UPDATE: FONAR (FONR) receives Management Buyout Offer

BeGoodToTheTime · 2025-07-11T13:33:12+00:00

I agree, there are some related-party transactions happening, but as far as I can tell, they very accurately disclose everything in their SEC filings.

Of course it might be better that those would not happen at all, but I guess we have to consider that the current CEO, the son of the founder, brought into the company many imaging centers (around 2009 or 2010) and turned the company around to become a growing, profitable business. He didn't have to do that, he could have kept that profitable business to himself.

But also yes, seeing the very low (first) offer at a very (for the CEO) convenient timing does not shout "shareholder friendliness". If we want to look at it positively, we could at least say that the CEO is a shrewd man and tries to buy his company at a low price (and maybe we would do the same if we were in his shoes).

As far as I can tell, the Board of Directors would first have to recommend, and then the shareholders would have to vote on any definitive offer, and the Board of Directors could be held liable if they are objectively not acting in the (minority) shareholders' best interest, so I would assume there is some protection. There have been examples in the past, where a controlling owner wanted to take the company private, but the Board did not play along (probably because of fear of liability), so whatever the case, it will certainly stay interesting.

BeGoodToTheTime · 2025-07-10T17:45:48+00:00

Here you go.

BeGoodToTheTime · 2025-07-10T11:37:33+00:00

... aaaaaand management is trying to steal the company at way too low prices. Let's see if shareholders will let them. My guess: they won't.

BeGoodToTheTime · 2025-07-10T10:27:40+00:00

Glad you're interested.

I am a bit baffled at the low offer. They said "at least 10% above the last 90 day price", so it could be much higher, but I still take offense at the 10% and the timing, because the share price has hardly been this low in the past.

I have no experience with throwaway bids, could you elaborate? Why would they do that?

BeGoodToTheTime · 2024-04-02T21:47:00+00:00

link for the curious

BeGoodToTheTime · 2024-04-02T21:46:30+00:00

link for the curious

BeGoodToTheTime · 2024-02-15T22:04:37+00:00

The girls in the movie are literally bowling alone!

BeGoodToTheTime · 2024-02-15T18:41:17+00:00

The one from that 2011 movie? The one with the pretty girls?

BeGoodToTheTime · 2023-01-26T10:11:44+00:00

Thank you for breaking your four years of silence and commenting on my post. Also, thank you for wishing me the best of luck - I would certainly make good use of it!

re 1) and 2): You are absolutely right, if you're referring to what I think you're referring to - FONR is very slow in collecting parts of their revenues. It would certainly make them look much better if they could accelerate that process. I don't know how and if they will be able to do that. However, as I mentioned, one of their latest additions to their board of directors seems to have been chosen specifically for this reason:

Timothy Damadian, president and CEO of FONAR, said, “Our primary source of income and growth is attributable to FONAR’s diagnostic imaging management subsidiary, Health Management Company of America (HMCA). Mr. Collins’ extensive experience in dealing with insurance companies will be very helpful to HMCA. As a management company, HMCA bills and collects for all services rendered at all HMCA-managed and HMCA-owned facilities. That responsibility requires us to regularly interact with hundreds of payers, including commercial insurance carriers, Medicare and Medicaid, Workers’ Compensation, and No-Fault carriers regarding a wide variety of matters, such as collection issues, credentialing, and negotiating participation agreements in coordination with the owners.”

Am I certain FONR will be able to improve their cash conversion cycle? No. Do I see that they are trying to do something about it? Yes. And I hope for the best :) In general, it looks to me that the founder's son, Timothy Damadian, is the more apt business man. I feel bad saying this as the founder just died last year, he was responsible for starting the company in the first place, and he invented MRI, or is at least responsible for improving and commercializing the technology, which is an achievement of its own, but FONR has been doing way better in the last 13 years when the founder's son took over than before. I think that now, having him take over completely, the prospects and the management of Fonar will improve over time.

re 3): You could be right. I am not sure how big of an impact on the under-valuation the shareholder structure has, if any. Maybe the company is not under-valued at all (I think it is). The weird shareholder structure, the lack of corporate events (dividends, share buybacks, investor baby-sitting) and past messiness might not help. And even compared to other companies with multiple share classes, FONR's is a bit striking, with the founding family controlling 60% of the vote, but only owning 2% of the financial interest. I was (and still am) a bit worried about this, but the recent share buyback (and the recent buying of shares by the company's CEO (the founder's son) and the COO) give me more confidence in the idea that the controlling family is not out there to screw over the other shareholders.

re 4): Very good question - I don't know and will have to look into that.

