for $323,000 payable in installments, subject to the plaintiff obtaining a sale for Fonar and the payment of
installments of the purchase price by the customer.
Matt Malek Madison v. Fonar Corporation,
United States District Court, Northern District of California, was commenced by plaintiff on August 27, 2007 to recover a down
payment for a scanner in the amount of $300,000, with interest. The plaintiff sought costs of suit and attorney’s fees as
well. Fonar answered the complaint and sued the plaintiff for breach of contract in the amount of $450,000. Although down payments
are usually expressly non-refundable in Fonar’s quotations and agreements, in this case, the quotation contemplated the sale
of four scanners, and provided that the deposit would be refundable with interest, if the customer were unable to find suitable
locations in the San Francisco Bay area. The issue was whether the customer made a good faith effort to find locations; Fonar’s
position was that the customer did not. The case went to trial before a judge; the parties submitted post-trial briefs, and judgment
was awarded to the plaintiff. Fonar appealed the trial court’s decision, but on January 31, 2012, the U.S. Court of Appeals
for the 9th Circuit affirmed the lower court’s decision awarding the plaintiff the $300,000 deposit with prejudgment
interest from July 1, 2006. Fonar sought to have the Court of Appeals reconsider the decision en banc, (by all or a larger number
of the judges on the Circuit Court of Appeals), but this was not granted. Although the case has been concluded, the plaintiff has
not taken any steps to collect the judgment. As of June 30, 2014 and 2013, $300,000 was included in the Company’s accrued expenses.
Bonutti Research v. Fonar Corporation, Health
Management Corporation of America, Health Diagnostics, LLC et al, was commenced on December 2, 2011. Bonutti Research filed
a patent infringement action in the U.S. District Court for the Eastern District Court of New York, alleging that Fonar’s
Upright® MRI scanners infringe plaintiff’s patent which relates to the moving of a patient into the scanner. Fonar
believes plaintiff’s claims are without merit and further, that the patent is invalid. The parties have settled the
case for $150,000 payable by Fonar in twelve installments and certain licenses and covenants not to sue. The $150,000 has
been recorded in the Company’s consolidated statements of income for the year ended June 30, 2014.
Bolt MRI Technologies v. Fonar Corporation,
Health Management Corporation of America & Health Diagnostics, LLC, was commenced on July 22, 2013, when Bolt MRI Technologies
filed an action against Fonar Corporation, Health Management Corporation of America and Health Diagnostics, LLC alleging infringement
of the same patent which is the subject of the Bonutti case. Bolt alleged that the patent was assigned to Bolt. The settlement
of the Bonutti case covers this case as well.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
Other Matters
The Company is also delinquent in filing
sales tax returns for certain states, for which the Company has transacted business. The Company has recorded tax obligations
of approximately $2,665,000 plus interest and penalties of approximately $2,374,000. The Company is in the process of
determining its regulatory requirements in order to become compliant.
On August 31, 2011 the Company submitted an
application to the Internal Revenue Service to voluntarily correct required reporting and disclosure requirements regarding its
401(k) Employee Benefit Plan. On December 9, 2011, the Internal Revenue Service issued a favorable determination letter on
the tax-qualified status of the 401K plan document and a favorable compliance statement. During December 2013, the Company
submitted an application to the U.S. Department of Labor to voluntarily correct the late filing of prior Form 5500s (annual returns).
The voluntary correction application is still pending. The Company, however, does not anticipate any additional penalties will
be assessed by the U.S. Department of Labor. The Company has recorded provisions for any potential penalties totaling $250,000,
which was the Company’s best estimate of its possible exposure for penalties at that time. The Company has engaged outside counsel to assist with the correction process and to obtain compliance with all reporting
and disclosure requirements. The Company’s actions to obtain compliance have concluded successfully and the $250,000 reserve
has been reversed.
The Company maintains a self-funded health insurance
program with a stop-loss umbrella policy with a third party insurer to limit the maximum potential liability for individual claims
to $100,000 per person and for a maximum potential claim liability based on member enrollment. With respect to this program, the
Company considers historical and projected medical utilization data when estimating its health insurance program liability and
related expense. As of June 30, 2014 and 2013, the Company had approximately $344,000 and $0, 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 periods covered by this report
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 14 - OTHER (EXPENSE) INCOME
Other (expense) income consists of:
| |
For the Years Ended June 30, |
| |
2014 | |
2013 |
Loss from investment | |
$ | — | | |
$ | (48,777 | ) |
Litigation settlement | |
| 13,586 | | |
| 716,250 | |
Loss on disposition of equipment | |
| (657,350 | ) | |
| | |
Gain on sale of equipment | |
| 40,000 | | |
| 557,473 | |
Impairment of management agreement | |
| — | | |
| (357,500 | ) |
Other expense | |
| (4,835 | ) | |
| (141,958 | ) |
| |
$ | (608,599 | ) | |
$ | 725,488 | |
NOTE 15 - SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended June 30, 2014 and 2013,
the Company paid $668,475 and $389,907 for interest, respectively.
During the years ended June 30, 2014 and 2013,
the Company paid $349,501 and $277,000 for income taxes, respectively.
