November 9, 2009
VIA EDGAR &
UNITED PARCEL DELIVERY
Mr. Brian Cascio
Accounting Branch Chief
Division of Corporation Finance
Mail Stop 3030
Securities and Exchange Commission
Washington, D.C. 20549
Re: Fonar Corporation
Form 10-K for the fiscal year ended June 30, 2009
Filed October 5, 2009
File No. 000-10248
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Dear Mr. Cascio:
I am writing in response to the Commission's comment letter dated October
27, 2009, addressed to the attention of Dr. Raymond V. Damadian, President and
Chief Executive Officer of Fonar Corporation. The responses contained in our
letter are presented in the same order as in the Commission's letter. Amendments
to our Form 10-K for the fiscal year ended June 30, 2009 are being filed
concurrently herewith.
FORM 10-K FOR FISCAL YEAR ENDED JUNE 30, 2009
Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations, page 29.
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Results of Operations, Fiscal 2009 compared to Fiscal 2008, page 31.
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Comment No. 1. We note the significant improvement in operating results of
- -------------- the medical equipment segment which is attributed to an
increase in scanner sales and a decrease in total costs and
expenses. Please tell us and revise future filings to
disclose the reasons for the significant decrease in costs
and expenses. We note that you instituted a significant cost
cutting program, however the specifics of this program and
its impact on your operating expenses is not discussed
within the results of operations.
Response No. 1. The decrease in expenses was due to the cost cutting
- --------------- programs we Instituted. In June of 2008, a substantial
portion of our employees were laid off, resulting in a
reduction of approximately $3.5 million in fiscal 2009 in
salaries, payroll taxes and consulting fees. Fonar also
significantly reduced its advertising and participation in
trade shows (recognizing a savings of approximately $1.8
million). Savings were realized in office and other expenses
as well, including telephone expenses and professional fees.
We also were able to reduce costs for scanner parts and
components by taking advantage of opportunities to acquire
these items at low costs.
Future filings will be revised accordingly to disclose the
reasons for any decreases or increases.
Note 1: Description of Business and Liquidity and Capital Resources, page 56
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Liquidity and Going Concern, page 56
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Comment No. 2. We reference the disclosure here and on page 36 that you
- -------------- instituted an aggressive program of cost cutting and
following the end of fiscal 2008 and that you implemented a
restructuring program during 2008. Please tell us where you
have provided the disclosures required by FASB ASC 420-
10-50 (SFAS 146) and SAB Topic 5.P.4.
Response No. 2. When the Company stated that it instituted an aggressive
- --------------- program of cost cutting and implemented a restructuring
program it was simply stating that due to the economic
conditions , the current recession and low volume of sales
for its MRI scanners, it reduced its workforce to a more
cost effective level. The reductions were not associated
with any exit or disposal activities nor are there any plans
for an exit or disposal for a business or segment.
The Company will clarify the language used in future
filings.
Note 2. Summary of Significant Accounting policies, page 58
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Patents and Copyrights, page 59
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Comment No. 3. Please tell us and revise future filings to disclose the
- -------------- nature of the capitalized patent costs and the basis for
capitalization. Please refer to FASB ASC 350-30-25-3
Response No. 3. Based on FASB ASC 350-30-25-3, the Company will clarify in
- --------------- future filings the following: The costs of applying for
patents, including legal and filing fees, are capitalized
and once the patent is granted, will be amortized on a
straight line basis over the lesser of the patent's economic
or legal life (15 to 17 years). If a patent is denied,
capitalized patent costs are written off in the period in
which a patent application is denied. Expenses for the
development of technology are charged to operations as
incurred. Capitalized costs will be expensed if patents are
not granted or it is determined that the patent is impaired.
Revenue Recognition page 61
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Comment No. 4. We note the disclosure that revenue under management
- -------------- contracts is recognized "based upon contractual agreements
for management services..." and that some of your contracts
are fixed monthly fees and others are based upon units of
activity. For fees based upon units of activity, please tell
us and revise future filings to disclose the activity that
the fee is based upon (e.g. number of scans) and how the
information is determined.
Response to No. 4. The fee is based on the number of scans. The number of scans
- ------------------ is determined by the following steps:
After the patients fill out a site's sign in sheet and the
MRI scan is completed, a copy of the transaction log is sent
on a daily basis to a Billing & Collection manager and an
accounting assistant of the Company. The accounting
assistant extracts the total number of scans and keys the
information into a spreadsheet.