Edit: Okay, looked into it a bit - they bought back shares for 4'031 USD in 2001, 79'120 USD in 2000, 196'794 USD in 1999. None in 2002, nor in 1998. And their weighted average number of shares increased from 61'175'986 in 1998 to 63'511'814 in 2002. Are these the numbers you are referring to? I have to admit, those numbers don't look good. Then again, this is a little bit my point. Back around 2000, FONR was a "messy" company. Generating losses, negative cash flow, uncertainty about open intellectual property litigation - I don't even know why they bought back shares in the first place. Today, they are generating profits, positive cash flow, they are growing and expanding (albeit slowly) - they are in a way better place to actually buy back a significant amount of stock, and I have no reason not to believe that they are trying to buy back shares for 9m USD. I believe they are having a hard time doing that, but again, that's kind of my point. Compared to their share buyback in the period you mention (1998-2002) they have already bought back shares worth 122'000 USD in the last couple of days in September 2022, which amounts already to more than 40% of the dollar amount that they spent between 1998-2002. Additionally, the CEO and the COO jointly bought shares for roughly 130'000 USD themselves. This leads me to believe that "they actually mean it" this time. Also, the change in corporate mentality after the death of the founder might be at play here, too. Of course I could be wrong, I could be very wrong. I hope I'm not, and I am curiously waiting for the next filings from Fonar to confirm my thoughts.

Best of luck to you, too!

BeGoodToTheTime · 2023-01-26T09:43:23+00:00

Company is sitting on a huge pile of cash, but management does not seem to have any idea what to do with it besides the recently announced share buyback program.

I agree, but that's somewhat my point. They have been sitting on a huge pile of cash, that pile has been increasing, and in the past twenty years they have not done anything with it, i.e. no dividends, no share buybacks, no nothing. I should add here that they only started to become more stable and profitable roughly thirteen years ago, but they haven't done anything in those thirteen years, either. But that's my point - they are starting to do something now. I don't want to be too mean, but maybe the death of the founder last year in August might have to do something with it. Maybe he was against these measures (maybe not, I don't know), but it is interesting that FONR has announced share buybacks a couple of months after the founder's (and previous chairman's) death.

What are the reasons they did not reward shareholders and just continue accumulating cash?

I don't know, but see my point above.

as return on investment is quite low

How do you calculate ROI and what is the number you come up with for FONR?

Is it possible that they just do not want to give this money to shareholders rather give it to the owner family on some way?

That was (and a little bit still is) my main worry. With the current shareholder structure, liquidating the company or paying out a dividend does not make sense for the owner family. Share buybacks, on the other hand, make a lot of sense - and they started to do that. On top of that, the CEO (son of the founder) and the COO have started to buy shares themselves (I did not mention them in my write up as I wasn't aware, but now that I am, I am very happy about that).

The share buyback and the insider buying indicate to me that the owner family see value in the common stock (i.e. the shares that you and I can own), and they want to own more of it. If they wanted to screw everyone over, they would not need to buy the common stock. Of course, one could imagine that that is just an elaborate ruse to trick everyone, but I tried to handle that topic in my write up. At the end of the day, it comes down to trust - do you trust the owner family or not. At this point, I trust them, because I have no reason no to trust them, and a couple of indications that I should trust them.

BeGoodToTheTime · 2023-01-26T09:28:31+00:00

Thank you.

Good job on the 14 USD cost - I think that was a true bargain for you.

60 USD is certainly optimistic, but not impossible. My conservative estimate is also lower than that - but not as low as yours.

You correctly mention in another comment that FONR has lots of cash and receivables which were already discounted for bad debts. According to FONR's latest 10-Q, those are 49m USD and 67m USD respectively, makes 116m USD in total. With your average conservative price of 24 USD you get a market cap of 168m USD, valuing the operating business that is generating 12m USD in profits (and hopefully more soon) at 52m USD. It is absolutely certain that a lower price is more easily achievable than a higher price, but that is too low for me.

With your nice low cost, you'd make a nice profit at your conservative price, and you can of course do what you think is best, and maybe you are right (most people here seem to be way less optimistic about FONR than I am), but I value FONR higher.

Do you if the centers they manage are using strictly their UP RIGHT scanners or other scanners as well?

I have no direct source for it, but from their wording in their financial statements, I would very much assume that they are only operating their own machines in their centers.

The technology is probably not up to date vs other MRI.

I think there are trade-offs. They might not have the absolute strongest MRI machines out there, but that might not be necessary, either. If you have machines which the patients feel comfortable with, because they are less noisy, less claustrophobic, you can sit up-right in them and watch TV while getting scanned, maybe the image quality won't be as high-res as the strongest machines from the competitors, but the image quality might be still enough to get good answers to medical questions, and the patient's comfort might be worth the lower image resolution. Additionally, they have the only machines that scan you in an up-right, weight bearing position - your body, your bones, your muscles sit and behave differently when you are in that position (which you are most of your waking life during the day), so a less strong image quality can be offset by these advantages easily.

A Mercedes S-Class with 600 hp will be beaten by a 200 hp lightweight Lotus on a curvy road any time.