Purchase consideration:
Assets acquired: | |
| | |
Management fee receivable | |
$ | 6,667,259 | |
Medical receivable | |
| 7,389,953 | |
Prepaid expenses and other current assets | |
| 10,262 | |
Property and equipment | |
| 14,912,650 | |
Intangible assets | |
| 9,200,000 | |
Goodwill | |
| 1,767,098 | |
Other assets | |
| 332,949 | |
Total assets acquired | |
$ | 40,280,171 | |
Less liabilities assumed: | |
| | |
Other current liabilities | |
$ | 6,323 | |
Long term debt | |
| 273,848 | |
Total liabilities assumed | |
$ | 280,171 | |
| |
$ | 40,000,000 | |
NOTE 16 – DUE TO RELATED MEDICAL PRACTICES
In June 2009, an entity owned by the Company’s
Chairman of the Board, Tallahassee Scanning Services PA, sold its Upright MRI scanning system to the Company for $550,000 in exchange
for 35 monthly payments of $18,769 to be made over a three year period, commencing October 18, 2009 including interest at a rate
of 10.41% per annum. The Company used this scanning system to fulfill a sales order with an unrelated customer. The unpaid balance
of as of June 30, 2014 and 2013 was $134,880.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
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.
Summarized financial information concerning
the Company’s reportable segments is shown in the following table:
| |
Manufacturing and Servicing of Medical Equipment | |
Management of Diagnostic Imaging Centers | |
Totals |
Fiscal 2014: | |
| |
| |
|
Net revenues from external customers | |
$ | 12,070,563 | | |
$ | 56,434,914 | | |
$ | 68,505,477 | |
Intersegment net revenues * | |
$ | 1,963,750 | | |
$ | — | | |
$ | 1,963,750 | |
Income from operations | |
$ | 468,793 | | |
$ | 11,833,876 | | |
$ | 12,302,669 | |
Depreciation and amortization | |
$ | 410,728 | | |
$ | 3,406,477 | | |
$ | 3,817,205 | |
Compensatory element of stock issuances | |
$ | 223,000 | | |
$ | — | | |
$ | 223,000 | |
Total identifiable assets | |
$ | 18,093,789 | | |
$ | 58,696,054 | | |
$ | 76,789,843 | |
Capital expenditures | |
$ | 234,275 | | |
$ | 600,633 | | |
$ | 834,908 | |
Fiscal 2013: | |
| | | |
| | | |
| | |
Net revenues from external customers | |
$ | 14,891,075 | | |
$ | 34,250,739 | | |
$ | 49,141,814 | |
Intersegment net revenues * | |
$ | 1,200,000 | | |
$ | — | | |
$ | 1,200,000 | |
Income from operations | |
$ | 139,390 | | |
$ | 7,396,357 | | |
$ | 7,535,747 | |
Depreciation and amortization | |
$ | 541,551 | | |
$ | 1,879,626 | | |
$ | 2,421,177 | |
Compensatory element of stock issuances | |
$ | 415,021 | | |
$ | — | | |
$ | 415,021 | |
Total identifiable assets | |
$ | 15,071,225 | | |
$ | 58,079,425 | | |
$ | 73,150,650 | |
Capital expenditures | |
$ | 237,636 | | |
$ | 25,170,303 | | |
$ | 25,407,939 | |
.* Amounts eliminated in consolidation
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 17 - SEGMENT AND RELATED INFORMATION (Continued)
Export Product Sales
The Company’s areas of operations are
principally in the United States. The Company had export sales of medical equipment amounting to 42.4% and 3.8% of product sales
revenues to third parties for the years ended June 30, 2014 and 2013, respectively.
The foreign product sales, as a percentage of
product sales to unrelated parties, were made to customers in the following countries:
| |
For the Years Ended June 30, |
| |
2014 | |
2013 |
Abu Dhabi | |
| 29.8 | % | |
| -% | |
Switzerland | |
| 12.4 | | |
| — | |
England | |
| — | | |
| 3.6 | |
Germany | |
| — | | |
| 0.1 | |
Libya | |
| 0.2 | | |
| 0.1 | |
| |
| 42.4 | % | |
| 3.8 | % |
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
8.8% and 8.2% of consolidated net service and repair fees for the years ended June 30, 2014 and 2013, respectively. The foreign
service and repair fees, as a percentage of total service and repair fees, were provided principally to the following countries:
| |
For the Years Ended June 30, |
| |
2014 | |
2013 |
Spain | |
| 1.0 | % | |
| 0.9 | % |
Puerto Rico | |
| 1.1 | | |
| 1.0 | |
Switzerland | |
| 1.1 | | |
| 1.1 | |
Germany | |
| .4 | | |
| — | |
England | |
| 2.6 | | |
| 2.0 | |
Holland | |
| 1.3 | | |
| 2.2 | |
Canada | |
| .2 | | |
| — | |
Australia | |
| 1.1 | | |
| 1.0 | |
| |
| 8.8 | % | |
| 8.2 | % |
The Company does not have any material assets
outside of the United States.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 and 2013
NOTE 18 – ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following represents a summary of allowance
for doubtful accounts for the years ended June 30, 2014 and 2013, respectively:
Description | |
Balance June 30, 2013 | |
Additions | |
Deductions | |
Balance June 30, 2014 |
Accounts receivable | |
$ | 257,362 | | |
(1)$ | — | | |
$ | — | | |
$ | 257,362 | |
Management and other fees receivable | |
| 9,095,320 | | |
(1) | 1,806,299 | | |
| — | | |
| 10,901,619 | |
Management and other fees receivable - related medical practices | |
| 403,047 | | |
| — | | |
| — | | |
| 403,047 | |
Medical receivables | |
| 2,584,669 | | |
(1) | 10,333,082 | | |
| — | | |
| 12,917,751 | |
Advance and notes to related parties | |
| 202,379 | | |
| — | | |
| — | | |
| 202,379 | |
| |
| | | |
| | | |
| | | |
| | |
Description | |
Balance June 30, 2012 | |
Additions | |
Deductions | |
Balance June 30, 2013 |
Accounts receivables | |
$ | 1,852,987 | | |
(1)$ | (92,454 | ) | |
$ | 1,503,171 | | |
$ | 257,362 | |
Management and other fees receivable | |
| 7,458,345 | | |
(1) | 950,000 | | |
| — | | |
| 9,095,320 | |
Management and other fees receivable - related medical practices | |
| 403,047 | | |
| — | | |
| — | | |
| 403,047 | |
Medical receivables | |
| — | | |
(1) | 2,584,669 | | |
| | | |
| 2,584,669 | |
Advance and notes to related parties | |
| 239,791 | | |
| — | | |
| 37,412 | | |
| 202,379 | |
Notes receivable | |
| 65,000 | | |
| — | | |
| 65,000 | | |
| — | |
(1) Included in provision for bad debts.