The amount per scan is set forth in the management
agreement.
Note 5: Management Fee Receivable and Accounts Receivable, Page 73
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Comment No. 5. Please tell us and revise future filings to disclose why you
- -------------- provide unaudited financial information of the
unconsolidated managed medical practices and why you believe
that this information is meaningful to investors. For
example, clarify if your operations are materially dependent
on management fee revenue from these entities. In that
regard, we see that management fee revenue is based upon
units of activity rather that the financial results of the
practices.
Response No. 5. Information is provided for informational purposes and will
- --------------- be eliminated with the next 10Q.
Note 8: Property and Equipment, page 77
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Comment No. 6. We see that you have $9.6 million of research, development
- -------------- and demonstration equipment. Please tell us your accounting
policy for demonstration equipment, including the useful
life of the assets and where the amortization expense is
recorded in your statement of operations. Tell us if you
loan or sell the demonstration equipment to customers and,
if so, how you account for these transactions.
Response No. 6. The demonstration equipment is for providing sales
- --------------- representatives and potential customers with a demonstration
of the product which is a common practice among technology
companies. Fonar's demonstration equipment is its trade show
booth. The useful life for this equipment is three years.
The amortization expense was included in the depreciation
and amortization expenses in the statement of operations.
Management does not intend to sell the unit because it is
not a fully operational unit. As of June 30, 2009, the net
book value of the demonstration equipment was zero.
Note 11: Capital Stock, page 81
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Stock Bonus Plans, page 85
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Comment No. 7. We see from the statement of stockholder's deficit that you
- -------------- issued shares under the stock bonus plan. Please revise
future filings to disclose your accounting for the
issuances.
Response No. 7. The Company will use the straight-line attribution method to
- --------------- recognize share-based compensation costs over the requisite
service period of the award. The exercise price of options
is equal to the market price of our common stock (defined as
the closing price reported by the NASDAQ System) on the date
of grant.
We will revise future filings to disclose the accounting for
stock issuances under stock bonus plan.
Item 9A. Controls and Procedures, page 108
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Comment No. 8. We note that you have provided a conclusion on the
- -------------- effectiveness of your "disclosure controls and procedures
over financial reporting." Please revise to disclose the
conclusions of the registrant's principal executive and
principal financial officers, or persons performing similar
functions, regarding the effectiveness of the registrant's
disclosure controls and procedures as of June 30, 2009.
Refer to Rule 307 of Regulation S-K.
Response No. 8. At the beginning of the second paragraph (third paragraph in
- --------------- the amended 10-K) of Item 9A, we state that "[o]ur principal
executive and financial officers have concluded that our
disclosure controls and procedures over financial reporting
were effective as of June 30, 2009".
Comment No. 9. Please revise to include the following disclosures in
- -------------- management's report on internal control over financial
reporting as of June 30, 2009:
* A statement of management's responsibility for
establishing and maintaining adequate internal control
over financial reporting for the registrant;
* A statement identifying the framework used by
management to evaluate the effectiveness of the
registrant's internal control over financial reporting.
Refer to Rule 308(T) of Regulation S-K.
Response No. 9. We have amended section 9A of our 10-K for the fiscal year
- --------------- ended June 30, 2009 to comply with the Commission's
comments.
Exhibit 31.1 and 31.2
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Comment No. 10. We note that you omitted the language in paragraph 4 of Item
- ---------------- 601(b)(31)(i) of Regulation S-K that refers to internal
control over financial reporting. Please note that you
should also comply with any relevant futures comments in the
filed amendment.
Response No. 10. Exhibit 31.1 has been amended to include the language
- ---------------- referring to internal control over financial reporting.
As requested, Fonar Corporation acknowledges that:
1. The Company is responsible for the adequacy and
accuracy of the disclosure in the filing;
2. Staff comments or changes to disclosure in response to
staff comments do not foreclose the Commission from
taking any action with respect to the filing; and
3. The Company may not assert staff comments as a defense
in any proceeding initiated by the Commission or any
person under the federal securities laws of the United
States.
Please feel free to call me at (631) 694-2929 in connection with your
comments and our responses.
Very truly yours,
/s/ Henry T. Meyer
Henry T. Meyer
General Counsel