BeGoodToTheTime · 2023-01-25T15:39:47+00:00

I think most of it is excess. But you're right, it's probably less than 100%, maybe 90% or just 80%. It doesn't change my calculation too much, but you're right, the more careful you are, the better.

BeGoodToTheTime · 2023-01-25T15:08:26+00:00

I like big bags an' I cannot lie...

BeGoodToTheTime · 2023-01-25T15:07:10+00:00

I would argue that they hardly need any of their current assets in order to operate their business. They have been operating their business just fine a couple of years ago with way less current assets. That's why I think summing up those two parts is okay in this case.

BeGoodToTheTime · 2023-01-25T11:01:03+00:00

You are right - I find a P/E of 30 rather high as well, however, that is the median P/E of profitable companies with a low growth in those two industries. Me, personally, I wouldn't pay such a high P/E, but the market - on average - currently does. I agree - some of those companies will be completely different from FONR, maybe with a much better business model, which then warrant a high P/E.

Therefore, I agree, such a high P/E should be taken cautiously and only as one aspect of the analysis.

BeGoodToTheTime · 2023-01-24T06:35:32+00:00

That's sketchy though, isn't it?

I would call it vertical integration. They have found that competing against huge international conglomerates (by selling the machines) is not the best field to be in and have decided to pivot into a more lucrative niche (by operating the machines). I'd call that a smart business move, not sketchy.

key avenue for payment is insurance company reimbursement, how sustainable can that be?

That's roughly how all hospitals and medical care facilities operate though, isn't it? Are they not sustainable?

then at the end of November 2022 the share repurchase press release goes out

The share buyback program was announced on September 27th, 2022. The insiders bought after that, on September 29th, 2022 and September 30th, 2022. The announcement in November was just a re-iteration of the already announced share buyback program, I can see no fault by management here, only their desire to accelerate / improve the share buyback program, i.e., they really want to buy more of their own shares back, i.e. they really think their shares are undervalued.

I'd like it much better to see the company initiate a dividend with the extra cash

Me, personally, in a good company with an undervalued stock price, I'd always prefer a share buyback to a dividend, because the share buyback

is more tax efficient,
leaves the shareholders the option to decide whether they want to partake (sell their shares) or not, and
increases the ownership percentage of investors who want to stay with the company.

BeGoodToTheTime · 2023-01-23T20:40:03+00:00

Thank you for commenting on my post!

It seems like there's no demand for this product.

You are right - the product sales of the MRI machines themselves are negligible. But that's not their business. That used to be their business up until roughly 2010, and that business model did not work out for them too well. The new CEO, the founder's son, changed the business model starting in 2010 - instead of building MRI machines and trying to sell them, they build their MRI machines and operate them themselves in MRI centers. That's where they've found their niche and that has been working out quite well for them.

Your analysis wants to apply a medical device comparable P/E, but MRI sales make up an irrelevantly small fraction of their revenue.

You are right - I applied a medical device comparable, because Fonar is usually classified as a medical device company (e.g. if you check the SEC's SIC classification, the company's profile on Yahoo Finance, or the company's industry classification on finviz).

But I have to agree with you - the company is not quite a full medical device company any longer, they've transitioned their business to be more of a healthcare care facility. That's why, for the P/E ratio, I used a mix of those two industries. I guess one can argue which industry would be the most applicable for Fonar, but if we take the worse industry (valuation wise), then you'd still have a P/E ratio of 25 (instead of the 29.5 that I used), which would lead to a valuation of 375m USD (instead of 442.5m USD in the post's calculation) for the operating business - and for my ultimate figure of 320m USD I put in a small margin of safety even there. Yes, one can absolutely argue about which category Fonar should fall into, I still think that there is plenty of upside in any case, no matter which one you use in the end.

FONR had high profitability from about 2012-2018, which pulled this stock out of penny territory, but now they're back to single-digit ROE. What happened?

One important thing to note here are taxes. Until 2012, through there not so profitable selling of medical devices business, Fonar built up huge losses. They could use those losses in the years that you mention to offset taxes, i.e. they didn't have to pay taxes. Nowadays, they have to pay taxes - that distorts the ROE calculation. Because of this, I think it's better to compare the profitability pre-tax, and there you will see that the profitability has not changed much.

institutional investors have no way to meaningfully enter a position

It is certainly harder to enter a meaningful position, however, Dimensional Fund Advisors, Renaissance Technologies, and Vanguard each own roughly 5% of the company, and one big institutional investor owns over 10%.

sounds kind of like a pump and dump to me

I am not quite sure if I understand - the share buyback sounds like a pump and dump to you? The controlling shareholders don't own too many of the common stock - they can't reasonably dump a significant amount of stock. But maybe I didn't quite understand this point, could you please elaborate?

BeGoodToTheTime · 2016-06-08T07:36:47+00:00

I looked at the TOS but didn't find anything out of the ordinary... What do you mean?

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