NOTE 19 – SUBSEQUENT EVENTS
The Company evaluates events that have occurred
after the balance sheet date, but before the consolidated financial statements are issued.
During the period from July 1, 2014 through
September 29, 2014, the Company has issued 5,000 shares of common stock to employees and consultants as compensation valued at
$53,200 under a stock bonus plan.
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”). We also engaged the services of a governance, risk and compliance consulting firm to assist in our evaluation and
remediation. Based upon that evaluation, our Principal Executive Officer and Acting Principal Financial Officer concluded, as of
the end of the period covered by this Annual Report that our disclosure controls and procedures were not effective due to material
weaknesses in internal control over financial reporting as discussed and defined in Management's Report on Internal Control over
Financial Reporting referred to below.
Our management has concluded that our consolidated
financial statements for the periods covered by and included in this Annual Report are prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”) and fairly present, in all material respects, our financial position,
results of operations and cash flows for each of the periods presented herein.
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) in 1992. Based on this evaluation,
our management concluded that our internal control over financial reporting was not effective at June 30, 2014 because of the material
weaknesses described below.
FONAR CORPORATION AND SUBSIDIARIES
Based on the COSO criteria, management
identified control deficiencies that constitute material weaknesses. A “material weakness”, as defined by COSO, is
a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is more than a reasonable
possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected
on a timely basis. Management has identified the following material weaknesses in our internal control over financial reporting:
1) Certain control procedures were not in place
while others were unable to be verified due to performance of the procedure not being sufficiently documented. As an example, some
procedures requiring review of certain reports could not be verified due to there being no written documentation of such review.
Also there is insufficient documentation to verify sufficient interaction of our internal accountants with our Audit Committee.
In certain instances controls were not documented or put in place.
2) Inadequate design of controls over period
end financial reporting and disclosure processes.
3) We did not maintain adequate segregation
of duties related to the approval and execution of certain transactions impacting our financial reporting. Management believes
that all transactions have been duly authorized, however there was a lack of written evidence of such authorization, review and
approval.
Changes in Internal Controls over Financial
Reporting
There have been no changes (other than
those described below) in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during
the most recent fiscal quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
Management's Plan to Remediate Material
Weaknesses
None of the material weaknesses describe
above resulted in audit adjustments to our 2014 annual financial statements. As a result, Management believes that the material
weaknesses described above did not have an effect on our financial results or reporting of those results for the periods covered
by this Annual Report. We are committed to remediating the material weaknesses described above and have developed and began implementing
plans to do so for fiscal 2015. The following describes our remediation plans for fiscal 2015:
To the extent reasonably possible, we will continue
to utilize the services of a governance, risk and compliance consulting firm to assist us in our remediation plan and we will utilize
internal resources to implement additional internal controls as deemed necessary. We are taking steps to implement additional review
and approval procedures as applicable to strengthen our controls over the financial reporting and disclosure process. In addition,
we are in the planning phase of creating and implementing new information technology policies and procedures related to controls
over information technology operations, security and change management. To the extent necessary, we will hire additional staff
or reassign duties of existing staff in connection with our remediation efforts.
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Audit Committee of the
Board of Directors and Shareholders of
FONAR Corporation and Subsidiaries
We have audited FONAR Corporation and Subsidiaries
(the “Company”) internal control over financial reporting as of June 30, 2014, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992. The
Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Annual
Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company's internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency,
or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that
a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
The following material weakness has been identified and included in “Management's Report on Internal Control Over financial
Reporting”.
| 1) | Certain control procedures were not in place while others were unable to be verified due to performance
of the procedure not being sufficiently documented. As an example, some procedures requiring review of certain reports could not
be verified due to there being no written documentation of such review. Also there is insufficient documentation to verify sufficient
interaction of our internal accountants with our Audit Committee. In certain instances controls were not documented or put in place
timely. |
| 2) | Inadequate design of controls over period end financial reporting and disclosure processes. |
| 3) | We did not maintain adequate segregation of duties related to the approval and execution of certain
transactions impacting our financial reporting. Management believes that all transactions have been duly authorized, however there
was a lack of written evidence of such authorization, review and approval. |
These material weaknesses were considered in
determining the nature, timing and extent of audit tests applied in our audit of the Company's fiscal June 30, 2014 consolidated
financial statements, and this report does not affect our report dated September 29, 2014.
In our opinion, because of the effect of the
material weaknesses described above on the achievement of the objectives of the control criteria, the Company has not maintained
effective internal control over financial reporting as of June 30, 2014, based on criteria established in Internal Control-Integrated
Framework issued in 1992 by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of June 30, 2014
and 2013 and the related consolidated statements of income, stockholders' equity, and cash flows for the years ended June 30, 2014,
and 2013 of the Company and our report dated September 29, 2014 expressed an unqualified opinion on those financial statements.
/s/ Marcum LLP
Marcum LLP
New York, New York
September 29, 2014
FONAR CORPORATION AND SUBSIDIARIES
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT.
Directors serve from the date of their
election until the next annual meeting of stockholders and until their successors are elected and qualify. With the exception of
Dr. Raymond V. Damadian, who does not receive any fees for serving as a director, each director receives $20,000 per annum for
his or her service as a director. Officers serve at the discretion of the Board of Directors.
A majority of our board of directors is
composed of independent directors: Robert J. Janoff, Charles N. O’Data and Ronald G. Lehman. The outside directors also serve
as the members of the audit committee, which is a standing committee of the board of directors having a charter describing its
responsibilities. Mr. O’Data has been designated as the audit committee financial expert. His relevant experience is described
in his biographical information.
We have adopted a code of ethics applicable
to, among other personnel, our principal executive officer, principal financial officer, controllers and persons performing similar
functions. The code is designed to deter wrongdoing and to promote: 1. honest and ethical conduct, including the ethical handling
of actual or apparent conflicts of interest between personal and professional relationships; 2. full, fair, accurate, timely and
understandable disclosure in reports and documents that we file or submit to the Securities and Exchange Commission and in other
public communications we make; 3. compliance with applicable governmental laws, rules and regulations; 4. the prompt internal reporting
of violations of the code to an appropriate person or persons identified in the code and 5. accountability for adherence to the
code. We will provide a copy of the code to any person who requests a copy. A person may request a copy by writing to Fonar Corporation,
110 Marcus Drive, Melville, New York 11747, to the attention of the Legal Department or Investor Relations.
The officers and directors of the Company
are set forth below:
Raymond V. Damadian, M.D. | |
| 78 | | |
President, Treasurer, Chairman of the Board and a Director |
Claudette J.V. Chan | |
| 76 | | |
Director and Secretary |
Robert J. Janoff | |
| 87 | | |
Director |
Charles N. O'Data | |
| 78 | | |
Director |
Ronald G. Lehman | |
| 38 | | |
Director |
Raymond V. Damadian, M.D. has been the
Chairman of the Board and President of Fonar since its inception in 1978 and Treasurer since February, 2001. 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. Dr. Damadian 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. Dr. Damadian is a 1988 recipient of the National Medal of Technology and in 1989
was inducted into the National Inventors Hall of Fame, for his contributions in conceiving and developing the application of magnetic
resonance technology to medical applications including whole body scanning and diagnostic imaging. Dr. Damadian is the President,
Treasurer and director of HMCA and a Manager of IMPERIAL.
FONAR CORPORATION AND SUBSIDIARIES
Claudette J.V. Chan has been a Director
of Fonar since October 1987 and Secretary of Fonar since January 2008. Mrs. Chan was employed from 1992 through 1997 by Raymond
V. Damadian, M.D. MR Scanning Centers Management Company and since 1997 by HMCA, as "site inspector," in which capacity
she is responsible for supervising and implementing standard procedures and policies for MRI scanning centers. From 1989 to 1994
Mrs. Chan was employed by St. Matthew's and St. Timothy's Neighborhood Center, Inc., as the director of volunteers in the "Meals
on Wheels" program, a program which cares for the elderly. From approximately 1983 to 1989, Mrs. Chan was President of the
Claudette Penot Collection, a retail mail-order business specializing in women's apparel and gifts. Mrs. Chan practiced and taught
in the field of nursing until 1973, when her son was born. She received a bachelor of science degree in nursing from Cornell University
in 1960. Mrs. Chan is the sister of Raymond V. Damadian.
Robert J. Janoff has been a Director of
Fonar since February 1989. Mr. Janoff has been a self-employed New York State licensed private investigator for more than thirty-five
years and was a Senior Adjustor in Empire Insurance Group for more than 15 years until retiring from that position on July 1, 1997.
Mr. Janoff also served, from June 1985 to June 1991, as President of Action Data Management Strategies, Ltd., a supplier of computer
programs for use by insurance companies. Mr. Janoff was a member of the Board of Directors of Harmony Heights of Oyster Bay, New
York for over 25 years, which is a nonprofit residential school for girls with learning disabilities.
Charles N. O'Data has been a Director
of Fonar since February 1998. From 1961 to 1997, Mr. O'Data was the Vice President for Development for Geneva College, a liberal
arts college located in western Pennsylvania. In that capacity, he acted as the College's chief investment officer. His responsibilities
included management of the College's endowment fund and fund raising. In July 1997, Mr. O'Data retired from Geneva College after
36 years of service to assume a position of National Sales Executive for SC Johnson Company's Professional Markets Group, a unit
of SC Johnson Wax, and specialized in healthcare and education sales, a position he held until the spring of 1999. In his capacity
with SC Johnson he was responsible for sales to the nation’s three largest Group Purchasing Organizations which included
some 4,000 hospitals. Mr. O'Data presently acts as an independent financial consultant to various entities. Mr. O'Data served on
the board of The Medical Center, Beaver, Pennsylvania, now a part of Heritage Valley Health System, a 500 bed acute care facility,
for 26 years, three as its Chair. Mr. O’Data also served on the board of the Hospital Council of Western Pennsylvania, a
shared-services and group purchasing organization covering seven states. He founded The Beaver County Foundation, a Community Foundation,
in 1992, and serves as its President. Mr. O'Data is listed as a finance associate in the Middle States Association, Commission
on Higher Education. The commission is the formal accrediting body for higher education in the eastern region of the country. In
this capacity he evaluates the financial aspects of educational organizations. Mr. O’Data is a graduate of Geneva College,
where he received a B.S. degree in Economics in 1958.
Ronald G. Lehman, has been a Director
of Fonar since April, 2012, when he was unanimously appointed by the remaining four Directors to fill the vacancy resulting from
the death of former Director Robert Djerejian. From October, 2009 to the present, Mr. Lehman has served as Managing Director of
Investment Banking with Bruderman Brothers, Inc., 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.
FONAR CORPORATION AND SUBSIDIARIES
ITEM 11. EXECUTIVE COMPENSATION.
With the exception of the Chief Executive
Officer, the compensation of the Company's executive officers is based on a combination of salary and bonuses based on performance.
The Chief Executive Officer's compensation consists of a salary.
The Chief Executive Officer’s salary
varies only slightly and is by his own decision relatively low. It is not expected to increase materially in the near future. At
such time as we become consistently and sufficiently profitable or there is a reconsideration of our compensation policy, the compensation
payable to the Chief Executive Officer may be reconsidered. As presently existing, the Chief Executive Officer’s compensation
package includes no understandings with respect to bonuses, options or other incentives; as such, it is not subject to our general
policy later discussed.
The Board of Directors does not have a
compensation Committee. Dr. Raymond V. Damadian, President, Chief Executive Officer and 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 participates in the determination of compensation for our officers and management.
The Board of Directors has established an audit committee.
The members of the committee are Robert J. Janoff, Charles N. O'Data and Ronald G. Lehman.
Our compensation policy includes a combination
of salary, commissions, bonuses, stock bonuses and stock options, designed to incentivize our employees. There is no universal
plan applicable to all of our employees. The fixed and variable components of our employees’ compensation tend to be individualized,
based on a combination of the employees’ performance, responsibilities and position, our assessment of how best to motivate
a person in such a position and the needs and preferences of the particular employees, as negotiated between employees and their
supervisors or management.
There is set forth in the following Summary
Compensation Table the compensation provided by us during fiscal 2014 to our Principal Executive Officer, who also serves as our
acting Principal Financial Officer. There is set forth in the following Outstanding Equity Awards Table and Director Compensation
Table the required information.
I. SUMMARY COMPENSATION TABLE
Name and All Other Principal Position (a) | |
Year (b) | |
Salary ($) (c) | |
Bonus ($) (d) | |
All Other Compensation | |
Total Compensation |
Raymond V, | |
| 2014 | | |
$ | 36,002.38 | | |
| — | | |
| — | | |
$ | 36,002.38 | |
Damadian | |
| 2013 | | |
$ | 36,111.30 | | |
| — | | |
| — | | |
$ | 36,111.30 | |
PEO/PFO | |
| 2012 | | |
$ | 35,934.76 | | |
| — | | |
| — | | |
$ | 35,934.76 | |
II. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Name | |
Number of Securities Underlying Unexercised Options (#) Exercisable
(a) | |
Option Exercise Price ($) (b) | |
Option Expiration Date (c) |
Raymond V. Damadian, PEO/PFO | |
| 0 | | |
| 0 | | |
N/A |
FONAR CORPORATION AND SUBSIDIARIES
III. DIRECTOR COMPENSATION
Name | |
Fees Earned or Paid in Cash ($) | |
Total ($) |
Raymond V.Damadian | |
| 0 | | |
| 0 | |
Claudette J.V.Chan | |
$ | 19,999.98 | | |
$ | 19,999.98 | |
Robert J.Janoff | |
$ | 20,000.24 | | |
$ | 20,000.24 | |
Charles N. O’Data | |
$ | 20,000.24 | | |
$ | 20,000.24 | |
Ronald G. Lehman | |
$ | 19,999.98 | | |
$ | 19,999.98 | |
EMPLOYEE COMPENSATION PLANS
Equity Compensation Plan Information as
of June 30, 2012
| |
(a) | |
(b) | |
(c) |
Plan category | |
Number of securities to be issued upon exercise of outstanding options, warrants and rights | |
Weighted-average exercise price of outstanding options, warrants and rights | |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) |
Equity compensation plans approved by security holders | |
| 14,022 | | |
$ | 27.76 | | |
| 130,943 | |
Equity compensation plans not approved by security holders | |
| — | | |
| N/A | | |
| — | |
Total | |
| 14,022 | | |
| 27.76 | | |
| 130,943 | |
Fonar’s 2002 Incentive Stock Option
Plan, adopted on July 1, 2002, was intended to qualify as an incentive stock option plan under Section 422A of the Internal Revenue
Code of 1954, as amended. The 2002 Incentive Stock Option Plan permitted the issuance of stock options covering an aggregate of
100,000 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 was granted, are nontransferable, are exercisable for a period not exceeding ten years and expire
upon the voluntary termination of employment. The 2002 Stock Option Plan terminated on June 30, 2012, and the remaining 6,610 options
granted under this plan expired during the year ended June 30, 2014.
Fonar’s 2005 Incentive Stock Option
Plan, adopted on February 15, 2005, is 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 will terminate on February 14, 2015. As of June 30, 2014, 70,000 shares of common stock of Fonar were available
for future grant under this plan.
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, 2014, 960,033 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 5, 2014.
Name and Address of Beneficial Owner (1) | |
Shares Beneficially Owned | |
Percent of Class |
Raymond V. Damadian, M.D. c/o Fonar Corporation Melville, New York Director, President, Treasurer CEO, 5% + Stockholder | |
| | | |
| | |
Common Stock | |
| 112,952 | | |
| 1.87 | % |
Class C Stock | |
| 382,447 | | |
| 99.98 | % |
Class A Preferred | |
| 19,093 | | |
| 6.09 | % |
Claudette Chan Director and Secretary | |
| | | |
| | |
Common Stock | |
| 106 | | |
| * | |
Class A Preferred | |
| 32 | | |
| * | |
Robert J. Janoff Director | |
| | | |
| | |
Common Stock | |
| 2,000 | | |
| * | |
Class A Preferred | |
| 79 | | |
| * | |
Charles N. O'Data Director | |
| | | |
| | |
Common Stock | |
| 528 | | |
| * | |
Ronald G. Lehman Director | |
| | | |
| | |
Common Stock | |
| 0 | | |
| * | |
All Officers and Directors as a Group (5 persons) | |
| | | |
| | |
Common Stock | |
| 115,936 | | |
| 1.92 | % |
Class C Stock | |
| 382,447 | | |
| 99.98 | % |
Class A Preferred | |
| 19,204 | | |
| 6.13 | % |
___________________________
* Less than one percent
1. Address provided for each beneficial
owner owning more than five percent of the voting securities of Fonar.
FONAR CORPORATION AND SUBSIDIARIES
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.
Background.
Between 1990 and 1996, Raymond V. Damadian,
M.D. MRI Scanning Centers Management Company, also referred to as “RVDC”, a Delaware corporation of which Dr. Damadian
was the sole stockholder, director and President, purchased and leased scanners from Fonar to establish a network of professional
corporations operating MRI scanning centers, also referred to as the "Centers", in New York, Florida, Georgia and other
locations. Dr. Raymond V. Damadian is the Chairman, President and principal stockholder of Fonar and was also the owner, director
and President of each of these professional corporations. RVDC provided the necessary management and the scanners to the Centers,
although in certain situations, a Center would acquire the scanner directly from Fonar.
ACQUISITION OF RVDC.
Effective June 30, 1997, Fonar’s
wholly-owned subsidiary, Health Management Corporation of America, also referred to as "HMCA", formerly known as U.S.
Health Management Corporation, acquired RVDC by purchasing all of the issued and outstanding shares of RVDC from Dr. Damadian for
400 shares of the Common Stock of Fonar. The transactions can be rescinded by Dr. Damadian, however, in the event of a change of
control in Fonar or the bankruptcy of Fonar. There is no time limit on the right to rescind. In connection with the transaction,
Fonar granted RVDC a nonexclusive royalty free license to Fonar’s patents and software. These licenses may be terminated
by Fonar in the event of the bankruptcy of RVDC or a change in control of RVDC.
OTHER AGREEMENTS.
Pursuant to HMCA’s management agreements
with the Centers, HMCA provides to the Centers comprehensive 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 provides service for the scanners at the Centers through Fonar. In total, as of September 5, 2014, 24 MRI Centers had management
agreements with HMCA.
The fees charged to the Centers under
the management agreements are flat fees charged on a monthly basis. These fees ranged from $100,000 to $242,340 per month in fiscal
2014.
Dr. Damadian owns three of the Centers
in Florida. The Centers owned by Dr. Damadian in Florida pay flat rate monthly fees ranging from $194,050 to $221,266 to HMCA per
month. These fees are renegotiable on an annual basis.
During the fiscal years ended June 30,
2014 and June 30, 2013 the net revenues received by HMCA from the MRI Centers owned by Dr. Damadian were approximately $9.3 million
and $7.9 million respectively.
Dr. Damadian owns a 1.667% interest
in Imperial’s Class A membership interests and a 1.25% interest in HDM’s Class A membership interests. Dr. Damadian
is also a Manager of HDM.
Timothy Damadian, a son of Dr. Damadian,
is one of the owners of Tritech Healthcare Management, which performs billing and collection services with respect to No-Fault
and Workers’ Compensation claims of HMCA’s (and HDM’s) clients. The monthly fee charged to HMCA is $30,000 and
the monthly charge to HDM is $55,000.
Bensonhurst MRI Limited Partnership, in
which Timothy Damadian holds an interest, was party to an agreement with Fonar for the service and maintenance of its Upright MRI®
Scanner for a price of $110,000 per annum. Bensonhurst continues to be party to a service agreement with Fonar for $110,000 per
annum.
Integrity Healthcare Management Holdings,
LLC, of which Timothy Damadian is an owner, has a 12% interest in Watchtower Entrepreneurs LLC. During fiscal 2014, Watchtower
agreed to sell equipment and components to Fonar for a total of $700,000.
FONAR CORPORATION AND SUBSIDIARIES
Integrity Healthcare Management Holdings,
LLC, also has a 14.967% interest in Imperial’s Class A membership interests and a 10.000% interest in HDM’s Class
A membership interests.
Ronald Lehman, a Director of Fonar, holds
a .0625% interest in HDM’s Class A membership interests. In addition, RGL Industries, Inc., a company of which he is an owner,
holds a .417% interest in Imperial’s Class A membership interests.
Claudette J.V. Chan, a Director and the
Secretary of Fonar, owns a .0625% interest in HDM’s membership interests.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES.
Audit Fees
The aggregate fees billed by Marcum LLP for the audit of our
annual consolidated financial statements for the fiscal year ended June 30, 2014 and the reviews of the financial statements included
in our Forms 10-Q for the fiscal year ended June 30, 2014 were $628,772.
The aggregate fees billed by Marcum LLP for the audit of our
annual financial statements for the fiscal year ended June 30, 2013 and the reviews of the financial statements included in our
Forms 10-Q for the fiscal year ended June 30, 2013 were $542,692.
Audit Related Fees
No fees were billed by Marcum LLP for the fiscal years ended
June 30, 2014 or June 30, 2013 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, 2014 or June 30, 2013 for designing, operating, supervising or implementing any of our financial information systems or
any hardware or software systems for our financial information.
Tax Fees
The aggregate fees billed by Marcum LLP for tax compliance,
tax advice and tax planning in the fiscal year ended June 30, 2014 were $66,580.
The aggregate fees billed by Marcum LLP for tax compliance,
tax advice and tax planning in the fiscal year ended June 30, 2013 were $147,979.
All Other Fees
The aggregate fees billed by Marcum LLP for all other services
rendered by them during the fiscal years ended June 30, 2014 and June 30, 2013 were $0 and $95,929, respectively. In fiscal 2013
these services included services in connection with the registration of securities, employee benefit plan audits and reviews and
procedures that we requested Marcum LLP to undertake to provide assurances on matters not required by laws or regulations.
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 fiscal 2013 and 2012 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, 2014 and 2013.
Consolidated Statements of Income
for the Years Ended June 30, 2014 and 2013.
Consolidated Statements of Stockholders'
Equity for the Years Ended June 30, 2014 and 2013.
Consolidated Statements of Cash
Flows for the Years Ended June 30, 2014 and 2013.
Notes to Consolidated Financial
Statements.
Information required by schedules
called for under Regulation S-X is either not applicable or is included in the consolidated financial statements or notes to the
financial statements.
b) REPORTS ON FORM 8-K
1. Registrant’s
Report on Form 8-K containing the
Company’s Earnings
Report for the first nine months of Fiscal 2014. May 15, 2014. Commission File No. 0-10248.
2. Registrant’s
Report on Form 8-K reporting the results of the election of directors and selection of auditors at the annual meeting of stockholders.
June 24, 2014. Commission File No. 0-10248.
c) EXHIBITS
3.1 Certificate of
Incorporation, as amended, of the Registrant incorporated by reference to Exhibit 3.1 to the Registrant's registration statement
on Form S-1,Commission File No. 33-13365.
3.2 Article Fourth
of the Certificate of Incorporation, as amended, of the Registrant incorporated by reference to Exhibit 4.1 to the Registrant's
registration statement on Form S-8, Commission File No. 33-62099.
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.
4.3 Form of 4% Convertible
Debentures due June 30, 2002 incorporated by reference to Exhibit 4.1 of the Registrant’s current report on Form 8-K filed
on June 11, 2001. Commission File No. 0-10248.
4.4 Form of Purchase
Warrants incorporated by reference to Exhibit 4.2 of the Registrant’s current report on Form 8-K filed on June 11, 2001.
Commission File No. 0-10248.
4.5 Form of Callable
Warrants incorporated by reference to Exhibit 4.3 of the Registrant’s current report on Form 8-K filed on June 11, 2001.
Commission File No. 0-10248.
FONAR CORPORATION AND SUBSIDIARIES
4.6 Form of Replacement
Callable Warrants incorporated by reference to Exhibit 4.7 of the Registrant’s registration statement on Form S-3, Commission
File No. 333-10677.
4.7 Form of Amended
and Restated Purchase Warrant for The Tail Wind Fund, Ltd. incorporated by reference to Exhibit 4.7 of the Registrants registration
statement on Form S-3, Commission File No. 333-116908.
4.8 Form of Amended
and Restated Purchase Warrant for Placement Agent and Designees incorporated by reference to Exhibit 4.8 of the Registrant’s
registration statement on Form S-3, Commission File No. 333-116908.
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 1983 Nonstatutory
Stock Option Plan incorporated by reference to Exhibit 10 (a) to Form 10-K for the fiscal year ended June 30, 1983, Commission
File No. 0-10248, and amendments thereto dated as of March 7, 1984 and dated August 22, 1984, incorporated by referenced to Exhibit
28 (a) to Form 10-K for the year ended June 30, 1984, Commission File No. 0-10248.
10.3 1984 Incentive
Stock Option Plan incorporated by reference to Exhibit 28 (c) to Form 10-K for the year ended June 30, 1984, Commission File No.
0-10248.
10.4 1986 Nonstatutory
Stock Option Plan incorporated by reference to Exhibit 10.7 to Form 10-K for the fiscal year ended June 30, 1986, Commission File
No. 0-10248.
10.5 1986 Stock Bonus
Plan incorporated by reference to Exhibit 10.8 to Form 10-K for the fiscal year ended June 30, 1986, Commission File No. 0-10248.
10.6 1986 Incentive
Stock Option Plan incorporated by reference to Exhibit 10.9 to Form 10-K for the fiscal year ended June 30, 1986, Commission File
No. 0-10248.
10.7 Lease Agreement,
dated as of August 18, 1987, between the Registrant and Reckson Associates incorporated by reference to Exhibit 10.26 to Form 10-K
for the fiscal year ended June 30, 1987, Commission File No. 0-10248.
10.8 1993 Incentive
Stock Option Plan incorporated by reference to Exhibit 28.1 to the Registrant's registration statement on Form S-8, Commission
File No. 33-60154.
10.9 1993 Non-Statutory
Stock Option Plan incorporated by reference to Exhibit 28.2 to the Registrant's registration statement on Form S-8, Commission
File No. 33-60154.
10.10 1993 Stock Bonus
Plan incorporated by reference to Exhibit 28.3 to the Registrant's registration statement on Form S-8, Commission File No. 33-60154.
10.11 1994 Non-Statutory
Stock Option Plan incorporated by reference to Exhibit 28.1 to the Registrant's registration statement on Form S-8, Commission
File No. 33-81638.
10.12 1994 Stock Bonus
Plan incorporated by reference to Exhibit 28.2 to the Registrant's registration statement on Form S-8, Commission File No. 33-81638.
10.13 1995 Non-Statutory
Stock Option Plan incorporated by reference to Exhibit 28.1 to the Registrant's registration statement on Form S-8, Commission
File No. 33-62099.
10.14 1995 Stock Bonus
Plan incorporated by reference to Exhibit 28.2 to the Registrant's registration statement on Form S-8, Commission File No. 33-62099.
10.15 1997 Non-Statutory
Stock Option Plan incorporated by reference to Exhibit 28.1 to the Registrant's registration statement on Form S-8, Commission
File No.: 333-27411.
10.16 1997 Stock Bonus
Plan incorporated by reference to Exhibit 28.2 to the Registrant's registration statement on Form S-8, Commission File No: 333-27411.
10.17 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.
FONAR CORPORATION AND SUBSIDIARIES
10.18 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.
10.19 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.
10.20 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.
10.21 2000 Stock Bonus
Plan incorporated by reference to Exhibit 99.1 to the Registrant’s registration Statement on Form S-8, Commission File No.:
333-66760.
10.22 2002 Stock Bonus
Plan incorporated by reference to Exhibit 99.1 to the Registrant’s registration statement on Form S-8, Commission File No.:
333-89578.
10.23 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.
10.24 2003 Stock Bonus
Plan incorporated by reference to Exhibit 99.1 to the Registrant’s registration statement on Form S-8, Commission File No:
333-106626.
10.25 2003 Supplemental
Stock Bonus Plan incorporated by reference to Exhibit 99.1 to the Registrant’s registration statement on Form S-8, Commission
File No: 333-106626.
10.26 2004 Stock Bonus
Plan incorporated by reference to Exhibit 99.1 to the Registrant’s registration statement on Form S-8, Commission File No.
333-112577.
10.27 2005 Stock Bonus
Plan incorporated by reference to Exhibit 99.1 to the Registrant’s registration statement on Form S-8, Commission File No.
333-122859.
10.28 2005 Supplemental
Stock Bonus Plan incorporated by reference to Exhibit 99.1 to the Registrant’s registration statement on Form S-8, Commission
File No. 333-126658.
10.29 Purchase Agreement
dated May 24, 2001 by and between the Registrant and The Tail Wind Fund Ltd. incorporated by reference to Exhibit 10.1 to the Registrant’s
current report on Form 8-K filed June 11, 2001. Commission File No. 0-10248.
10.30 Registration
Rights Agreement dated May 24, 2001 by and among the Registrant, The Tail Wind Fund Ltd. and Roan Meyers, Inc. incorporated herein
by reference to Exhibit 10.2 to the Registrant’s current report on Form 8-K filed June 11, 2001. Commission File No. 0-10248.
10.31 Amendment to
Callable Warrant dated April 28, 2004 by and between The Tail Wind Fund, Ltd. and the Registrant incorporated by reference to Exhibit
10.17 to the Registrant’s registration statement on Form S-3, Commission File No. 333-116908.
10.32 First Amendment
to Purchase Warrant dated April 28, 2004 by and between The Tail Wind Fund, Ltd. and the Registrant incorporated by reference to
Exhibit 10.18 to the Registrant’s registration statement on Form S-3, Commission File No. 333-116908.
10.33 Form of First
Amendment to Purchase Warrant dated June 1, 2004 by and between each of Roan/Meyers Associates, L.P. and its designees and the
Registrant, incorporated by reference to Exhibit 10.19 to the Registrant’s registration statement on Form S-3, Commission
File No. 333-116908.
10.34 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.
10.35 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.
10.36 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.
FONAR CORPORATION AND SUBSIDIARIES
10.37 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.
10.38 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. 10.39 Modification to Operating Agreement for Health Diagnostics Management, LLC. See Exhibits.
10.40 Purchase Agreement
dated March 5, 2013 among Health Diagnostics Management, LLC, Health Diagnostics, LLC and others. Incorporated by reference to
Exhibit 10.1 to the Registrant’s Form 8-K filed March 11, 2013. Commission File No. 0-10248.
14.1 Code of Ethics,
incorporated by reference to Exhibit 14.1 of Registrant’s Form 10-K for the fiscal year ended June 30, 2004, Commission File
No.: 0-10248.
21.1 Subsidiaries
of the Registrant. See Exhibits.
23.1 Independent Registered
Public Accounting Firm’s Report See Exhibits.
31.1 Section 302 Certification.
See Exhibits.
32.1 Section 906 Certification.
See Exhibits.
SIGNATURES
Pursuant to the requirements of Section
13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: September 29, 2014
By:/s/Raymond V.
Damadian
Raymond V. Damadian,
President
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signature | |
Title | |
| Date | |
/s/Raymond V. Damadian Raymond V. Damadian, | |
Chairman of the Board of Directors, President, Director Principal Executive Officer and Acting Principal Financial Officer | |
| September 29, 2014 | |
/s/Claudette J.V. Chan | |
Director | |
| September 29, 2014 | |
Claudette J.V. Chan | |
| |
| | |
/s/ Robert J. Janoff | |
Director | |
| September 29, 2014 | |
Robert J. Janoff | |
| |
| | |
/s/ Charles N. O'Data | |
Director | |
| September 29, 2014 | |
Charles N. O'Data | |
| |
| | |
/s/Ronald G. Lehman | |
Director | |
| September 29, 2014 | |
Ronald G. Lehman | |
| |
| | |
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
211 Quality
Circle, Suite 210
College
Station, TX 77845
Shareholder
Services Number(s): 800 962 4284
Investor
Centre™ portal: www.computershare.com/investor
Auditors
Marcum
LLP
New York,
New York
Board of
Directors
Raymond
V. Damadian, M.D.
Chairman
of the Board
Claudette
J.V. Chan, Director
Robert
Janoff, Director
Charles
N. O'Data, Director
Ronald
G. Lehman, Director
Officers
Raymond
V. Damadian, M.D.
President,
Chief Executive Officer and Treasurer
Claudette
J.V. Chan
Secretary
Fonar (NASDAQ:FONR)
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